<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended October 26, 1996
Commission file number 1-10259
WABAN INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0109661
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Mercer Road
Natick, Massachusetts 01760
(Address of principal executive offices) (Zip Code)
(508) 651-6500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
The number of shares of the Registrant's common stock outstanding as of
November 23, 1996: 32,725,078
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
WABAN INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Thirteen Weeks Ended
-----------------------
October 26, October 28,
1996 1995
----------- -----------
(In Thousands Except
Per Share Amounts)
<S> <C> <C>
Net sales $1,064,228 $ 965,990
--------- ---------
Cost of sales, including buying and occupancy costs 911,885 825,484
Selling, general and administrative expenses 120,953 113,082
Interest on debt and capital leases (net) 4,988 3,581
------- -------
Total expenses 1,037,826 942,147
--------- ---------
Income before income taxes 26,402 23,843
Provision for income taxes 10,376 9,299
--------- ---------
Net income $ 16,026 $ 14,544
========= =========
Net income per common share (see Exhibit 11 for
detailed computations):
Primary $ 0.49 $ 0.44
======= =======
Fully diluted $ 0.46 $ 0.42
======= =======
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
WABAN INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------
October 26, October 28,
1996 1995
----------- -----------
(In Thousands Except
Per Share Amounts)
<S> <C> <C>
Net sales $3,196,817 $2,902,327
--------- ---------
Cost of sales, including buying and occupancy costs 2,732,515 2,472,315
Selling, general and administrative expenses 365,676 341,376
Interest on debt and capital leases (net) 14,354 11,239
--------- ---------
Total expenses 3,112,545 2,824,930
--------- ---------
Income before income taxes 84,272 77,397
Provision for income taxes 33,119 30,185
--------- ---------
Net income $ 51,153 $ 47,212
========= =========
Net income per common share (see Exhibit 11 for
detailed computations):
Primary $ 1.54 $ 1.42
========= =========
Fully diluted $ 1.44 $ 1.34
========= =========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
WABAN INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
October 26, January 27, October 28,
1996 1996 1995
----------- ----------- -----------
(Dollars In Thousands)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,114 $ 32,155 $ 7,360
Marketable securities - 20,339 56,339
Accounts receivable 61,217 59,221 52,412
Merchandise inventories 691,610 570,236 607,307
Current deferred income taxes 21,413 21,445 22,292
Prepaid expenses 12,568 10,755 13,769
--------- --------- ---------
Total current assets 796,922 714,151 759,479
--------- --------- ---------
Property at cost:
Land and buildings 419,252 376,930 351,444
Leasehold costs and improvements 90,021 84,052 77,959
Furniture, fixtures and equipment 317,516 288,929 272,520
--------- --------- ---------
826,789 749,911 701,923
Less accumulated depreciation
and amortization 200,082 169,711 161,753
--------- --------- ---------
626,707 580,200 540,170
--------- --------- ---------
Property under capital leases 14,289 15,640 15,652
Less accumulated amortization 6,295 6,904 6,634
--------- --------- ---------
7,994 8,736 9,018
--------- --------- ---------
Property held for sale (net) - 4,603 5,607
Deferred income taxes 8,711 11,557 5,659
Other assets 14,100 13,204 13,082
--------- --------- ---------
Total assets $1,454,434 $1,332,451 $1,333,015
========= ========= =========
LIABILITIES
Current liabilities:
Short-term debt $ 35,000 $ - $ -
Current installments of long-
term debt 12,472 12,828 12,827
Accounts payable 351,477 275,963 325,710
Restructuring reserve 3,569 7,175 8,131
Accrued expenses and other
current liabilities 134,922 143,316 130,286
Accrued federal and state
income taxes 1,818 8,771 2,866
Obligations under capital leases
due within one year 370 648 752
--------- --------- ---------
Total current liabilities 539,628 448,701 480,572
--------- --------- ---------
Real estate debt 467 924 939
General corporate debt 12,000 24,000 24,000
Senior subordinated debt 100,000 100,000 100,000
Convertible subordinated debt 108,600 108,600 108,600
Obligations under capital leases,
less portion due within one year 11,548 11,789 11,896
Noncurrent restructuring reserve 10,346 20,623 15,932
Other noncurrent liabilities 66,134 62,694 61,039
STOCKHOLDERS' EQUITY
Common stock, par value $.01,
authorized 190,000,000 shares,
issued 33,270,685, 33,296,935
and 33,301,935 shares 333 333 333
Additional paid-in capital 329,469 328,619 327,286
Unrealized holding gains - 22 4
Retained earnings 286,366 235,213 209,448
Treasury stock, at cost, 552,784,
567,571 and 461,240 shares (10,457) (9,067) (7,034)
--------- --------- ---------
Total stockholders' equity 605,711 555,120 530,037
--------- --------- ---------
Total liabilities and
stockholders' equity $1,454,434 $1,332,451 $1,333,015
========= ========= =========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
WABAN INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------
October 26, October 28,
1996 1995
----------- -----------
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 51,153 $ 47,212
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization of property 41,726 34,188
Loss on property disposals 1,115 213
Amortization of premium on marketable securities 120 642
Other noncash items (net) 690 777
Deferred income taxes 2,893 2,069
Increase (decrease) in cash
due to changes in:
Accounts receivable (1,996) (537)
Merchandise inventories (121,374) (94,688)
Prepaid expenses (1,813) (4,777)
Other assets (1,388) (568)
Accounts payable 75,514 75,868
Restructuring reserves (13,883) (12,916)
Accrued expenses 4,323 11,175
Accrued income taxes (6,953) 330
Other noncurrent liabilities 3,440 9,880
------- -------
Net cash provided by operating activities 33,567 68,868
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (20,873) (109,628)
Sale of marketable securities 37,927 64,284
Maturity of marketable securities 3,140 52,547
Property additions (101,185) (122,993)
Property disposals 4,465 8,518
------- -------
Net cash used in investing activities (76,526) (107,272)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing of short-term debt 35,000 -
Repayment of long-term debt (12,813) (12,749)
Repayment of capital lease obligations (519) (750)
Purchase of treasury stock (11,392) (7,333)
Proceeds from sale and issuance of
common stock 10,642 1,556
------- -------
Net cash provided by (used in)
financing activities 20,918 (19,276)
------- -------
Net decrease in cash and cash
equivalents (22,041) (57,680)
Cash and cash equivalents at
beginning of year 32,155 65,040
------- -------
Cash and cash equivalents at
end of period $ 10,114 $ 7,360
======= ======
Supplemental cash flow information:
Interest paid $ 10,434 $10,490
Income taxes paid 37,179 27,756
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
WABAN INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<CAPTION>
(In Thousands Except Per Share Amounts)
-------------------------------------------------------------
Common Unrealized Total
Stock Additional Holding Stock-
Par Value Paid-In Gains Retained Treasury holders'
$.01 Capital (Losses) Earnings Stock Equity
--------- ---------- ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 28,
1995 $ 332 $325,565 $ (44) $162,236 $ - $488,089
Net income - - - 47,212 - 47,212
Unrealized
holding gains - - 48 - - 48
Purchase of
treasury stock - - - - (7,333) (7,333)
Sale and issuance
of common stock 1 1,721 - - 299 2,021
----- -------- ----- -------- ------- --------
Balance, October 28,
1995 $ 333 $327,286 $ 4 $209,448 $(7,034) $530,037
===== ======== ===== ======== ======= ========
Balance, January 27,
1996 $ 333 $328,619 $ 22 $235,213 $(9,067) $555,120
Net income - - - 51,153 - 51,153
Unrealized
holding losses - - (22) - - (22)
Purchase of
treasury stock - - - - (11,392) (11,392)
Sale and issuance
of common stock - 850 - - 10,002 10,852
----- -------- ----- -------- -------- --------
Balance, October 26,
1996 $ 333 $329,469 $ - $286,366 $(10,457) $605,711
===== ======== ===== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The results for the first nine months are not necessarily indicative of
results for the full fiscal year because the Company's business, in common with
the business of retailers generally, is subject to seasonal influences. BJ's
Wholesale Club's sales and profits have typically been strongest in the
Christmas holiday season and lowest in the first quarter of each fiscal year.
HomeBase's sales and profits are typically lower in the first and fourth
quarters than they are in the second and third quarters, which correspond to
the most active season for home construction.
2. The financial statements are unaudited and reflect all normal recurring
adjustments considered necessary by the Company for a fair presentation of its
financial statements in accordance with generally accepted accounting
principles. Certain amounts in the prior year's financial statements have been
reclassified for comparative purposes.
3. These interim financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in the Annual
Report on Form 10-K for the fiscal year ended January 27, 1996.
4. Presented below is information relative to the operating results of the
Company's business segments (dollars in thousands):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------- -----------------------
October 26, October 28, October 26, October 28,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales:
BJ's Wholesale Club $ 697,818 $604,426 $2,053,894 $1,767,903
HomeBase 366,410 361,564 1,142,923 1,134,424
--------- ------- --------- ---------
$1,064,228 $965,990 $3,196,817 $2,902,327
========= ======= ========= =========
Operating income:
BJ's Wholesale Club $ 21,302 $ 15,875 $ 61,252 $ 46,866
HomeBase 12,009 13,353 43,202 47,337
General corporate expense (1,921) (1,804) (5,828) (5,567)
--------- ------- --------- ---------
31,390 27,424 98,626 88,636
Interest on debt and capital
leases (net) (4,988) (3,581) (14,354) (11,239)
--------- ------- -------- ---------
Income before income taxes $ 26,402 $ 23,843 $ 84,272 $ 77,397
========= ======= ======== =========
</TABLE>
Warehouses in operation - end of period:
- ---------------------------------------
BJ's Wholesale Club 79 68
HomeBase 84 79
5. On October 23, 1996, the Company announced its intention to spin off its
BJ's Wholesale Club division in a tax-free distribution (the "Distribution")
that will take the form of a special dividend to stockholders. On November 5,
1996 the Company filed a ruling request with the Internal Revenue Service with
respect to the tax-free status of the Distribution and filed preliminary proxy
materials with the SEC. The Company expects to hold a special stockholders'
meeting early in 1997 to vote on several related proposals, including approval
of the Distribution, which is currently expected to be completed in the spring
of 1997. However, the Company's Board of Directors has reserved the right to
abandon, defer or modify the Distribution at any time prior to its completion.
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Thirteen Weeks (Third Quarter) and Thirty-Nine Weeks (Nine Months) Ended
October 26, 1996 versus Thirteen and Thirty-Nine Weeks Ended October 28, 1995.
Results of Operations
- ---------------------
Consolidated net sales for the quarter ended October 26, 1996 were $1.1
billion, an increase of 10.2% over last year's third quarter. For the nine
months ended October 26, 1996, consolidated net sales were $3.2 billion, or
10.1% higher than the first three quarters of last year. These increases were
due to the opening of new stores and comparable store sales increases at BJ's
Wholesale Club, partially offset by comparable store sales decreases at
HomeBase. Comparable store sales at BJ's increased 3.7% in the third quarter
and 5.5% for the nine-month period. HomeBase's comparable store sales
decreased 4.5% in the third quarter and 4.6% year-to-date.
Cost of sales (including buying and occupancy costs) was 85.7% of sales in this
year's third quarter versus 85.5% in the comparable period last year. For the
first nine months, the cost of sales percentage was 85.5% this year versus
85.2% last year. This year's higher cost of sales ratios were attributable
primarily to the increased proportion of consolidated sales contributed by
BJ's, which has higher cost of sales than HomeBase.
Selling, general and administrative ("SG&A") expenses were 11.4% of sales in
the third quarter this year versus 11.7% in the comparable period last year.
Year-to-date SG&A expenses were 11.4% this year versus 11.8% last year. This
year's lower ratios were primarily due to BJ's larger share of consolidated
sales. SG&A expenses are lower at BJ's than at HomeBase, whose business
requires a higher level of customer service.
BJ's operating income in this year's third quarter was $21.3 million, an
increase of 34.2% over last year's $15.9 million. Year-to-date operating
income rose 30.7% to $61.3 million versus $46.9 million last year. These
increases were due mainly to comparable store sales increases and higher
merchandise gross margins resulting from a shift in the mix of sales to higher
margin categories and efficiencies in merchandise distribution. Membership fee
income in the third quarter was $13.7 million compared to $12.3 million in the
same period last year. For the nine months, membership fee income was $37.3
million, $2.0 million higher than last year.
Operating income at HomeBase was $12.0 million for the third quarter compared
to $13.4 million last year and totalled $43.2 million for the first nine months
versus the prior year's $47.3 million. These decreases were primarily due to
comparable store sales declines, which reflected significant new competition
and a weak environment for home improvement expenditures in certain of
HomeBase's markets.
The components of net interest expense were as follows (in thousands):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
Oct. 26, Oct. 28, Oct. 26, Oct. 28,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest expense on debt $ 4,901 $ 4,710 $14,652 $14,832
Interest and investment income (302) (1,538) (1,478) (4,840)
------ ------ ------ ------
Interest on debt (net) 4,599 3,172 13,174 9,992
Interest on capital leases 389 409 1,180 1,247
------ ------ ------ ------
Interest on debt and capital
leases (net) $ 4,988 $ 3,581 $14,354 $11,239
====== ====== ====== ======
</TABLE>
Interest expense on debt was net of capitalized interest of $505,000 in this
year's third quarter and $1,814,000 year-to-date. Last year's capitalized
interest was $942,000 in the third quarter and $2,420,000 in the first nine
months. Interest and investment income was lower this year because of
decreased investments in marketable securities.
The year-to-date provision rate for income taxes was 39.3% this year versus
39.0% last year.
Net income for the third quarter was $16.0 million, or $.46 per share, fully
diluted, versus $14.5 million or $.42 per share, in the third quarter of last
year. Year-to-date net income was $51.2 million, or $1.44 per share, fully
diluted, versus $47.2 million, or $1.34 per share, last year.
Liquidity and Capital Resources
- -------------------------------
During the first nine months of this fiscal year, the Company opened eight new
BJ's clubs and five new HomeBase warehouse stores, and relocated one HomeBase
store. Last year the Company opened six new BJ's clubs and four HomeBase
stores, including the relocation of one store, in the same time period. The
renovation of ten older HomeBase stores was also completed during the first
nine months of this fiscal year, bringing the total number of stores reflecting
HomeBase's new prototype design to 49 at October 26, 1996. Cash expended for
property additions year-to-date was $101.2 million versus $123.0 million last
year.
The Company's capital expenditures are expected to total approximately $125
million in the current fiscal year. Two new BJ's clubs will be opened and two
additional HomeBase warehouse stores will be renovated in the fourth quarter.
In the fiscal year ending January 31, 1998, the Company expects to open
approximately ten new BJ's clubs and one to three new HomeBase stores, and will
continue its remodeling program for older HomeBase warehouse stores. The
timing of actual store openings and the amount of related expenditures could
vary from these estimates due to, among other things, the complexity of the
real estate development process.
As of October 26, 1996, the Company has closed 18 HomeBase warehouse stores in
connection with its restructuring and expects to close two additional HomeBase
stores that are currently in operation. The Company currently remains
obligated under leases for three closed stores.
Net cash outflow related to restructuring transactions, net of tax benefits,
was $3.2 million during the first nine months of this fiscal year. Future net
cash outflow in connection with the disposition of the remaining warehouse
locations, including long-term lease obligations, is expected to be
approximately $2 million to $7 million (net of tax benefits). The terms of the
remaining leases expire at various dates through 2007. In some cases, the
Company has made lump sum cash payments to settle lease obligations, and it may
settle other future lease obligations in the same manner. The actual future
cash flows could vary from the estimates above, depending on certain factors,
principally the Company's ability to dispose of closed HomeBase locations on
anticipated terms.
During the first nine months of this fiscal year, the Company repurchased
570,000 shares of common stock on the open market at a total cost of $11.4
million, or an average cost of $19.99 per share. Cumulatively, the Company has
spent $21.3 million to purchase 1.2 million shares of its common stock at an
average cost of $17.86, pursuant to the $50 million repurchase program approved
by the Board of Directors in June 1995. The Company has suspended repurchase
activity in view of its announced intention to spin off BJ's Wholesale Club
(see "Recent Developments").
During the second quarter of this fiscal year, the Company extended its $150
million credit agreement with a group of banks through March 30, 1999. The
agreement includes a $20 million sub-facility for standby letters of credit.
As of May 1996, the annual facility fee that the Company is required to pay was
reduced from $300,000 to $225,000, and the surcharge on borrowings made at
LIBOR was reduced from 0.45% to 0.40%. These rates, which are the minimum
provided under the agreement, are both subject to change, based upon the
Company's fixed charge coverage ratio. At October 26, 1996, the Company had
$35 million of borrowings outstanding under its line of credit and $8.2 million
of standby letters of credit were outstanding under the line's sub-facility.
The Company expects that no short-term borrowings will be outstanding at the
end of its fiscal year.
Increases in inventory from October 28, 1995 to October 26, 1996 were
attributable primarily to new stores. Increases in inventory since the end of
the previous fiscal year were due mainly to normal seasonal requirements and to
new stores.
Cash, cash equivalents and marketable securities totalled $10.1 million as of
October 26, 1996. The Company expects that its current resources, together
with anticipated cash flow from operations, will be sufficient to finance its
operations through the fiscal year ending January 31, 1998. However, the
Company may from time to time seek to obtain additional financing. See "Recent
Developments" below for information regarding the Company's financing plans in
connection with the proposed spin-off of its BJ's Wholesale Club division.
Seasonality
- -----------
BJ's sales and operating income have typically been strongest in the Christmas
holiday season and lowest in the first quarter of each fiscal year. HomeBase's
sales and earnings are typically lower in the first and fourth quarters than
they are in the second and third quarters, which correspond to the most active
season for home construction.
Recent Developments
- -------------------
The following comments should be read in conjunction with the preliminary proxy
statement filed by the Company with the Securities and Exchange Commission
("SEC") on November 5, 1996.
On October 23, 1996, the Company announced its intention to spin off its BJ's
Wholesale Club division in a tax-free distribution (the "Distribution") that
will take the form of a special dividend to stockholders. On November 5, 1996,
the Company filed a ruling request with the Internal Revenue Service with
respect to the tax-free status of the Distribution and filed preliminary proxy
materials with the SEC. The Company expects to hold a special stockholders'
meeting early in 1997 to vote on several related proposals, including approval
of the Distribution, which will separate the Company's food and general
merchandise warehouse club business (BJ's Wholesale Club) from its home
improvement warehouse business (HomeBase). After the Distribution, BJ's
Wholesale Club, Inc., ("BJI") a newly formed, wholly-owned subsidiary of the
Company, will be an independent, publicly owned Company that will operate and
develop BJ's business. The Company's stockholders will also be asked to
approve an amendment to Waban Inc.'s Certificate of Incorporation changing the
name of the Company to "HomeBase, Inc.", which will continue to operate and
develop HomeBase's business after the Distribution. Other proposals to be
voted upon include an amendment to increase the number of shares available for
issuance under the Company's stock incentive plan and to approve certain
incentive plans for BJI which are similar to the Company's current incentive
plans.
The Distribution is conditioned upon a number of other factors, including (i)
declaration of the Distribution by the Board of Directors; (ii) receipt of a
ruling from the Internal Revenue Service that the Distribution will qualify as
a tax-free transaction; (iii) the conversion into common stock or the
redemption for cash of Waban Inc.'s $108.6 million convertible subordinated
debentures and, if these debentures are redeemed for cash, the closing of an
equity offering by BJI to reduce the indebtedness that the Company would incur
to finance the redemption; and (iv) BJI and HomeBase, Inc. having obtained bank
credit facilities in amounts deemed necessary by the Company's management.
Prior to the Distribution, the Company also intends to repay its $24 million
9.58% senior notes due May 31, 1998 and retire (via open market purchase or a
tender offer) or defease its $100 million 11% senior subordinated notes due May
15, 2004.
The Company currently expects the Distribution to be completed in the spring of
1997. However, the Company's Board of Directors has reserved the right to
abandon, defer or modify the Distribution at any time prior to its completion.
Forward-Looking Information
- ---------------------------
This quarterly report on Form 10-Q contains "forward-looking statements,"
including certain information with respect to the Company's plans and strategy.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause actual events or the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, the
effects of regional economic conditions and competition, as well as other
factors noted under "Recent Developments" above and elsewhere in this quarterly
report on Form 10-Q.
<PAGE>
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10.10 Employment Agreement dated as of September 19, 1996
with Herbert J. Zarkin
11.0 Statement regarding computation of per share
earnings
27.0 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K with
the Securities and Exchange Commission during the quarter
ended October 26, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WABAN INC.
----------
(Registrant)
Date: December 6, 1996 /S/ HERBERT J. ZARKIN
----------------------------- -----------------------------
Herbert J. Zarkin
President and
Chief Executive Officer
Date: December 6, 1996 /S/ EDWARD J. WEISBERGER
----------------------------- ------------------------------
Edward J. Weisberger
Senior Vice President and
Chief Financial Officer
<PAGE>
<TABLE>
Exhibit 11
WABAN INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
(Unaudited)
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------- -----------------------
October 26, October 28, October 26, October 28,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income as reported $16,026,000 $14,544,000 $51,153,000 $47,212,000
========== ========== ========== ==========
Net income used for primary
computation $16,026,000 $14,544,000 $51,153,000 $47,212,000
Add (where dilutive):
Tax effected interest and
amortization of debt expense
on convertible debt 1,085,000 1,085,000 3,256,000 3,256,000
---------- ---------- ---------- ----------
Net income used for fully
diluted computation $17,111,000 $15,629,000 $54,409,000 $50,468,000
========== ========== ========== ==========
Weighted average number of
common shares outstanding 32,710,994 32,919,353 32,875,965 33,084,047
Add (where dilutive):
Assumed exercise of those
options that are common
stock equivalents net of
treasury shares deemed to
have been repurchased 283,670 232,944 348,045 188,904
---------- ---------- ---------- ----------
Weighted average number of
common and common equivalent
shares outstanding used for
primary computation 32,994,664 33,152,297 33,224,010 33,272,951
Add (where dilutive):
Shares applicable to stock
options in addition to those
used in primary computation
due to the use of period-end
market price when higher than
average price 116,740 - 92,233 -
Assumed exercise of
convertible securities 4,387,879 4,387,879 4,387,879 4,387,879
---------- ---------- ---------- ----------
Adjusted shares outstanding
used for fully diluted
computation 37,499,283 37,540,176 37,704,122 37,660,830
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Waban
Inc. consolidated statements of income and consolidated balance sheets filed
with the Form 10-Q for the quarter ended October 26, 1996 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
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- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
EMPLOYMENT AGREEMENT
DATED AS OF SEPTEMBER 19, 1996
BETWEEN HERBERT J ZARKIN AND WABAN INC.
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
PAGE
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT dated as of September 19, 1996 between Herbert J Zarkin of 8
Lands End Lane, Sudbury, Massachusetts 01776 ("Executive") and Waban Inc., a
Delaware corporation (the "Company"), whose principal office is in Natick,
Massachusetts 01760.
RECITALS
--------
The Executive currently serves as President and Chief Executive Officer of
the Company under an Employment Agreement dated as of May 25, 1993, with a term
ending January 25, 1997.
The Company and the Executive desire to continue the employment of the
Executive in such capacities beyond January 25, 1997.
The Company and Executive deem it desirable and appropriate, therefore, to
enter into this Agreement.
AGREEMENT
---------
The parties hereto, in consideration of the mutual agreements hereinafter
contained, agree as follows:
1. EFFECTIVE DATE; TERM OF AGREEMENT. This agreement shall become
---------------------------------
effective as of the date hereof (the "Effective Date"). This Agreement shall
supersede any existing employment agreement including, without limitation, the
Employment Agreement dated as of May 25, 1993 between Executive and the
Company. Notwithstanding the foregoing, the Amended and Restated Change of
Control Severance Agreement between the Company and Executive dated as of May
25, 1993 (the "Change of Control Agreement") shall remain in full force and
effect. Executive's employment by the Company shall continue on the terms
provided herein until January 29, 2000 and thereafter until terminated by
either Executive or the Company, subject to earlier termination as provided
herein (such period of employment hereinafter called "Employment Period").
2. SCOPE OF EMPLOYMENT.
-------------------
(a) Nature of Services. Executive shall diligently perform the duties
------------------
and the responsibilities of President and Chief Executive Officer of the
Company and such additional executive duties and responsibilities as shall
from time to time be assigned to him by the Board or its Chairman.
(b) Extent of Services. Except for illnesses and vacation periods,
------------------
Executive shall devote substantially all his working time and attention and his
best efforts to the performance of his duties and responsibilities under this
Agreement. However, Executive may (a) make any passive investments where he is
not obligated or required to, and shall not in fact, devote any managerial
efforts, (b) participate in charitable or community activities or in trade or
professional organizations or (c) subject to Board approval (which approval
shall not be unreasonably withheld or withdrawn), hold directorships in public
companies, except only that the Board shall have the right to limit such
services as a director or such participation whenever the Board shall believe
that the time spent on such activities infringes in any material respect upon
the time required by Executive for the performance of his duties under this
Agreement or is otherwise incompatible with those duties.
3. COMPENSATION AND BENEFITS.
-------------------------
(a) Base Salary. Executive shall be paid a base salary at the rate of no
-----------
less than $625,000 per year to be reviewed annually by the Committee (the "Base
Salary"). Base Salary shall be payable in such manner and at such times as the
Company shall pay base salary to other executive employees.
(b) New MIP Awards. Executive shall be eligible to receive awards under
--------------
the Company's Management Incentive Plan ("MIP") applicable to Executive. The
goals, scope and conditions of any award shall be established annually by
mutual agreement between Executive and the Committee. In each fiscal year,
Executive shall be entitled to earn up to a specified percentage of his Base
Salary as a Target, or Maximum Award, as the case may be. For each fiscal
year of the Company, the Target Award shall equal 50% of Executive's Base
Salary earned during the fiscal year, and the Maximum Award shall equal 100%
of the Executive's annualized Base Salary in effect at the beginning of the
fiscal year, with the payment potential scaling from 0% to the Maximum Award,
as established by the terms of the Award.
(c) New Company Options. The Committee has granted Executive non-
-------------------
statutory options under the Waban 1989 Plan, as amended, for 210,000 shares of
Stock, effective September 19, 1996, vesting in three (3) equal annual
installments, commencing September 19, 1997.
(d) Qualified Plans. Executive shall be entitled during the Employment
---------------
Period to participate in the Company's tax-qualified retirement and profit-
sharing plans, if any, in accordance with the provisions of those plans.
(e) Policies and Fringe Benefits. Executive shall be subject to Company
----------------------------
policies applicable to its executives generally and Executive shall be entitled
to receive all such fringe benefits as the Company shall from time to time make
available to other executives generally (subject to the terms of any applicable
fringe benefits plan).
4. TERMINATION OF EMPLOYMENT; IN GENERAL.
-------------------------------------
(a) The Company shall have the right to end Executive's employment at any
time and for any reason, with or without Cause.
<PAGE>
(b) The Employment Period shall terminate when Executive becomes
Disabled. In addition, if by reason of Incapacity Executive is unable to
perform his duties for at least six continuous months, upon written notice by
the Company to Executive the Employment Period will be terminated for
Incapacity.
(c) Whenever the Employment Period shall terminate, Executive shall
resign all offices or other positions he shall hold with the Company and any
affiliated corporations, including any position on the Board.
5. BENEFITS UPON TERMINATION OF EMPLOYMENT.
---------------------------------------
(a) Certain Terminations for Death, Disability or Incapacity; Termination
---------------------------------------------------------------------
by Company without Cause; Termination under Specified Circumstances. If the
- -------------------------------------------------------------------
Employment Period shall be terminated prior to, on, or after January 29, 2000
(i) by reason of death, Disability or Incapacity of Executive, (ii) by
termination by the Company for any reason other than Cause or (iii) by
termination by Executive in the event that either (A) Executive shall be
removed from or fail to be reelected to the offices of President, Chief
Executive Officer, a Director and a member of the Executive Committee of the
Board (other than in connection with termination of Executive's employment
for Cause or by Executive's voluntary termination for reasons not specified
in this clause (iii)) or (B) Executive is relocated more than 40 miles from
the current corporate headquarters of the Company, in either case without his
prior written consent (a "Specified Voluntary Termination," which termination
shall not constitute a voluntary termination for any purpose of this
Agreement), then all compensation and benefits for Executive shall be as
follows:
(i) For 24 months after such termination, the Company will continue
to pay to Executive Base Salary at the rate in effect at termination of
employment. Base Salary shall be paid for the first six months of the
period without reduction for compensation earned from other employment or
self-employment, and shall thereafter be reduced by such compensation
earned from other employment or self-employment.
(ii) Until the expiration of the period of Base Salary payments
described in (i) above, except to the extent that Executive shall obtain
the same from another employer or from self-employment, the Company will
provide such medical and hospital insurance, and term life insurance for
Executive and his family, comparable to the insurance provided for
executives generally, as the company shall determine, and upon the same
terms and conditions as the same shall be provided for other Company
executives generally; provided, however, that in no event shall such
-------- -------
benefits or the terms and conditions thereof be less favorable to
Executive than those afforded to him as of the date of termination.
(iii) The Company will pay to Executive, without offset for
compensation earned from other employment or self-employment, the
following amounts under the Company's MIP applicable to Executive:
(bullet) First, if not already paid, any amounts to which Executive
is entitled under MIP for the fiscal year of the Company ended
immediately prior to Executive's termination of employment. These
amounts will be paid at the same time as other awards for such prior
year are paid.
(bullet) Second, an amount equal to Executive's MIP Target Award for
the year of termination. This amount will be paid at the same time
as other MIP awards for the year of termination are paid.
In addition, the Company will pay to Executive such amounts as Executive
shall have deferred (but not received) under the Company's General
Deferred Compensation Plan in accordance with the provisions of that Plan.
(iv) Executive shall also be entitled to the benefits with respect to
any Stock Options or other Stock-based awards held by Executive on the
date of termination as provided under the Waban 1989 Plan, as amended. In
addition, Executive shall be entitled to benefits under other Company
plans, to the extent, if any, therein provided in the circumstances.
(v) If termination occurs by reason of Incapacity or Disability,
Executive shall be entitled to such compensation, if any, as is payable
pursuant to the Company's long-term disability plan or any successor
Company disability plan. Any payments made to Executive under any long
term disability plan of the Company with respect to the salary
continuation period in clause (i) above shall be offset against such
salary continuation payments and to the extent not so offset, Executive
shall promptly make reimbursement payments to the Company of such
disability payments.
(b) Certain Voluntary Terminations; Termination for Cause; Violation of
-------------------------------------------------------------------
Certain Agreements. If, prior to, on, or after January 29, 2000, Executive
- ------------------
should end his employment voluntarily or if the Company should end Executive's
employment for Cause, or, notwithstanding (a) above, if Executive should
violate the protected persons or noncompetition provisions of Section 6 to
the extent then applicable, all compensation and benefits otherwise payable
pursuant to this Agreement shall cease, other than (x) such amounts as
Executive shall have deferred (but not received) under the Company's General
Deferred Compensation Plan in accordance with the provisions of that Plan,
(y) any benefits to which Executive may be entitled with respect to any PARS
and Stock Options held on such date, in each case, as provided under the
Waban 1989 Plan, as amended, and (z) any benefits to which Executive may be
entitled under other Company plans to the extent, if any, therein provided
in the circumstances. The Company does not waive any rights it may have for
damages or for injunctive relief.
(c) Benefits Upon Change of Control. Following a Change of Control (as
-------------------------------
defined in the Change of Control Agreement), any rights of Executive under this
Agreement or any other agreement or plan with respect to uncompleted MIP
periods shall be governed solely by the Change of Control Agreement. Upon a
termination constituting Qualified Termination (as defined in the Change of
Control Agreement), all rights of Executive with respect to salary
continuation, life insurance, medical insurance and disability benefits shall
be governed solely by the Change of Control Agreement unless Executive shall
elect to have all such rights governed by the applicable terms of this
Agreement (including a determination of whether the termination was voluntary
or involuntary), in which case the Change of Control Agreement shall have no
effect as to such rights (upon such election, the nature of the termination,
e.g. voluntary, involuntary or for Specified Voluntary Termination, shall be
determined by reference to this Agreement and shall not be determined by
reference to the classification of the termination under the Change of
Control Agreement). To be effective, written notice of such election must
be furnished by Executive to the Company within seven days following the
Qualified Termination.
6. AGREEMENT NOT TO SOLICIT OR COMPETE.
-----------------------------------
(a) Upon the termination of employment at any time, then for a period of
two years after the termination of the Employment Period, Executive shall not
under any circumstances employ, solicit the employment of, or accept
unsolicited the services of, any "protected person" or recommend the
employment of any "protected person" to any other business organization. A
"protected person" shall be a person known by Executive (i) to be employed
by the Company or its Subsidiaries or (ii) to have been employed by the
Company or its Subsidiaries within six months prior to the commencement of
conversations with such person with respect to employment.
As to (i) each "protected person" to whom the foregoing applies, (ii) each
limitation on (A) employment, (B) solicitation and (C) unsolicited acceptance
of services of each "protected person" and (iii) each month of the period
during which the provisions of this Subsection (a) apply to each of the
foregoing, the provisions set forth in this Subsection (a) are deemed to be
separate and independent agreements and in the event of unenforceability of
any such agreement, such unenforceable agreement shall be deemed automatically
deleted from the provisions hereof and such deletion shall not affect the
enforceability of any other provision of this Subsection (a) or any other
term of this Agreement.
(b) During the course of his employment, Executive has learned many trade
secrets of the Company and has had access to confidential information and
business plans for the Company. Therefore, if Executive should end his
employment at any time during the Employment Period for any reason, including
by reason of retirement or disability, or if the Company should end Executive's
employment at any time during the Employment Period for any reason, and whether
with or without Cause, then for a period of two years thereafter, Executive
will not engage, either as a principal, employee, partner, consultant or
investor (other than a less-than-1% stock interest in a corporation), in a
business which is a competitor of the Company (a "Competitive Business"). A
business shall be deemed a Competitive Business if and only if it shall then
be so regarded by retailers or wholesalers generally, or if it shall operate
home improvement warehouse stores (such as Home Depot, Builders Square,
Lowe's or Home Quarters) or warehouse clubs (such as Sam's or PriceCostco).
Nothing herein shall restrict the right of Executive to engage in a business
that operates exclusively conventional or full mark-up department stores or
general merchandise discount department stores. In addition, if during a
period of salary continuation under Section 5(a)(i) following Executive's
termination by the Company for any reason other than Cause, Executive so
engages in a Competitive Business (whether or not the provisions of this
paragraph (b) are otherwise then applicable to Executive), Executive's
rights to any further salary continuation or benefits continuation under
Sections 5(a)(i) and 5(a)(ii) shall terminate. Executive agrees that if, at
any time, pursuant to action of any court, administrative or governmental
body or other arbitral tribunal, the operation of any part of this paragraph
shall be determined to be unlawful or otherwise unenforceable, then the
coverage of this paragraph shall be deemed to be restricted as to the
duration, geographical scope or otherwise, to the extent, and only to the
extent, necessary to make this paragraph lawful and enforceable in the
particular jurisdiction in which such determination is made.
(c) If the Employment Period terminates, Executive agrees (i) to notify
the Company promptly upon his securing employment or becoming self-employed
during any period when Executive's compensation from the Company shall be
subject to reduction or his benefits provided by the Company shall be subject
to termination as provided in Section 5 and (ii) to furnish to the Company
written evidence of his compensation earned from any such employment or self-
employment as the Company shall from time to time reasonably request. In
addition, upon termination of the Employment Period for any reason other than
the death of Executive, Executive shall immediately return all written trade
secrets, confidential information and business plans of the Company and shall
execute a certificate certifying that he has returned all such items in his
possession or under his control.
7. ASSIGNMENT. The rights and obligations of the Company shall inure to
----------
the benefit of and shall be binding upon the successors and assigns of the
Company. The rights and obligations of Executive are not assignable except
only that payments payable to him after his death shall be made by devise or
descent.
8. NOTICES. All notices and other communications required hereunder
-------
shall be in writing and shall be given by mailing the same by certified or
registered mail, return receipt requested, postage prepaid. If sent to the
Company the same shall be mailed to the Company at One Mercer Road, Natick,
Massachusetts 01701, Attention: Chairman of the Board of Directors, or such
other address as the Company may hereafter designate by notice to Executive;
and if sent to Executive, the same shall be mailed to Executive at 8 Lands
End Lane, Sudbury , Massachusetts 01776 or at such other address as Executive
may hereafter designate by notice to the Company.
9. WITHHOLDING. Anything to the contrary notwithstanding, all payments
-----------
required to be made by the Company hereunder to Executive shall be subject to
the withholding of such amounts, if any, relating to tax and other payroll
deductions as the Company may reasonably determine it should withhold pursuant
to any applicable law or regulation.
10. GOVERNING LAW. This Agreement and the rights and obligations of the
-------------
parties hereunder shall be governed by and construed in accordance with the
domestic substantive laws of The Commonwealth of Massachusetts without giving
effect to any choice or conflict of laws, rules or provisions that would cause
the application of the domestic substantive laws of any other jurisdiction.
11. ARBITRATION. In the event that there is any claim or dispute arising
-----------
out of or relating to this Agreement, or the breach thereof, and the parties
hereto shall not have resolved such claim or dispute within 60 days after
written notice from one party to the other setting forth the nature of such
claim or dispute, then such claim or dispute shall be settled exclusively by
binding arbitration in Boston, Massachusetts in accordance with the Commercial
Arbitration Rules of the American Arbitration Association by an arbitrator
mutually agreed upon by the parties hereto or, in the absence of such
agreement, by an arbitrator selected according to such Rules.
Notwithstanding the foregoing, if either the Company or Executive shall
request, such arbitration shall be conducted by a panel of three arbitrators,
one selected by the Company, one selected by Executive and the third selected
by agreement of the first two, or, in the absence of such agreement, in
accordance with such Rules. Judgment upon the award rendered by such
arbitrator(s) shall be entered in any Court having jurisdiction thereof
upon the application of either party.
12. LEGAL FEES. The Company will pay the reasonable fees and expenses of
----------
Executive's legal counsel in connection with Executive's entering into this
Agreement.
13. ENTIRE AGREEMENT. This Agreement, including Exhibit A, supersedes all
---------------- ---------
prior written or oral agreements between the Company and Executive and
represents the entire agreement between the parties relating to the terms of
Executive's employment by the Company, except the Change of Control Agreement.
/s/ HERBERT J ZARKIN
------------------------------
Herbert J Zarkin
WABAN INC.
By: /s/ L. WAXLAX
---------------------------
Chairman of the Board
ADI01DB1/
<PAGE>
EXHIBIT "A"
----------
Certain Definitions
- -------------------
In this Agreement, the following terms shall have the following meanings:
(a) "Base Salary" means, for any period, the amount described in Section
3(a).
(b) "Board" means the Board of Directors of the Company.
(c) "Committee" means the Executive Compensation Committee of the Board.
(d) "Cause" means dishonesty by Executive in the performance of his
duties, conviction of a felony (other than a conviction arising
solely under a statutory provision imposing criminal liability upon
Executive on a per se basis due to the Company offices held by
--- --
Executive, so long as any act or omission of Executive with respect
to such matter was not taken or omitted in contravention of any
applicable policy or directive of the Board), gross neglect of duties
(other than as a result of Disability or death), or conflict of
interest which conflict shall continue for 30 days after the Company
gives written notice to Executive requesting the cessation of such
conflict.
(e) "Date of Termination" means the date on which Executive's employment
is terminated.
(f) "Disability" has the meaning given it in the Company's long-term
disability plan. Executive's employment shall be deemed to be
terminated for Disability on the date on which Executive is entitled
to receive long-term disability compensation pursuant to such long-
term disability plan.
(g) "Incapacity" means a disability (other than Disability within the
meaning of (f) above) or other impairment of health that renders
Executive unable to perform his duties to the reasonable satisfaction
of the Committee.
(h) "Stock" means the common stock, $0.01 par value, of the Company.
(i) "Subsidiary" means any corporation in which the Company owns,
directly or indirectly 50 percent or more of the total combined
voting power of all classes of stock.
