<PAGE>
Filed pursuant to Rule 424(b)(1)
Registration Statement No. 33-52665
PROSPECTUS
$100,000,000
WABAN INC.
11% SENIOR SUBORDINATED NOTES DUE 2004
----------------
The 11% Senior Subordinated Notes due May 15, 2004 (the "Notes") of Waban
Inc. (the "Company") offered hereby will bear interest at the rate of 11% per
annum, payable semi-annually in arrears on May 15 and November 15 of each
year, commencing November 15, 1994.
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time and from time to time, on and after May 15, 1999, at the
redemption prices set forth herein, together with accrued and unpaid interest.
See "Description of Notes--Optional Redemption." Upon a Change of Control (as
defined), holders of Notes will have the right, subject to certain
restrictions and conditions, to require the Company to purchase all or any
part of their Notes at 101% of the principal amount thereof, plus accrued and
unpaid interest thereon to the date of purchase. See "Description of Notes--
Change of Control."
The Notes will be unsecured obligations and will be subordinate in right of
payment to all existing and future Senior Indebtedness (as defined) of the
Company. As of January 29, 1994, Senior Indebtedness was approximately
$79,700,000, and the Company had available borrowings of $80,000,000 under its
bank credit agreement, which would constitute Senior Indebtedness. Subject to
certain restrictions, the Indenture pursuant to which the Notes will be issued
permits the Company to incur additional indebtedness, but prohibits the
incurrence of any indebtedness that is senior to the Notes but subordinate to
Senior Indebtedness.
The Notes are a new issue of securities with no established trading market
and will not be listed on any securities exchange.
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN EVALUATING AN
INVESTMENT IN THE NOTES, SEE "CERTAIN INVESTMENT CONSIDERATIONS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HASTHE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note................................ 100% 2.5% 97.5%
- --------------------------------------------------------------------------------
Total................................... $100,000,000 $2,500,000 $97,500,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from May 11, 1994.
(2) The Company has agreed to indemnify the Underwriter against, and to
provide contribution with respect to, certain liabilities, including
liabilities under the Securities Act of 1933. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $475,000.
The Notes are offered by Bear, Stearns & Co. Inc., subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to
the approval of certain legal matters by counsel and certain other conditions.
The Underwriter reserves the right to withdraw, cancel or modify the offer and
to reject orders in whole or in part. It is expected that delivery of the
Notes will be made against payment therefor on or about May 11, 1994 at the
offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York
10167.
----------------
BEAR, STEARNS & CO. INC.
MAY 4, 1994
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company with the Commission can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices located at Suite 1300, 7 World Trade Center,
New York, New York 10048, and Suite 1400, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
materials can also be inspected at the New York Stock Exchange (the "NYSE"),
20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which have been omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement,
including the exhibits filed as part thereof and otherwise incorporated
therein. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily
complete; with respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. Copies
of the Registration Statement and the exhibits may be inspected, without
charge, at the offices of the Commission, or obtained at prescribed rates from
the Public Reference Section of the Commission at the address set forth above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended January
29, 1994, previously filed with the Commission by the Company pursuant to the
Exchange Act, is incorporated by reference in this Prospectus and made a part
hereof.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the
termination of the offering made hereby shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which is also incorporated
or deemed to be incorporated by reference herein modifies, supersedes or
replaces such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to any person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy
of any or all of the documents which have been incorporated by reference in
this Prospectus, other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference into the documents so incorporated.
Requests for such copies should be directed to Investor Relations, Waban Inc.,
One Mercer Road, Natick, Massachusetts 01760 (telephone number: (508) 651-
6500).
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Fiscal year references refer to the Company's
fiscal year, which ends on the last Saturday of January of each year.
THE COMPANY
Waban Inc. ("Waban" or the "Company") operates two warehouse merchandising
businesses: BJ's Wholesale Club ("BJ's") and HomeBase. BJ's operates 52 food
and general merchandise membership warehouse clubs located mainly in the
northeastern United States. HomeBase sells a broad selection of home
improvement and building supply products through 82 warehouse stores located in
the western United States. 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. The Company's sales have grown
from $2.1 billion in fiscal 1990 to $3.6 billion in fiscal 1994, and its total
number of stores has increased from 81 at the end of fiscal 1990 to 134 at the
end of fiscal 1994.
BJ's introduced the warehouse club concept to New England in 1984 and is the
third largest membership warehouse chain in the country. BJ's now operates 52
warehouse clubs in 11 northeastern states and Florida with over 2.6 million
members. BJ's is a high volume, low-price, low-margin membership warehouse club
which sells a narrow assortment of brand-name food and general merchandise
within a wide range of product categories. By limiting its product assortment
and taking advantage of the productivity and efficiency of the warehouse
format, BJ's is able to offer its members substantial savings over many other
channels of wholesale and retail distribution. Maintaining a low operating cost
structure is a critical element of the BJ's strategy. BJ's has grown from 23
warehouse clubs and sales of $1.0 billion in fiscal 1990 to 52 warehouse clubs
and sales of $2.0 billion in fiscal 1994. The membership warehouse club
industry has grown from sales of approximately $14 billion in calendar 1988 to
sales of approximately $39 billion in calendar 1993.
BJ's strategy is to continue to strengthen its market position in the
northeastern United States by opening additional warehouse clubs, attracting
new members to existing warehouse clubs and increasing BJ's share of members'
overall retail spending. The Company believes that its regional strategy of
concentrating its resources in the Northeast enables it to compete more
effectively with large, national warehouse club chains. BJ's opened 13 new
warehouse clubs in fiscal 1994 and expects to open approximately 15 warehouse
clubs during fiscal 1995 (including the relocation of one warehouse club). All
of the BJ's warehouse clubs opened in fiscal 1994 and those planned to be
opened in fiscal 1995 are in the Northeast.
HomeBase is the second largest operator of home improvement warehouse stores
in the western United States and is one of the nation's four largest home
improvement merchandisers using a warehouse format. HomeBase offers a very
broad assortment of home improvement and building supply products at attractive
prices to a customer base that includes both serious and casual "Do-It-
Yourself" customers, as well as professional contractors. This merchandising
presentation is supported by a strong commitment to customer service aimed at
developing ongoing relationships with its customers. HomeBase has grown from 58
warehouse stores and sales of $1.1 billion in fiscal 1990 to 82 warehouse
stores and sales of $1.6 billion in fiscal 1994. The Company believes that the
total market for home improvement products was approximately $115 billion in
calendar 1993. The home improvement market is highly fragmented and the
warehouse format continues to gain an increasing share of the market.
HomeBase is currently implementing a series of strategic initiatives designed
to strengthen its market position in the western United States and improve its
profitability. These initiatives include (i) a significant
3
<PAGE>
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 fiscal 1994, a new management team,
led by a senior executive from BJ's, was installed at HomeBase to implement
these strategic initiatives.
The new management team also undertook a thorough review of HomeBase's
business and real estate strategies, the result of which was a recommendation
to take certain actions in a restructuring plan, which the Company's Board of
Directors approved on November 15, 1993. Consequently, in the fourth quarter of
fiscal 1994, the Company recorded a pre-tax restructuring charge of $101.1
million, primarily to cover expenses related to the repositioning of HomeBase.
The restructuring is designed to enable 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 16
additional stores where the potential to achieve the Company's objectives is
limited, and (iii) liquidating certain discontinued merchandise. The Company
closed the eight stores in the Midwest in January 1994 and has disposed of five
of these locations. The Company is actively seeking to sell, assign or sublease
the remaining three midwestern stores, as well as the other 16 stores
identified for closing. The disposition of the 24 HomeBase warehouse stores is
expected to generate a significant amount of cash flow and to improve
HomeBase's operating income. HomeBase plans to open approximately four new
warehouse stores in the western United States during fiscal 1995.
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.
The address of the Company is One Mercer Road, Natick, Massachusetts 01760,
telephone number (508) 651-6500. Unless the context otherwise requires, the
term "Company" refers to Waban Inc. and its subsidiaries.
4
<PAGE>
THE OFFERING
Securities Offered.......... $100,000,000 principal amount of 11% Senior Sub-
ordinated Notes due May 15, 2004 (the "Notes").
Interest Payment Dates...... May 15 and November 15, commencing November 15,
1994.
Maturity Date............... May 15, 2004.
Optional Redemption......... Redeemable at the Company's option, in whole or
in part, at any time and from time to time, on
and after May 15, 1999, initially at 105 1/2% of
principal amount and thereafter at prices declin-
ing to 100% from and after May 15, 2002.
Change of Control........... Upon a Change of Control (as defined), holders of
Notes will have the right, subject to certain re-
strictions and conditions, to require the Company
to purchase all or any part of their Notes at
101% of the principal amount thereof, plus ac-
crued and unpaid interest thereon to the date of
purchase. Certain changes of control would con-
stitute an event of default under the Company's
Credit Agreement and would result in the Company
being obligated to offer to redeem its Convert-
ible Subordinated Debentures due 2002 and its
9.58% Notes due 1998 (the "Senior Notes"). In
such event, the Company may not have sufficient
resources to satisfy all its repayment and repur-
chase obligations. See "Description of Notes--
Change of Control."
Ranking..................... Subordinate to all existing and future Senior In-
debtedness (as defined) of the Company and effec-
tively subordinate to all indebtedness and other
liabilities of subsidiaries of the Company. As of
January 29, 1994, Senior Indebtedness was approx-
imately $79,700,000, and the Company had avail-
able borrowings of $80,000,000 under its bank
credit agreement, which would constitute Senior
Indebtedness. Subject to certain restrictions,
the indenture pursuant to which the Notes will be
issued (the "Indenture") permits the Company to
incur additional indebtedness, including Senior
Indebtedness. However, the Indenture prohibits
the Company from incurring any indebtedness that
is senior to the Notes but subordinate to Senior
Indebtedness. See "Description of Notes--Subordi-
nation."
Certain Covenants........... The Indenture restricts, among other things, the
payment of dividends, the repurchase of capital
stock and the making of certain other Restricted
Payments (as defined), the incurrence of addi-
tional indebtedness, the making of certain In-
vestments (as defined), and certain mergers, con-
solidations or sales of assets. Upon certain
sales of assets, the Company will be required to
offer to purchase, at 101% of their principal
amount plus accrued and unpaid interest, if any,
Notes in principal amount equal to any net cash
proceeds which are not invested in properties and
assets in the warehouse merchandising business or
applied to permanently reduce Senior Indebted-
ness. The Senior Notes restrict certain such pre-
payments of the Notes. See "Description of
Notes--Certain Covenants."
Use of Proceeds............. The net proceeds of this offering, approximately
$97 million, will be used (i) to fund the opening
of new stores, including the acquisition of real
estate and the construction of stores, (ii) to
make scheduled principal repayments on Senior In-
debtedness, including a $12 million principal
payment due in May 1994 on the Company's Senior
Notes, (iii) to repay short-term borrowings (sub-
ject to reborrowing) under the Company's bank
credit agreement (under which $20 million was
outstanding at February 26, 1994), and (iv) for
general corporate purposes.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial data of the Company for each of
the five fiscal years ended January 29, 1994 is derived from the Company's
consolidated financial statements, including the notes thereto, which have been
audited by Coopers & Lybrand, the Company's independent accountants. The
financial statements of the Company include the financial statements of those
subsidiaries of TJX which operated TJX's warehouse club segment prior to June
14, 1989. The Company operates on a 52- or 53-week fiscal year, ending the last
Saturday in January of each year. Fiscal 1993 was a 53-week year. This selected
financial information should be read in conjunction with the consolidated
financial statements, related notes and other financial information appearing
elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------
JAN. 27, JAN. 26, JAN. 25, JAN. 30, JAN. 29,
1990 1991 1992 1993 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS EXCEPT RATIOS AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............... $ 2,056.5 $ 2,409.7 $ 2,783.6 $ 3,357.8 $ 3,589.3
Restructuring charge.... -- -- -- -- (101.1)
Operating income (loss)
....................... 51.6 36.2(1) 52.2(2) 74.6 (21.5)(3)
Interest expense, net... 3.1 5.5 3.3 6.3 12.5
Net income (loss) ...... 28.8 18.4(1) 30.0(2) 44.2 (17.8)(3)(4)
Net income (loss) per
common share
Primary................ 1.01 .64(1) 1.01(2) 1.33 (.54)(3)(4)
Fully diluted.......... 1.01 .64(1) 1.01(2) 1.31 (.54)(3)(4)
OTHER DATA:
EBITDA(5)............... $ 66.6 $ 54.3(1) $ 74.3(2) $ 104.4 $ 15.6(3)(6)
Depreciation & amortiza-
tion................... 15.0 18.1 22.1 29.8 37.0
EBITDA/Total interest
expense................ 17.0x 9.7x 10.4x 9.5x 1.1x(6)
Total long-term
debt/EBITDA............ 0.5x 0.5x 1.2x 1.8x 11.2x(6)
Total long-term debt as
a percentage of
total capitalization... 10.6% 9.3% 18.3% 30.6% 29.3%
Capital expenditures
Existing stores........ $ 23.0 $ 12.8 $ 26.2 $ 24.9 $ 22.3
New stores, other than
real estate........... 13.7 14.2 18.8 41.1 32.7
Purchase of real es-
tate.................. 6.1 7.9 29.3 99.8 78.1
--------- --------- --------- --------- ---------
Total.................. $ 42.8 $ 34.9 $ 74.3 $ 165.8 $ 133.1
========= ========= ========= ========= =========
Number of stores (at end
of period)............. 81 93 102 125 134
BALANCE SHEET DATA:
Working capital......... $ 137.7 $ 154.3 $ 268.6 $ 285.8 $ 203.8
Total assets............ 537.3 579.8 786.4 1,007.0 1,073.0
Long-term debt (includ-
ing capital leases).... 31.4 29.2 86.8 192.6 174.1
Stockholders' equity.... 265.3 284.2 388.6 436.6 420.5
</TABLE>
- --------
(1) After a charge of $8.8 million before taxes ($5.3 million after taxes, $.18
per share) for the discontinuation of HomeBase's membership program.
(2) After charges of $3.4 million before taxes ($2.1 million after taxes, $.07
per share) for changing the name of HomeClub to HomeBase and $5.5 million
before taxes ($3.3 million after taxes, $.11 per share) for closing four
BJ's warehouse clubs in the Chicago market.
(3) After a restructuring charge of $101.1 million before taxes ($60.2 million
after taxes), primarily related to HomeBase.
(4) Effective January 31, 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," resulting in net after-tax income of approximately $.9 million,
or $.02 per share, in fiscal 1994.
(5) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is presented as a measure of the Company's ability to service its cash
requirements. EBITDA should not be considered in isolation from, or as a
substitute for, net income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity.
(6) Excluding the effect of the restructuring charge in fiscal 1994, EBITDA
would have been $116.7 million and the ratios of EBITDA/Total interest
expense and Total long-term debt/EBITDA would have been 8.3x and 1.5x,
respectively.
6
<PAGE>
CERTAIN INVESTMENT CONSIDERATIONS
Prospective purchasers of the Notes should consider, among other things, the
factors set forth below, as well as the other information set forth in this
Prospectus, before making an investment in the Notes.
REGIONAL ECONOMIC CONDITIONS
BJ's warehouse clubs are located primarily in the northeastern United States
and a substantial number of HomeBase's warehouse stores are located in
California. Both BJ's and HomeBase have been adversely affected by the economic
downturns experienced in recent years in their respective geographic markets.
In particular, the performance of HomeBase warehouse stores has been affected
by the downturn in the California housing market. If these conditions intensify
or continue for a significant period of time, the ability of the Company to
improve or maintain its financial performance could be adversely affected.
EXPANSION
The Company plans to open a significant number of new stores. In addition to
the 13 stores opened in fiscal 1994, BJ's expects to open approximately 15
stores during fiscal 1995 (including the relocation of one warehouse club).
HomeBase opened five stores in fiscal 1994 and expects to open approximately
four stores during fiscal 1995. A significant portion of the proceeds of this
offering will be used for such expansion. The Company's business could be
adversely affected if it encounters difficulties in implementing its expansion
strategy. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources," "Business--BJ's
Wholesale Club--Expansion" and "Business--HomeBase--Expansion."
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. Major warehouse club
competitors of BJ's include Price/Costco, Inc. and Sam's Clubs (a division of
Wal-Mart Stores, Inc.). Major competitors of HomeBase that use the warehouse
format include The Home Depot, Inc. and Builder's Square Inc. (a subsidiary of
Kmart Corporation). Competition exists primarily in the areas of price, product
selection and service. Competitive factors could require price reductions or
increased operational costs, including increases in expenditures for marketing
and customer service, that would 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" and
"Business--HomeBase."
COMPARABLE STORE SALES
The Company's comparable store sales, on a same-week basis, decreased at both
BJ's and HomeBase from fiscal 1993 to fiscal 1994. The decline in BJ's
comparable store sales was due largely to increased competition from other
warehouse club operators; the effects of opening new BJ's warehouse clubs in
the trading areas of existing BJ's warehouse clubs; the effects of price
deflation, particularly in food products; and the weak economic conditions in
the Northeast. The decline in HomeBase's comparable store sales was due largely
to increased competition and the depressed economic conditions in its major
markets, particularly California. Further declines in comparable store sales
could adversely affect the profitability of the Company's businesses.
HOMEBASE STRATEGIC INITIATIVES
HomeBase is currently implementing a series of strategic initiatives designed
to strengthen its market position in the western United States and improve its
profitability. There can be no assurance that HomeBase will be successful in
implementing these strategic initiatives or improving the performance of its
warehouse
7
<PAGE>
stores. Several of these initiatives, such as the hiring of additional customer
service personnel, will result in increased operating costs and there can be no
assurance that these increased costs will be offset by increased sales and
gross margins; such costs could therefore adversely affect the Company's
results of operations. As part of the strategic repositioning of HomeBase, the
Company is currently seeking to dispose of 19 HomeBase store locations,
including three stores in the Midwest that it has already closed and 16 stores
in the western United States that it plans to close. Failure to dispose of
these locations on a timely basis or on favorable terms could have a material
adverse effect on the Company's operating results and cash flow. See
"Business--HomeBase--Strategy."
SUBORDINATION
The Notes will be subordinated in right of payment to all existing and future
Senior Indebtedness (as defined) of the Company, which includes indebtedness
under the Company's Credit Agreement, 9.58% Notes due 1998 (the "Senior
Notes"), certain capital lease obligations and real estate mortgages. Further,
subject to certain restrictions, the Indenture permits the Company to incur
additional Senior Indebtedness. As of January 29, 1994, the aggregate amount of
outstanding Senior Indebtedness was approximately $79,700,000, and the Company
had available borrowings of $80,000,000 under its bank credit agreement, which
would constitute Senior Indebtedness. By reason of the subordination applicable
to the Notes, in the event of an insolvency, liquidation, dissolution or other
reorganization of the Company, the Senior Indebtedness must be paid in full
before the Company may pay any obligations on the Notes. In addition, under
certain circumstances, no payments may be made with respect to the principal
of, premium, if any, or interest on the Notes upon the occurrence of a default
under the terms of certain Senior Indebtedness.
The Notes will also be structurally subordinated to creditors of subsidiaries
of the Company. As of January 29, 1994, the Company's subsidiaries had
outstanding indebtedness of approximately $11.4 million, and had property and
assets with a book value of approximately $261.8 million. In addition, although
the Notes will be senior to the Company's 6.5% Convertible Subordinated
Debentures due 2002, such Debentures mature prior to the Notes.
In certain circumstances, including upon a Change of Control (as defined) and
an Asset Sale (as defined), the Company may be obligated to repurchase or to
make an offer to repurchase the Notes. The subordination of the Notes to all
existing and future Senior Indebtedness of the Company and the amount of funds
available to the Company may limit the ability of the Company to repurchase the
Notes. Furthermore, certain restrictions in the Senior Notes limit the
Company's ability to prepay the Notes, including upon a Change of Control and
an Asset Sale. See "Description of Notes."
ABSENCE OF PUBLIC MARKET
Prior to this offering, there has been no market for the Notes. The Company
does not intend to apply for the listing of the Notes on any national
securities exchange or for their quotation through the Nasdaq Stock Market. The
Company has been advised that the Underwriter currently intends to make a
market in the Notes, but it is not obligated to do so and may discontinue any
such market making at any time without notice. Therefore, there can be no
assurance that an active trading market will develop for, or as to the
liquidity of, the Notes.
8
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Notes
offered hereby are approximately $97 million. The Company expects to use the
net proceeds (i) to fund the opening of new stores, including the acquisition
of real estate and construction of stores, (ii) to make scheduled principal
repayments on Senior Indebtedness, including a $12 million principal payment
due in May 1994 on the Company's Senior Notes, (iii) to repay outstanding
borrowings under its bank credit agreement and (iv) for general corporate
purposes. As of February 26, 1994, the Company had outstanding $20 million of
borrowings under its $80 million bank credit agreement (which bore interest at
an average rate of 4.3% per annum in fiscal 1994), and such amount may
increase prior to the closing of this offering. The Company may from time to
time after the closing of this offering reborrow amounts under its bank credit
agreement, which expires on January 28, 1995. See "Description of Certain
Indebtedness."
Until used, substantially all of the net proceeds of the sale of the Notes
will be invested in high-grade commercial paper, United States Government
securities, other investment-grade securities or short-term deposits with
major banks. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
CAPITALIZATION
The following table sets forth the consolidated short-term debt and
capitalization of the Company as of January 29, 1994, and as adjusted to give
effect to the issuance of the Notes offered hereby.
<TABLE>
<CAPTION>
JANUARY 29, 1994
------------------
ACTUAL AS ADJUSTED
------ -----------
(IN MILLIONS)
<S> <C> <C>
Cash and marketable securities on hand...................... $ 19.9 $116.9
Short-term debt:
Current installments of long-term debt and capital leases. 15.1 15.1
------ ------
Total short-term debt(1)................................ 15.1 15.1
====== ======
Long-term debt and capital leases (excluding current
installments):
9.58% Notes due 1998...................................... $ 48.0 $ 48.0
Real Estate Mortgages..................................... 4.1 4.1
Capital Leases............................................ 13.4 13.4
11% Senior Subordinated Notes due 2004.................... -- 100.0
6.5% Convertible Subordinated Debentures due 2002......... 108.6 108.6
------ ------
Total long-term debt.................................... 174.1 274.1
------ ------
Stockholders' equity:
Common Stock, $.01 par value, authorized 190,000,000
shares; issued and outstanding 33,086,295 shares(2)...... 0.3 0.3
Additional paid-in capital................................ 322.9 322.9
Retained earnings......................................... 97.2 97.2
------ ------
Total stockholders' equity.............................. 420.4 420.4
------ ------
Total capitalization.................................. $594.5 $694.5
====== ======
</TABLE>
- --------
(1) The Company has a bank credit agreement with a group of banks that
provides for borrowings up to $80.0 million through January 28, 1995. See
"Description of Certain Indebtedness--The Credit Agreement."
(2) Does not include 4,387,879 shares reserved for issuance upon conversion of
the 6.5% Convertible Subordinated Debentures due 2002 and 1,502,901 shares
of Common Stock reserved for issuance upon exercise of outstanding options
as of January 29, 1994.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial data of the Company for each
of the five fiscal years ended January 29, 1994 is derived from the Company's
consolidated financial statements, including the notes thereto, which have
been audited by Coopers & Lybrand, the Company's independent accountants. The
financial statements of the Company include the financial statements of those
subsidiaries of TJX which operated TJX's warehouse club segment prior to June
14, 1989. The Company operates on a 52- or 53-week fiscal year, ending the
last Saturday in January of each year. Fiscal 1993 was a 53-week year. This
selected financial information should be read in conjunction with the
consolidated financial statements, related notes and other financial
information appearing elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------------
JAN. 27, JAN. 26, JAN. 25, JAN. 30, JAN. 29,
1990 1991 1992 1993 1994
----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS EXCEPT RATIOS AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $ 2,056.5 $ 2,409.7 $ 2,783.6 $ 3,357.8 $3,589.3
Cost of sales, including
buying and occupancy
costs.................. 1,770.8 2,076.3 2,399.8 2,881.3 3,086.7
Selling, general and
administrative
expenses............... 234.1 288.4 322.7 401.9 423.0
Cost of closing BJ's
warehouse clubs in
Chicago................ -- -- 5.5 -- --
Discontinuation of the
HomeBase membership
program and name
change................. -- 8.8 3.4 -- --
Restructuring charge.... -- -- -- -- 101.1
----------- ----------- ----------- ----------- -----------
Operating income (loss). 51.6 36.2(1) 52.2(2) 74.6 (21.5)(3)
Interest on debt and
capital leases, net.... 3.1 5.5 3.3 6.3 12.5
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes and
cumulative effect of
accounting principle
changes................ 48.5 30.7 48.9 68.3 (34.0)
Provision (benefit) for
income taxes........... 19.7 12.3 18.9 24.1 (15.3)
----------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of
accounting principle
changes................ 28.8 18.4 30.0 44.2 (18.7)
Cumulative effect of
accounting principle
changes(4)............. -- -- -- -- 0.9
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ 28.8 $ 18.4(1) $ 30.0(2) $ 44.2 $ (17.8)(3)(4)
=========== =========== =========== =========== ===========
Net income (loss) per
common share
Primary................ $ 1.01 $ .64(1) $ 1.01(2) $ 1.33 $ (.54)(3)(4)
Fully diluted.......... 1.01 .64(1) 1.01(2) 1.31 (.54)(3)(4)
Number of common shares
for computation of
fully diluted earnings
per share.............. 28,457 28,689 29,810 35,707 33,082
OTHER DATA:
EBITDA(5)............... $ 66.6 $ 54.3(1) $ 74.3(2) $ 104.4 $ 15.6(3)(6)
Depreciation &
amortization........... 15.0 18.1 22.1 29.8 37.0
EBITDA/Total interest
expense................ 17.0x 9.7x 10.4x 9.5x 1.1x(6)
Total long-term
debt/EBITDA............ 0.5x 0.5x 1.2x 1.8x 11.2x(6)
Total long-term debt as
a percentage of total
capitalization......... 10.6% 9.3% 18.3% 30.6% 29.3%
Ratio of earnings to
fixed charges(7)....... 3.67x 2.26x 2.61x 2.63x 0.22x(6)
Capital expenditures
Existing stores........ $ 23.0 $ 12.8 $ 26.2 $ 24.9 $ 22.3
New stores, other than
real estate........... 13.7 14.2 18.8 41.1 32.7
Purchase of real
estate................ 6.1 7.9 29.3 99.8 78.1
----------- ----------- ----------- ----------- -----------
Total................. $ 42.8 $ 34.9 $ 74.3 $ 165.8 $ 133.1
=========== =========== =========== =========== ===========
Number of stores (at end
of period)............. 81 93 102 125 134
</TABLE>
<TABLE>
<CAPTION>
JAN. 30, 1993 JAN. 29, 1994
------------- -------------
(IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $ 285.8 $ 203.8
Total assets........................................ 1,007.0 1,073.0
Long-term debt (including capital leases)........... 192.6 174.1
Stockholders' equity................................ 436.6 420.5
</TABLE>
- -------
(1) After a charge of $8.8 million before taxes ($5.3 million after taxes,
$.18 per share) for the discontinuation of HomeBase's membership program.
(2) After charges of $3.4 million before taxes ($2.1 million after taxes, $.07
per share) for changing the name of HomeClub to HomeBase and $5.5 million
before taxes ($3.3 million after taxes, $.11 per share) for closing four
BJ's warehouse clubs in the Chicago market.
(3) After a restructuring charge of $101.1 million before taxes ($60.2 million
after taxes), primarily related to HomeBase.
(4) Effective January 31, 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," resulting in net after-tax income of approximately $.9 million,
or $.02 per share, in fiscal 1994.
(5) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is presented as a measure of the Company's ability to service its cash
requirements. EBITDA should not be considered in isolation from, or as a
substitute for, net income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity.
(6) Excluding the effect of the restructuring charge in fiscal 1994, EBITDA
would have been $116.7 million, the ratios of EBITDA/Total interest
expense and Total long-term debt/EBITDA would have been 8.3x and 1.5x,
respectively, and the ratio of earnings to fixed charges would have been
2.37x.
(7) Computed by dividing income before taxes plus fixed charges, excluding
capitalized interest, by fixed charges. Fixed charges consist of interest
expense, including capitalized interest, and the estimated interest
component of lease expense.
10
<PAGE>
SELECTED INFORMATION BY MAJOR BUSINESS SEGMENT
The following selected information by major business segment of the Company
for the five fiscal years ended January 29, 1994 is derived from the Company's
consolidated financial statements, which have been audited by Coopers &
Lybrand, the Company's independent accountants. The Company operates on a 52-
or 53-week fiscal year, ending the last Saturday in January of each year.
Fiscal 1993 was a 53-week year.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------
JAN. 27, JAN. 26, JAN. 25, JAN. 30, JAN. 29,
1990 1991 1992 1993 1994
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales:
BJ's Wholesale Club.... $ 984.6 $1,149.6 $1,432.2 $1,786.9 $2,003.4
HomeBase............... 1,071.9 1,260.1 1,351.4 1,570.9 1,585.9
-------- -------- -------- -------- --------
Total.................. $2,056.5 $2,409.7 $2,783.6 $3,357.8 $3,589.3
======== ======== ======== ======== ========
Operating income (loss):
BJ's Wholesale Club.... $ 18.9 $ 11.6 $ 17.4(1) $ 35.4 $ 45.2
HomeBase............... 39.9 31.7(2) 42.1(3) 47.2 (55.8)(4)
General corporate
expense............... (7.2) (7.1) (7.3) (8.0) (10.9)(4)
-------- -------- -------- -------- --------
Total.................. 51.6 36.2 52.2 74.6 (21.5)
Interest on debt and
capital leases, net.... (3.1) (5.5) (3.3) (6.3) (12.5)
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
cumulative effect of
accounting principle
changes................ $ 48.5 $ 30.7 $ 48.9 $ 68.3 $ (34.0)
======== ======== ======== ======== ========
Identifiable assets:
BJ's Wholesale Club.... $ 172.3 $ 185.7 $ 230.5 $ 364.2 $ 501.2
HomeBase............... 349.6 381.3 439.5 590.3 551.9
Corporate (cash, cash
equivalents and
marketable
securities)........... 15.4 12.8 116.4 52.5 19.9
-------- -------- -------- -------- --------
Total.................. $ 537.3 $ 579.8 $ 786.4 $1,007.0 $1,073.0
======== ======== ======== ======== ========
Depreciation and
amortization:
BJ's Wholesale Club.... $ 5.4 $ 6.7 $ 8.5 $ 11.4 $ 16.8
HomeBase............... 9.6 11.4 13.6 18.4 20.2
-------- -------- -------- -------- --------
Total.................. $ 15.0 $ 18.1 $ 22.1 $ 29.8 $ 37.0
======== ======== ======== ======== ========
Capital expenditures:
BJ's Wholesale Club.... $ 13.8 $ 21.0 $ 40.9 $ 89.7 $ 95.1
HomeBase............... 29.0 13.9 33.4 76.1 38.0
-------- -------- -------- -------- --------
Total.................. $ 42.8 $ 34.9 $ 74.3 $ 165.8 $ 133.1
======== ======== ======== ======== ========
Warehouses at end of
period(5):
BJ's Wholesale Club.... 23 27 29 39 52
HomeBase............... 58 66 73 86 82(6)
-------- -------- -------- -------- --------
Total.................. 81 93 102 125 134(6)
======== ======== ======== ======== ========
</TABLE>
- --------
(1) After a charge of $5.5 million for closing four BJ's warehouse clubs in the
Chicago market.
(2) After a charge of $8.8 million for the discontinuation of HomeBase's
membership program.
(3) After a charge of $3.4 million for changing the name of HomeClub to
HomeBase.
(4) After a restructuring charge of $101.1 million, of which $98.5 million was
charged to HomeBase's operating income and $2.6 million was charged to
general corporate expense.
(5) Reflects the closing of one BJ's warehouse club in fiscal 1991 and its
conversion to a HomeBase warehouse store during fiscal 1992; the closing of
four BJ's warehouse clubs in fiscal 1992 and the conversion of three of
them to HomeBase warehouse stores in fiscal 1993; and the closing of nine
HomeBase warehouse stores in fiscal 1994.
(6) Includes 16 stores in operation at January 29, 1994 which the Company plans
to close as part of the restructuring of HomeBase.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
GENERAL
The Company believes that stores using a warehouse merchandising format are
continuing to gain an increasing share of both the food and general
merchandise market, in which BJ's operates, and the home improvement market,
in which HomeBase operates. To compete effectively in these markets, warehouse
operators need to maintain a low cost structure and be able to offer customers
a diversified selection of merchandise at attractive prices. The Company
believes that it has established efficient operations at both BJ's and
HomeBase that enable the Company to minimize its costs and to provide
increased value to customers.
In fiscal 1993 (the year ended January 30, 1993), the Company achieved sales
growth at both BJ's and HomeBase, primarily through the opening of new stores
and also from comparable store sales growth. In fiscal 1994 (the year ended
January 29, 1994), the Company's sales growth was attributable to new store
openings. Comparable store sales, on a same-week basis, decreased at both BJ's
and HomeBase from fiscal 1993 to fiscal 1994. The decrease at BJ's was due
largely to increased competition from other warehouse club operators; the
effects of opening new BJ's stores in the trading areas of existing BJ's
warehouse clubs; the effects of price deflation, particularly in food
products; and the weak economic conditions in the Northeast. The decrease at
HomeBase was due largely to increased competition and the depressed economic
conditions in its major markets, particularly California.
BJ's strategy is to continue to strengthen its market position in the
northeastern United States by opening additional warehouse clubs, attracting
new members to existing warehouse clubs and increasing BJ's share of members'
overall retail spending.
HomeBase is currently implementing a series of strategic initiatives designed
to strengthen its market position in the western United States and improve its
profitability. These initiatives include (i) a significant increase in the
level of customer service offered at HomeBase warehouse stores, through an
increase in the number of salespeople, including hiring of 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 efficiencies created
by the 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 fiscal 1994, a new management team,
led by a senior executive from BJ's, was installed at HomeBase to implement
these strategic initiatives.
The new management team also undertook a thorough review of HomeBase's
business and real estate strategies, the result of which was a recommendation
to take certain actions in a restructuring plan, which the Company's Board of
Directors approved on November 15, 1993. Consequently, in the fourth quarter
of fiscal 1994, the Company recorded a pre-tax restructuring charge of $101.1
million primarily to cover expenses related to the repositioning of HomeBase.
The restructuring is designed to enable 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 of HomeBase's primary market area, (ii) the planned closing of 16
additional stores where the potential to achieve the Company's objectives is
limited, and (iii) liquidating certain discontinued merchandise. The Company
closed the eight stores in the Midwest in January 1994 and has disposed of
five of these locations. The Company is actively seeking to sell, assign or
sublease the remaining three midwestern stores, as well as the other 16 stores
identified for closing.
The results at HomeBase for fiscal 1994 exclude sales and operating income or
losses since October 31, 1993 for the eight midwestern HomeBase warehouse
stores that have closed and since November 28, 1993
12
<PAGE>
for the other 16 HomeBase warehouse stores planned to be closed. Sales from all
24 warehouse stores have been removed from comparable store sales.
The disposition of the 24 HomeBase warehouse stores is expected to generate a
significant amount of cash flow (see "Liquidity and Capital Resources") and to
improve HomeBase's operating income. If the results of the 24 warehouse stores
had been excluded for the full year ended January 29, 1994, sales would have
been reduced by approximately $270 million and operating income would have been
increased by approximately $8 million.
The Company is finding it increasingly necessary to acquire and develop,
rather than lease from third parties, new store sites. As a result, the
Company's requirements for capital have increased, and store openings more
frequently result in increased capital expenditures and related interest and
depreciation expense rather than rental expense.
FISCAL YEARS ENDED JANUARY 29, 1994, JANUARY 30, 1993 AND JANUARY 25, 1992
The following table presents selected income statement and segment data for
the last three fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------
JANUARY 25, 1992 JANUARY 30, 1993 JANUARY 29, 1994
------------------ ------------------ -------------------
(53 WEEKS)
% OF % OF % OF
$ NET SALES $ NET SALES $ NET SALES
-------- --------- -------- --------- -------- ---------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $2,783.6 100.0% $3,357.8 100.0% $3,589.3 100.0%
Cost of sales, including
buying and occupancy
costs.................. 2,399.8 86.2 2,881.3 85.8 3,086.7 86.0
Selling, general and
administrative
expenses............... 322.7 11.6 401.9 12.0 423.0 11.8
Restructuring charge.... -- -- -- -- 101.1 2.8
Cost of closing BJ's
clubs in Chicago....... 5.5 .2 -- -- -- --
Change of HomeClub name
to HomeBase............ 3.4 .1 -- -- -- --
Interest on debt and
capital leases (net)... 3.3 .1 6.3 .2 12.5 .3
-------- ----- -------- ----- -------- -----
Income (loss) before
income taxes and
cumulative effect of
accounting principle
changes................ 48.9 1.8 68.3 2.0 (34.0) (.9)
Provision (benefit) for
income taxes........... 18.9 .7 24.1 .7 (15.3) (.4)
-------- ----- -------- ----- -------- -----
Income (loss) before
cumulative effect of
accounting principle
changes................ 30.0 1.1 44.2 1.3 (18.7) (.5)
Cumulative effect of
accounting principle
changes................ -- -- -- -- .9 --
-------- ----- -------- ----- -------- -----
Net income (loss)....... $ 30.0 1.1% $ 44.2 1.3% $ (17.8) (.5)%
======== ===== ======== ===== ======== =====
Fully diluted net income
(loss) per common
share.................. $ 1.01 $ 1.31 $ (0.54)
======== ======== ========
SELECTED SEGMENT DATA:
BJ's Wholesale Club:
Net sales.............. $1,432.2 100.0% $1,786.9 100.0% $2,003.4 100.0%
Operating income....... $ 17.4 1.2% $ 35.4 2.0% $ 45.2 2.3%
HomeBase:
Net sales.............. $1,351.4 100.0% $1,570.9 100.0% $1,586.0 100.0%
Operating income
(loss)................ $ 42.1 3.1% $ 47.2 3.0% $ (55.8) (3.5)%
</TABLE>
13
<PAGE>
Total sales of the Company increased by 6.9% from fiscal 1993 (which contained
53 weeks) to fiscal 1994 and by 20.6% from fiscal 1992 to fiscal 1993. The
increases in both years were due primarily to the opening of new warehouse
stores. Comparable store sales increases (decreases) on a same-week basis for
the last two fiscal years were as follows:
<TABLE>
<CAPTION>
FY 1993 VS. FY 1994 VS.
FY 1992 FY 1993
----------- -----------
<S> <C> <C>
BJ's Wholesale Club 3.9% (9.9%)
HomeBase 2.0% (1.5%)
Total 2.9% (6.4%)
</TABLE>
Comparable store sales at BJ's, on a same-week basis, decreased 9.9% from
fiscal 1993 to fiscal 1994, and during fiscal 1993 comparable store sales at
BJ's declined from double-digit increases in the first quarter to decreases in
the fourth quarter. These decreases were due largely to increased competition
from other warehouse club operators; the effects of opening new BJ's warehouse
clubs in the trading areas of existing BJ's warehouse clubs; the effects of
price deflation, particularly in food products; and the weak economic
conditions in the Northeast.
HomeBase's comparable store sales, on a same-week basis, decreased 1.5% from
fiscal 1993 to fiscal 1994, following an increase of 2.0% from fiscal 1992 to
fiscal 1993. The decrease at HomeBase in fiscal 1994 was due largely to
increased competition and the depressed economic conditions in its major
markets, particularly California.
Cost of sales (including buying and occupancy costs) as a percentage of sales
was 86.0% in fiscal 1994, compared with 85.8% in fiscal 1993 and 86.2% in
fiscal 1992. The increase in the percentage from fiscal 1993 to fiscal 1994 was
attributable primarily to the increased proportion of consolidated sales
contributed by BJ's, which is a lower margin business than HomeBase. Gross
selling margins increased at both divisions from fiscal 1993 to fiscal 1994,
particularly at BJ's. The decrease in cost of sales as a percentage of sales
from fiscal 1992 to fiscal 1993 was due mainly to higher gross selling margins
at HomeBase.
Selling, general and administrative ("SG&A") expenses as a percentage of sales
were 11.8% in fiscal 1994 versus 12.0% in fiscal 1993 and 11.6% in fiscal 1992.
The ratio of SG&A expenses to sales was lower in fiscal 1994 than in fiscal
1993 mainly because of BJ's increased proportion of consolidated sales, and
operating efficiencies and improvements in expense controls at BJ's. SG&A
expenses as a percentage of sales are lower at BJ's than at HomeBase, which
offers a higher level of customer service. The increase in the SG&A ratio from
fiscal 1992 to fiscal 1993 was attributable primarily to higher payroll and
preopening expenses at HomeBase. The Company expects that its SG&A expenses
will increase in fiscal 1995 as a result of hiring a significant number of
additional customer service personnel at its HomeBase warehouse stores.
The Company's $101.1 million pre-tax restructuring charge in fiscal 1994
relates primarily to store closings and the write-down of discontinued
inventory at HomeBase. The main components of this charge were:
1) Operating losses and store closing costs (excluding employee termination
costs) were estimated to be approximately $31.3 million. This charge
comprises the actual losses and costs of the eight midwestern HomeBase
warehouse stores from the beginning of November 1993 through their
closing at the end of January 1994, and the estimated losses and costs of
16 other warehouse stores from the beginning of December 1993 through
their anticipated closings in the fiscal year ending in January 1995.
2) Employee termination costs were estimated to be approximately $3.6
million, including severance pay and postemployment medical expenses.
3) The net book value of HomeBase property to be disposed of was written
down by approximately $17.4 million. This charge represents the
difference between the net book value of owned real estate, leasehold
improvements and furniture, fixtures and equipment to be disposed of and
the estimated proceeds to be realized from their sale.
4) Contract termination costs were estimated to be approximately $36.9
million. This charge primarily represents HomeBase's obligations for
leased properties after their closing date offset by estimated sublease
income expected to be realized, net of expenses.
5) The write-down to net realizable value of inventory being discontinued
because it is not related to HomeBase's core home improvement merchandise
was estimated to be approximately $9.8 million.
14
<PAGE>
The Company's restructuring charge was based on a number of estimates, and the
actual loss could vary from these estimates, depending on certain factors,
principally the Company's ability to sublease, assign or sell closed HomeBase
locations on favorable terms.
BJ's operating income of $45.2 million in fiscal 1994 included a pre-tax
charge of $2.2 million for the estimated expenses related to the relocation of
the BJ's Wholesale Club in Syracuse, New York. BJ's fiscal 1993 operating
income of $35.4 million included a $1.1 million pre-tax gain from the disposal
of real estate properties. BJ's operating income of $17.4 million in fiscal
1992 included a pre-tax charge of $5.5 million for closing the four BJ's clubs
in Chicago. Excluding these items, operating income at BJ's was $47.4 million,
or 2.4% of sales, in fiscal 1994, compared with $34.3 million, or 1.9% of
sales, in fiscal 1993 and $22.9 million, or 1.6% of sales, in fiscal 1992. The
improvement in operating income over the three-year period is due to
productivity gains in the movement of merchandise, a shift in the mix of sales
to higher margin categories, operating efficiencies in the warehouse clubs and
improvements in expense controls.
HomeBase posted an operating loss of $55.8 million in fiscal 1994, which
included a pre-tax restructuring charge of $98.5 million. Excluding this charge
from fiscal 1994, and excluding a fiscal 1992 charge of $3.4 million for
changing HomeBase's name from "HomeClub," operating income at HomeBase was
$42.7 million, or 2.7% of sales, in fiscal 1994, $47.2 million, or 3.0% of
sales, in fiscal 1993 and $45.5 million, or 3.4% of sales, in fiscal 1992.
Increased payroll and occupancy costs in fiscal 1994, partially offset by
decreased advertising and preopening costs, accounted for the decrease in
operating income from fiscal 1993 to fiscal 1994. The increase in operating
income from fiscal 1992 to fiscal 1993 was attributable to improved gross
merchandise margins, offset by higher payroll and preopening expenses.
The components of net interest expense in the last three fiscal years were as
follows (in millions):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------
JAN. 1992 JAN. 1993 JAN. 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest expense on debt $ 4.5 $ 8.4 $11.4
Interest and investment income (3.9) (4.7) (1.5)
----- ----- -----
Interest on debt (net) .6 3.7 9.9
Interest on capital leases 2.7 2.6 2.6
----- ----- -----
Interest on debt and capital leases (net) $ 3.3 $ 6.3 $12.5
===== ===== =====
</TABLE>
Interest on debt, net of interest and investment income, increased in each of
the last two years because of the borrowing of $60.0 million through the
private placement of the Senior Notes in June 1991 and $108.6 million through
the public offering of the Convertible Subordinated Debentures in July 1992 and
the subsequent investment of these funds in the expansion of the Company's
businesses. For additional information, see "Liquidity and Capital Resources"
below.
The Company's income tax benefit was 45.0% of its pre-tax loss in fiscal 1994.
This compares with income tax provisions of 35.2% of pre-tax income in fiscal
1993 and 38.7% of pre-tax income in fiscal 1992. During the Company's third
quarter of fiscal 1994, the statutory federal income tax rate for corporations
was raised from 34% to 35%, retroactive to January 1, 1993, and the Targeted
Jobs Tax Credit was restored retroactive to July 1, 1992. The net effect of the
tax law changes on the Company's provision (benefit) for income taxes, which
was recorded in the third quarter of fiscal 1994, was not material. The
Company's provision for income taxes in fiscal 1994 includes 38.2% of pre-tax
income before the restructuring charge and a 40.5% tax benefit from the
restructuring charge. Fiscal 1993's tax rate was favorably impacted by a
benefit resulting from the difference in the book and tax bases of real estate
which was sold, and by an increase in Targeted Jobs Tax Credits over the
previous fiscal year. See Note F of Notes to the Consolidated Financial
Statements for additional information.
15
<PAGE>
In the first quarter of fiscal 1994, 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):
<TABLE>
<S> <C>
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
====
</TABLE>
Barring a significant change in tax rates, which would affect the Company's
accrual for deferred income taxes, the Company believes that the ongoing effect
of adopting SFAS Nos. 106, 109 and 112 will not be material. (See Notes F and H
of Notes to the Consolidated Financial Statements for additional information.)
The Company's net loss for fiscal 1994 was $17.8 million, or $.54 per share,
fully diluted, compared to net income of $44.2 million, or $1.31 per share, in
fiscal 1993, and net income of $30.0 million, or $1.01 per share, in fiscal
1992.
Results for the last three fiscal years included the following transactions
(in millions):
<TABLE>
<CAPTION>
INCOME (EXPENSE)
-----------------
PRE-TAX POST-TAX
------- --------
<S> <C> <C>
Fiscal 1994:
Restructuring charge $(101.1) $(60.2)
Cost of relocating BJ's Syracuse, NY club (2.2) (1.3)
Charge related to resignation of Company's previous
president (1.0) (.6)
Cumulative effect of accounting changes (net) -- .9
------- ------
(104.3) (61.2)
------- ------
Fiscal 1993:
Net gain from disposal of real estate properties at BJ's 1.1 2.3
------- ------
Fiscal 1992:
Change of HomeClub name to HomeBase (3.4) (2.1)
Closing BJ's clubs in Chicago (5.5) (3.3)
------- ------
(8.9) (5.4)
------- ------
</TABLE>
Excluding the items in the preceding table from the respective periods, net
income for fiscal 1994 was $43.4 million, or $1.27 per share, fully diluted,
compared to $41.9 million, or $1.25 per share, in fiscal 1993 and $35.4
million, or $1.19 per share, in fiscal 1992.
16
<PAGE>
FIRST QUARTER SALES
Set forth below are the Company's sales results for the months of February
1994 and March 1994, as compared to the comparable periods of 1993 (dollars in
millions):
<TABLE>
<CAPTION>
FOUR WEEKS FIVE WEEKS
ENDED ENDED
------------- % % CHANGE ------------- % % CHANGE
FEB. FEB. CHANGE COMPARABLE APRIL APRIL CHANGE COMPARABLE
26, 27, TOTAL STORE 2, 3, TOTAL STORE
1994 1993 SALES SALES 1994 1993 SALES SALES
------ ------ ------ ---------- ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BJ's Wholesale Club..... $142.3 $123.6 +15.2% -4.1% $195.2 $162.7 +20.0% -0.6%
HomeBase*............... 84.8 108.3 -21.7% -5.5% 134.7 161.5 -16.6% -1.4%
------ ------ ------ ------
Total................... $227.1 $231.9 -2.1% -4.7% $329.9 $324.3 +1.8% -0.9%
</TABLE>
- --------
* As part of the HomeBase restructuring announced on November 16, 1993, there
is a group of 24 stores that have been or will be closed. HomeBase sales shown
in the above table for the periods ending in calendar 1994 include results
from the remaining 67 stores, including one store opened in fiscal 1995,
(versus 87 stores for the comparable periods last year) and exclude sales from
the 24 stores that have been or will be closed. Comparable store sales results
shown above do not include the results of the entire group of 24 stores for
either period.
The Company currently expects that its comparable store sales in dollars at
both BJ's and HomeBase for the month and quarter ending April 30, 1994 will be
lower than for the comparable month and quarter of the preceding fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1994, the Company opened 13 BJ's and five HomeBase stores. Cash
expended for property additions was $132.0 million versus $164.9 million in
fiscal 1993, when the Company opened a total of 23 stores. Ten of the new
stores opened in fiscal 1994 were owned versus seven in fiscal 1993. The
Company is increasingly required to acquire and develop, rather than lease from
third parties, sites for new stores.
The Company expects to open approximately 15 additional BJ's (including the
relocation of one warehouse club) and four additional HomeBase warehouse stores
in fiscal 1995. Capital expenditures are planned to be approximately $165
million, including an estimated $100 million for new store real estate. The
timing and amount of actual openings and expenditures could vary from these
estimates due to the complexity of the real estate development process.
During fiscal 1994, the Company reduced its average merchandise inventories
per warehouse store from $4.2 million at January 30, 1993 to $3.8 million at
January 29, 1994, including the effect of a $9.7 million reserve for write-down
of discontinued inventory. Cash provided by the reduction of inventories, net
of accounts payable, was $24.3 million in fiscal 1994 compared with a net cash
outflow for these items of $83.4 million in fiscal 1993.
The Company's restructuring is expected to generate a significant amount of
cash flow. The total pre-tax restructuring charge of $101.1 million includes
approximately $27 million for write-downs of property and inventory, which are
non-cash charges. In addition to tax benefits, cash flow will be generated by
the sale of inventory and property in the stores to be closed (net of accounts
payable and closing costs) and from the liquidation of HomeBase's discontinued
inventory. The initial phase of the restructuring, including the disposition of
all warehouse store locations and merchandise inventories, is expected to
result in $90 million to $100 million of cash inflow (including tax benefits).
The net cash outflow for long-term lease obligations (net of tax benefits)
after closing these locations is estimated to be $15 million to $20 million
over the remaining terms of the leases. The terms of these leases expire at
various dates through 2012. The actual amount of cash flow could vary from
these estimates, depending on certain factors, principally the Company's
ability to sublease or sell closed HomeBase locations on favorable terms.
17
<PAGE>
As of January 29, 1994, the balance of the current portion of the
restructuring reserve liability was $29.4 million and the noncurrent
restructuring reserve liability was $28.6 million. Merchandise inventories were
stated net of a reserve for write-down of discontinued inventories of $9.7
million, and property held for sale was stated net of a reserve for write-down
of $17.5 million. The balances of deferred tax assets at January 29, 1994 were
significantly higher than those at the end of the previous fiscal year
primarily because most of the restructuring charge was not currently
deductible. 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.
Under a bank credit agreement dated July 8, 1993 and amended November 15,
1993, the Company may borrow up to $80 million from a group of banks through
January 28, 1995, with any borrowings to be repaid by January 28, 1995. The
Company does not have any compensating balance requirements under this
agreement, but is required to pay a fee of one-half percent per annum of the
total commitment. Interest on borrowings is payable, at the Company's option,
either at (a) the Eurodollar rate plus one percent, or (b) the lending banks'
average prime rate. The agreement also contains covenants which, among other
things, include minimum fixed charge coverage and net worth requirements and
limit the payment of cash dividends on common stock in any fiscal year to not
more than 25% of the Company's consolidated net income for the immediately
preceding fiscal year. After the closing of this offering, the Company expects
to renegotiate the terms and expiration date of its bank credit facility. See
"Description of Certain Indebtedness--The Credit Agreement."
As of January 29, 1994, the Company had $19.9 million of cash and cash
equivalents. In addition to its $80 million bank credit agreement, the Company
maintained unsecured lines of credit to provide up to $15 million of short-term
borrowings with interest payable at a rate no greater than prime. There were no
borrowings outstanding under either the Company's bank credit agreement or its
unsecured lines of credit at January 29, 1994.
The Company expects that the proceeds of this offering, together with
anticipated cash flow from operations, proceeds from the disposition of
inventory and stores, borrowings available under its current bank credit
facility and borrowings expected to be available under a successor bank credit
facility that the Company plans to negotiate after the completion of this
offering, will be sufficient to finance its operations through fiscal 1996.
However, the Company may from time to time seek to obtain additional financing.
The Company's cash requirements may vary, based on its success in disposing of
the HomeBase stores planned for closing.
SEASONALITY
BJ's sales and profits have typically been strongest in the Christmas holiday
season, while HomeBase's sales and profits have been strongest in the spring
building season.
18
<PAGE>
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
one of the nation's four largest home improvement merchandisers using a
warehouse format. HomeBase offers a very broad assortment of home improvement
and building supply products. As of January 29, 1994, the Company operated 52
BJ's warehouse clubs and 82 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 for shipment to individual warehouses or to
consolidation/deconsolidation facilities where truckload shipments are
separated and reassembled for immediate delivery to individual warehouse
stores.
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 52 warehouse clubs in 12 states and has
over 2.6 million members. The table below shows BJ's locations by state.
<TABLE>
<CAPTION>
NUMBER OF
STATE LOCATIONS
----- ---------
<S> <C>
Massachusetts................................................... 11
New York........................................................ 11
Maryland........................................................ 5
New Jersey...................................................... 5
Florida......................................................... 4
Pennsylvania.................................................... 4
Virginia........................................................ 4
New Hampshire................................................... 3
Connecticut..................................................... 2
Delaware........................................................ 1
Maine........................................................... 1
Rhode Island.................................................... 1
---
Total......................................................... 52
===
</TABLE>
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,
19
<PAGE>
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 multi-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 and operating costs substantially below those of
traditional retailers. Warehouse clubs also carry bulk sizes and packaging
generally not available from 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 $39 billion in 1993, rapidly gaining market share of both food and
general merchandise sales. The Company believes that there is opportunity for
continued growth in market share. In 1993, the warehouse club industry
accounted for less than 3% of U.S. retail sales and less than 6% of U.S. retail
grocery sales. The Company expects that market share growth 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. The Company's
management believes the northeastern United States is underserved by the
warehouse club industry, as compared to other areas of the United States where
warehouse clubs account for a greater percentage of total retail sales.
STRATEGY
BJ's strategy is to build on its existing base of 52 warehouse clubs by (i)
opening additional warehouse clubs in markets in the Northeast, (ii) attracting
new members to existing warehouse clubs, and (iii) increasing BJ's share of
members' overall retail spending. BJ's has developed a number of programs to
execute this strategy:
Expand in Existing Markets. BJ's currently plans to open approximately 15 new
warehouse clubs each year over the next several years. The Company expects that
virtually all of these new warehouse clubs will be located in the Northeast,
with particular emphasis during fiscal 1995 on the metropolitan New
York/northern New Jersey market. BJ's new-store strategy is focused on filling
in existing markets, with expansion in future years planned for contiguous
market areas.
Continue to Implement Cost Reductions. Since BJ's appeal is based on its low
prices, BJ's constantly seeks to reduce its operating costs and pass these
savings along to its members. For example, BJ's has made extensive use of
consolidation/deconsolidation facilities to reduce the costs of transporting
and receiving merchandise by breaking down truckload quantity shipments from
manufacturers and re-allocating these goods for shipment, generally on a same-
day basis, to individual BJ's warehouse clubs. BJ's has also achieved
significant cost reductions over the past two years by installing supermarket
style conveyers and sophisticated scanning technology at its checkouts.
Increase Customer Base Through Marketing. BJ's strives to increase customer
awareness of the value provided by the membership warehouse format, as well as
the specific benefits of joining BJ's, through public relations efforts,
marketing programs for new stores, direct mail solicitations and by word-of-
mouth. BJ's also intends to continue to make limited use of television and
radio advertising to increase consumer awareness of its warehouse clubs.
Introduce New Products and Services. To increase its share of each member's
total purchases and the frequency of members' visits and to attract new
customers, BJ's continually introduces new products, services and membership
benefits. For example, in recent years BJ's has introduced fresh meat and
bakery departments, optical centers, lottery ticket counters, an auto buying
service and a travel service.
20
<PAGE>
EXPANSION
Over the last six fiscal years BJ's increased the number of its warehouse
clubs from 19 to 52.
<TABLE>
<CAPTION>
WAREHOUSE CLUBS WAREHOUSE
IN OPERATION WAREHOUSE CLUBS CLOSED CLUBS IN
FISCAL YEAR AT BEGINNING CLUBS OPENED DURING THE OPERATION AT
ENDED JANUARY OF YEAR DURING THE YEAR YEAR END OF YEAR
- ------------- --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
1989................. 19 3 -- 22
1990................. 22 1 -- 23
1991................. 23 5 1 27
1992................. 27 6 4 29
1993................. 29 10 -- 39
1994................. 39 13 -- 52
</TABLE>
BJ's store opening strategy for fiscal 1995 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
awareness of BJ's, by attracting new customers to more convenient locations and
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.
BJ's employs a team of experienced real estate professionals who are devoted
to identifying sites for future development, as well as a group of project
managers who coordinate the development of BJ's new warehouse club locations.
Many of the markets in which BJ's operates are already heavily developed, and
quality retail sites large enough to accommodate a BJ's warehouse club are
difficult to locate and develop. Zoning, environmental and other regulatory
approvals may also delay or prevent the development of a warehouse club
location. Although the Company believes that it will be able to obtain
sufficient locations to achieve its expansion objectives, there can be no
assurance of its ability to do so.
STORE PROFILE
The average size of the 52 BJ's warehouse clubs in operation at January 29,
1994 is approximately 110,000 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
$4.9 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. A new BJ's warehouse club entails an initial capital investment of
approximately $2.0 million for fixtures and equipment. In addition to capital
expenditures, each new warehouse club requires approximately $2.0 million for
inventory (net of accounts payable) and pre-opening expenses.
MERCHANDISING
BJ's merchandising strategy is to provide its members with a broad range of
high quality, brand name merchandise offered at every day prices consistently
lower than the prices available through traditional wholesalers, discount
retailers or supermarkets. An important element of this strategy is to carry
only those products for which the Company can provide its customers significant
cost savings. BJ's limits specific items in each product line to fast selling
styles, sizes and colors and, therefore, carries an average of approximately
3,500 stock-keeping units ("SKUs"). By contrast, supermarkets normally stock
18,000 to 35,000 SKUs.
In recent years, food has become an increasing percentage of BJ's sales mix
and currently represents approximately 60% of sales. The remaining 40% consists
of a wide variety of non-food items. Food categories
21
<PAGE>
at BJ's include frozen foods, meat and dairy products, dry grocery items, fresh
produce and canned goods. 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, cleaning supplies, paper goods, housewares and apparel.
BJ's continually strives to add new departments, services and membership
benefits to attract new members and to generate incremental sales from existing
members. In recent years, for example, BJ's has introduced fresh meat and
bakery departments, optical centers, lottery ticket counters, an auto buying
service and a travel service. 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.
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 29, 1994, the
Company had over 2.6 million members (including supplemental cardholders).
BJ's has generally charged an annual membership fee for individuals and
qualified businesses of $25 for the primary membership card, plus an additional
$10 for each supplemental card. The Company has recently changed this policy
and, in March 1994, began charging $30 for the primary membership card and will
provide one free supplemental card to each primary member. The Company believes
that its new fee structure will be competitive within the industry, will
increase the Company's aggregate number of members, and is designed to increase
the level of spending by each family or small business member. Additional
supplemental cards now 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 is beneficial in helping it to expand awareness of the
warehouse club concept and has attracted incremental sales without adversely
affecting its costs.
BJ's permits members to pay for their purchases by cash, check or Discover
card. In addition, the Company recently introduced a BJ's credit card, which is
provided by a major financial institution on a non-recourse basis. BJ's does
not accept other national credit cards because of their high fee structure.
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. BJ's 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. In 1993, the Company used 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.
22
<PAGE>
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. The Company's principal methods of
achieving operating efficiencies include the following:
Efficient Merchandise Handling. BJ's buys virtually all of its merchandise at
volume discounts from manufacturers for shipment either directly to BJ's
warehouse clubs or to a consolidation/deconsolidation facility. As a result,
BJ's 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 non-food merchandise as well as
an increasing percentage of food purchases through
consolidation/deconsolidation 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. Having vendors
ship to these consolidation/deconsolidation facilities permits BJ's to
negotiate better volume discounts and reduces freight expense by combining full
truckload merchandise shipments from different vendors to individual warehouse
clubs. In addition, by receiving and processing merchandise at a central point,
BJ's reduces the number of trucks received at each warehouse club and related
receiving costs. BJ's believes that its strategy of opening additional
warehouse clubs within existing markets will permit it to achieve further
efficiencies at its existing consolidation/deconsolidation facilities.
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.
Minimal Shrinkage. 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-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.
Reduced Working Capital Requirements. In order to generate rapid inventory
turnover, BJ's limits total inventories per warehouse club to an average of
approximately 3,500 active SKUs. As a result of its high sales volume and rapid
inventory turnover, BJ's has the opportunity to sell a substantial portion of
its inventory before it is required to pay vendors for such merchandise. As
sales in a given warehouse club increase and inventory turnover becomes more
rapid, a greater percentage of the inventory is financed through payment terms
provided by vendors rather than with working capital.
MANAGEMENT INFORMATION SYSTEMS
Over the past three years, BJ's has made a significant investment in
enhancing the efficiency with which it handles purchases and captures sales
information. While BJ's originally followed the traditional warehouse club
model of a two-person team at the checkout counter--a cashier plus a "caller"
who read out SKU numbers and physically transferred merchandise--BJ's was the
first warehouse club to eliminate the caller position by introducing 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
23
<PAGE>
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 MIS 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, several 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.). Price/Costco was formed in October 1993 by the merger of Costco
Wholesale Corporation and The Price Company, Inc., two large operators of
membership warehouse clubs. A majority of the units of another major operator
of warehouse clubs, Pace Membership Warehouse, Inc., were recently acquired by
Wal-Mart and combined with its Sam's division.
A large number of competitive membership warehouse clubs have opened in the
Northeast within the last two years. Forty-eight of BJ's 52 warehouse clubs
have at least one competitive membership warehouse club in their trading areas
at an average distance of approximately 6 miles. The influx of competitors'
units (as well as the addition of new BJ's warehouse clubs) over the past two
years has had an adverse effect on BJ's comparable stores' sales. While the
Company expects additional competition to continue for at least the next fiscal
year, it expects the pace of competitive openings will be lower than it has
been in the past two years, in part due to the recent industry consolidation.
Also, as a result of this consolidation, a number of former Pace warehouse
clubs and Price/Costco warehouse clubs have ceased operation in BJ's trading
areas.
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.
24
<PAGE>
HOMEBASE
GENERAL
HomeBase opened its first warehouse store in California in October 1983 and
as of January 29, 1994, operated 82 warehouse stores in 11 states (including 16
stores identified for closing). HomeBase's warehouse stores are located in the
western United States. The table below shows HomeBase's locations by state as
of January 29, 1994.
<TABLE>
<CAPTION>
NUMBER OF
STATE LOCATIONS
----- ---------
<S> <C>
California....................................................... 51
Washington....................................................... 8
Colorado......................................................... 5
Arizona.......................................................... 4
Oregon........................................................... 4
Nevada........................................................... 2
New Mexico....................................................... 2
Texas............................................................ 2
Utah............................................................. 2
Idaho............................................................ 1
Oklahoma......................................................... 1
---
Total.......................................................... 82*
===
</TABLE>
--------
* Includes 16 stores in operation at January 29, 1994 which the Company
plans to close as part of the restructuring of HomeBase. See
"HomeBase--Strategy."
INDUSTRY OVERVIEW
Warehouse-format home centers typically provide lower prices compared to
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 Do-It-Yourself (DIY)
customers who are individuals and families that are making purchases and
completing projects generally for their own homes on a Do-It-Yourself basis.
These 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 $115 billion in calendar 1993. The market for home improvement
products is fragmented, with the five largest home improvement retailers
representing approximately 20% of sales in 1992, and the top 100 operators
representing less than 40% of sales.
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
25
<PAGE>
to take advantage of economies created by large sales volumes. Despite the
significant growth of warehouse-format home centers in recent years, the
Company believes that this format represented less than 15% of the overall
market in 1993.
STRATEGY
Over the past three years, HomeBase has redirected its marketing focus to
attract a wider range of customers. Originally developed as a "membership
warehouse club" for the home improvement industry, HomeBase (then known as
"HomeClub") appealed primarily to those customers requiring little assistance
and a limited assortment of products at low prices. Recognizing that this
strategy was not addressing a large portion of the market for Do-It-Yourself
merchandise, HomeBase discontinued its membership requirement, changed its name
and broadened its merchandise assortment while retaining the operating
efficiencies inherent in the warehouse format.
HomeBase is currently implementing a series of strategic initiatives designed
to strengthen its market position in the western United States and improve its
profitability. These initiatives include (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 fiscal 1994, a new management team, led by a senior executive
from BJ's, was installed at HomeBase to implement these strategic initiatives.
The new management team also undertook a thorough review of HomeBase's
business and real estate strategies, the result of which was a recommendation
to take certain actions in a restructuring plan, which the Company's Board of
Directors approved on November 15, 1993. Consequently, in the fourth quarter of
fiscal 1994, the Company recorded a pre-tax restructuring charge of $101.1
million primarily to cover expenses related to the repositioning of HomeBase.
The restructuring is designed to enable 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 16
additional stores where the potential to achieve the Company's objectives is
limited, and (iii) liquidating certain discontinued merchandise. The Company
closed the eight stores in the Midwest in January 1994 and has disposed of five
of these locations. The Company is actively seeking to sell, assign or sublease
the remaining three midwestern stores, as well as the other 16 stores
identified for closing.
The following are critical elements of HomeBase's strategy for growth:
Provide Superior Customer Service. HomeBase believes that a high level of
customer service is required to build both customer loyalty and sales. To
improve its level of customer service, HomeBase added a significant number of
sales and service personnel in the fourth quarter of fiscal 1994. Many of the
recently hired personnel are tradespeople or specialists trained in particular
merchandise categories who will be able to provide knowledgeable assistance to
customers. HomeBase has also reoriented its training programs to emphasize the
importance of customer service and to focus sales personnel on becoming
knowledgeable specialists in particular areas of home improvement. By
increasing customer contact with knowledgeable tradespeople and trained
specialists, HomeBase believes that it will be able to raise its level of
customer service, thereby broadening its appeal both to DIY and professional
customers.
Increase Customer Awareness. The Company is undertaking an aggressive
marketing program to attract new customers by emphasizing HomeBase's enhanced
commitment to customer service, its broad product selection, high quality
merchandise and everyday low prices. This program will supplement HomeBase's
regular print advertising with the extensive use of television advertising.
26
<PAGE>
Build Customer Know-How. HomeBase believes that it is important not only to
address the needs of the existing DIY marketplace, but that it is also
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.
Serve the Professional. HomeBase has designed a series of programs designed
to specifically address the needs of contractors. A majority of HomeBase
warehouse stores have Contractor Desks, with staff dedicated to handling
contractors' special needs, including the ability to receive faxed orders and
pre-assemble them for pick-up, and 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.
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 in
the last six years:
<TABLE>
<CAPTION>
WAREHOUSE STORES WAREHOUSE
IN OPERATION AT WAREHOUSE WAREHOUSE STORES IN
FISCAL YEAR BEGINNING STORES OPENED STORES CLOSED OPERATION AT
ENDED JANUARY OF YEAR DURING THE YEAR DURING THE YEAR END OF YEAR
- ------------- ---------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
1989............. 36 10 -- 46
1990............. 46 12 -- 58
1991............. 58 8 -- 66
1992............. 66 7 -- 73
1993............. 73 13 -- 86
1994............. 86 5 9 82
</TABLE>
As of October 30, 1993, HomeBase operated 90 warehouse stores. As part of the
repositioning of HomeBase, the Company closed eight stores in the Midwest in
January 1994, resulting in 82 stores in operation at the end of fiscal 1994.
The Company has also announced its plans to close an additional 16 warehouse
stores. In fiscal 1995, HomeBase plans to open approximately four warehouse
stores, which will be located in existing market areas.
STORE PROFILE
The average size of the 82 HomeBase warehouse stores in operation at January
29, 1994 was 101,000 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 HomeBase warehouse store requires six
to ten acres of land. Construction and site development costs for a new
HomeBase warehouse store average $5.1 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
$1.5 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.
27
<PAGE>
MERCHANDISING
HomeBase's large product offering provides a broad selection of brand name
merchandise to both DIY customers and professional contractors. HomeBase's
merchandise selection is broad enough to allow a customer to purchase virtually
every item needed to build an entire home. The Company believes that its 25,000
SKU selection is broader than the selection offered by traditional home center
competitors.
By making use of the operating efficiencies of the warehouse format to
maximize productivity, HomeBase believes it is able to provide substantial
savings over other channels of home improvement and building supply product
distribution. In order to achieve greater operational efficiencies, HomeBase
has recently centralized its merchandise replenishment operations and improved
its logistics of distribution to reduce freight costs. By centralizing its
replenishment activities, the Company believes it will be able to improve the
manner in which it acquires products. In addition, this program will permit the
Company to redeploy store personnel, which will increase customer service.
Merchandise sold by HomeBase includes lumber, building materials, plumbing
supplies and fixtures, electrical materials and fixtures, hand and power tools,
hardware, paints, garden supplies, nursery items, home decorative items and
related seasonal and household merchandise. HomeBase's name brand orientation
allows customers to compare HomeBase's prices to the same items offered by
competitors. In selected categories, HomeBase supplements these name brand
offerings with high quality private label products at lower prices. As part of
its restructuring, in the fourth quarter of fiscal 1994, HomeBase discontinued
certain merchandise unrelated to its core home improvement offerings. In
addition, HomeBase raised prices on selected merchandise items to the lower end
of the range of prices offered by competitors in the relevant trading area.
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 are used to reinforce HomeBase's
image of providing superior customer service and offering a broad assortment of
merchandise at every day 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. The Company has recently commenced an aggressive
marketing program to attract new customers by emphasizing HomeBase's enhanced
commitment to customer service, its broad product selection, high quality
merchandise and everyday low prices.
WAREHOUSE OPERATIONS
Customer Service. 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.
The HomeBase warehouse is designed to serve both the contractor and DIY
markets. 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's contractor desk, with its dedicated staff, permits the contractor to
take advantage of the breadth of HomeBase's offerings in a timely manner.
Complemented by HomeBase's delivery capability, the HomeBase contractor desk
strives to be the "supplier of first choice" to the professional contractor
market.
Training. HomeBase strives to develop the skills of its store personnel to
ensure that customers consistently receive knowledgeable and courteous
assistance. HomeBase's training programs have been recently reoriented to
emphasize the importance of customer service and to improve store employees'
selling
28
<PAGE>
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.
Low Cost Operation. HomeBase purchases most of its merchandise directly from
manufacturers for shipment either directly to the selling warehouse store or to
consolidation/deconsolidation 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 facilities, HomeBase's fixturing
and operating costs are kept substantially below those of traditional home
improvement retailers.
Credit. HomeBase offers its own private label credit card to customers under
a non-recourse program operated by a major financial institution. The Company
plans to introduce a similar third party program directed toward professional
contractors. HomeBase 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. These systems are designed to enhance HomeBase's "quick response"
capability. 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. From this information, the data center produces daily reports that
are used to support merchandising, inventory replenishment and promotional
decisions.
HomeBase's satellite television network broadcasts several times each week to
all of HomeBase's warehouse stores. Broadcasts include training sessions,
vendor product demonstrations and interactive discussions with HomeBase's
management.
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 700 vendors and
plans to expand its use of this technology.
COMPETITION
HomeBase competes with 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 improving 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. Major competitors in
HomeBase's market areas that also use the warehouse merchandising format
include The Home Depot, Inc. and Builder's Square Inc. (a subsidiary of Kmart
Corporation). Approximately 70% of HomeBase's warehouse stores currently have
at least one warehouse home improvement retailer in their trading areas at an
average distance of approximately 3 miles. Approximately 60% of HomeBase's
warehouse stores currently compete with Home Depot units. HomeBase also
competes with a number of smaller regional operators such as Orchard Lumber
Supply, Contractor's Warehouse (a division of Grossman's Inc.) and Eagle
Hardware & Garden, Inc. Some of the Company's competitors have significantly
greater financial and marketing resources than the Company.
29
<PAGE>
EMPLOYEES
As of January 29, 1994, the Company had approximately 16,000 employees, of
whom approximately 2,300 were part-time employees. Approximately 1,100
employees were corporate and divisional management and office support
employees; the balance were warehouse personnel. All full-time employees are
eligible for Company subsidized medical benefits after a minimum period of
service.
None of the Company's employees is represented by unions. The Company
considers its relations with its employees to be excellent.
PROPERTIES
The Company operated 134 warehouse locations as of January 29, 1994, of which
108 are leased under long-term leases and 22 are owned. The Company owns the
buildings at the remaining four locations, which are subject to long-term
ground leases.
The unexpired terms of these leases range from one year to 39.9 years, and
average approximately 14.2 years. The Company has options to renew all but one
of its leases for periods that range from approximately 5 to 50 years and
average approximately 18.4 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.
30
<PAGE>
MANAGEMENT
The following sets forth certain information regarding directors and
executive officers of the Company.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AGE WITH THE COMPANY
---- --- ---------------------
<S> <C> <C>
Sumner L. Feldberg............... 69 Chairman of the Board
S. James Coppersmith............. 61 Director
Stanley H. Feldberg.............. 69 Director
Allyn L. Levy.................... 66 Director
Arthur F. Loewy.................. 65 Director
Thomas J. Shields................ 46 Director
Lorne R. Waxlax.................. 60 Director
Herbert J Zarkin................. 55 President, Chief Executive Officer and
Director
John J. Nugent................... 47 Executive Vice President, President--BJ's
Wholesale Club
Allan P. Sherman................. 49 Executive Vice President, President--
HomeBase
Dale N. Garth.................... 44 Senior Vice President, Treasurer and Chief
Financial Officer
Sarah M. Gallivan................ 51 Vice President--General Counsel and
Secretary
Edward J. Weisberger............. 52 Vice President--Finance
</TABLE>
SUMNER L. FELDBERG has been Chairman of the Board since February 1989. Mr.
Feldberg is also Chairman of the Board of TJX, and was Chairman of TJX from
1973 to 1987 and Chairman of that company's Executive Committee from 1987 to
1989. Mr. Feldberg is a trustee of Mass. Mutual Corporate Investors, Inc. and
Mass. Mutual Participation Investors. Mr. Feldberg is also a past chairman of
the National Retail Merchants Association. Mr. Feldberg is Chairman of the
Executive Committee and a member of the Finance Committee.
S. JAMES COPPERSMITH has been a director of the Company since December 1993.
He was President and General Manager of WCVB-TV, a Boston television station,
from 1990 to 1994, and is currently President of WCVB-TV. From 1982 to 1990 he
was Vice President and General Manager of WCVB-TV. Mr. Coppersmith is a
director of Sun America Asset Management Corporation and Uno Restaurant
Corporation and Chairman of the Board of Trustees of Emerson College. Mr.
Coppersmith is a member of the Executive Compensation Committee.
STANLEY H. FELDBERG has been a director of the Company since February 1989.
He is a director of TJX and was President of TJX from 1956 to 1978. He is also
an independent general partner of ML-Lee Acquisition Funds I and II. Mr.
Feldberg is a member of the Audit Committee and the Executive Compensation
Committee.
ALLYN L. LEVY has been a director of the Company since October 1993. He has
been a private investor since 1988. From 1974 until 1986, he was founder,
Chairman of the Board and Chief Executive Officer of Patriot Bank Corporation,
a commercial bank holding company. He is a director of CV Reit, Inc. Mr. Levy
is a member of the Audit Committee.
ARTHUR F. LOEWY has been a director of the Company since February 1989. He is
a director of TJX and was Chief Financial Officer and Executive Vice
President--Finance of TJX from 1982 to 1989. Mr. Loewy is Chairman of the
Finance Committee.
THOMAS J. SHIELDS has been a director of the Company since June 1992. He is
President of Thomas J. Shields & Company, Inc., an investment banking and
financial advisory firm. From 1989 to 1991 he was a Managing Director of Bear,
Stearns & Co. Inc. and from 1982 to 1991 Mr. Shields was Manager of the Boston
Corporate Finance office of Bear, Stearns & Co. Inc. Mr. Shields is also a
director of Seaboard Corporation. Mr. Shields is Chairman of the Audit
Committee.
31
<PAGE>
LORNE R. WAXLAX has been a director of the Company since January 1990. He was
an Executive Vice President of The Gillette Company from 1985 to 1993. Mr.
Waxlax is also a director of the Iams Company, Hon Industries, Inc., Clean
Harbors, Inc. and AMTROL Inc. Mr. Waxlax is Chairman of the Executive
Compensation Committee and a member of the Executive Committee.
HERBERT J ZARKIN has been a director, President and Chief Executive Officer
of the Company since May 1993 and was President of the Company's BJ's Wholesale
Club Division from May 1990 to May 1993. From April 1989 to May 1993 he was
Executive Vice President of the Company. He was previously with TJX as Senior
Vice President--Warehouse Club Divisions from December 1988 to June 1989. He
was Chairman of the Zayre Stores Division of TJX from May 1988 and continued in
that capacity through December 1988 following TJX's sale of that division in
October 1988; he was President of TJX's HomeBase Division during 1986-1988. Mr.
Zarkin is a member of the Executive Committee and the Finance Committee.
JOHN J. NUGENT has been Executive Vice President of the Company and President
of BJ's Wholesale Club since September 1993. From 1991 to 1993 he was Senior
Vice President of BJ's Wholesale Club and from 1989 to September 1993 he was
Director of Sales Operations of BJ's Wholesale Club. Prior thereto, he was Vice
President of Operations at Child World from 1980 to 1989.
ALLAN P. SHERMAN has been Executive Vice President of the Company since May
1993 and President of HomeBase since September 1993. From May 1993 to September
1993 he was President of BJ's Wholesale Club. From August 1991 to May 1993 he
was Senior Vice President and General Merchandise Manager--Non Food of BJ's
Wholesale Club and was Vice President and General Merchandise Manager--Non Food
of BJ's Wholesale Club from February 1991 to August 1991. Prior thereto, Mr.
Sherman was President of My House, a division of Jamesway (1989-1991) and
Divisional Merchandise Manager of the Zayre Stores Division of TJX from 1986
and continued in that capacity through May 1989 following TJX's sale of that
division in October 1988.
DALE N. GARTH has been Senior Vice President and Chief Financial Officer of
the Company since September 1992 and Treasurer since December 1992. Prior
thereto, Mr. Garth was Senior Vice President, Finance and Chief Financial
Officer of Talbots, Inc. (1989-1991).
SARAH M. GALLIVAN has been employed by the Company since October 1989 and was
elected Vice President, General Counsel and Secretary of the Company in
December 1989. Prior thereto, Ms. Gallivan was with Damon Corporation as legal
counsel from 1973 to 1989.
EDWARD J. WEISBERGER has been Vice President-Finance of the Company since
April 1989. Prior thereto, Mr. Weisberger was Vice President--Corporate
Controller of TJX (1987-1989).
Stanley H. Feldberg and Sumner L. Feldberg are first cousins. There are no
other family relationships among any of the Company's directors and executive
officers.
32
<PAGE>
RELATIONSHIP WITH TJX
In connection with the Company's 1989 spin-off from TJX (the "Spin-off"), the
Company and TJX entered into a Distribution Agreement and a Services Agreement.
The Distribution Agreement provides for, among other things, (i) the division
between the Company and TJX of certain liabilities and (ii) certain other
agreements governing the relationship between the Company and TJX following the
Spin-off. Under the Distribution Agreement, TJX assumed certain liabilities
relating to the Company's business for the period prior to the Spin-off. In
general, the Company assumed responsibility for all post-Spin-off liabilities
relating to its business. TJX retained liability for insured claims arising
before the Spin-off and in 1999 will receive from (or pay to) the Company the
amount by which TJX's costs at the end of this 10-year period exceed (or are
less than) the reserve amount agreed to.
Pursuant to the Services Agreement, TJX provided certain services, primarily
data processing, to the Company during fiscal 1994, for which the Company paid
TJX approximately $6.5 million. The Company has elected to continue to purchase
data processing and certain other services through fiscal 1995.
33
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 29, 1994 (unless
otherwise indicated) by (i) each person known to the Company to beneficially
own more than 5% of the outstanding shares of Common Stock, (ii) each director
of the Company, (iii) each executive officer of the Company and (iv) all the
Company's directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF OUTSTANDING
NAME SHARES(1) COMMON STOCK(1)
- ---- --------- ---------------
<S> <C> <C>
FMR Corp. ........................................ 4,310,338(2) 13.0%
82 Devonshire Street
Boston, Massachusetts 02109
David J. Greene and Company....................... 2,089,027(3) 6.3%
599 Lexington Avenue
New York, New York 10022
The Prudential Insurance Company of America....... 1,921,290(4) 5.8%
Prudential Plaza
Newark, New Jersey 01702
Mellon Bank Corporation and subsidiaries.......... 1,751,000(5) 5.3%
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Sumner L. Feldberg................................ 179,958(6) *
S. James Coppersmith.............................. 2,000 *
Stanley H. Feldberg............................... 153,017(6) *
Allyn L. Levy..................................... 5,000 *
Arthur F. Loewy................................... 6,632(6) *
Thomas J. Shields................................. 500 *
Lorne R. Waxlax................................... 5,000 *
Herbert J Zarkin.................................. 150,182 *
John J. Nugent.................................... 65,936 *
Allan P. Sherman.................................. 49,500 *
Dale N. Garth..................................... 15,625 *
Sarah M. Gallivan................................. 11,500 *
Edward J. Weisberger.............................. 31,976 *
All directors and executive officers as a group
(13 persons)..................................... 643,460 1.9%
</TABLE>
- --------
* Less than 1%.
(1) Includes the following shares of Common Stock issuable in respect of
shares of Common Stock that may be acquired upon exercise of outstanding
stock options which are exercisable on January 29, 1994 or within 60 days
thereafter: Mr. Zarkin, 52,672 shares; Mr. Nugent, 27,250 shares; Mr.
Sherman, 19,500 shares; Mr. Garth, 3,125 shares; Mr. Weisberger, 13,936
shares; Ms. Gallivan, 5,000 shares; all directors and executive officers
as a group, 121,483 shares.
(2) Information is as of March 31, 1994 and is based on a Schedule 13G filed
with the Commission by FMR Corp. and Edward C. Johnson 3d. FMR Corp.
reported that it has sole power to vote or to direct the voting of 72,843
shares, and sole dispositive power as to all such shares. Includes
4,186,901 shares beneficially owned by Fidelity Management & Research
Company, a registered investment adviser, including 2,926,300 shares held
by Fidelity Magellan Fund. Includes an aggregate of 183,838 shares
issuable upon conversion of Convertible Subordinated Debentures.
(3) Information is as of December 31, 1993 and is based on a Schedule 13G
filed with the Commission by David J. Greene and Company, a registered
broker-dealer and investment adviser. David J. Greene and Company reported
that it has sole power to vote 115,000 shares and shared power to vote
1,314,100 shares and has sole dispositive power with respect to 115,000
shares and shared dispositive power with respect to 1,974,027 shares.
(4) Information is as of December 31, 1993 and is based on a Schedule 13G
filed with the Commission by The Prudential Insurance Company of America
("Prudential"). Prudential reported that is has sole power to vote 6,400
shares and shared power to vote 1,914,890 shares and has sole dispositive
power with respect to 6,400 and shared dispositive power with respect to
1,914,890 shares.
(5) Information is as of December 31, 1993 and is based on a Schedule 13G
filed with the Commission by Mellon Bank Corporation ("Mellon") on its own
behalf and on behalf of several of its subsidiaries. Mellon reported that
it and its subsidiaries have sole power to vote 1,055,000 shares and
shared power to vote 70,000 shares and have sole dispositive power with
respect to 1,446,000 shares and shared dispositive power with respect to
305,000 shares.
(6) Includes the following shares beneficially owned by the following persons
as trustees or custodians of which beneficial interest is disclaimed
unless otherwise indicated: Stanley H. Feldberg (33,366 shares); Sumner L.
Feldberg (73,029 shares, of which 33,366 are shares also beneficially
owned by Stanley H. Feldberg). Excludes the following shares beneficially
owned by or held in trust by or for the benefit of the respective spouses
of the following persons and any shares held in a trust for which the
following persons are income beneficiaries, as to which the following
persons disclaim beneficial ownership: Stanley H. Feldberg (90,663
shares); Sumner L. Feldberg (13,168 shares); and Arthur F. Loewy (413
shares).
34
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an indenture (the "Indenture") to be
dated as of May 11, 1994 between the Company and The First National Bank of
Boston, as trustee (the "Trustee"), the form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (the
"Trust Indenture Act"). The Notes are subject to all such terms and holders of
the Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of certain provisions of the Indenture
does not purport to be complete and is qualified in its entirety by reference
to the Indenture, including the definitions therein of certain terms used
below. The definitions of certain terms used in the following summary are set
forth below under "Certain Definitions." Section references in this Prospectus
refer to sections in the Indenture.
The Notes will be general obligations of the Company. The Notes will be
senior subordinated obligations of the Company, subordinate in the right of
payment to all Senior Indebtedness of the Company and will be senior in right
of payment to, or pari passu in right of payment with, other subordinated
indebtedness of the Company. The Notes are effectively subordinate to all
indebtedness and other liabilities of Subsidiaries of the Company.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $100,000,000 and will
mature on May 15, 2004. Interest on the Notes will accrue to the rate of 11%
per annum and will be payable semi-annually on each May 15 and November 15,
commencing on November 15, 1994, to the holder of record on the immediately
preceding May 1 and November 1, whether or not a business day. Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of first issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months. The
Notes will be payable both as to principal and interest at the office or agency
of the Company maintained for such purpose within the City and State of New
York or, at the option of the Company, payment of interest may be made by check
mailed to the holders of the Notes at their respective addresses set forth in
the register of holders of Notes. Unless otherwise designated by the Company,
the Company's office or agency in New York City will be the office of the
Trustee maintained for such purpose. The Notes will be issued in denominations
of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
The Notes are not redeemable at the option of the Company prior to May 15,
1999. Thereafter, the Notes will be subject to redemption at the option of the
Company, in whole or in part, at the redemption prices (expressed as a
percentage of the principal amount) set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve month period beginning May 15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICES
---- ----------
<S> <C>
1999............................................................ 105 1/2%
2000............................................................ 103 5/8%
2001............................................................ 101 7/8%
2002 and thereafter............................................. 100%
</TABLE>
(Section 3.01).
35
<PAGE>
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
the Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed or, if the Notes are not listed on a national securities
exchange, on a pro rata basis, by lot or by such method as the Trustee shall
deem fair and appropriate, provided that notice shall be mailed by first class
mail at least 15 but not more than 60 days before the redemption date to each
holder of Notes to be redeemed at its registered address. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original Note. On and after
the redemption date, interest ceases to accrue on Notes or portions of them
called for redemption. (Sections 3.02 through 3.06).
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined below), each holder
shall have the right to require at such holder's election the repurchase of all
or a portion (in $1,000 increments) of such holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at a purchase price equal
to 101% of the aggregate principal amount plus accrued and unpaid interest, if
any, to the date of purchase. Immediately following any Change of Control, the
Company shall mail a notice to the Trustee and to each holder stating: (i) that
the Change of Control Offer is being made pursuant to the "Repurchase Upon
Change of Control" covenant in the Indenture and that all Notes tendered will
be accepted for payment; (ii) the purchase price and the purchase date (which
shall be no earlier than 30 days nor later than 60 days from the date such
notice is mailed) (the "Change of Control Payment Date"); (iii) that any Note
not tendered will continue to accrue interest; (iv) that, unless the Company
defaults in the payment thereof, all Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest on and after the Change
of Control Payment Date; (v) that holders electing to have any Notes purchased
pursuant to a Change of Control Offer will be required to surrender the Notes
to be purchased to the Paying Agent at the address specified in the notice
prior to the close of business on the Business Day preceding the Change of
Control Payment Date; (vi) that holders will be entitled to withdraw their
election on the terms and conditions set forth in such notice; (vii) that
holders whose Notes are being purchased only in part will be issued new Notes
equal in principal amount to the unpurchased portion of the Notes surrendered;
provided that each Note purchased and each such new Note issued shall be in a
principal amount of $1,000 or integral multiples thereof; and (viii) the
circumstances and relevant facts regarding such Change of Control (including
pro forma historical financial information after giving effect to such Change
of Control) and information regarding the person or persons acquiring control.
On the Change of Control Payment Date, the Company shall (i) accept for
payment all Notes or portions thereof tendered, pursuant to the Change of
Control Offer, (ii) deposit with the Paying Agent money sufficient to pay the
purchase price of all Notes or portions thereof so tendered, and (iii) deliver
or cause to be delivered to the Trustee, all Notes so tendered together with an
officer's certificate specifying the Notes or portions thereof tendered to the
Company. The Paying Agent shall promptly mail to each holder of Notes so
tendered, payment in an amount equal to the purchase price for such Notes, and
the Trustee shall promptly authenticate and mail to such holder a new Note
equal in principal amount to any unpurchased portion of the Notes surrendered;
provided that such new Note shall be in a principal amount of $1,000 or
integral multiples thereof. The Company will publicly announce the results of
the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date. (Section 4.11).
The Company will comply with the requirements of Rule 14e-1 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes
triggered by a Change of Control.
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"Change of Control" means (a) the acquisition, including through merger,
consolidation or otherwise, by any Person or any group for purposes of Section
13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof, of
direct or indirect beneficial ownership (as defined in Rule 13d-3 of the
Exchange Act) of 50% or more of either (i) the outstanding shares of common
stock of the Company or (ii) the total voting power of all classes of capital
stock of the Company entitled to vote generally in the election of directors,
or (b) the Company sells, conveys, transfers or leases all or substantially all
of its assets (including without limitation the stock of one or more Subsidiary
Guarantors (as defined below) which singly or in the aggregate own all or
substantially all of the assets of the Company and its Subsidiaries determined
on a consolidated basis to any Person (other than one or more Wholly-owned
Subsidiaries)) in a transaction or series of related transactions, other than
in connection with the reincorporation of the Company in another jurisdiction
where each holder of common stock immediately prior to such reincorporation
owns the same percentage of the Company immediately after its reincorporation.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of the Notes to require
that the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring. The Company's ability to purchase
the Notes will be limited by the Company's then available financial resources
and, if such financial resources are insufficient, its ability to arrange
financing to effect such purchases. There can be no assurance that the Company
will have sufficient funds to repurchase the Notes upon a Change of Control or
that the Company will be able to arrange financing for such purpose.
The occurrence of a change of control as defined in the Credit Agreement
would constitute an event of default under the Credit Agreement and could
result in the acceleration of the Company's debt repayment obligations
thereunder. Upon the occurrence of a change of control, as defined in each of
the Company's Convertible Subordinated Debentures and the Senior Notes, the
Company is obligated to offer to redeem the Convertible Subordinated Debentures
at par and the Senior Notes at par, plus a make-whole amount or adjusted make-
whole amount (each as defined). In such event, the Company may not have
sufficient resources to satisfy all its repayment and repurchase obligations.
SUBORDINATION
The Notes are subordinated in right of payment to the prior payment in full
in cash or, at the sole option of the holders of Senior Indebtedness, cash
equivalents, of all Senior Indebtedness. (Section 10.01).
Upon any (i) bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property (whether voluntary or
involuntary), (ii) assignment for the benefit of creditors or any marshalling
of the assets and liabilities of the Company or (iii) distribution to creditors
of the Company in a liquidation or dissolution of the Company, the indebtedness
and other monetary claims and obligations evidenced by the Notes (including,
without limitation, principal of, premium, if any, and interest) will be
subordinated in right of payment, to the extent and in the manner set forth in
the Indenture, to the prior payment in full of all Senior Indebtedness,
including any interest accruing on such Senior Indebtedness before or after the
commencement of such proceeding. Upon any default by the Company in the payment
of the principal of, premium, if any, or interest on Senior Indebtedness, when
the same becomes due, no payment may be made on or in respect of the Notes
until such default has been cured or waived. No such subordination will limit
the right of the holders of the Notes or Trustee to take any action to
accelerate the maturity of the Notes or pursue other remedies upon the
occurrence of any Event of Default (as defined in the Indenture); provided,
however, that all Senior Indebtedness then due and payable must first be paid
in full before the holders of the Notes or the Trustee are entitled to receive
any payment from the Company in respect of the Notes. The Indenture also
provides that no payment may be made by the Company upon or in respect of the
Notes for the period specified below (the "Payment Blockage Period") during the
continuance of any non-payment event of default with respect to Specified
Senior Indebtedness pursuant to which the maturity thereof may be accelerated.
The Payment Blockage Period shall commence on the earlier of (i) the
commencement of judicial proceedings relating to a non-payment event of
default, (ii) receipt by the Trustee of notice from the holder or holders of at
least 25% in aggregate principal amount of any Specified Senior Indebtedness,
the trustee or an authorized representative for the holders of any Specified
Senior Indebtedness or (iii) if such
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non-payment event of default results from the acceleration of the Notes, the
date of such acceleration, and shall end 179 days thereafter unless (a)
appropriate enforcement proceedings shall have been commenced upon such non-
payment default or (b) such Payment Blockage Period shall have been earlier
terminated. The holders of more than one class of Senior Indebtedness who
collectively meet the $20,000,000 threshold for Specified Senior Indebtedness
may act in concert to cause a Payment Blockage Period. Not more than one
Payment Blockage Period with respect to the Notes may be commenced during any
period of 360 consecutive days. No event of default that existed or was
continuing on the date of the commencement of any Payment Blockage Period with
respect to the Specified Senior Indebtedness and which was known to the holder
or holders (or agents) of such Specified Senior Indebtedness on such date of
commencement shall be made the basis for the commencement of a second Payment
Blockage Period by the representative for or the holders of such Specified
Senior Indebtedness whether or not within a period of 360 consecutive days.
(Section 10.03).
As a result of the subordination provisions described above, in the event of
insolvency of the Company, creditors of the Company who are not holders of
Senior Indebtedness may recover less ratably than holders of Senior
Indebtedness and may recover more ratably than holders of the Notes and the
Company may be unable to make all payments due under the Notes.
As of January 29, 1994, after giving effect to the issuance of the Notes, the
aggregate amount of Senior Indebtedness outstanding was $79.7 million. Certain
of the Company's operations are conducted through its Subsidiaries. As of
January 29, 1994, the Subsidiaries of the Company had outstanding Indebtedness
of approximately $11.4 million, including trade payables, and had property and
assets with a book value of approximately $261.8 million. As of January 29,
1994, the Company's total shareholders' equity was $420.5 million. The Notes
will be structurally subordinated to Indebtedness of the Company's present and
future Subsidiaries, including trade payables. In the future, the Company may
issue additional Senior Indebtedness to refinance existing indebtedness or for
other corporate purposes. See "Limitation on Additional Indebtedness."
CERTAIN COVENANTS
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any of its Subsidiaries to, directly or
indirectly, (i) declare or pay any dividend or make any distribution or
repurchase on account of the Company's or any of its Subsidiaries' Capital
Stock or other Equity Interests (other than dividends or distributions payable
to the Company or any of its Wholly-owned Subsidiaries or payable in shares of
Capital Stock of the Company other than Redeemable Stock), (ii) purchase,
redeem or otherwise retire for value any Equity Interests of the Company or any
of its Subsidiaries (other than any purchase, redemption or retirement of such
Equity Interests owned by the Company or any of its Wholly-owned Subsidiaries);
(iii) purchase, redeem, prepay, defease or otherwise retire for value prior to
scheduled maturity, repayment or sinking fund payment, (A) any Indebtedness of
the Company that is contractually subordinated in right of payment to the
Notes, or (B) any Indebtedness of any Subsidiary that is contractually
subordinated in right of payment to the Notes other than Indebtedness to the
Company or (iv) make Investments (either through the Company or any of its
Wholly-owned Subsidiaries) other than Permitted Investments (the foregoing
actions set forth in clauses (i) through (iv) being referred to as "Restricted
Payments"), if at the time of such Restricted Payment:
(a) a Default or Event of Default shall have occurred and be continuing
or shall occur as a consequence thereof; or
(b) such Restricted Payment, together with the aggregate of all other
Restricted Payments made on or after the date of the Indenture, exceeds (x)
$35 million (in the event the Notes on the date of computation are rated
BBB- (or better) by Standard & Poor's Corporation and Baa3 (or better) by
Moody's Investors Service, Inc., such amount shall be increased by $50
million) plus 50% of the amount of the cumulative Consolidated Net Income
of the Company for the period (taken as one accounting period) from January
29, 1994 through the last fiscal quarter immediately preceding such
Restricted Payment (or, if Consolidated Net Income for such period is a
deficit, minus 100% of such deficit); plus (y) 100% of the aggregate net
cash proceeds received by the Company on or after January 29, 1994
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from (i) the issue or sale of Equity Interests of the Company (other than
such Equity Interests issued or sold to a Subsidiary of the Company and
other than Redeemable Stock), (ii) the conversion of Indebtedness of the
Company (other than (A) in respect of the Convertible Subordinated
Debentures or (B) such Indebtedness held by a Subsidiary of the Company)
into Capital Stock of the Company (other than Redeemable Stock), which for
purposes of this clause (b) shall be valued at the net cash proceeds
received by the Company upon the initial issuance of such Indebtedness plus
such additional Cash consideration payable to the Company upon such
conversion, or (iii) the net cash proceeds received by the Company from its
investment in, and the sale, disposition or other liquidation of,
Investments that are not Permitted Investments; or
(c) immediately after such Restricted Payment, the Company would not be
permitted to incur $1.00 of additional Indebtedness pursuant to the
covenants set forth in "Limitation of Additional Indebtedness" below.
The foregoing provisions will not prohibit, so long as no Default or Event of
Default shall have occurred and be continuing: (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the retirement of any shares of the Company's Capital Stock in
exchange for, or out of the net proceeds of the substantially concurrent sale
(other than to a Subsidiary of the Company) of other shares of the Company's
Capital Stock, other than any Redeemable Stock; (iii) Investments by the
Company or a Subsidiary of the Company in the Company or a Wholly-owned
Subsidiary of the Company or the purchase, redemption, or other acquisition or
retirement for value of such Investments; (iv) acquisitions of Wholly-owned
Subsidiaries; (v) the purchase, redemption, prepayment, defeasance or other
acquisition or retirement for value prior to scheduled maturity, or any
repayment or sinking fund payment of any Indebtedness of any Wholly-owned
Subsidiary of the Company which is not contractually subordinated in right of
payment to the Notes; (vi) the redemption, repurchase or other acquisition or
retirement for value of Subordinated Indebtedness of the Company which is made
in exchange for, or out of proceeds of the substantially concurrent issue and
sale (other than to a Subsidiary) of (A) shares of Capital Stock (other than
Redeemable Stock) of the Company, provided, however, that any Net Cash Proceeds
from such issue are excluded from clause (b)(y)(i) of the preceding paragraph
or (B) new Indebtedness of the Company, so long as (1) such Indebtedness is
expressly subordinated to the Notes at least to the same extent as the
Subordinated Indebtedness being so refinanced; (2) such Indebtedness has an
Average Life to Stated Maturity equal to or greater than the remaining Average
Life to Stated Maturity of the Notes; and (3) such Indebtedness has a final
scheduled maturity which exceeds the final Stated Maturity of the Notes,
provided, however, that any Net Cash Proceeds from such issue are excluded from
clause (b)(y)(ii) of the preceding paragraph; and (vii) loans and advances to
officers and employees of the Company or any of its Subsidiaries up to $5
million in the aggregate outstanding at any one time. For purposes of
determining the aggregate permissible amount of Restricted Payments in
accordance with clause (b) of the first paragraph of this covenant, no amounts
expended pursuant to clauses (iii), (iv), (v), (vi) and (vii) of this paragraph
shall be included. (Section 4.06).
Limitation on Payment Restrictions Affecting Subsidiaries. The Indenture
provides that the Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective or enter into any agreement, with any Person that
would cause or permit to exist or become effective, any encumbrance or
restriction on the ability of (i) any Wholly-owned Subsidiary to pay dividends
or make any other distributions on its Capital Stock or any other interest or
participation in, or measured by, its profits, owned by the Company or any of
its Subsidiaries or (ii) any Subsidiary to (A) pay any Indebtedness owed to the
Company or any Subsidiary, (B) make loans or advances to the Company, or (C)
transfer any of its properties or assets to the Company, except for purposes of
clauses (i) and (ii), for such encumbrances or restrictions existing under or
by reason of (1) applicable law, (2) the Indenture, (3) customary non-
assignment provisions of any lease governing a leasehold interest of the
Company or any of its Subsidiaries, (4) any instrument governing indebtedness
of a Person acquired by the Company or any of its Subsidiaries at the time of
such acquisition, which encumbrance or restriction is applicable to any Person
so acquired or its properties or assets and was not entered into in connection
with such acquisition, (5)
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encumbrances or restrictions under Existing Indebtedness or (6) encumbrances or
restrictions under any Real Estate Financing by any of the Company's
Subsidiaries. (Section 4.07).
Limitation on Other Senior Subordinated Debt. The Indenture provides that the
Company will not incur, create, assume, guarantee or otherwise become liable
for any Indebtedness that is contractually subordinated in right of payment to
any Senior Indebtedness and contractually senior in any respect in right of any
payment to the Notes. (Section 4.08).
Limitation on Additional Indebtedness. The Indenture provides that the
Company shall not, and shall not permit any of its Subsidiaries, directly or
indirectly, to create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable with respect to any Indebtedness other than
Permitted Indebtedness; provided, however, that (a) the Company or any
Subsidiary may incur Indebtedness if, after giving pro forma effect to the
incurrence of such Indebtedness and the application of any of the proceeds
therefrom to repay Indebtedness as if such incurrence had occurred on the first
day of such period, the Consolidated Interest Coverage Ratio for its four full
fiscal quarters ending immediately prior to the date such additional
Indebtedness is created, incurred, issued, assumed or guaranteed will be at
least 2.5 to 1.0 prior to May 15, 1995, and at least 2.75 to 1.0 thereafter,
provided that such calculation shall give effect to (A) the incurrence of any
Indebtedness (after giving effect to the application of the proceeds thereof)
in connection with the simultaneous acquisition of any Person, business,
property or assets, and (B) the Consolidated Net Income generated by such
acquired Person, business, property or assets, giving effect in each case to
such incurrence of Indebtedness, application of proceeds and Consolidated Net
Income as if such acquisition had occurred at the beginning of such four
quarter period, and (b) a Subsidiary of the Company may incur Indebtedness if
(i) the assets of the Subsidiary consist solely of (x) real estate securing
Real Estate Financing and (y) other assets with a book value not in excess of
10% of the principal amount of any Indebtedness incurred by such Subsidiary and
such Indebtedness constitutes Real Estate Financing at the time it is created,
incurred, issued, assumed or guaranteed by such Subsidiary of the Company
(which Real Estate Financing shall not have been guaranteed by the Company and
shall be non-recourse to the Company) or (ii) such Indebtedness, together with
all other Indebtedness of all Subsidiaries of the Company (other than
Indebtedness incurred pursuant to clause (b)(i) of this paragraph), is an
aggregate amount not exceeding $5 million at any time outstanding. (Section
4.09).
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Lien on any of their respective assets,
now owned or hereafter acquired, or any income or properties therefrom,
securing any Indebtedness that is pari passu with or contractually subordinated
in right of payment to the Notes, other than Permitted Liens. (Section 4.10).
Limitation on Use of Proceeds from Asset Sales. The Indenture provides that
the Company and its Subsidiaries will not, directly or indirectly, consummate
any Asset Sales unless (i) the Company or the Subsidiary, as the case may be,
receives consideration at the time of any such Asset Sale at least equal to the
fair market value of the assets sold or otherwise disposed of, (ii) at least
80% of the Net Proceeds from the Asset Sales are received in Cash and
Marketable Securities at closing, and (iii) with respect to any Asset Sale
involving the Equity Interests of any Subsidiary, the Company shall sell all of
the Equity Interests it owns of such Subsidiary in such Asset Sale. Within
twelve months (or, in the event of a sale-and-leaseback transaction, twenty-
four months) after the receipt of Cash in respect of any Asset Sale, the
Company or a Subsidiary may use all such Cash either to (x) invest in capital
assets, (y) purchase properties and assets that are of a type similar to the
properties and assets that were the subject of such Asset Sale, and in the case
of clauses (x) and (y) the acquired capital assets or properties and assets, as
the case may be, are to be used primarily in a retail warehousing business of
the Company which is operated by the Company or a Significant Subsidiary of the
Company (or is a business which meets the test necessary to be a Significant
Subsidiary) immediately prior to such acquisition or (z) permanently reduce
Senior Indebtedness. "Excess Proceeds" shall mean any Cash from an Asset Sale
that is not invested or used to permanently reduce Senior Indebtedness as
provided in the preceding sentence. When the aggregate amount of Excess
Proceeds from any Asset Sale or series of related Asset Sales exceeds 10% of
the aggregate book value of the tangible assets of the Company and its
Subsidiaries (measured at the end of the most recent fiscal quarter ended prior
to such Asset Sale), the Company shall offer to purchase from all holders of
the Notes the maximum principal amount of Notes that may be
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purchased out of such Excess Proceeds, at an offer price in cash in an amount
equal to 101% of the principal amount thereof plus accrued interest, if any, to
the date fixed for the closing of such offer, in accordance with the same
procedures applicable to offers to purchase Notes upon the occurrence of a
Change of Control. To the extent that the aggregate amount of the Notes
tendered pursuant to the Excess Proceeds Offer is less than the Excess
Proceeds, the Company may use such deficiency, or a portion thereof, for
general corporate purposes. If the aggregate principal amount of the Notes
surrendered by holders thereof exceeds the amount of Net Proceeds, the Company
shall select the Notes to be purchased on a pro rata basis. Upon completion of
such offer, the amount of Excess Proceeds shall be reset at zero.
Notwithstanding the foregoing, $5 million of Cash received from any Asset Sale
or Asset Sales in any fiscal year shall not be subject to the restrictions
contained in this covenant. (Section 4.12).
The Senior Notes Agreement includes covenants restricting prepayments of the
Notes, and therefore the Company may not, under certain circumstances, be able
to make payments of Excess Proceeds to holders of the Notes without causing a
default under the Senior Notes. See "Description of Certain Indebtedness--The
Senior Notes."
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes pursuant to an Excess Proceeds offer.
Limitation on Transactions with Affiliates. The Indenture provides that,
except as otherwise permitted by the Indenture, neither the Company, nor any of
its Subsidiaries, will make any Investment, loan, advance, guarantee or capital
contribution to, or for the benefit of, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or for the benefit of, or
purchase or lease any property or assets from, or enter into or amend any
contract, agreement or understanding with, or for the benefit of, any Affiliate
of the Company or any of its Subsidiaries (other than the Company or any of its
Wholly-owned Subsidiaries) unless (i) the Board of Directors of the Company or
such Subsidiary, as the case may be, determines, in its reasonable good faith
judgment, that such transaction or series of transactions is in the best
interest of the Company or such Subsidiary based on full disclosure of all
relevant facts and circumstances, (ii) such transaction or series of
transactions is fair to the Company or such Subsidiary and on terms that are no
less favorable to the Company or the relevant Subsidiary, as the case may be,
than those that could have been obtained in a comparable transaction on an
arm's length basis from a person that is not an Affiliate and (iii) with
respect to a transaction or series of transactions involving aggregate payments
greater than $5 million, a majority of independent directors of the Company
shall approve such transaction or series of transactions by a resolution
certifying that such transaction or series of related transactions comply with
the clause (ii) above. (Section 4.13).
Merger, Consolidation or Sale of Assets. The Indenture provides that the
Company shall not consolidate with, merge with or into, or transfer all or
substantially all of its assets (as an entirety or substantially as an entirety
in one transaction or a series of related transactions), to any Person or
permit any party to merge with or into it unless: (i) the Company shall be the
continuing Person, or the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or to which the properties
and assets of the Company, substantially as an entirety, are transferred shall
be a corporation organized and existing under the laws of the United States or
any State thereof or the District of Columbia and shall expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all of the obligations of the Company under the
Notes and Indenture; (ii) immediately before and immediately after giving
effect to such transaction, no Event of Default and no Default shall have
occurred and be continuing; (iii) immediately after giving effect to such
transaction on a pro forma basis, the Consolidated Net Worth of the surviving
entity is at least equal to the Consolidated Net Worth of the Company
immediately prior to such transaction; and (iv) the surviving entity, after
giving pro forma effect to such transaction, could incur $1.00 of additional
Indebtedness pursuant to the covenants set forth in "Limitation on Additional
Indebtedness" above; provided however that the transfer by the Company of all
or substantially all of its assets (as an entirety or substantially as an
entirety in one transaction or a series of related transactions) to one or more
Wholly-owned Subsidiaries shall not be subject to the provisions of this
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paragraph if each such Subsidiary (i) is organized and existing under the laws
of the United States or any State thereof or the District of Columbia and (ii)
complies with the covenants described in "Subsidiary Guarantees" below.
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing paragraph, the
successor corporation formed by such consolidation or into which the Company is
merged or to which such transfer is made, shall succeed to, and be substituted
for, and may exercise every right and power of the Company under the Indenture
with the same effect as if such successor corporation had been named as the
Company in the Indenture; and thereafter, the Company shall be discharged and
released from all obligations and covenants under the Indenture and the Notes.
(Section 5.01).
Subsidiary Guarantees. The Indenture provides that if (i) the Company or any
Subsidiary of the Company that is a Subsidiary Guarantor transfers or causes to
be transferred, in one transaction or a series of related transactions,
property or assets (including, without limitation, businesses, divisions, real
property, assets or equipment) which in the aggregate have a book value equal
to or greater than 15% of the book value of the Company's total assets
determined on a consolidated basis as of the time of transfer to any Subsidiary
or Subsidiaries of the Company that is not a Subsidiary Guarantor, other than
in connection with a Real Estate Financing, or (ii) any Subsidiary of the
Company Guarantees or otherwise becomes obligated with respect to any
Indebtedness, other than Real Estate Financing, the Company shall cause such
Subsidiary or Subsidiaries to (A) execute and deliver to the Trustee a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee pursuant to which such Subsidiary or Subsidiaries shall unconditionally
guarantee all of the Company's Obligations under the Indenture and the Notes on
the terms set forth in such supplemental indenture, which Guarantee shall be
subordinate to any Guarantee granted by such Subsidiary Guarantor in respect of
Senior Indebtedness of the Company or Indebtedness of the Subsidiary or
Subsidiaries, and (B) deliver to the Trustee (x) an Opinion of Counsel
reasonably satisfactory to the Trustee that such supplemental indenture has
been duly executed and delivered by such Subsidiary Guarantor or Subsidiary
Guarantors and (y) an opinion from a nationally recognized appraisal firm, in
form and substance reasonably satisfactory to the Trustee, stating that after
giving effect to such Guarantee, the Subsidiary Guarantor or Subsidiary
Guarantors is or are solvent, as the case may be. (Section 4.14).
Under the terms of the Senior Notes, the Company would, in certain
circumstances, be required to obtain the consent of the requisite percentage of
the holders of the Senior Notes in order to cause any Subsidiary to guaranty
indebtedness of the Company.
The Guarantee by a Subsidiary Guarantor may be subject to avoidance by a
bankruptcy trustee or debtor in possession as a fraudulent conveyance under
Title 11 of the United States Code (the "Bankruptcy Code") or applicable state
fraudulent conveyance statutes or by a creditor of a Subsidiary Guarantor under
applicable state fraudulent conveyance statutes. In the event that such
Subsidiary Guarantor becomes a debtor under the Bankruptcy Code within one year
of the delivery of the Guarantee and was insolvent, rendered insolvent or left
with unreasonably small working capital, a court may void the Guarantee as a
fraudulent conveyance if the court finds that the Subsidiary Guarantor received
less than reasonably equivalent value in exchange for the Guarantee. Even if
there is no proceeding commenced under the Bankruptcy Code or if the Subsidiary
Guarantor is insolvent, rendered insolvent or left with unreasonably small
working capital at the time the Guarantee is delivered or as a result thereof,
a court may, at the request of a creditor of the Subsidiary Guarantor, void the
Guarantee as a fraudulent conveyance if the court finds that the Subsidiary
Guarantor received less than reasonably equivalent value in exchange for the
Guarantee. In either event, a court may set aside the Guarantee and order the
recovery of any payments made by the Subsidiary Guarantor during the applicable
statutory period--one year under the Bankruptcy Code and varying periods under
state law depending upon which state's law applies. The statute of limitations
applicable to fraudulent conveyance statutes are as long as six years in some
states.
Generally, under the definition provided in the Bankruptcy Code, the
Subsidiary Guarantor would be considered insolvent if the sum of the Subsidiary
Guarantor's debts, including contingent liabilities, was greater than the value
of its assets at a fair valuation. State fraudulent conveyance statutes differ
but generally
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define insolvent to mean the fair saleable value of assets being less than
probable liabilities. The Bankruptcy Code and state fraudulent conveyance
statutes do not define what constitutes inadequate working capital. Generally,
courts have found companies to have inadequate working capital if the company
has insufficient current assets with which to satisfy current liabilities as
they mature in the ordinary course.
Payments for Consent. The Indenture provides that neither the Company nor any
of its Subsidiaries shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such consideration
is offered to be paid or agreed to be paid to all holders of the Notes who so
consent, waive or agree to amend in the time frame set forth in solicitation
documents relating to such consent, waiver or agreement. (Section 4.20).
Provision of Reports and Other Information. The Indenture provides that at
all times while any Note is outstanding, the Company will file with the
Trustee, whether or not then obligated to so file with the Commission, all such
reports and other information as would be required by Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended. Within fifteen days after the
same are filed with the Commission in definitive form, the Company will file
with the Trustee and supply to each holder of the Notes, without cost, copies
of such reports (without exhibits) or other information.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in payment of interest on the Notes; (ii)
default in payment when due of principal of or premium, if any, on the notes,
whether at maturity, or upon acceleration, redemption or otherwise; (iii)
failure by the Company to comply in any respect with any of its other covenants
or agreements in the Indenture or the Notes and such Default continues for 45
days after receipt of a written notice from the Trustee or holders of at least
25% of the aggregate principal amount of the Notes then outstanding, specifying
such Default and requiring that it be remedied; (iv) default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Subsidiaries (or the payment of which is guaranteed by
the Company or any of its Subsidiaries) whether such Indebtedness is now
existing or hereafter created, and either (A) such default is in the payment of
any principal of or interest on any such Indebtedness when due at maturity and
the principal amount of such Indebtedness exceeds $10 million in the aggregate
and such Indebtedness does not constitute Real Estate Financing that is
guaranteed by or with recourse to the Company or any of its other Subsidiaries
and, as a result of such default, Indebtedness of the Company or its
Subsidiaries (other than such Real Estate Financing) aggregating $10 million or
more is accelerated, or (B) as a result of such default the maturity of such
Indebtedness has been accelerated prior to its express maturity and the
principal amount of such Indebtedness, together with the principal amount of
any other such Indebtedness (in each case other than Real Estate Financing that
is not guaranteed by or not with recourse to the Company or any of the
Subsidiaries) the maturity of which has been accelerated, aggregates $10
million or more; (v) failure by the Company or any Subsidiary to pay certain
final judgments aggregating in excess of $10 million and either (A) enforcement
proceedings have been commenced upon such judgments or (B) such judgments are
not stayed within 60 days after their entry; (vi) certain events of bankruptcy,
insolvency or reorganization with respect to the Company or one or more of its
Subsidiaries that individually or when considered as one entity would
constitute a Significant Subsidiary. (Section 6.01).
If an Event of Default occurs and is continuing and if it is known to the
Trustee, the Trustee shall mail to each holder of the Notes notice of the Event
of Default within 90 days after it becomes known to the Trustee, unless such
Event of Default has been cured or waived. Except in the case of an Event of
Default in the payment of principal of, premium, if any, or interest on any
Note, the Trustee may withhold the notice if and so long as a committee of
officers of the Trustee in good faith determines that withholding the notice is
in the interest of the holders of the Notes.
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If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency or reorganization) occurs and is continuing, the Trustee
or the holders of at least 25% of the principal amount of the Notes then
outstanding, by written notice to the Company (and to the Trustee if such
notice is given by such holders) (the "Acceleration Notice"), may, and such
Trustee at the request of such holders shall, declare all unpaid principal of,
premium, if any, and accrued interest on such Notes to be due and payable, (i)
immediately if no amount is outstanding and no commitment is in effect under
the Specified Senior Indebtedness or (ii) if any amount is outstanding or there
exists any commitment under the Specified Senior Indebtedness, upon the earlier
of five business days after delivery of the Acceleration Notice to the Company
by the Trustee or the holders, as the case may be, or acceleration of the
Specified Senior Indebtedness, and thereupon the Trustee may, at its
discretion, proceed to protect and enforce the rights of the holders of the
Notes by appropriate judicial proceedings. Upon a declaration of acceleration,
such principal, premium, if any, and accrued interest shall be due and payable.
If an Event of Default resulting from certain events of bankruptcy, insolvency
or reorganization occurs, all unpaid principal of, premium, if any, and accrued
interest on the Notes only then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder. The holders of at least two-thirds in principal
amount of the Notes by notice to the Trustee may rescind an acceleration and
its consequences, except an acceleration due to default in payment of principal
or interest on the Notes, only upon conditions provided in the Indenture. A
holder of Notes may not pursue any remedy with respect to the Indenture or the
Notes unless: (i) the holder gives to the Trustee written notice of a
continuing Event of Default; (ii) the holders of at least 25% in principal
amount of such Notes outstanding make a written request to the Trustee to
pursue the remedy; (iii) such holder or holders offer to the Trustee indemnity
or security satisfactory to the Trustee against any loss, liability or expense;
(iv) the Trustee does not comply with the request within 30 days after receipt
of the request and the offer of indemnity or security; and (v) during such 30-
day period the holders of a majority in principal amount of the outstanding
Notes do not give the Trustee a direction which is inconsistent with the
request. (Sections 6.02 and 6.06).
The Indenture provides that the Company is required to deliver to the Trustee
annually a certificate (a) as to its compliance with the Indenture, (b) as to
its knowledge of the existence of any Default or Event of Default and (c)
setting forth each Restricted Payment made by the Company or any of its
Subsidiaries during the year (other than Restricted Payments made to purchase
Marketable Securities that do not constitute Permitted Investments but that are
liquidated for cash within 90 days of the date of such Investment in an amount
at least equal to the initial purchase price of such Investment), stating that
each such Restricted Payment is permitted and setting forth the basis upon
which the calculations required by the "Limitation on Restricted Payments"
covenants were computed.
DEFEASANCE AND DISCHARGE OF THE INDENTURE AND THE NOTES
If the Company irrevocably deposits, or causes to be deposited with the
Trustee or the Paying Agent, at any time prior to the stated maturity of the
Notes or the date of redemption of all the outstanding Notes, as trust funds in
trust, money or direct noncallable obligations of or guaranteed by the United
States of America in amounts (including interest, but without consideration of
any reinvestment of such interest) and maturities sufficient to pay timely and
discharge the entire principal and premium, if any, of the then outstanding
Notes and all interest then due in cash, the Indenture shall cease to be of
further effect as to all outstanding Notes (except, among other things, as to
(i) remaining rights of registration of transfer and substitution and exchange
of the Notes, (ii) rights of holders to receive payment of principal, premium,
if any, and interest on the Notes, and (iii) the rights, obligations and
immunities of the Trustee). (Section 8.01).
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture. The
Registrar and the Company may require a holder, among other things, to furnish
appropriate endorsements and transfer documents, and to pay any taxes and fees
required by law or permitted by the Indenture. The Registrar is not required to
transfer or exchange any Note selected for redemption. Also, the Registrar is
not required to transfer or exchange any Note for a period of 15 days before a
selection of Notes to be redeemed.
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The registered holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture or the Notes may be amended or
supplemented with the consent of the holders of at least two-thirds in
aggregate principal amount of the Notes then outstanding, and any existing
default or compliance with any provision may be waived (other than a continuing
Default or Event of Default in the payment of principal, premium, if any, or
interest on any Note) with the consent of the holders of at least two-thirds in
principal amount of the then outstanding Notes.
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder of Notes) (i) reduce
the percentage of principal amount of the Notes whose holders must consent to
an amendment or waiver, (ii) change the fixed maturity of the principal,
premium, if any, or any interest on, any Note or alter the redemption
provisions with respect thereto, (iii) make any change in the subordination
provisions of the Indenture that adversely affects the rights of any holders of
the Notes or any change to any other section of the Indenture that adversely
affects the rights of any holder of the Notes under the subordination
provisions of the Indenture, (iv) waive a default in the payment of the
principal, premium, if any, or interest on, any Note, (v) make any change to
the "Repurchase Upon Change of Control" or "Limitation on Use of Proceeds from
Asset Sales" covenants in the Indenture or (vi) make any change in the
foregoing. (Section 9.02).
Notwithstanding the foregoing, without the consent of any holder of the
Notes, the Company and the Trustee may amend or supplement the Indenture or the
Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Company's obligations to holders of the Notes
in the case of a merger or consolidation, to make any change that does not
adversely affect the rights of any holder of the Notes, to enter into
Supplemental Indentures in connection with Subsidiary Guarantees or to comply
with any requirement of the Commission in connection with the qualification of
the Trustee under the Trust Indenture Act. (Section 9.01).
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect to any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, or apply to the Commission for
permission to continue or resign.
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any of the holders of the Notes, unless they shall have
offered to the Trustee security or indemnity satisfactory to it against any
loss, liability or expense.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Under the Internal Revenue Code of 1986, as amended (the "Code"), a holder of
Notes may be subject, under certain circumstances, to "backup withholding" at a
31% rate with respect to cash payments in respect of payments of interest or
gross proceeds. This withholding generally applies only if the holder (i) fails
to furnish the social security or other taxpayer identification number ("TIN")
within a reasonable time after the request therefor, (ii) furnishes an
incorrect TIN, (iii) is notified by the Internal Revenue Service (the
"Service") that it has failed to report properly interest or dividends, or (iv)
fails, under certain circumstances,
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to provide a certified statement signed under penalty of perjury, that the TIN
provided is the holder's correct number and that the holder is not subject to
backup withholding. Any amount withheld from a payment to a holder under the
backup withholding rules is allowable as a credit against such holder's federal
income tax liability, provided that the required information is furnished to
the Service. Corporations and certain other entities described in the Code and
treasury regulations promulgated thereunder are exempt from such withholding if
their exempt status is properly established. Holders of Notes should consult
their tax advisors as to their qualification for exemption from withholding and
the procedure for obtaining such exemption.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH RECIPIENT HEREOF SHOULD CONSULT WITH ITS OWN TAX ADVISOR AS
TO THE SPECIFIC TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF THE NOTES,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference is
made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. A Person shall be deemed to "control"
(including the correlative meanings, the terms "controlling," "controlled by,"
and "under common control with") another Person if the controlling Person (a)
possesses, directly or indirectly, the power to direct or cause the direction
of the management or policies, of the controlled Person, whether through
ownership of voting securities, by agreement or otherwise, or (b) owns,
directly or indirectly, 10% or more of any class of Voting Stock of the
controlled Person.
"Asset Sale" means, with respect to any Person, (i) the sale, lease,
conveyance, disposition or other transfer by such Person of any of its assets
(including by way of a sale-and-leaseback transaction and including the sale or
other transfer of any of the Capital Stock of any Subsidiary of such Person) or
(ii) the issuance, sale, conveyance, disposition or other transfer by such
Person of any Capital Stock of such Person or any Subsidiary of such Person or
a Subsidiary of any such Subsidiary; provided, however, that notwithstanding
the foregoing, the term "Asset Sale" shall not include (A) the sale, lease,
conveyance, disposition or other transfer of any inventory in the ordinary
course of business, (B) the issuance by the Company of shares of its Capital
Stock, (C) the sale of a Permitted Investment (other than a Permitted
Investment under clause (vii) of such definition), (D) the assignment or
sublease of a lease (where the Person or its Subsidiary is the lessee) or the
execution of a new lease (where the Person or its Subsidiary is the lessor) in
connection with the closing down of any retail warehouse of such Person or
Subsidiary, (E) the sale, lease, conveyance, disposition or other transfer of
any asset in connection with the restructuring plan implemented by the Company
prior to the date of this Indenture, (F) the sale, lease, conveyance or other
transfer of assets by the Company to any Wholly-owned Subsidiary or by any
Wholly-owned Subsidiary of the Company to the Company or any other Wholly-owned
Subsidiary of the Company, or (G) the liquidation or sale for cash of
Marketable Securities.
"Average Life" means, as of the date of determination, with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products of
the numbers of years from the date of determination to the dates of each
successive scheduled principal payment (assuming the exercise by the obligor of
such debt security of all unconditional (other than as to the giving of notice)
extension option of each such scheduled payment date) of such debt security
multiplied by the amount of such principal payment by (ii) the sum of all such
principal payments.
"Capital Lease Obligation" means, at the time any determination thereof is to
be made, the amount of the liability in respect of a capital lease which would
at such time be so required to be capitalized on the balance sheet in
accordance with GAAP.
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"Capital Stock" means any and all shares, interests, participations, rights
or other equivalents (however designated) of corporate stock (including common
and preferred stock) or partnership interests.
"Cash" shall mean (i) cash; (ii) cash equivalents; (iii) direct or guaranteed
obligations of the United States of America that mature within two (2) years
from the date of purchase by the Company or any of its Subsidiaries; (iv)
demand deposits, certificates of deposit, bankers' acceptances and time
deposits of United States banks having total assets in excess of
$10,000,000,000 United States dollars and which are rated not less than (A) "A
1" if such deposits or acceptances mature over a year from the date made or
created, or (B) "A 2" if such deposits or acceptances mature within one year of
the date made or created, in each case as rated by Standard and Poor's
Corporation; (v) securities commonly known as "commercial paper" issued by a
corporation organized and existing under the laws of the United States of
America or any state thereof that at the time of purchase have been rated and
the ratings for which are not less than "P 2" as rated by Moody's Investors
Services, Inc. and not less than "A 2" as rated by Standard and Poor's
Corporation; (vi) investments in tax-free government securities rated "A" or
better as rated by Standard and Poor's Corporation and government securities
mutual funds which have a weighted average life of less than two (2) years;
(vii) investments in repurchase agreements relating to a security which is
rated "A" or better as rated by Standard and Poor's Corporation that mature
within two years from the date the Investment is made by the Company or any of
its Subsidiaries; (viii) investments in corporate securities rated "A" or
better as rated by Standard and Poor's Corporation that mature within two years
from the date the Investment is made by the Company or any of its Subsidiaries;
and (ix) indebtedness for borrowed money assumed by the purchaser in connection
with any Asset Sale provided that neither the Company nor any of its
Subsidiaries has any further liability in respect of such Indebtedness;
provided, that when any non-Cash proceeds are liquefied, such proceeds will be
deemed to be Cash at that time.
"Consolidated Interest Coverage Ratio" means the ratio of (i) the sum of (a)
Consolidated Net Income, (b) Consolidated Interest Expense, (c) Consolidated
Tax Expense, (d) depreciation, (e) any expense recognized in respect of step
rentals (or minus any income recognized in respect of step rentals), and (f)
without duplication, all amortization, in each case, for such period, of the
Company and its Subsidiaries on a consolidated basis, all as determined in
accordance with GAAP, to (ii) the sum of (a) Consolidated Interest Expense,
plus (b) all dividends for such period in respect of Redeemable Stock issued by
a Subsidiary of the Company, plus (c) the product of (x) the amount of all
dividends paid or accrued on any series of preferred stock issued by a
Subsidiary of the Company times (y) a fraction, the numerator of which is one
and the denominator of which is one minus the effective combined consolidated
federal, state and local tax rate of such Subsidiary, expressed as a decimal;
provided, that in calculating Consolidated Interest Expense on a pro forma
basis, any Indebtedness bearing a floating interest rate shall be computed as
if the rate in effect on the date of computation had been the applicable rate
for the entire period.
"Consolidated Interest Expense" means for any period the aggregate amount of
interest in respect of Indebtedness (including all commissions, discounts and
other fees and charges owed with respect to letters of credit and bankers'
acceptance financing and the net cost (benefit) associated with Interest Rate
Agreements, and excluding amortization of deferred finance fees and interest
recorded as accretion in the carrying value of liabilities (other than
Indebtedness) recorded at a discounted value) and all but the principal
component of rentals in respect of Capital Lease Obligations, paid, accrued or
scheduled to be paid or accrued by the Company and its Subsidiaries during such
period (without duplication), other than fees, commissions and expenses
associated with the Notes, the Senior Notes, the Credit Agreement and the
Convertible Subordinated Debentures, and excluding amortization of original
issue discount and other non-cash charges incurred on or prior to the date of
the initial issuance of the Notes or incurred as a result of the application of
the net proceeds from the sale of the Notes offered hereby.
"Consolidated Net Income" means for any period the net income or loss of the
Company and its Subsidiaries for such period on a consolidated basis as
determined in accordance with GAAP adjusted by excluding, without duplication,
(i) net gains or losses in respect of dispositions of assets other than in the
ordinary course of business; (ii) any gains or losses from currency exchange
transactions not in the ordinary course of business consistent with past
practice; (iii) any gains (but not losses) attributable to any
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extraordinary items; (iv) the Net Income of any Person acquired in a pooling of
interest transaction for any period prior to the date of such transaction; (v)
the Net Income of any Person accounted for by the equity method of accounting,
except that (A) the Company's equity in the net income of any such Subsidiary
for such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Subsidiary during such
period to the Company or another Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution to another
Subsidiary, to the limitation contained in this clause (v)) and (B) the
Company's equity in a net loss of any such Subsidiary for such period shall be
included in determining such Consolidated Net Income; (vi) the Net Income of
any Subsidiary to the extent such Net Income has any restrictions or
encumbrances on making distributions to the Company; (vii) the income or loss
of any Person (not acquired in a pooling of interest transaction) accrued prior
to the date it becomes a Subsidiary of the Company or any of its Subsidiaries
or is merged into a consolidation with the Company or any of its Subsidiaries
or that Person's assets are acquired by the Company or any of its Subsidiaries;
(viii) non-cash charges in connection with the issuance of Equity Interests of
the Company to employees of the Company as compensation; (ix) the effect of
non-cash charges incurred prior to the date of the Indenture in connection with
the sale, discontinuance, disposition or rationalization of the Company's
operations; and (x) income attributable to the reversal of non-cash charges
previously excluded pursuant to clause (ix) of this definition.
"Consolidated Net Worth" means, with respect to any Person, as of any date,
the amount which, in accordance with GAAP, would be set forth under the caption
"Stockholders' Equity" (or any like caption) on the consolidated balance sheet
of such Person and its Subsidiaries, less amounts attributable to Redeemable
Stock of such Person and preferred stock of any of its Subsidiaries.
"Consolidated Tax Expense" of the Company means, for any period, the
aggregate of the federal, state, local and foreign income tax expense (net of
benefits) of the Company and its consolidated Subsidiaries for such period,
determined in accordance with GAAP.
"Convertible Subordinated Debentures" means the 6.5% Convertible Subordinated
Debentures due 2002 issued by the Company under the Indenture dated as of July
1, 1992, between the Company and Continental Bank, N.A., as trustee.
"Credit Agreement" means the Company's Credit Agreement dated as of July 8,
1993, as amended on November 15, 1993, by and among the Company, Bank of
America, N.T.S.A., The First National Bank of Boston, Continental Bank, N.A.
and The First National Bank of Chicago.
"Credit Facility" means the Credit Agreement and the Letter of Credit
Agreement and any extension, renewal, replacement or substitute thereof or any
subsequent or additional credit facility.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Equity Interests" means Capital Stock, warrants, options or other rights to
acquire Capital Stock (but excluding any debt security which is convertible
into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries in existence on the date of the Indenture.
"Existing Investments" means Investments existing on the date of the
Indenture.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are applicable as of the date of
determination; provided, however, that these definitions and all ratios and
calculations contained in the covenants in the Indenture shall be determined in
accordance with GAAP as in effect and applied by the Company on the date of the
Indenture, consistently applied.
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"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Indebtedness" means, without duplication, (a) any liability of any Person,
if and to the extent it would appear as a liability upon a balance sheet of
such person prepared on a consolidated basis in accordance with GAAP, (1) for
borrowed money, (2) evidenced by a bond, note, debenture or similar instrument
(including a purchase money obligation) given in connection with the
acquisition of any businesses, properties or assets of any kind) or (3) in
respect of Capital Lease Obligations (including by way of a sale-and-leaseback
transaction); (b) any liability of any Person under any reimbursement
obligation relating to a letter of credit; (c) all Redeemable Stock valued at
the greater of its voluntary or involuntary liquidation preference plus accrued
and unpaid dividends; (d) preferred stock of any Subsidiary of the Company
(other than preferred stock held by the Company or any of its Wholly-owned
Subsidiaries); (e) obligations with respect to Interest Rate Agreements; (f)
any liability of others described in the preceding clauses (a), (b), (c), (d)
and (e) that the Person has guaranteed or with respect to which it is otherwise
contingently liable; and (g) any amendment, supplement, modification, deferral,
renewal, extension or refunding of any liability of the types referred to in
clauses (a), (b), (c), (d), (e) and (f) above. Notwithstanding anything to the
contrary in the foregoing, Indebtedness shall not include (x) any obligations
in respect of Operating Lease Obligations and (y) trade payables, accrued
liabilities for deferred taxes, insurance and similar items and current
liabilities for goods, materials or services purchased or for compensation to
employees, in each case arising in the ordinary course of business.
"Interest Rate Agreement" means the obligation of any Person pursuant to any
interest rate swap agreement, interest rate collar agreement, currency swap or
other similar agreement or arrangement designed to protect such Person or any
of its subsidiaries against fluctuations in interest rates or the value of
currencies.
"Investment" means any direct or indirect advance, loan or other extension of
credit or capital contribution to (by means of a transfer of cash or other
property to others or a payment for property or services for the account or use
of others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other securities issued by any other Person. Notwithstanding
anything to the contrary in the foregoing, Investment shall not include (a)
advances to customers or vendors in the ordinary course of business, which are
recorded as accounts receivable on the balance sheet of any Person or its
Subsidiaries and other than advances or loans to officers and employees of the
Company or any of its Subsidiaries up to $5 million in the aggregate principal
amount outstanding at any one time, (b) loans and advances to developers of
real estate upon which the Company's or any of its Wholly-owned Subsidiary's
warehouse merchandising stores are located provided that the aggregate amount
of all such loans and advances does not exceed $25,000,000 at any one time
outstanding, (c) obligations (direct, contingent or otherwise) incurred by the
Company to purchase real estate upon which the Company's or any of its Wholly-
owned Subsidiary's warehouse merchandising stores are located, and (d) any
obligations in respect of Operating Lease Obligations.
"Letter of Credit Agreement" means the Company's letter of credit facility
between the Company and Bank of America, N.T.S.A.
"Lien" means any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind, whether or not filed, recorded or otherwise perfected
under applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give any security interest in any filing or other agreement to give any
financing statement (other than any filing or financing statement given in
connection with a Capital Lease Obligation in the ordinary course of business)
under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction
and including a sale-and-leaseback transaction).
"Marketable Securities" means securities that are rated investment grade by a
nationally recognized rating agency such as Standard and Poor's Corporation or
Moody's Investor Services, Inc. or securities for which a trading market exists
on a nationally registered securities exchange or pursuant to the Nasdaq Stock
49
<PAGE>
Market and such securities are registered under the Securities Act of 1933, as
amended, for sale by the Person who owns such securities or are exempt from
registration in connection with any proposed sale by such Person.
"Net Proceeds" means the aggregate proceeds received by the Company or any of
its Subsidiaries in respect of any Asset Sale, net of the out-of-pocket costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees and sale commissions) and any relocation expenses
and severance and shutdown costs incurred as a result thereof, taxes paid or
payable as a result thereof, amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets which are the subject of
such Asset Sale and any reasonable reserve in accordance with GAAP for
adjustment in respect of the sale price of such asset or assets.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Operating Lease Obligation" means at the time any determination thereof is
to be made, the amount of the liability in respect of an operating lease which
would at such time be so required to be classified as such in accordance with
GAAP.
"Permitted Indebtedness" means (i) Indebtedness under the Credit Facility
(provided that Indebtedness under the Credit Facility, including unused
commitments, shall not at any time exceed $150 million in aggregate outstanding
principal amount (including the available undrawn amount of any letters of
credit issued under the Credit Facility)); (ii) Existing Indebtedness; (iii)
Indebtedness represented by the Notes; (iv) Indebtedness created, incurred,
issued, assumed or guaranteed in exchange for or the proceeds of which are used
to extend, refinance, renew, replace, substitute or refund Indebtedness
referred to in clauses (i), (ii) and (iii) above (the "Refinancing
Indebtedness"); provided, however, that (A) the principal amount of such
Refinancing Indebtedness shall not exceed the principal amount of Indebtedness
(including unused commitments) so extended, refinanced, renewed, replaced,
substituted or refunded, (B) such Indebtedness ranks in right of payment to the
Notes at least to the same extent as the Indebtedness so extended, refinanced,
renewed, replaced, substituted or refunded, (C) with respect to Refinancing
Indebtedness incurred pursuant to this clause, the Refinancing Indebtedness
shall have an Average Life and Stated Maturity equal to or greater than the
Average Life and Stated Maturity of the Indebtedness being extended,
refinanced, renewed, replaced, substituted or refunded, and (D) a Subsidiary
shall not incur Refinancing Indebtedness to extend, refinance, renew, replace,
substitute or refund Indebtedness of the Company or another Subsidiary unless
such Subsidiary was previously obligated by Guaranty or otherwise for the
Indebtedness being refinanced; (v) intercompany Indebtedness permitted by the
covenants set forth in "Limitation on Restricted Payments" above; (vi) Interest
Rate Agreements entered into in the ordinary course of business; (vii)
obligations in connection with the construction or acquisition of retail
warehouses in the ordinary course of business in an aggregate amount not
exceeding $30 million, and such additional obligations as would not appear as a
liability upon a balance sheet prepared in accordance with GAAP; (viii) letters
of credit and bankers' acceptances for the purchase of merchandise and
guarantees of obligations of suppliers, licensees, and franchises, in either
event in the ordinary course of business, and in the aggregate in an amount not
exceeding 10% of the aggregate book value of the inventories held by the
Company and its Subsidiaries (measured at the time of such issuance); (ix)
letters of credit securing workers' compensation and self-insurance obligations
of the Company in the ordinary course of business; and (x) Indebtedness not
otherwise permitted in an aggregate principal amount which shall not exceed $50
million.
"Permitted Investments" means, (i) direct or guaranteed obligations of the
United States of America that mature within two (2) years from the date of
purchase by the Company or any of its Subsidiaries; (ii) demand deposits,
certificates of deposit, bankers' acceptances and time deposits of United
States banks having total assets in excess of $10,000,000,000 United States
dollars and which are rated not less than (A) "A 1" if such deposits or
acceptances mature over a year from the date made or created, or (B) "A 2" if
such deposits or acceptances mature within one year of the date made or
created, in each case as rated by Standard and Poor's Corporation; (iii)
securities commonly known as "commercial paper" issued by a corporation
organized and existing under the laws of the United States of America or any
state thereof that at the time of
50
<PAGE>
purchase have been rated and the ratings for which are not less than "P 2" as
rated by Moody's Investors Services, Inc., and not less than "A 2" as rated by
Standard and Poor's Corporation; (iv) investments in tax-free government
securities rated "A" or better as rated by Standard and Poor's Corporation and
government securities mutual funds which have a weighted average life of less
than two (2) years; (v) investments in repurchase agreements relating to a
security which is rated "A" or better as rated by Standard and Poor's
Corporation that mature within two (2) years from the date the Investment is
made by the Company or any of its Subsidiaries; (vi) Investments in corporate
securities rated "A" or better as rated by Standard and Poor's Corporation
that mature within two (2) years from the date the Investment is made by the
Company or any of its Subsidiaries; (vii) Investments in Persons which, after
giving effect to the Investment, are Wholly-owned Subsidiaries of the Company
or any of its Subsidiaries and which are engaged in businesses directly
related to the business of the Company and its Subsidiaries, and Investments
consisting of assets which, after giving effect to the Investment, are used by
the Company or any of its Subsidiaries in such businesses; and (viii) Existing
Investments.
"Permitted Liens" means (a) Liens securing Senior Debt of the Company or
Indebtedness of any Subsidiary that is permitted by the Indenture to be
incurred; (b) Liens in favor of the Company; (c) Liens on property of a person
existing or created at the time such person is merged into or consolidated
with the Company or any Subsidiary of the Company; (d) Liens on property
existing or created at the time of acquisition thereof by the Company or any
Subsidiary of the Company; (e) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other obligations of
a like nature incurred in the ordinary course of business; (f) Liens existing
on the date of the Indenture; (g) Liens for taxes, assessments or governmental
charges or claims or mechanics', suppliers', materialmen's, repairmen's, or
other like Liens arising in the ordinary course of business, in either case,
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded;
provided, that any reserve or other appropriate provision as shall be required
in conformity with GAAP shall have been made therefor; (h) Liens incurred in
the ordinary course of business of the Company or any Subsidiary of the
Company that are not incurred in connection with the borrowing of money or the
obtaining of advances or credits (other than trade credit in the ordinary
course of business); (i) Liens securing Indebtedness created, incurred,
issued, assumed or guaranteed in exchange for or the proceeds of which are
used to extend, refinance, renew, replace, substitute or refund Indebtedness
secured by a Permitted Lien; and (j) Liens securing Indebtedness that is pari
passu with the Notes so long as at the time such Liens are granted the Notes
are equally and ratably secured.
"Person" means any individual, corporation, partnership, joint venture,
incorporated or unincorporated association, joint-stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof or other entity of any kind.
"Real Estate Financing" means Indebtedness incurred by a Subsidiary that is
secured by real estate owned by such Subsidiary which at the time the
Indebtedness is incurred has an appraised value (as determined by a
nationally-recognized independent real estate appraiser who is qualified to
make appraisals of such real estate) equal to or greater than the aggregate
principal amount of such Indebtedness.
"Redeemable Stock" means any Equity Interest which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable before the stated maturity of the Notes), or upon the happening
of any event, matures or is mandatorily redeemable, in whole or in part, prior
to the stated maturity of the Notes.
"Senior Indebtedness" means the principal of, premium, if any, and interest
(including, without limitation, post-petition interest whether or not allowed
as a claim in bankruptcy, reorganization, insolvency, receivership or similar
proceeding) on any Indebtedness of the Company, whether outstanding on the
date of the Indenture or thereafter created, incurred, assumed or guaranteed,
unless, in the case of any particular Indebtedness, the instrument under which
such Indebtedness is created, incurred, assumed or guaranteed expressly
provides that such Indebtedness shall not be senior or superior in right of
payment to the Notes. Without limiting the generality of the foregoing,
"Senior Indebtedness" shall include (i) Indebtedness under the Credit Facility
including the available undrawn amount of any letters of credit issued under
the Credit Facility (together with
51
<PAGE>
all interest (including, without limitation, post-petition interest whether or
not allowed as a claim in any bankruptcy, reorganization, insolvency,
receivership or similar proceeding), fees, reasonable expenses, indemnities,
and charges payable on or in respect of such Indebtedness)), (ii) the
Company's Senior Notes (together with all interest (including, without
limitation, post-petition interest whether or not allowed as a claim in any
bankruptcy, reorganization, insolvency, receivership or similar proceeding),
premium, if any, fees, reasonable expenses, indemnities, and charges payable
on or in respect of such Indebtedness)), (iii) Existing Indebtedness, and (iv)
Refinancing Indebtedness. Notwithstanding anything to the contrary in the
foregoing, Senior Indebtedness shall not include (a) any Indebtedness of the
Company to any of its Subsidiaries or other Affiliates, (b) any Indebtedness
incurred after the date of the Indenture that is contractually subordinated in
right of payment to any Senior Indebtedness, (c) trade payables and current
liabilities for goods, materials or services purchased or for compensation to
employees, in each case arising in the ordinary course of business, (d) any
Indebtedness in respect of Capital Lease Obligations, unless such Indebtedness
expressly provides that it shall be senior or superior in right of payment to
the Notes, and (e) any obligations in respect of Operating Lease Obligations.
Notwithstanding anything to the contrary in the Indenture or the Notes, the
Indebtedness represented by the Notes shall be superior in right of payment
to, and Senior Indebtedness shall not include, any Indebtedness represented by
the Company's 6.5% convertible subordinated debentures due 2002.
"Senior Notes" means the Company's 9.58% Notes due May 31, 1998 issued
pursuant to separate Note Purchase Agreements, dated as of June 15, 1991,
between the Company and, respectively, the purchasers named in Annex I
thereto, as the same may be amended, modified or restated from time to time.
"Significant Subsidiary" shall have the meaning set forth for such term in
Rule 1-02 of Regulation S-X under the Securities Act of 1933, as amended.
"Specified Senior Indebtedness" means Indebtedness under (i) the Credit
Facility, (ii) the Senior Notes and (iii) any other Senior Indebtedness of the
Company, the then outstanding principal amount of which exceeds $20 million.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the principal of such security is due
and payable, including pursuant to any mandatory redemption provision.
"Subsidiary" means any corporation, association or other business entity of
which more than 50% of the total voting power of shares of Capital Stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by any Person or one or more of other
Subsidiaries of that Person or a combination thereof.
"Subsidiary Guarantee" means each Guarantee by any Subsidiary Guarantor of
the Company's Obligations under the Indenture and the Notes required to be
given pursuant to the covenant entitled "Subsidiary Guarantees."
"Subsidiary Guarantor" means any Subsidiary that is required to execute a
Subsidiary Guarantee in accordance with the provisions of the covenant
entitled "Subsidiary Guarantees," and its successors and assigns.
"Voting Stock" means any class or classes of Equity Interests pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any Person (irrespective of whether or not at the time stock of
any other class or classes shall have or might have voting power by reason of
the happening of any contingency).
"Wholly-owned Subsidiary" of any Person means any Subsidiary of such Person
to the extent the entire voting share capital of such Subsidiary, other than
directors' qualifying shares, is owned by such Person (either directly or
indirectly through Wholly-owned Subsidiaries).
52
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summaries describe the principal terms of the Credit Agreement,
the Senior Notes, and the Convertible Debentures. These summaries, however, do
not purport to be complete and are subject to the detailed provisions of, and
qualified in their entirety by reference to, the Credit Agreement, the Note
Purchase Agreement dated as of June 15, 1991, as amended, governing the Senior
Notes (the "Senior Notes Agreement") and the Convertible Debentures Indenture,
copies of which will be made available to prospective purchasers of the Notes
upon request. Capitalized terms used in each of the following sections without
definitions shall have the meanings assigned thereto in the various agreements
to which they refer.
THE CREDIT AGREEMENT
In November 1993, the Company entered into an amended Credit Agreement with
several banks (the "Credit Agreement") providing for a credit facility expiring
on January 28, 1995 with a maximum availability of $80 million, which may be
increased to $125 million by the addition of banks. The Company's previous
credit agreement with the same banks provided for a $100 million facility
(which was also subject to increase to $125 million) and had an expiration date
of June 30, 1996. Interest under the Credit Agreement is payable on the
outstanding balance, at the Company's option, (a) at the banks' average Base
Rates or (b) at rates applicable to certain dollar deposits in the interbank
Eurodollar market plus 1%. A facility fee equal to 0.5% per annum is payable on
the amount of the facility. Borrowings under the Credit Agreement are unsecured
and will constitute Senior Indebtedness under the Indenture.
Covenants contained in the Credit Agreement limit the Company's ability to,
among other things: (i) incur debt, (ii) incur liens, (iii) incur real estate
expenditures, (iv) make investments, (v) pay dividends or make other
distributions on or redemption of its capital stock, (vi) make capital
expenditures, (vii) prepay or repay the Notes or other subordinated
indebtedness, and (viii) consolidate, merge, or dispose of assets. The Credit
Agreement also contains several financial covenants, including minimum required
tangible net worth, liabilities to tangible net worth ratios, working capital
requirements, fixed charge coverage ratios, permitted rental expenses, and
permitted real estate expenditures.
THE SENIOR NOTES
The Senior Notes are outstanding in $60 million principal amount, bear
interest at the rate of 9.58% per annum, and mature on May 31, 1998, with
annual scheduled principal prepayments at par of $12 million each on May 31 of
the years 1994 through 1998. The Senior Notes may be prepaid by the Company at
any time at par plus a Make-Whole Amount and accrued interest. Upon a Change in
Control (as defined in the indenture governing the Senior Notes), each holder
of Senior Notes may require the Company to prepay such holder's Senior Notes at
par plus a Make-Whole Amount or Adjusted Make-Whole Amount plus accrued
interest. The Senior Notes are unsecured and will constitute Senior
Indebtedness under the Indenture.
The Senior Notes Agreement contains covenants limiting the Company's ability
to, among other things, (i) incur debt, (ii) incur liens, (iii) change its
present business, (iv) make investments, (v) pay dividends or make other
distributions on or redemption of its capital stock or prepay subordinated debt
(which would include the Notes), (vi) incur lease obligations, and (vii)
consolidate, merge, or dispose of assets, including shares of subsidiaries. The
Senior Notes also contain several financial covenants, including minimum
required tangible net worth, working capital requirements, fixed charge
coverage ratios and a Current Debt cleanup requirement. The Company and holders
of the Senior Notes have agreed, in connection with this offering, to amend
certain covenants set forth in the Senior Notes Agreement so that they conform
to similar convenants set forth in the Indenture.
CONVERTIBLE DEBENTURES
As of January 29, 1994, the Company had $108,600,000 principal amount
outstanding of 6 1/2% Convertible Subordinated Debentures due 2002 (the
"Convertible Debentures"). The Convertible Debentures are convertible into
shares of Common Stock of the Company at $24.75 per share, which is subject to
53
<PAGE>
adjustment under certain conditions. Commencing July 15, 1995, the Convertible
Debentures are redeemable at the option of the Company as a whole or from time
to time in part, at 104.333% of par value (plus accrued interest), declining to
100% on July 1, 2001. The Convertible Debentures will be junior to the Notes,
but mature prior to the Notes.
Upon a Change of Control, each holder of the Convertible Debentures may
require the Company to repurchase such holder's Convertible Debentures at par
plus accrued interest. The Convertible Debentures Indenture contains no other
financial covenants.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to the Underwriter, and the Underwriter has
agreed to purchase from the Company, all of the Notes.
The Underwriting Agreement provides that the obligations of the Underwriter
thereunder are subject to approval of certain legal matters by counsel and
various other conditions. The nature of the obligations of the Underwriter is
such that it is committed to purchase all of the Notes if any are purchased.
The Underwriter has advised the Company that it proposes to offer the Notes
directly to the public initially at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at that price less a
concession not in excess of 1/4% of the principal amount of the Notes, and that
the Underwriter may allow, and those dealers may reallow, to certain other
dealers a further concession not in excess of 1/8% of the principal amount of
the Notes. After the initial offering, the price to the public and selling
concessions may be changed by the Underwriter.
During the period of 90 days following the date of this Prospectus, the
Company will not, without the consent of the Underwriter, directly or
indirectly, issue, sell, offer or agree to sell, or otherwise dispose of any
debt or redeemable equity (other than for other nonredeemable equity
securities) securities (or any securities convertible into, exercisable for or
exchangeable for any such securities) other than the Notes.
The Notes are a new issue of securities with no established trading market.
The Notes will not be listed on any securities exchange nor will application be
made for their admission to trading in any automated quotation system. The
Company has been advised by the Underwriter that it intends to make a market in
the Notes but is not obligated to do so and may discontinue market making at
any time without notice. No assurance can be given as to the liquidity of the
trading market for the Notes.
The Company has agreed to indemnify the Underwriter against, and to provide
contribution with respect to, certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
The legality of the securities being offered hereby will be passed upon for
the Company by Hale and Dorr, Boston, Massachusetts. Certain legal matters in
connection with the offering will be passed upon for the Underwriter by Weil,
Gotshal & Manges (a partnership including professional corporations), New York,
New York.
EXPERTS
The consolidated balance sheets as of January 29, 1994 and January 30, 1993
and the consolidated statements of Income, Cash Flows and Stockholders' Equity,
included in this Prospectus have been audited by Coopers & Lybrand, independent
accountants, as indicated in their reports thereon appearing elsewhere herein
and in the Company's Annual Report on Form 10-K for the fiscal year ended
January 29, 1994, and have been so included in reliance upon such reports and
the authority of said firm as experts in accounting and auditing.
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED JANUARY 29,
1994, JANUARY 30, 1993 AND JANUARY 25, 1992
Report of Independent Accountants....................................... F-2
Consolidated Statements of Income for the fiscal years ended January 29,
1994, January 30, 1993 and January 25, 1992 ........................... F-3
Consolidated Balance Sheets as of January 29, 1994 and January 30, 1993. F-4
Consolidated Statements of Cash Flows for the fiscal years ended
January 29, 1994, January 30, 1993 and January 25, 1992................ F-5
Consolidated Statements of Stockholders' Equity for the fiscal years
ended
January 29, 1994, January 30, 1993, and January 25, 1992............... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
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 29, 1994 and January 30, 1993, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three fiscal years in the period ended January 29, 1994. 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 29, 1994 and January 30, 1993 and the consolidated
results of their operations and their cash flows for each of the three fiscal
years in the period ended January 29, 1994 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 fiscal 1994.
Coopers & Lybrand
Boston, Massachusetts
March 1, 1994
F-2
<PAGE>
WABAN INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------
JANUARY 29, JANUARY 30, JANUARY 25,
1994 1993 1992
------------- ------------- -------------
(53 WEEKS)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales $ 3,589,341 $ 3,357,794 $ 2,783,585
------------- ------------- -------------
Cost of sales, including buying
and occupancy costs 3,086,670 2,881,334 2,399,765
Selling, general and
administrative expenses 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) 12,489 6,280 3,292
------------- ------------- -------------
Total expenses 3,623,318 3,289,519 2,734,662
------------- ------------- -------------
Income (loss) before income taxes
and cumulative effect of
accounting principle changes (33,977) 68,275 48,923
Provision (benefit) for income
taxes (15,290) 24,033 18,914
------------- ------------- -------------
Income (loss) before cumulative
effect of accounting principle
changes (18,687) 44,242 30,009
Cumulative effect of accounting
principle changes 905 -- --
------------- ------------- -------------
Net income (loss) $ (17,782) $ 44,242 $ 30,009
============= ============= =============
Income (loss) per common share:
Primary earnings per share:
Income (loss) before cumulative
effect of accounting principle
changes $ (0.56) $ 1.33 $ 1.01
Cumulative effect of accounting
principle changes .02 -- --
------------- ------------- -------------
Net income (loss) $ (0.54) $ 1.33 $ 1.01
============= ============= =============
Fully diluted earnings per
share:
Income (loss) before cumulative
effect of accounting principle
changes $ (0.56) $ 1.31 $ 1.01
Cumulative effect of accounting
principle changes .02 -- --
------------- ------------- -------------
Net income (loss) $ (0.54) $ 1.31 $ 1.01
============= ============= =============
Number of common shares for
earnings per share computations:
Primary 33,082 33,191 29,807
Fully diluted 33,082 35,707 29,810
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
WABAN INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,877 $ 35,644
Marketable securities -- 16,872
Accounts receivable 62,447 41,405
Merchandise inventories (net) 505,188 525,002
Current deferred income taxes 36,996 10,013
Prepaid expenses 9,662 9,211
---------- ----------
Total current assets 634,170 638,147
---------- ----------
Property at cost:
Land and buildings 222,522 182,446
Leasehold costs and improvements 59,844 70,132
Furniture, fixtures and equipment 195,740 183,235
---------- ----------
478,106 435,813
Less accumulated depreciation and amortization 96,623 91,565
---------- ----------
381,483 344,248
---------- ----------
Property under capital leases 18,452 22,094
Less accumulated amortization 6,924 7,032
---------- ----------
11,528 15,062
---------- ----------
Property held for sale (net) 30,247 --
Deferred income taxes 4,967 --
Other assets 10,599 9,557
---------- ----------
Total assets $1,072,994 $1,007,014
========== ==========
LIABILITIES
Current liabilities:
Current installments of long-term debt $ 13,814 $ 2,222
Accounts payable 253,232 239,017
Restructuring reserve 29,444 --
Accrued expenses and other current liabilities 129,637 105,991
Accrued federal and state income taxes 2,970 3,923
Obligations under capital leases due within one year 1,264 1,197
---------- ----------
Total current liabilities 430,361 352,350
---------- ----------
Real estate financings, exclusive of current install-
ments 4,075 5,889
General corporate debt 48,000 60,000
Subordinated debt 108,600 108,600
Obligations under capital leases, less portion due
within one year 13,379 18,141
Noncurrent restructuring reserve 28,642 --
Other noncurrent liabilities 19,445 15,856
Deferred income taxes -- 9,568
STOCKHOLDERS' EQUITY
Common stock, par value $.01, authorized 190,000,000
shares,
issued and outstanding 33,086,295 and 33,004,536
shares 331 330
Additional paid-in capital 322,915 321,252
Retained earnings 97,246 115,028
---------- ----------
Total stockholders' equity 420,492 436,610
---------- ----------
Total liabilities and stockholders' equity $1,072,994 $1,007,014
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
WABAN INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 29, JANUARY 30, JANUARY 25,
1994 1993 1992
----------- ----------- -----------
(53 WEEKS)
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (17,782) $ 44,242 $ 30,009
Adjustments to reconcile net income to
net cash provided by operating
activities:
Restructuring charge 101,133 -- --
Depreciation and amortization of prop-
erty 37,039 29,823 22,128
Utilization of net operating loss and
investment tax credit carryforwards -- -- 2,599
(Gain) loss on property disposals 790 (706) 23
Amortization of premium on marketable
securities 9 2,280 1,019
Other non-cash items, net 3,102 1,536 1,185
Deferred income taxes (41,518) (1,825) (2,041)
Increase (decrease) in cash due to
changes in:
Accounts receivable (21,042) (11,580) (9,049)
Merchandise inventories 10,048 (128,705) (40,604)
Prepaid expenses (1,121) (3,558) (1,127)
Other assets, net (1,042) (1,160) (1,253)
Accounts payable 14,215 45,280 28,503
Restructuring reserves (15,850) -- --
Accrued expenses 20,411 18,611 9,324
Accrued income taxes (953) (487) 78
Other noncurrent liabilities 3,589 1,705 1,926
--------- --------- ---------
Net cash provided by (used in) operating
activities 91,028 (4,544) 42,720
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities -- (135,274) (96,533)
Sale of marketable securities 16,905 186,600 25,491
Property additions (131,974) (164,928) (68,565)
Property disposals 14,839 2,658 1,440
--------- --------- ---------
Net cash used in investing activities (100,230) (110,944) (138,167)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt, net of is-
suance costs of $2,569 in FY 1993 and
$496 in FY 1992 -- 106,031 59,504
Repayment of long-term debt (2,222) (2,051) (2,767)
Repayment of capital lease obligations (5,024) (1,020) (746)
Proceeds from sale and issuance of common
stock 681 1,815 73,018
--------- --------- ---------
Net cash provided by (used in) financing
activities (6,565) 104,775 129,009
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (15,767) (10,713) 33,562
Cash and cash equivalents at beginning
of year 35,644 46,357 12,795
--------- --------- ---------
Cash and cash equivalents at end of year $ 19,877 $ 35,644 $ 46,357
========= ========= =========
Supplemental cash flow information:
Interest paid $ 13,682 $ 10,226 $ 6,282
Income taxes paid 25,099 26,345 18,569
Noncash financing and investing activi-
ties:
Capital lease obligation 329 786 572
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
WABAN INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------------
COMMON ADDITIONAL TOTAL
STOCK PAID-IN RETAINED STOCKHOLDERS'
PAR VALUE $.01 CAPITAL EARNINGS EQUITY
-------------- ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance, January 26, 1991 $286 $243,122 $ 40,777 $284,185
Net income -- -- 30,009 30,009
Sale and issuance of common
stock 41 74,410 -- 74,451
---- -------- -------- --------
Balance, January 25, 1992 327 317,532 70,786 388,645
Net income -- -- 44,242 44,242
Sale and issuance of common
stock 3 3,720 -- 3,723
---- -------- -------- --------
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
==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
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. The fiscal
years ended January 29, 1994 and January 25, 1992 each included 52 weeks. The
fiscal year ended January 30, 1993 included 53 weeks.
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. At
January 30, 1993, marketable securities consisted of $10,111,000 of
collateralized mortgage obligations, which were collateralized by U.S.
government agency securities, and $6,761,000 of municipal securities. These
investments were stated at the lower of amortized cost or market value.
Merchandise Inventories
Inventories are stated primarily 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. At January 29, 1994, merchandise inventories are stated
net of a reserve of $9,653,000, which was established in connection with the
Company's restructuring.
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 opens.
Membership Fees
Membership fees are included in revenue when received, but not before a
warehouse opens.
Interest on Debt and Capital Lease
Interest on debt and capital leases in the Statement of Income is presented
net of interest income and investment income of $1,507,000 in fiscal 1994,
$4,743,000 in fiscal 1993 and $3,886,000 in fiscal 1992.
Capitalized Interest
The Company capitalizes interest related to the development of owned
facilities. Interest in the amount of $2,773,000, $2,441,000 and $521,000 was
capitalized in fiscal 1994, 1993 and 1992, respectively.
F-7
<PAGE>
WABAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
A.CUMULATIVE EFFECT OF ACCOUNTING PRINCIPLE CHANGES
Effective January 31, 1993 (the first day of fiscal 1994), 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):
<TABLE>
<S> <C>
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
======
</TABLE>
B.RESTRUCTURING CHARGE
In the fourth quarter of the fiscal year ended January 29, 1994 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
includes:
1) closing or relocating 16 HomeBase warehouses which have limited
potential for long-term profitability. This group of warehouses
consists mostly of older units which do not have desirable locations
or are not suitable for the current HomeBase prototype;
2) closing all eight HomeBase warehouses in the midwestern markets of
Chicago and Toledo;
3) liquidating discontinued merchandise; and
4) related administrative expenses.
The main components of the restructuring charge in fiscal 1994 are:
1) Operating losses and store closing costs (excluding employee
termination costs) are estimated to be approximately $31.3 million.
This charge comprises the actual losses and costs of the eight
midwestern HomeBase warehouse stores from the beginning of November
1993 through their closing at the end of January 1994, and the
estimated losses and costs of 16 other warehouse stores from
the beginning of December 1993 through their anticipated closings in
the fiscal year ending in January 1995.
2) Employee termination costs are estimated to be approximately $3.6
million, including severance pay and postemployment medical expenses.
3) The net book value of HomeBase property to be disposed of was written
down by approximately $17.4 million. This charge represents the
difference between the net book value of owned real estate, leasehold
improvements and furniture, fixtures and equipment to be disposed of
and the estimated proceeds to be realized from their sale.
4) Contract termination costs are estimated to be approximately $36.9
million. This charge primarily represents HomeBase's obligations for
leased properties after their closing date offset by estimated
sublease income expected to be realized, net of expenses.
F-8
<PAGE>
WABAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5) The write-down to net realizable value of inventory being discontinued
because it is not related to HomeBase's core home improvement
merchandise is estimated to be approximately $9.8 million.
At January 29, 1994, merchandise inventories are stated net of a reserve
for write-down of discontinued inventories of $9,653,000, and property held
for sale was stated net of a reserve for write-down of $17,479,000.
C.DEBT
At January 29, 1994 and January 30, 1993, long-term debt, exclusive of
current installments, consisted of the following:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
1994 1993
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Real estate financings, interest
at 8.19% to 9.25%, maturing
through March 1, 2003 $ 4,075 $ 5,889
======== ========
General Corporate Debt:
Senior notes, interest at 9.58%,
maturing May 31, 1994 through
May 31, 1998 $ 48,000 $ 60,000
======== ========
Subordinated Debt:
Convertible debentures, interest
at 6.5%, maturing July 1, 2002 $108,600 $108,600
======== ========
</TABLE>
The aggregate maturities of long-term debt outstanding at January 29, 1994
were as follows:
<TABLE>
<CAPTION>
REAL GENERAL
ESTATE CORPORATE SUBORDINATED
FISCAL YEARS ENDING JANUARY FINANCINGS DEBT DEBT TOTAL
--------------------------- ---------- --------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996 $1,344 $12,000 $ -- $ 13,344
1997 1,458 12,000 -- 13,458
1998 810 12,000 -- 12,810
1999 72 12,000 -- 12,072
Later years 391 -- 108,600 108,991
------ ------- -------- --------
Total $4,075 $48,000 $108,600 $160,675
====== ======= ======== ========
</TABLE>
As of January 29, 1994, real estate financings were collateralized by land
and buildings with a net book value of $23,740,000.
The Company's 9.58% unsecured senior notes are payable in five annual
installments of $12 million beginning May 31, 1994. In July 1992, the
Company issued $108.6 million of 6.5% convertible subordinated debentures
due 2002. The debentures are convertible into the Company's common stock at
a conversion price of $24.75 per share.
Under a bank credit agreement dated July 8, 1993 and amended November 15,
1993, the Company may borrow up to $80 million from a group of banks
through January 28, 1995, with any borrowings to be
F-9
<PAGE>
WABAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
repaid by January 28, 1995. The Company does not have any compensating
balance requirements under this agreement, but is required to pay a fee of
one-half percent per annum of the total commitment. Interest on borrowings
is payable, at the Company's option, either at (a) the Eurodollar rate plus
one percent, or (b) the lending banks' average prime rate.
The senior note and bank credit agreements contain covenants which, among
other things, include minimum working capital, net worth and fixed charge
coverage requirements and limit the payment of cash dividends on common
stock. Under the most restrictive requirements, cash dividends in any
fiscal year are limited to not more than 25% of the Company's consolidated
net income for the immediately preceding fiscal year, and cumulative cash
dividends are limited to not more than $10 million plus 50% of adjusted net
income after January 26, 1991 and 50% of the cash proceeds from common
stock sales after July 1, 1991, reduced by any investments deemed to be
restricted.
The Company has unsecured lines of credit that provide up to $15 million of
short-term borrowings with interest payable at a rate no greater than
prime. There were no borrowings outstanding under either the Company's bank
credit agreement or its unsecured lines of credit at January 29, 1994. In
addition, the Company has letter of credit facilities of approximately
$36.4 million primarily to support the purchase of inventories, of which
approximately $12.6 million were outstanding at January 29, 1994. The
Company does not have any compensating balance requirements nor does it pay
commitment fees under this arrangement.
D. COMMITMENTS
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 7 years.
Future minimum lease payments as of January 29, 1994 were:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEARS ENDING JANUARY LEASES LEASES
--------------------------- ------- ----------
(IN THOUSANDS)
<S> <C> <C>
1995 $ 3,005 $ 97,551
1996 2,614 105,871
1997 2,181 104,433
1998 1,831 103,263
1999 1,859 100,698
Later years 21,253 1,132,296
------- ----------
Total minimum lease payments 32,743 $1,644,112
==========
Less amount representing interest 18,100
-------
Present value of net minimum capital lease payments $14,643
=======
</TABLE>
Rental expense under operating leases (including contingent rentals which
were not material) amounted to $90,699,000, $81,006,000 and $67,345,000 for
the fiscal years ended January 29, 1994, January 30, 1993 and January 25,
1992, respectively.
F-10
<PAGE>
WABAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of January 29, 1994, the Company is contingently liable on three
warehouse store leases that were assigned to a third party in connection
with HomeBase's restructuring. The Company believes that this contingent
liability will not have a material effect on the Company's financial
condition.
E. CAPITAL STOCK, STOCK OPTIONS AND STOCK PURCHASE PLANS
Under its Stock Incentive Plan, the Company has granted certain key
employees 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 29, 1994, 472,139 shares
were exercisable under the Stock Incentive Plan.
Option activity during the past three fiscal years was as follows:
<TABLE>
<CAPTION>
NUMBER OF
OPTION PRICES OPTIONS
--------------- ---------
<S> <C> <C>
Fiscal 1992:
Options granted $15.875-$22.375 790,150
Options exercised $ 6.25-$ 8.125 (46,650)
Cancellations $ 6.25-$15.875 (70,650)
---------
Outstanding at January 25, 1992 $ 6.25-$22.375 1,199,510
Fiscal 1993:
Options granted $ 18.75-$25.625 590,550
Options exercised $ 6.25-$15.875 (113,520)
Cancellations $ 6.25-$25.625 (61,259)
---------
Outstanding at January 30, 1993 $ 6.25-$25.625 1,615,281
Fiscal 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
=========
</TABLE>
The Company has also issued, at no cost, restricted stock awards to certain
key employees under its Stock Incentive Plan. The restrictions on the
transferability of 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 fiscal 1994, 1993 and 1992 the Company
issued 237,250, 160,250 and 93,500 restricted shares, respectively;
229,145, 2,125 and 9,250 restricted shares were returned to the Company and
cancelled in fiscal 1994, 1993 and 1992, respectively.
As of January 29, 1994 and January 30, 1993, respectively, 1,450,010 and
1,423,900 shares were reserved for future stock awards under the Company's
Stock Incentive 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;
F-11
<PAGE>
WABAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
F. INCOME TAXES
Effective January 31, 1993 (the first day of fiscal 1994), the Company
adopted SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 changes
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 the fiscal
year ended January 29, 1994 (See Note A). As permitted by SFAS No. 109,
prior years' financial statements were not restated.
During the Company's third quarter of fiscal 1994, the statutory federal
income tax rate for corporations was raised from 34% to 35%, retroactive to
January 1, 1993, and the Targeted Jobs Tax Credit was restored retroactive
to July 1, 1992. The net effect of the tax law changes on the Company's
provision (benefit) for income taxes, which was recorded in the third
quarter of fiscal 1994, was not material.
The provision (benefit) for income taxes on income (loss) before the
cumulative effect of accounting changes includes the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 29, JANUARY 30, JANUARY 25,
1994 1993 1992
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal
Current $ 18,450 $20,523 $15,978
Deferred (29,555) (1,442) (1,581)
State
Current 3,665 5,335 4,977
Deferred (7,850) (383) (460)
-------- ------- -------
Total income tax provision (benefit) $(15,290) $24,033 $18,914
======== ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 29, JANUARY 30, JANUARY 25,
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax rates (35)% 34% 34%
State income taxes, net of federal tax
benefit (8) 5 6
Benefit from sale of real estate -- (2) --
Targeted jobs tax credits (3) (1) (1)
Other 1 (1) --
--- --- ---
Effective income tax rates (45)% 35% 39%
=== === ===
</TABLE>
F-12
<PAGE>
WABAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
as of January 29, 1994 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Self-insurance reserves $14,032
Rental step liabilities 7,116
Restructuring reserves 32,993
Capital leases 1,261
Compensation and benefits 4,664
Other 4,175
-------
Total deferred tax assets 64,241
-------
Deferred tax liabilities:
Accelerated depreciation -- property 21,805
Other 473
-------
Total deferred tax liabilities 22,278
-------
Net deferred tax assets $41,963
=======
</TABLE>
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.
For fiscal 1993 and 1992, the deferred tax provisions, computed in
accordance with Accounting Principles Board Opinion No. 11, represent the
effects of timing differences between financial and income tax reporting.
The following summarizes the major items comprising federal and state
deferred income tax expense in those years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------
JANUARY 30, JANUARY 25,
1993 1992
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Accelerated depreciation $ 1,746 $ 688
Self-insurance reserves (4,368) (2,975)
Discontinuation of HomeClub name and membership
program 1,702 1,818
Rental step adjustments (564) (641)
Other (341) (931)
------- -------
Total $(1,825) $(2,041)
======= =======
</TABLE>
During the fiscal year ended January 25, 1992, the Company utilized $6.4
million of net operating loss carryforwards and $.4 million of investment
tax credit carryforwards related to a prior acquisition. The Company
recognized the utilization of these carryforwards by reducing the recorded
value of the acquired fixed assets by $.9 million and by recording deferred
credits of $1.7 million in fiscal 1992, which are included in other
noncurrent liabilities on the balance sheet. Income tax expense was not
affected. The deferred credits are being amortized over the estimated
useful lives of the acquired assets.
F-13
<PAGE>
WABAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. During fiscal 1993, the Board of Directors voted that
no benefits would accrue under this plan after July 4, 1992. No gain or
loss resulted from the curtailment of this plan. In December 1993, the
Company terminated its unfunded plan which provided additional retirement
benefits for certain key employees. The net income effect of the
termination and settlement of this plan was not material. The Company also
has a non-contributory retirement plan covering directors who are not
employees or officers of the Company.
Net periodic pension cost under the Company's plans, presented in
accordance with SFAS No. 87, includes the following components (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 29, JANUARY 30, JANUARY 25,
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Service cost $451 $ 722 $ 793
Interest cost on projected benefit ob-
ligation 592 656 494
Actual return on assets (380) (157) (279)
Net amortization and deferrals 21 (81) 110
---- ------ ------
Net pension cost $684 $1,140 $1,118
==== ====== ======
</TABLE>
The following table sets forth the funded status of the Company's defined
benefit pension plan for full-time employees as of January 29, 1994
(amounts related to the Directors' plan are immaterial) and of all plans as
of January 30, 1993 in accordance with SFAS No. 87 (in thousands):
<TABLE>
<CAPTION>
JANUARY 29, 1994 JANUARY 30, 1993
---------------- ------------------
FUNDED FUNDED UNFUNDED
---------------- ------- ---------
<S> <C> <C> <C>
Actuarial present value of accumulated
benefit obligation:
Vested benefits $ 4,790 $ 3,035 $ 1,010
Nonvested benefits 940 1,180 455
------- ------- --------
$ 5,730 $ 4,215 $ 1,465
======= ======= ========
Projected benefit obligation $ 5,730 $ 4,215 $ 3,577
Plan assets at fair market value 4,880 4,384 --
------- ------- --------
Projected benefit obligation in excess
of (less than) plan assets 850 (169) 3,577
Unrecognized net loss from past
experience different from that assumed
and effects of changes in assumptions -- -- (1,853)
Prior service cost reduction not yet
recognized 34 52 --
Unrecognized net obligation (1,431) (249) (154)
Minimum liability adjustment 1,397 -- --
------- ------- --------
Accrued (prepaid) pension cost included
in balance sheets $ 850 $ (366) $ 1,570
======= ======= ========
</TABLE>
F-14
<PAGE>
WABAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average discount rates used in determining the actuarial
present value of the projected benefit obligation were 7.5% in fiscal 1994
and 8.5% in fiscal 1993. The assumed rate of increase in future
compensation levels used in fiscal 1993 was 5.5%. This assumption is not
applicable in fiscal 1994 because no benefits accrue under the Company's
retirement plan after July 4, 1992. The expected long-term rate of return
on assets was 9.5% in both years. 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.
Effective on July 4, 1992, the Company's 401(k) Savings Plan was amended so
that non-highly compensated employees may make pre-tax contributions up to
15% of covered compensation, as allowed under Section 401(k) of the
Internal Revenue Code. The Company matches employee contributions at 100%
of the first one percent of covered compensation and 50% of the next four
percent, payable at the end of the year. Before the amendment became
effective, eligible employees could make pre-tax contributions up to 10% of
covered compensation, and the Company matched contributions of the first
five percent of covered compensation at rates ranging from 25% to 50%. The
Company's expense under this plan was $3,277,000 in fiscal 1994, $2,216,000
in fiscal 1993 and $838,000 in fiscal 1992.
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
fiscal 1994.
Net periodic postretirement medical benefit cost for the fiscal year ended
January 29, 1994, presented in accordance with SFAS No. 106, includes the
following components (in thousands):
<TABLE>
<S> <C>
Service cost $100
Interest cost 38
----
Net periodic postretirement benefit cost $138
====
</TABLE>
The following table sets forth the funded status of the Company's
postretirement medical plan and the amount recognized in the Company's
balance sheet at January 29, 1994 in accordance with SFAS No. 106 (in
thousands):
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Retired participants $ --
Fully eligible active participants 11
Other active participants 424
----
Unfunded accumulated postretirement benefit obligation 435
Unrecognized net gain 51
----
Accrued postretirement benefit cost included in balance sheet $486
====
</TABLE>
F-15
<PAGE>
WABAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For measurement purposes as of January 31, 1993, an annual rate of increase
in the per capita cost of medical coverage of 12% in fiscal 1994 grading
down to 5% after 20 years was assumed. For measurement purposes as of
January 29, 1994, an annual rate of increase in the per capita cost of
medical coverage of 10% in fiscal 1995 grading down to 5% after 10 years
was assumed. 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 fiscal 1994
by $27,000 and would increase the accumulated postretirement benefit
obligation as of January 29, 1994 by $87,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8.5% as of January 31, 1993 and 7.5%
as of January 29, 1994.
I.ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The major components of accrued expenses and other current liabilities are
as follows:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
1994 1993
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Sales and use taxes payable $ 16,966 $ 18,634
Employee compensation 18,995 19,325
Self-insurance reserves 34,472 21,090
Rent, utilities, advertising and other 59,204 46,942
-------- --------
$129,637 $105,991
======== ========
</TABLE>
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.
F-16
<PAGE>
WABAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
J.SELECTED INFORMATION BY MAJOR BUSINESS SEGMENT
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
JANUARY 29, JANUARY 30, JANUARY 25,
1994 1993 1992
----------- ----------- -----------
(53 WEEKS)
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales:
BJ's Wholesale Club $2,003,385 $1,786,916 $1,432,228
HomeBase 1,585,956 1,570,878 1,351,357
---------- ---------- ----------
$3,589,341 $3,357,794 $2,783,585
========== ========== ==========
Operating income (loss):
BJ's Wholesale Club (net of $5,500
charge in FY 1992 for cost to close
Chicago clubs) $ 45,216 $ 35,366 $ 17,392
HomeBase (net of $98,533 restructuring
charge in FY 1994 and $3,400 charge
in FY 1992 for discontinuation of
HomeClub name) (55,805) 47,170 42,077
General corporate expense (including
$2,600 restructuring charge in FY
1994) (10,899) (7,981) (7,254)
---------- ---------- ----------
(21,488) 74,555 52,215
Interest on debt and capital leases
(net) (12,489) (6,280) (3,292)
---------- ---------- ----------
Income (loss) before income taxes and
cumulative effect of accounting
principle changes $ (33,977) $ 68,275 $ 48,923
========== ========== ==========
Identifiable assets:
BJ's Wholesale Club $ 501,230 $ 364,154 $ 230,473
HomeBase 551,887 590,344 439,469
Corporate (cash, cash equivalents and
marketable securities) 19,877 52,516 116,463
---------- ---------- ----------
$1,072,994 $1,007,014 $ 786,405
========== ========== ==========
Depreciation and amortization:
BJ's Wholesale Club $ 16,825 $ 11,362 $ 8,480
HomeBase 20,214 18,461 13,648
---------- ---------- ----------
$ 37,039 $ 29,823 $ 22,128
========== ========== ==========
Capital expenditures:
BJ's Wholesale Club $ 95,170 $ 89,765 $ 40,905
HomeBase 37,974 76,083 33,377
---------- ---------- ----------
$ 133,144 $ 165,848 $ 74,282
========== ========== ==========
</TABLE>
K.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.
F-17
<PAGE>
WABAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Marketable Securities
The fair value of the Company's marketable securities is based on quoted
values provided by dealers of these securities.
Real Estate Financings and General Corporate Debt
The fair value of the Company's real estate financings 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.
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):
<TABLE>
<CAPTION>
JANUARY 29, 1994 JANUARY 30, 1993
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 19,877 $ 19,877 $ 35,644 $ 35,644
Marketable securities -- -- 16,872 16,924
Real estate financings (5,889) (6,287) (8,111) (8,736)
General corporate debt (60,000) (65,085) (60,000) (63,902)
Subordinated debt (108,600) (102,627) (108,600) (106,700)
</TABLE>
L.SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Fiscal year ended January 29,
1994
Net sales $834,225 $967,209 $897,646 $890,261
Gross earnings (a) 113,379 137,438 124,169 127,685
Income (loss) before cumula-
tive effect of accounting
principle changes 4,425 13,704 8,087 (44,903)(b)
Per common share, fully di-
luted .13 .39 .24 (1.36)(b)
Net income 5,330 13,704 8,087 (44,903)(b)
Per common share, fully di-
luted .16 .39 .24 (1.36)(b)
Fiscal year ended January 30,
1993
Net sales $736,012 $863,501 $820,648 $937,633
Gross earnings (a) 99,979 124,764 115,771 135,946
Net income 6,169 12,787 11,198 14,088 (c)
Per common share, fully di-
luted .19 .38 .33 .41 (c)
</TABLE>
(a) Gross earnings equals net sales less cost of sales, including buying
and occupancy costs.
(b) Includes a post-tax restructuring charge of $60.2 million and a $1.3
million post-tax charge for relocating a BJ's Wholesale Club warehouse.
Excluding these items, fully diluted earnings per share would have been
$.47.
(c) Includes a post-tax gain of $2.3 million, or $.07 per share, from the
disposal of real estate properties at BJ's.
NOTE: The fiscal year ended January 30, 1993 contained 53 weeks and its
fourth quarter contained 14 weeks.
F-18
<PAGE>
WABAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
M.RELATIONSHIP WITH THE TJX COMPANIES, INC. ("TJX")
The Company was formed in 1989, when Zayre Corp. (now TJX), as part of its
restructuring, combined its BJ's Wholesale Club and HomeBase divisions to
form Waban Inc. In connection with the spin-off from TJX (the "Spin-Off"),
the Company and TJX entered into a Distribution Agreement and a Services
Agreement.
The Distribution Agreement provides for, among other things, (i) the
division between the Company and TJX of certain liabilities and (ii)
certain other agreements governing the relationship between the Company and
TJX following the Spin-Off. Under the Distribution Agreement, TJX assumed
certain liabilities relating to the Company's business for the period prior
to the Spin-Off. In general, the Company assumed responsibility for all
post-Spin-Off liabilities relating to its business. TJX retained liability
for insured claims arising before the Spin-Off and in 1999 will receive
from (or pay to) the Company the amount by which TJX's costs at the end of
this 10-year period exceed (or are less than) the reserve amount agreed to.
Pursuant to the Services Agreement, TJX provided certain services,
primarily data processing, for which the Company paid TJX $6,483,000,
$5,547,000 and $5,241,000 in fiscal 1994, 1993 and 1992, respectively. The
Company has elected to continue to purchase data processing and certain
other services through fiscal 1995.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER WILL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR SINCE THE DATE AS OF WHICH THE INFORMATION IS SET
FORTH HEREIN.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary........................................................ 3
Certain Investment Considerations......................................... 7
Use of Proceeds........................................................... 9
Capitalization............................................................ 9
Selected Consolidated Financial Information............................... 10
Selected Information by Major Business Segment............................ 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 12
Business.................................................................. 19
Management................................................................ 31
Relationship with TJX..................................................... 33
Principal Stockholders.................................................... 34
Description of Notes...................................................... 35
Description of Certain Indebtedness....................................... 53
Underwriting.............................................................. 54
Legal Matters............................................................. 54
Experts................................................................... 54
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$100,000,000
WABAN INC.
11% SENIOR
SUBORDINATED NOTES
DUE 2004
----------------
PROSPECTUS
----------------
BEAR, STEARNS & CO. INC.
MAY 4, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
GRAPHIC APPENDIX PURSUANT TO RULE 304 OF REGULATION S-T
Description of artwork on Prospectus cover:
Logos of HomeBase and BJ's Wholesale Club located alongside the Registrant's
corporate name
Description of artwork on inside front covers (2 pages)
Inside Cover A: 3 photographs and captions and HomeBase logo
a. Photo of the outside of a HomeBase store
(caption: HomeBase opened its first warehouse store in
California in 1983 and operates 82 warehouse stores located
in 11 states throughout the western United States (including
16 stores to be closed as part of HomeBase's restructuring).
b. Photo of a HomeBase delivery truck
(caption: HomeBase has implemented a series of programs
designed to specifically address the needs of contractors.
Most HomeBase warehouse stores have contractor desks and
delivery service to meet contractors' special needs.)
c. Photo of two customers in a HomeBase outdoors nursery area
(caption: HomeBase believes that a high level of customer
service is required to build both customer loyalty and sales,
and has recently added a significant number of sales and
service personnel with home improvement product knowledge.)
Inside Cover B: 3 photographs and captions and BJ's logo
a. Photo of customers in front of a BJ's store
(caption: 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 52 warehouse clubs in 12 states and
has over 2.6 million members.)
b. Photo of two customers in BJ's computer sales area
(caption: BJ's merchandising strategy is to provide its
members with a broad range of high quality, brand name
merchandise offered at every day prices consistently lower
than the prices available through traditional wholesalers,
discount retailers or supermarkets.)
c. Photo of the inside of a BJ's warehouse club
(caption: BJ'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.)
Description of artwork on inside back cover:
Map of the United States indicating the locations of BJ's and HomeBase stores,
together with a list of stores by state.
Description of artwork on back cover of Prospectus:
Logos of HomeBase and BJ's located below the Registrant's corporate
name.
