Item 1. Business
General
On July 28, 1997, BJ's Wholesale Club, Inc. ("BJ's" or the "Company") became an independent, publicly owned entity when Waban Inc. ("Waban"), BJ's parent company at the time, distributed to its stockholders on a pro rata basis all of the Company's outstanding common stock. Before that date, the BJ's business had operated as a division of Waban.
BJ's introduced the warehouse club concept to New England in 1984 and has since expanded in the northeastern and Mid-Atlantic states, as well as in southern Florida. As of January 31, 1998, BJ's operated 84 warehouse clubs in twelve states and had over 4.5 million members. The table below shows the number of BJ's locations by state.
Number of State Locations ----- --------- New York........................................ 21 Massachusetts................................... 13 New Jersey...................................... 10 Pennsylvania.................................... 9 Florida......................................... 6 Maryland........................................ 6 Virginia........................................ 6 Connecticut..................................... 5 New Hampshire................................... 4 Maine........................................... 2 Delaware........................................ 1 Rhode Island.................................... 1 --- Total........................................ 84 ===
The Company's fiscal year ends on the last Saturday in January. The fiscal year ended January 31, 1998 is referred to as "1997" below. Earlier years are referred to in a similar manner.
Industry Overview
Warehouse clubs offer a narrow assortment of brand name food and general merchandise items 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 wholesale and retail distribution channels, such as supermarkets, discount stores, office supply stores, consumer electronics stores, automotive stores and wholesale distributors. The Company believes that it is difficult for these higher cost channels of distribution to match the low prices offered by warehouse clubs.
Warehouse clubs eliminate many of the merchandise handling costs associated with traditional multiple-step distribution channels by purchasing directly from manufacturers and by storing merchandise on the sales floor rather than in central warehouses. By operating no-frills, self-service warehouse facilities, warehouse clubs have fixturing and operating costs substantially below those of traditional retailers. Because of their higher volume and rapid inventory turnover, warehouse clubs generally have the opportunity to generate cash from the sale of a large portion of their inventory before they are required to pay merchandise vendors. As a result, a greater percentage of the inventory is financed through payment terms provided by vendors rather than by working capital. Two broad groups of customers, individual households and small businesses, have been attracted to the savings made possible by the high sales volumes and operating efficiencies achieved by warehouse clubs. The customers at warehouse clubs are generally limited to members who pay an annual fee.
Business Model
The Company has developed an operating model that it believes differentiates it from its warehouse club competition. First, BJ's endeavors to have the leading industry position in the markets in which it operates. By clustering its clubs, BJ's seeks to maximize the efficiencies of management support, distribution and marketing activities. Secondly, BJ's places added focus on the retail customer, its Inner Circle(R) member, through merchandising strategies that emphasize a customer-friendly shopping experience. By supplementing the warehouse format with aisle markers, express check-out lanes and low-cost video-based sales aids, BJ's makes shopping more efficient for its members. BJ's is also the only major warehouse club to accept manufacturers' coupons, which provides added value for its members. Additionally, BJ's emphasizes the creation of an exciting shopping experience for its retail members with a constantly changing mix of food and general merchandise items. Management believes these strategies aimed at the general consumer allow BJ's to achieve higher warehouse club operating margins.
Expansion
Since the beginning of fiscal 1992, BJ's has grown from 29 clubs to 84 clubs in operation at January 31, 1998. As a result, approximately 68% of BJ's Wholesale Clubs have been in operation for fewer than six years, and many of these are considered to be in the early stages of maturation.
BJ's plans to open twelve to thirteen new clubs in the current year. It expects to enter one new market, Cleveland, Ohio, expand its presence in southern Florida and fill in existing markets. Longer term, BJ's plans to increase the square footage of the chain by approximately 10% annually.
Clubs Clubs Clubs Clubs in Operation Opened Closed in Operation Fiscal at Beginning During During at End Year of Year the Year the Year of Year ---- ------- -------- -------- ------- 1992...................... 29 10 -- 39 1993...................... 39 13 -- 52 1994...................... 52 11 1 62 1995...................... 62 9 -- 71 1996...................... 71 10 -- 81 1997...................... 81 4 1 84
Store Profile
As of January 31, 1998, BJ's operated 74 traditional size "big box" warehouse clubs that averaged approximately 112,000 square feet and ten smaller format warehouse clubs that averaged approximately 69,000 square feet. Two of the new BJ's warehouse clubs planned for 1998 are expected to be in the smaller format, which is designed to serve markets whose population is not sufficient to support a full-sized warehouse club. Including space for parking, a typical full-sized BJ's warehouse club requires eight to ten acres of land. The smaller version typically requires approximately eight acres. BJ's warehouse clubs are located in both free-standing locations and shopping centers.
Construction and site development costs for a full-sized BJ's warehouse club average approximately $5.0 million. Land acquisition costs for a warehouse club generally range from $2.5 million to $5.5 million, but can be significantly higher in some locations. Opening a traditional-sized BJ's warehouse club entails an initial capital investment of approximately $2.6 million for fixtures and equipment, as well as approximately $2.0 million for inventory (net of accounts payable) and preopening expenses.
Merchandising
BJ's services its current members and attracts new members by providing a broad range of high quality, brand name merchandise at everyday prices that are consistently lower than the prices of traditional wholesalers, discount retailers, supermarkets and specialty retail operations. BJ's limits the items offered in each product line to fast selling styles, sizes and colors and, therefore, carries an average of approximately 5,000 active stock-keeping units ("SKUs"). By contrast, supermarkets normally stock approximately 25,000 SKUs, and discount stores typically stock approximately 60,000 SKUs. BJ's works closely with manufacturers to develop packaging and sizes which are best suited to selling through the warehouse club format in order to minimize handling costs and to provide increased value to members.
In 1997, food accounted for 61% of BJ's sales. The remaining 39% consisted of a wide variety of general merchandise items. Food categories at BJ's include frozen foods, fresh meat and dairy products, dry grocery items, fresh produce, canned goods, and household paper products and cleaning supplies. General merchandise includes office supplies and equipment, consumer electronics, small appliances, auto accessories, tires, jewelry, housewares, health and beauty aids, computer software, books, greeting cards, apparel, tools, toys and seasonal items.
BJ's also offers a number of specialty services designed to enable members to complete more of their shopping at BJ's and to encourage more frequent visits to the clubs. Included are full-service optical stores, travel services, cellular phones and pagers, food courts offering brand name fast food service, rotisserie chicken prepared on site, one-hour photo service, an auto buying service, discounted mortgage and moving services and a selection of garden sheds and gazebos. To enhance this aspect of the business, BJ's is also testing several additional services including mini-branch banks, gas stations and muffler and brake service.
To ensure that its merchandise selection is closely attuned to the tastes of its members, BJ's employs regional buyers who are 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 essential part of the warehouse club concept. In addition to providing a source of revenue which permits BJ's to offer low prices, membership reinforces customer loyalty. BJ's has two primary types of members: business members and Inner Circle members. BJ's Inner Circle members are likely to be home owners and have incomes which are above the average for the Company's trading areas. BJ's believes that a significant percentage of its business members are also active BJ's shoppers for their personal needs. At January 31, 1998, the Company had over 4.5 million members (including supplemental cardholders).
Effective February 1, 1998, BJ's charges $35 per year for a primary Inner Circle membership that includes one free supplemental membership. A business membership is $30 per year. Additional supplemental business memberships cost $15 each. BJ's membership policy is open to all, whereas the Company's warehouse club competitors have typically required individual members to belong to certain qualifying groups. BJ's believes that its more liberal membership policy has attracted incremental sales without adversely affecting its costs.
Advertising and Public Relations
BJ's increases customer awareness of its warehouse clubs primarily through public relations efforts, new store marketing programs, direct mail and limited vendor-funded television and radio advertising during the Christmas holiday season. BJ's also employs a team of dedicated marketing personnel who solicit potential business members and who contact selected community groups to increase the number of members. From time to time, BJ's runs free trial membership promotions to attract new members with
the objective of converting them to paid membership status and also uses one-day passes to introduce non-members to its warehouse clubs. These programs result in very low marketing expenses compared with typical discount retailers and supermarkets.
Warehouse Club Operations
BJ's ability to achieve profitable operations depends upon the efficient operation of its warehouse clubs and high sales volumes. The Company buys most of its merchandise at volume discounts from manufacturers for shipment either to a BJ's cross-docking facility or directly to BJ's warehouse clubs. This eliminates many of the costs associated with traditional multiple-step distribution channels, including distributors' commissions and the costs of storing merchandise in central distribution facilities.
BJ's routes a significant percentage of its purchases through cross-docking facilities which break down truckload quantity shipments from manufacturers and reallocate these goods for shipment, generally on a same-day basis, to individual warehouse clubs. This permits BJ's to negotiate better volume discounts and reduces freight expense, the number of trucks received at each warehouse club and related receiving costs.
The Company 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 by designing its warehouse clubs to be self-service for members. 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 in steel racks above the sales floor. BJ's goal is to keep at least one day's supply of each item on the selling floor.
BJ's has been able to limit inventory losses to levels well below those typical of discount retailers by strictly controlling the exits of its warehouse clubs, by generally limiting customers to members and by using state-of-the-art electronic article surveillance technology. Problems associated with payments by check have been insignificant, since members who issue dishonored checks are restricted to cash-only terms.
In October 1995, BJ's became the first warehouse club chain to accept the MasterCard(R) credit card, and at the same time introduced a co-branded BJ's MasterCard underwritten by a major financial institution on a non-recourse basis. Purchases made at BJ's warehouse clubs with the co-branded BJ's MasterCard earn a 2% rebate. All other purchases with the BJ's MasterCard earn a 1% rebate. Rebates are issued in the form of BJ's Bucks(R), which can be redeemed by members only at BJ's warehouse clubs. In September 1997, BJ's became the first warehouse club chain to accept VISA(R). Additionally, BJ's members may pay for their purchases by cash, check or Discover(R) Card.
Information Systems
Over the course of its development, BJ's has made a significant investment in information systems. BJ's was the first warehouse club to introduce scanning devices which work in conjunction with its electronic point of sale (EPOS) terminals. Sales data is analyzed daily for replenishment purposes. Detailed purchasing data on individual members permits the buying staff and store managers to track changes in members' buying behavior. Detailed shrinkage data by SKU by club allows management to quickly identify inventory shrinkage problems and formulate effective action plans.
Competition
BJ's competes with a wide range of national, regional and local retailers and wholesalers selling food or general merchandise in its markets, including supermarkets, general merchandise chains, specialty chains and other warehouse clubs, some of which have significantly greater financial and marketing resources than BJ's. Major competitors that operate warehouse clubs include Costco Companies, Inc. and Sam's Clubs (a division of Wal-Mart Stores, Inc.).
There is a large number of competitive membership warehouse clubs in BJ's markets. Approximately 85% of BJ's 74 "big box" warehouse clubs have at least one competitive membership warehouse club in their trading areas at a distance of ten miles or less. None of the smaller format clubs has direct competition from other warehouse clubs.
BJ's believes price is the major competitive factor in the markets in which it competes. Other competitive factors include store location, merchandise selection and name recognition. BJ's believes its efficient, low cost form of distribution gives it a significant competitive advantage over more traditional channels of wholesale and retail distribution.
Seasonality
Sales and net income have typically been strongest in the Christmas holiday season and lowest in the first quarter of each fiscal year.
Employees
As of January 31, 1998, BJ's had approximately 11,600 employees ("team members") of whom approximately 300 were considered part-time employees (persons who work less than 20 hours per week). Approximately 700 team members were employed in management and office support functions; the balance worked in the warehouse clubs and cross-docking facilities. None of the Company's team members is represented by unions. BJ's considers its relations with its team members to be excellent.
Item 2.
Item 2. Properties
BJ's operated 84 warehouse locations as of January 31, 1998, of which 46 are leased under long-term leases and 28 are owned. BJ's owns the buildings at the remaining ten locations, which are subject to long-term ground leases. A listing of BJ's locations within each state is shown on page 2.
The unexpired terms of BJ's leases range from approximately two to 43 years, and average approximately 15 years. BJ's has options to renew all but one of its leases for periods that range from approximately 5 to 50 years and average approximately 20 years. These leases require fixed monthly rental payments which are subject to various adjustments. Certain leases require payment of a percentage of the club's gross sales in excess of certain amounts. All leases require that BJ's pay all property taxes, insurance, utilities and other operating costs.
BJ's home offices in Natick, Massachusetts, occupy 142,000 square feet under leases expiring January 31, 1999 with options to extend these leases through January 31, 2006. The Company also leases two cross-docking facilities, which occupy a total of 442,000 square feet under leases which expire in 2005 and 2010, with options to extend these leases through 2015 and 2025, respectively.
See Note D of Notes to Consolidated Financial Statements included elsewhere in this report for additional information with respect to the Company's leases.
Item 3.
Item 3. Legal Proceedings
BJ's is involved in various legal proceedings that are typical of a retail business. Although it is not possible to predict the outcome of these proceedings or any related claims against the Company, BJ's believes that such proceedings or claims will not, individually or in the aggregate, have a material adverse effect on its financial condition or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended January 31, 1998.
Item 4A. Executive Officers of the Registrant
Office and Employment Name Age During Last Five Years - ---- --- ----------------------
Herbert J. Zarkin .. 59 Chairman of the Board of the Company since July 1997; President, Chief Executive Officer and Director of Waban (1993-1997); Executive Vice President of Waban (1989-1993); President of the BJ's Division of Waban (the "BJ's Division") (1990-1993)
John J. Nugent ..... 51 President, Chief Executive Officer and Director of the Company since July 1997; Executive Vice President of Waban and President of the BJ's Division (1993-1997); Senior Vice President of the BJ's Division (1991-1993); Director of Sales Operations of the BJ's Division (1989-1993)
Frank D. Forward ... 43 Executive Vice President and Chief Financial Officer of the Company since July 1997; Executive Vice President, Finance of the BJ's Division from February 1997 to July 1997; Senior Vice President, Finance of the BJ's Division (1994-1997); Vice President, Finance of the BJ's Division (1991-1994)
Laura J. Sen ....... 41 Executive Vice President, Merchandising of the Company since July 1997; Executive Vice President, Merchandising of the BJ's Division from February 1997 to July 1997; Senior Vice President, General Merchandise of the BJ's Division (1993-1997); Vice President, Logistics of the BJ's Division (1991-1993)
Michael T. Wedge ... 44 Executive Vice President, Club Operations of the Company since July 1997; Executive Vice President, Sales Operations of the BJ's Division from February 1997 to July 1997; Senior Vice President, Sales Operations of the BJ's Division (1993-1997); Vice President, Sales Operations of the BJ's Division (1991-1993)
Sarah M. Gallivan .. 55 Vice President and General Counsel of the Company since July 1997; Vice President and General Counsel of Waban (1989-1997)
All officers serve at the discretion of the Board of Directors and hold office until the next annual meeting of the Board of Directors and until their successors are elected and qualified.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The common stock of the Company began trading on July 29, 1997 and is listed on the New York Stock Exchange (symbol "BJ"). The quarterly high and low stock prices for the fiscal year ended January 31, 1998 were:
Quarter High Low ------- --------- --------- Third 31 9/16 26 5/16 Fourth 32 5/16 26
The approximate number of stockholders of record at March 31, 1998 was 3,330. The Company has not paid any cash dividends on its common stock. The Company currently intends to retain earnings to support its growth strategy and does not anticipate paying cash dividends in the foreseeable future. For restrictions on the payment of dividends, see Note C of Notes to the Consolidated Financial Statements included elsewhere in this report.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
BJ's Wholesale Club, Inc., which previously had been a wholly owned subsidiary of Waban Inc., became a separate and independent public entity on July 28, 1997, when Waban distributed to its stockholders on a pro rata basis all of the Company's outstanding common stock (the "spin-off"). The financial statements of the Company include the financial statements of those subsidiaries of Waban which, prior to the spin-off, were part of Waban's BJ's Wholesale Club Division.
Fiscal year references apply to BJ's Wholesale Club, Inc.'s fiscal year which ends on the last Saturday in January of the following calendar year. For example, the fiscal year ended January 31, 1998 is referred to as "1997".
Results of Operations
The following table presents selected income statement data for the last three fiscal years:
Net sales increased by 10.5% from 1996 to 1997 (a 53-week fiscal year) and by 15.8% from 1995 to 1996. The increases in both years were due mainly to the opening of new stores. Comparable store net sales (on a same-week basis) increased by 3.1% from 1996 to 1997 and by 5.6% from 1995 to 1996.
Total revenues included membership fees of $57.9 million in 1997, $54.3 million in 1996 and $51.3 million in 1995. Net sales and membership fees in the last three years have been positively impacted by successful trial membership promotional programs conducted by the Company.
Cost of sales (including buying and occupancy costs) as a percentage of net sales was 90.9% in 1997, 91.1% in 1996 and 91.6% in 1995. The decreases in the cost of sales percentage resulted from the Company's ability to introduce higher margin products into the merchandise mix and to achieve economies of scale and other efficiencies in its distribution and inventory management operations.
Selling, general and administrative expenses were 7.4% of net sales in each of 1997, 1996 and 1995. Credit expenses have risen in the last two years as the Company began accepting MasterCard in October 1995 and VISA in September 1997. The Company has been able to offset these increases by effectively controlling other operating expenses and leveraging certain fixed costs on increased sales resulting from both comparable store sales increases and a growing number of clubs. In comparing 1997 to 1996, the Company benefited from lower preopening expenses because it opened fewer new clubs in 1997, but incurred incremental general and administrative expenses as a result of operating as an independent publicly traded entity.
The components of net interest expense in the last three fiscal years were as follows (dollars in millions):
Interest expense on debt was net of capitalized interest of $.4 million in 1997, $1.0 million in 1996 and $1.5 million in 1995. As described in more detail below, interest expense in 1997 was lower than in 1996 because of significantly lower borrowing levels and interest rates applied to those borrowings after the spin-off.
The Company's income tax provision was 39.0% of pre-tax income in 1997, 38.9% in 1996 and 38.8% in 1995.
Net income was $68.3 million, or $1.81 per share diluted, in 1997 versus $53.6 million, or $1.43 per share diluted, in 1996 and $41.6 million, or $1.11 per share diluted, in 1995.
BJ's Wholesale Club, Inc. commenced operations as a separate entity immediately following its July 28, 1997 spin-off from Waban Inc. Therefore, reported financial results through the first half of 1997 reflect BJ's historical position as a division of Waban Inc. and, as such, may not be indicative of performance after the spin-off. As a separate, publicly owned company, BJ's is incurring SG&A costs expected to be approximately $.5 million per quarter in addition to the amounts shown in the historical financial statements for periods preceding the spin-off. However, interest on intercompany borrowings at an annual rate of 10% prior to the spin-off has been replaced by interest on bank borrowings at an assumed rate of approximately 6.5% per year, and the level of debt has been reduced substantially by the contribution to capital of $101.3 million of BJ's intercompany debt in connection with the spin-off. Restating historical results for these changes, and reflecting common stock equivalents expected to be included in earnings per share calculations after the spin-off, operating income, net income and diluted net income on an "analytical basis" for the last three years were as follows:
Waban's Board of Directors approved the termination of the Waban Inc. Retirement Plan effective July 26, 1997. However, in accordance with generally accepted accounting principles, the additional cost to terminate the Plan is not recognized until the Plan termination is settled. Accordingly, the Company expects to record a post-tax charge applicable to its Plan participants of approximately $1.0 million in the fiscal year ending January 30, 1999, when the Plan termination is settled.
Effective February 1, 1998, the Company increased its membership fees for Inner Circle members from $30.00 to $35.00. Business membership fees were not changed. While the Company expects to benefit in 1998 from the fee increase, this benefit is expected to be largely offset by several factors. The Company is planning a significantly higher number of club openings in 1998, approximately twelve or thirteen versus four in 1997, which will result in increased preopening costs. Secondly, the Company expects that its credit expenses will continue to rise as a result of both the strong acceptance of the VISA card and increased costs associated with the BJ's co-branded MasterCard. Thirdly, the Company will not benefit from the impact of the 53-week fiscal year, as it did in 1997. Finally, the Company is planning a higher-than-usual level of marketing expenses to support its entry into the Cleveland market.
The Company has worked for several years to prepare its financial, merchandising and other computer-based systems for the Year 2000. The Company estimates that its Year 2000 implementation effort was approximately 80% complete at the end of 1997 and will be substantially complete by the end of 1998 without any material adverse effect on its results of operations, financial position or cash flows. Additionally, the Company is working with key vendors and other third parties with whom it will be doing business to minimize the adverse impact that they could have on the Company if they fail to address the Year 2000 issue successfully.
Seasonality
The Company's business, in common with the business of retailers generally, is subject to seasonal influences. The Company's sales and operating income have typically been strongest in the Christmas holiday season and lowest in the first quarter of each fiscal year.
Recent Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," was issued in June 1997. This statement establishes standards for reporting and displaying comprehensive income and its components in the financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was also issued in June 1997. This statement requires that public business enterprises report certain information about operating segments and related disclosures about products and services, geographic areas and major customers.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" was issued in February 1998. This statement standardizes disclosure requirements for pension and other postretirement benefits, requires additional information on changes in benefit obligations and fair values of plan assets, and eliminates certain existing disclosure requirements.
SFAS Nos. 130, 131 and 132 become effective in the Company's fiscal year ending January 30, 1999. The adoption of these statements is expected to have no impact on the Company's results of operations, financial position or cash flows and to produce no major changes in current disclosures.
The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," in March 1998. This statement provides guidance as to whether certain internal-use software costs should be capitalized as a long-lived asset or expensed when incurred. SOP 98-1 becomes effective in the Company's fiscal year ending January 29, 2000, but may be adopted earlier. The Company is in the process of evaluating the requirements of SOP 98-1, but does not expect that it will materially affect its results of operations, financial position or cash flows. The Company has not yet decided whether it will adopt this standard in 1998.
Liquidity and Capital Resources
Net cash provided by net income plus depreciation was $105.7 million in 1997 versus $87.4 million in 1996. A total of $63.1 million was provided by operating activities in 1997 compared with $105.2 million in 1996. This decrease was attributable primarily to a lower accounts payable-to-inventory ratio at January 31, 1998, due in part to the effect of the 53rd week.
Cash expended for property additions was $50.3 million in 1997 versus $71.7 million in 1996. The Company opened four new clubs in 1997 and two new clubs in February 1998. One club in the Hartford, Connecticut, market was closed in 1997. The Company opened ten new clubs in 1996.
The Company's capital expenditures are expected to total approximately $110 million in 1998, based on opening a total of twelve to thirteen new clubs. The Company plans to enter the Cleveland, Ohio, market by opening approximately three new clubs in 1998. The timing of actual club openings and the amount of related expenditures could vary from these estimates due, among other things, to the complexity of the real estate development process.
Prior to the spin-off, the Company's operations and expansion were financed through loans advanced by Waban as needed. In July 1997, the Company entered into a $200 million unsecured credit agreement with a group of banks which expires July 9, 2002. The agreement, which was amended in December 1997, includes a $50 million sub-facility for letters of credit, of which $17 million was outstanding at January 31, 1998. The Company is required to pay an annual facility fee which is currently 0.15% of the total commitment. Interest on borrowings is payable at the Company's option either at (a) the Eurodollar rate plus a margin which is currently 0.30%, (b) the agent bank's prime rate or (c) a rate determined by competitive bidding. The facility fee and Eurodollar margin are both subject to change based upon the Company's fixed charge coverage ratio. The agreement contains covenants which, among other things, include minimum net worth and fixed charge coverage requirements and a maximum funded debt-to-capital limitation, and which prohibit the payment of cash dividends on the Company's common stock.
The Company also maintains a separate line in the amount of $30 million for letters of credit, primarily to support the purchase of inventories, of which $5.4 million was outstanding at January 31, 1998, and an additional $20 million uncommitted credit line for short-term borrowings.
Cash and cash equivalents totaled $12.7 million as of January 31, 1998. Borrowings as of January 31, 1998 consisted of $35 million under the Company's bank credit agreement and $7.5 million under its uncommitted credit line. The Company expects that its current resources, together with anticipated cash flow from operations, will be sufficient to finance its operations through January 30, 1999. However, the Company may from time to time seek to obtain additional financing.
Factors Which Could Affect Future Operating Results
This report contains a number of "forward-looking statements," including statements regarding expected expenses to be incurred by BJ's as a stand-alone entity, planned capital expenditures, planned store openings, charges expected to be incurred in connection with the termination of the Waban Inc. Retirement Plan and other information with respect to the Company's plans and strategies. 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, including, without limitation, the factors set forth below.
BJ's warehouse clubs are located in the eastern United States, primarily in the Northeast. The Company's business has been adversely affected from time to time by economic downturns experienced in its markets, and future economic downturns in its markets could adversely affect the Company. In addition, the Company may be impacted by weather conditions prevailing in its markets and by state and local regulation in its markets.
The Company competes with national, regional and local retailers and wholesalers, including national chains in the warehouse merchandising business, some of which have significantly greater financial and marketing resources than the Company, which could adversely affect the Company's business, operating results and financial condition.
Although the BJ's business has a substantial operating history as a division of Waban, the Company has been a stand-alone entity only since its spin-off from Waban in July 1997. Any difficulties experienced by the Company in connection with its transition to being a stand-alone entity could adversely affect the Company's business, operating results and financial condition.
In connection with the spin-off of Waban by The TJX Companies, Inc. ("TJX") in 1989, Waban and TJX entered into an agreement pursuant to which Waban agreed to indemnify TJX against any liabilities that TJX might incur with respect to 44 current HomeBase leases as to which TJX was either a lessee or guarantor. In connection with the spin-off of the Company from Waban in 1997, the Company agreed to indemnify TJX with respect to any liabilities TJX may incur with respect to HomeBase leases through January 31, 2003 and for 50% of such liabilities thereafter. Although HomeBase is primarily liable for these leases, there can be no assurance that HomeBase will be able to make all future payments under these leases. Pursuant to the Company's spin-off from Waban, BJ's may not renew any of its real estate leases (other than ground leases) for which HomeBase may be liable during any period in which BJ's does not meet certain minimal standards of creditworthiness.
In connection with the spin-off in 1997, Waban received a letter ruling from the Internal Revenue Service to the effect that, for Federal income tax purposes, the distribution of the Company's stock to Waban's stockholders (the "Distribution") and related asset transfers would be tax-free to Waban's stockholders. Certain future events not within the control of the Company or HomeBase, including, for example, certain dispositions of the Company's common stock or HomeBase's common stock, could cause the Distribution not to qualify for tax-free treatment. If this occurred, the related tax liability would be payable by HomeBase, although the Company has agreed to indemnify HomeBase under certain circumstances for all or a portion of such tax liability.
Other factors which could affect future operating results of the Company include, without limitation, the successful implementation of the Company's Year 2000 remediation plans and new club opening plans discussed above.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page ---- Consolidated Statements of Income for the fiscal years ended January 31, 1998, January 25, 1997 and January 27, 1996 16
Consolidated Balance Sheets as of January 31, 1998 and January 25, 1997 17
Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1998, January 25, 1997 and January 27, 1996 18
Consolidated Statements of Stockholders' Equity for the fiscal years ended January 31, 1998, January 25, 1997 and January 27, 1996 19
Notes to Consolidated Financial Statements 20
Selected Quarterly Financial Data 31
Report of Independent Accountants 32
Report of Management 33
BJ'S WHOLESALE CLUB, INC. CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended ----------------------------------- January 31, January 25, January 27, 1998 1997 1996 ---------- ---------- ---------- (53 weeks) (Dollars in Thousands except Per Share Amounts) Net sales .................................. $3,159,786 $2,859,950 $2,470,307 Membership fees and other .................. 66,688 62,882 59,301 ---------- ---------- ---------- Total revenues ............................. 3,226,474 2,922,832 2,529,608 ---------- ---------- ---------- Cost of sales, including buying and occupancy costs .......................... 2,872,303 2,605,602 2,263,532 Selling, general and administrative expenses 233,525 212,660 183,419 ---------- ---------- ---------- Operating income ........................... 120,646 104,570 82,657 Interest on debt and capital leases (net) .. 8,733 16,838 14,757 ---------- ---------- ---------- Income before income taxes ................. 111,913 87,732 67,900 Provision for income taxes ................. 43,646 34,108 26,350 ---------- ---------- ---------- Net income ................................. $ 68,267 $ 53,624 $ 41,550 ========== ========== ========== Net income per common share: Basic ................................... $ 1.82 $ 1.43 $ 1.11 ========== ========== ========== Diluted ................................. $ 1.81 $ 1.43 $ 1.11 ========== ========== ========== Number of common shares for earnings per share computations: Basic ................................... 37,481,173 37,484,937 37,484,937 Diluted ................................. 37,743,899 37,484,937 37,484,937
The accompanying notes are an integral part of the financial statements.
BJ'S WHOLESALE CLUB, INC. CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the financial statements.
BJ'S WHOLESALE CLUB, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the financial statements.
BJ'S WHOLESALE CLUB, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of the financial statements.
BJ'S WHOLESALE CLUB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Accounting Policies
Basis of Presentation
The consolidated financial statements of BJ's Wholesale Club, Inc. (the "Company") include the financial statements of all of the Company's subsidiaries, all of whose common stock is wholly owned by the Company.
Fiscal Year
The Company's fiscal year ends on the last Saturday in January. The fiscal year ended January 31, 1998 included 53 weeks. The fiscal years ended January 25, 1997 and January 27, 1996 each included 52 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.
Merchandise Inventories
Inventories are stated at the lower of cost, determined under the average cost method, or market. The Company recognizes the write-down of slow-moving or obsolete inventory in cost of sales when such write-downs are probable and estimable.
Property and Equipment
Property is depreciated by use of the straight-line method for financial reporting purposes. Buildings are depreciated over 33 1/3 years. Leasehold costs and improvements are amortized over the lease term or their estimated useful life, whichever is shorter. Furniture, fixtures and equipment are depreciated over three to ten years.
Membership Fees
In accordance with industry practice, membership fees are included in revenue when received, but not before a warehouse club opens.
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 club opens.
Interest on Debt and Capital Leases
Interest on debt and capital leases in the Statements of Income is presented net of interest income of $463,000 in 1997, $51,000 in 1996 and $54,000 in 1995.
Capitalized Interest
The Company capitalizes interest related to the development of owned facilities. Interest in the amount of $430,000, $966,000 and $1,547,000 was capitalized in 1997, 1996 and 1995, respectively.
Stock-Based Compensation
The Company applies the accounting provisions prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its stock-based compensation.
BJ'S WHOLESALE CLUB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Disclosures about Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of these instruments. Because of the short contractual maturities of the Company's bank debt, its carrying amount also approximates fair value (See Note C of Notes to the Consolidated Financial Statements).
Estimates Included in Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Other
Certain amounts in prior years' financial statements have been reclassified for comparative purposes.
A. Spin-off of the Company from Waban Inc.
The Company, which previously had been a wholly owned subsidiary of Waban Inc. ("Waban"), became a separate and independent public entity on July 28, 1997, when Waban distributed to its stockholders on a pro rata basis all of the Company's outstanding common stock (the "spin-off"). The financial statements of the Company include the financial statements of those subsidiaries of Waban which, prior to the spin-off, operated Waban's BJ's Wholesale Club Division.
As of July 26, 1997, Waban transferred all of the assets and liabilities of its BJ's Wholesale Club Division to the Company and contributed all of the Company's intercompany debt of $101.3 million to the Company's equity in connection with the spin-off.
Pursuant to the spin-off, the Company adopted its own employee benefit plans providing substantially the same benefits as Waban's plans at the date of the spin-off. Assets and liabilities applicable to the Company's employees were transferred by Waban to the Company's plans after the spin-off.
The Company adopted its own stock incentive plans effective with the spin-off. Awards granted to the Company's employees under these plans included stock options to purchase shares of the Company's common stock and restricted stock awards in replacement of Waban options and awards outstanding at the spin-off date.
Also pursuant to the spin-off, the Company and Waban entered into a Tax Sharing Agreement to provide for the payment of taxes and the entitlement of tax refunds for periods prior to the spin-off date. Each party has agreed to indemnify the other in specified circumstances if certain events occurring after July 28, 1997 cause the spin-off or certain related transactions to become taxable.
B. Related Party Transactions
Prior to the spin-off, Waban loaned funds to the Company as needed. The intercompany balance was considered to be long-term debt. Waban charged interest to the Company at an annual rate of 10% based on the Company's average monthly intercompany balance (net of cash). The Company's intercompany interest expense was $7,642,000 in 1997 (all of which was incurred in the first half of the fiscal year), $17,557,000 in 1996 and $16,032,000 in 1995.
BJ'S WHOLESALE CLUB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selling, general and administrative expenses included certain allocations of overhead incurred by Waban that supported the Company's business prior to the spin-off. These expenses totalled $2,246,000 in 1997 (all of which was incurred in the first half of the fiscal year), $3,891,000 in 1996 and $3,587,000 in 1995 and were generally allocated based on specific identification and management's estimates of the time devoted to supporting the Company.
Under Waban's cash management system, checks issued by its divisions but not yet presented to banks resulted in overdraft balances in certain periods. The Company had an overdraft balance of $2.3 million as of January 25, 1997, which was included in accrued expenses and other current liabilities on the balance sheet.
Since the spin-off, the Company has provided certain services to Waban (now known as HomeBase, Inc. ("HomeBase") ) at rates negotiated in accordance with a Services Agreement entered into between the Company and HomeBase. The amounts received by the Company for these services were not material.
C. Debt
In July 1997, the Company entered into a $200 million unsecured credit agreement with a group of banks which expires July 9, 2002. The agreement, which was amended in December 1997, includes a $50 million sub-facility for letters of credit, of which $17 million was outstanding at January 31, 1998. The Company is required to pay an annual facility fee which is currently 0.15% of the total commitment. Interest on borrowings is payable at the Company's option either at (a) the Eurodollar rate plus a margin which is currently 0.30%, (b) the agent bank's prime rate or (c) a rate determined by competitive bidding. The facility fee and Eurodollar margin are both subject to change based upon the Company's fixed charge coverage ratio. The agreement contains covenants which, among other things, include minimum net worth and fixed charge coverage requirements and a maximum funded debt-to-capital limitation, and which prohibit the payment of cash dividends to the Company's common stockholders.
The Company also maintains a separate line in the amount of $30 million for letters of credit, primarily to support the purchase of inventories, of which $5.4 million was outstanding at January 31, 1998, and an additional $20 million uncommitted credit line for short-term borrowings.
The Company's long-term debt as of January 31, 1998 consisted of $35 million under its bank credit agreement and $7.5 million under its uncommitted credit line. The weighted-average interest rate on the borrowings was 5.92%. These borrowings are classified as long-term debt pursuant to the Company's intention and ability to refinance these obligations on a long-term basis under its bank credit agreement.
D. Commitments and Contingencies
The Company is obligated under long-term leases for the rental of real estate and fixtures and equipment, some of which are classified as capital leases pursuant to SFAS No. 13. In addition, the Company is generally required to pay insurance, real estate taxes and other operating expenses and, in some cases, additional rent 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 5 years.
BJ'S WHOLESALE CLUB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments as of January 31, 1998 were:
Capital Operating Fiscal Years Ending January Leases Leases --------------------------- ------ ------ (In Thousands) 1999 ................................................. $ 426 $ 46,972 2000 ................................................. 427 51,199 2001 ................................................. 427 51,013 2002 ................................................. 427 49,497 2003 ................................................. 449 47,153 Later years .......................................... 1,938 532,340 ------ -------- Total minimum lease payments ......................... 4,094 $778,174 ========
Less amount representing interest .................... 1,479 ------ Present value of net minimum capital lease payments .. $2,615 ======
Rental expense under operating leases (including contingent rentals which were not material) amounted to $43,558,000, $40,185,000 and $37,561,000 in 1997, 1996 and 1995, respectively.
The Company is involved in various legal proceedings that are typical of a retail business. Although it is not possible to predict the outcome of these proceedings or any related claims against the Company, the Company believes that such proceedings or claims will not, individually or in the aggregate, have a material adverse effect on its financial condition or results of operations.
In connection with the spin-off of Waban by The TJX Companies, Inc. ("TJX") in 1989, Waban and TJX entered into an agreement pursuant to which Waban agreed to indemnify TJX against any liabilities that TJX might incur with respect to 44 current HomeBase leases as to which TJX was either a lessee or guarantor. In settlement of legal proceedings filed by TJX in 1997, the Company agreed that it will indemnify TJX with respect to any liabilities that TJX may incur with respect to HomeBase leases through January 31, 2003 and thereafter it will indemnify TJX for 50% of such liabilities. The Company believes that since HomeBase is primarily liable for these leases, the Company's contingent liability under this agreement will not have a material effect on the Company's financial condition.
E. Capital Stock, Stock Options and Stock Purchase Plans
The historical capitalization of the Company has been retroactively restated to reflect the issuance of 37,484,937 shares of common stock, the number of shares of the Company's common stock distributed to Waban stockholders on July 28, 1997. In addition, the Company has authorized 20,000,000 shares of preferred stock, $.01 par value, of which no shares have been issued.
In connection with the spin-off, and pursuant to the BJ's Wholesale Club, Inc. 1997 Replacement Stock Incentive Plan (the "Replacement Plan"), BJ's employees who held Waban stock options and restricted stock were granted replacement BJ's options and restricted stock. These replacement awards preserved the same inherent value, vesting terms and expiration dates as the Waban awards they replaced as of the spin-off date. The maximum number of shares issuable under the Replacement Plan was 2,500,000. A total of 1,871,354 options and 3,945 restricted shares were issued under the plan, which expired on January 28, 1998.
At January 31, 1998, the Company had two remaining stock-based compensation plans. Under its 1997 Stock Incentive Plan, the Company has granted certain key employees options, which expire ten years from the grant date, to purchase common stock at prices equal to 100% of market price on
BJ'S WHOLESALE CLUB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the grant date. Options outstanding are exercisable 25% per year starting one year after the grant date. The maximum number of shares of common stock issuable under the 1997 Stock Incentive Plan is 1,000,000, plus 624,701 shares which had not been issued under the Replacement Plan when it expired, plus shares subject to awards granted under the Replacement Plan which are not actually issued because such awards expire or are cancelled.
Under its 1997 Director Stock Option Plan, BJ's external directors who held Waban stock options as of the spin-off date were granted 35,060 replacement BJ's options which preserved the same inherent value, vesting terms and expiration dates as the Waban options they replaced. A maximum of 150,000 shares may be issued under the 1997 Director Stock Incentive Plan, which provides for annual awards to directors.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its stock-based compensation. Total pre-tax compensation cost recognized in income for stock-based employee compensation awards to the Company's employees was $171,000 in 1997 and $200,000 in 1996, and consisted entirely of restricted stock expense, which is charged to income ratably over the periods during which the restrictions lapse. During 1996, 1,000 shares of restricted Waban stock were issued to the Company's employees at a weighted-average grant-date fair value of $24.75. No restricted stock (other than the replacement shares noted above) was issued in 1997. No compensation cost was recognized for the Company's stock options under APB 25 because the exercise price equaled the market price of the underlying stock on the date of the grant.
Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the Company had accounted for its stock options under the fair value method of that statement. The fair value for these options was estimated at the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions : risk-free interest rates of 6.01%, 6.47% and 5.80% in 1997,1996 and 1995, respectively; volatility factor of the expected market price of the Company's common stock of .35 in 1997 and .37 in 1996 and 1995, and expected life of the options of 5 years in 1997 and 4.5 years in 1996 and 1995. No dividends were expected.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information for each of the last three fiscal years follows (in thousands except for earnings per share information):
1997 1996 1995 ------- ------- ------- Pro forma net income..................... $65,951 $52,837 $41,099 Pro forma earnings per share: Basic.................................. $1.76 $1.41 $1.10 Diluted................................ $1.75 $1.41 $1.10
BJ'S WHOLESALE CLUB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The effects of applying the provisions of FASB Statement No. 123 for pro forma disclosure are not necessarily representative of the effects on reported net income for future years because options vest over several years and additional awards generally are made each year. In accordance with the transition requirements of FASB Statement No. 123, the pro forma disclosures above include stock options awarded only after January 28, 1995.
Presented below is a summary of the status of BJ's Wholesale Club, Inc. stock option activity from the date of the spin-off to January 31, 1998. Also shown is a summary of activity related to Waban stock options held by Company employees for the fiscal years ended January 27, 1996 and January 25, 1997 and the six-month period ended July 28, 1997:
BJ'S WHOLESALE CLUB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additional information related to stock options outstanding at January 31, 1998 is presented below:
As of January 31, 1998, 1,222,458 shares were reserved for future stock awards under the Company's 1997 Stock Incentive Plan and 1997 Director Stock Option Plan.
In 1997, the Company adopted a shareholder rights plan, pursuant to which shareholders are issued one Right for each share of common stock. Each Right entitles the holder to purchase from the Company 1/1000 share of Series A Junior Participating Preferred Stock ("Series A Preferred Stock") at a price of $120. The Company has designated 100,000 shares of Series A Preferred Stock for issuance under the shareholder rights plan; none has been issued. Generally, the terms of the Series A Preferred Stock are designed so that 1/1000 share of Series A Preferred Stock is the economic equivalent of one share of the Company's common stock. The Rights are exercisable only if a person acquires 20% or more of the Company's common stock or commences a tender offer that would result in such person owning 30% or more of the Company's common stock. In general, if any person becomes a 20% owner, each Right not owned by such person will enable its holder to purchase that number of shares of the Company's common stock equal to $120 divided by one-half of the then current market price of the Company's common stock. In addition, in general, if after a person has become a 20% owner, the Company is involved in a business combination transaction in which it is not the surviving corporation or in connection with which the Company's common stock is changed, or the Company disposes of 50% or more of its assets or earning power, each Right that has not previously been exercised or voided will entitle its holder to purchase that number of shares of common stock of such other person which equals $120 divided by one-half of the then current market price of such common stock. The Company will generally be entitled to redeem the Rights at $.01 per Right at any time until the tenth business day following public announcement that a person has become a 20% owner. The Rights expire on July 10, 2007, unless earlier redeemed or exchanged.
In December 1997, one of the Company's subsidiaries issued 126 shares of non-voting preferred stock to individual stockholders at $2,200 per share. These shares are entitled to receive annual dividends of $200 per share beginning with the calendar year ended December 31, 1997. The minority interest in this subsidiary is equal to the preferred shares' liquidation value of $277,200 and is included in other noncurrent liabilities in the Company's consolidated balance sheet at January 31, 1998.
BJ'S WHOLESALE CLUB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
F. Earnings Per Share
The following details the calculation of earnings per share for the last three fiscal years:
G. Income Taxes
Until July 26, 1997, the Company was included in the consolidated federal income tax returns of Waban and was charged or credited with its proportionate share of the consolidated income tax provision. The Company is filing its own tax returns as a separate company for periods subsequent to the spin-off.
The provision for income taxes includes the following:
Fiscal Year Ended ------------------------------------- January 31, January 25, January 27, 1998 1997 1996 ----------- ----------- ----------- (Dollars in Thousands) Federal Current ........................ $ 35,229 $ 27,208 $ 22,710 Deferred ....................... 1,722 1,153 (814) State Current ........................ 7,414 5,447 4,680 Deferred ....................... (719) 300 (226) -------- -------- -------- Total income tax provision . $ 43,646 $ 34,108 $ 26,350 ======== ======== ========
BJ'S WHOLESALE CLUB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a reconciliation of the statutory federal income tax rates and the effective income tax rates:
Fiscal Year Ended ------------------------------------- January 31, January 25, January 27, 1998 1997 1996 ----------- ----------- ------------ Statutory federal income tax rate ...... 35% 35% 35% State income taxes, net of federal tax benefit .................. 4 4 4 -- -- -- Effective income tax rates ............. 39% 39% 39% == == ==
Significant components of the Company's deferred tax assets and liabilities as of January 31, 1998 and January 25, 1997 were as follows:
January 31, January 25, 1998 1997 ----------- ----------- (Dollars in Thousands) Deferred tax assets: Self-insurance reserves ..................... $13,326 $11,516 Rental step liabilities ..................... 4,317 3,951 Compensation and benefits ................... 3,742 3,392 Other ....................................... 2,714 2,071 ------- ------- Total deferred tax assets ................ 24,099 20,930 ------- ------- Deferred tax liabilities: Accelerated depreciation-property ........... 19,480 15,375 Real estate taxes ........................... 1,850 2,390 Other ....................................... 768 161 ------- ------- Total deferred tax liabilities ........... 22,098 17,926 ------- ------- Net deferred tax assets ........................ $ 2,001 $ 3,004 ======= =======
The Company has not established a valuation allowance because its deferred tax assets can be realized by offsetting 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.
H. Pensions
The Company participates in the Waban Inc. Retirement Plan, 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. No benefits have accrued under this plan since July 4, 1992, when it was frozen. The Company's expense under this plan amounted to $34,000, $129,000 and $124,000 in 1997, 1996 and 1995, respectively.
Waban's Board of Directors approved the termination of the Waban Inc. Retirement Plan effective July 26, 1997. However, in accordance with generally accepted accounting principles, the cost to terminate the Plan will not be recognized until the Plan termination is settled. Accordingly, the Company expects to record a post-tax charge applicable to its Plan participants of approximately $1.0 million in the fiscal year ending January 30, 1999.
BJ'S WHOLESALE CLUB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Waban does not segregate plan assets or liabilities by each participating subsidiary company and, as a result, the following tables present the periodic pension cost and funded status of the Waban plan in accordance with SFAS No. 87:
Fiscal Year Ended ---------------------- January 31, January 25, January 27, 1998 1997 1996 ------------------------------------ (Dollars in Thousands)
Service cost ........................ $ 149 $ 180 $ 182 Interest cost on projected benefit obligation ............... 463 455 429 Actual return on assets ............. (593) (940) (1,245) Net amortization and deferrals ...... 41 561 892 ----- ----- ------ Net pension cost .................... $ 60 $ 256 $ 258 ===== ===== ======
January 31, January 25, 1998 1997 ----------- ----------- (Dollars in Thousands) Actuarial present value of accumulated benefit obligation: Vested benefits ................................ $ 7,597 $6,451 ======= ====== Projected benefit obligation ..................... $ 7,597 $6,451 Plan assets at fair market value ................. 7,869 6,455 ------- ------ Projected benefit obligation less than plan assets ................................... (272) (4) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions ..................... (1,400) (878) ------- ------ Prepaid pension cost included in balance sheets .. $(1,672) $ (882) ======= ======
The weighted-average discount rates used in determining the actuarial present value of the projected benefit obligation were 6.75% in 1997 and 7.25% in 1996. The expected long-term rate of return on assets used was 9.0% in 1997 and 1996. Waban's funding policy is to contribute annually an amount allowable for federal income tax purposes. In anticipation of the pending termination of the plan, pension plan assets consisted primarily of short-term fixed income securities at the end of 1997. BJ's Wholesale Club, Inc. has recorded $877 thousand of prepaid pension cost on its balance sheet at January 31, 1998 as its share of the Waban plan's prepaid pension cost.
Effective October 1, 1997, assets and liabilities applicable to the Company's employees in Waban's 401(k) Savings Plans were transferred to BJ's own 401(k) Savings Plans. Under these plans, participating employees may make pre-tax contributions up to 15% of covered compensation. The Company matches employee contributions at 100% of the first one percent of covered compensation and 50% of the next four percent. The Company's expense under these plans was $2,382,000, $2,259,000 and $1,867,000 in 1997, 1996 and 1995, respectively.
BJ'S WHOLESALE CLUB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of the spin-off, assets and liabilities related to the Company's employees in Waban's non-contributory defined contribution retirement plan for certain key employees were transferred to the Company, which established its own similar plan. Under this plan, the Company funds annual retirement contributions for the designated participants, on an after-tax basis. For the last three years, the Company's contributions equaled 5% of the participants' base salary. Participants become fully vested in their contribution accounts at the end of the fiscal year in which they complete four years of service. The Company's expense under this plan was $650,000, $522,000 and $485,000 in 1997, 1996 and 1995, respectively.
I. Postretirement Medical Benefits
As of the spin-off, liabilities related to the Company's employees in Waban's defined benefit postretirement medical plan were transferred to the Company, which established its own similar plan. This plan covers employees and their spouses who retire after age 55 with at least 10 years of service, who are not eligible for Medicare, and who participated in a Company-sponsored medical plan. Amounts contributed by retired employees under this plan are based on years of service prior to retirement. The plan is not funded.
Net periodic postretirement medical benefit cost, presented in accordance with SFAS No. 106, includes the following components:
Fiscal Year Ended ------------------------------------- January 31, January 25, January 27, 1998 1997 1996 ----------- ----------- ----------- (Dollars in Thousands) Service cost......................... $108 $62 $57 Interest cost........................ 36 27 21 Net amortization and deferrals....... -- (2) (5) ---- --- --- Net periodic postretirement benefit cost ..................... $144 $87 $73 ==== === ===
The following table sets forth the status of the Company's postretirement medical plan and the amount recognized in the Company's balance sheets at January 31, 1998 and January 25, 1997 in accordance with SFAS No. 106:
January 31, January 25, 1998 1997 ----------- ----------- (Dollars in Thousands) Accumulated postretirement benefit obligation: Retired participants ............................ $ -- $ -- Fully eligible active participants .............. 9 32 Other active participants ....................... 661 368 ---- ---- Unfunded accumulated postretirement benefit obligation ...................................... 670 400 Unrecognized net gain (loss) ...................... (58) 68 ---- ---- Accrued postretirement benefit cost included in balance sheets ...................... $612 $468 ==== ====
BJ'S WHOLESALE CLUB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For measurement purposes, an annual rate of increase in the per capita cost of medical coverage of 7.5% in 1997 grading down to 4.5% after 7 years was assumed as of January 25, 1997. Increasing the assumed health care cost trend rate one percentage point would increase the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1997 by $19,000 and would increase the accumulated postretirement benefit obligation as of January 31, 1998 by $81,000.
The weighted-average discount rates used in determining the accumulated postretirement benefit obligation as of January 31, 1998 and January 25, 1997 were 6.75% and 7.25%, respectively.
J. Accrued Expenses and Other Current Liabilities
The major components of accrued expenses and other current liabilities are as follows:
January 31, January 25, 1998 1997 ----------- ----------- (Dollars in Thousands) Employee compensation............................. $17,466 $14,998 Self-insurance reserves........................... 11,777 13,134 Sales and use taxes, rent, utilities, advertising and other........................... 42,405 38,170 ------- ------- $71,648 $66,302 ======= =======
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 individual occurrences above $200,000 per year for group medical claims. In addition to the amounts shown above in current liabilities, noncurrent self-insurance reserves of $20.8 million and $15.3 million as of January 31, 1998 and January 25, 1997, respectively, were included in other noncurrent liabilities.
K. Selected Quarterly Financial Data (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (Dollars in Thousands except Per Share Amounts) Fiscal year ended January 31, 1998 Net sales ................... $664,258 $773,682 $744,023 $977,823 Total revenues .............. 678,947 785,455 762,438 999,634 Gross earnings (a) .......... 66,748 82,180 83,093 122,150 Net income .................. 7,057 14,955 13,818 32,437 Net income per common share: Basic .................... 0.19 0.40 0.37 0.86 Diluted .................. 0.19 0.40 0.36 0.85 Fiscal year ended January 25, 1997 Net sales ................... $608,626 $720,022 $681,847 $849,455 Total revenues .............. 622,388 733,688 697,818 868,938 Gross earnings (a) .......... 60,079 76,453 73,906 106,792 Net income .................. 5,383 12,686 9,675 25,880 Net income per common share: Basic and diluted ........ 0.14 0.34 0.26 0.69
- --------- (a) Gross earnings equals total revenues less cost of sales, including buying and occupancy costs.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of BJ's Wholesale Club, Inc.:
We have audited the accompanying consolidated balance sheets of BJ's Wholesale Club, Inc. and subsidiaries as of January 31, 1998 and January 25, 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three fiscal years in the period ended January 31, 1998. These 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 BJ's Wholesale Club, Inc. and subsidiaries as of January 31, 1998 and January 25, 1997 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 1998 in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 2, 1998
REPORT OF MANAGEMENT
The financial statements and related financial information in this annual report have been prepared by and are the responsibility of management. The financial statements were prepared in accordance with generally accepted accounting principles and necessarily include amounts which are based upon judgments and estimates made by management.
The Company maintains a system of internal controls designed to provide, at appropriate cost, reasonable assurance that assets are safeguarded, transactions are executed in accordance with management's authorization and the accounting records may be relied upon for the preparation of financial statements. The accounting and control systems are continually reviewed by management and modified as necessary in response to changing business conditions and the recommendations of the Company's internal auditors and independent public accountants.
The Audit Committee, which is comprised of members of the Board of Directors who are neither officers nor employees, meets periodically with management, the internal auditors and the independent public accountants to review matters relating to the Company's financial reporting, the adequacy of internal accounting control and the scope and results of audit work. The internal auditors and the independent public accountants have free access to the Committee.
The financial statements have been audited by Coopers & Lybrand L.L.P., whose opinion as to their fair presentation in accordance with generally accepted accounting principles appears above.
/s/ JOHN J. NUGENT /s/ FRANK D. FORWARD
John J. Nugent Frank D. Forward President and Executive Vice President and Chief Executive Officer Chief Financial Officer
March 2, 1998
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The Company will file with the Securities and Exchange Commission a definitive Proxy Statement no later than 120 days after the close of its fiscal year ended January 31, 1998 (the "Proxy Statement"). The information required by this Item and not given in Item 4A, Executive Officers of the Registrant, is incorporated by reference from the Proxy Statement.
Item 11.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the Proxy Statement. However, information under "Executive Compensation Committee Report" and "Performance Graph" in the Proxy Statement is not so incorporated.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference from the Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from the Proxy Statement.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
A. The Financial Statements filed as part of this report are listed and indexed on page 15. Schedules other than those listed in the index have been omitted because they are not applicable or the required information has been included elsewhere in this report.
B. Listed below are all Exhibits filed as part of this report. Certain Exhibits are incorporated by reference to documents previously filed by the Registrant with the Securities and Exchange Commission pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, as amended.
Exhibit No. Exhibit
3.1 Amended and Restated Certificate of Incorporation (1) 3.2 Amended and Restated By-Laws (1) 4.1 Rights Agreement, dated as of July 10, 1997, between the Company and First Chicago Trust Company of New York (2) 4.2 Specimen Certificate of Common Stock, $.01 par value per share (5) 10.1 Separation and Distribution Agreement, dated as of July 10, 1997 between the Company and Waban Inc. (3) 10.2 Services Agreement, dated as of July 28, 1997, between the Company and Waban Inc. (3) 10.3 Tax Sharing Agreement, dated as of July 28, 1997, between the Company and Waban Inc. (3) 10.4 Employee Benefits Agreement, dated as of July 28, 1997, between the Company and Waban Inc. (3) 10.5 BJ's Wholesale Club, Inc. Management Incentive Plan* (4) 10.6 BJ's Wholesale Club, Inc. Growth Incentive Plan* (4) 10.7 BJ's Wholesale Club, Inc. 1997 Director Stock Option Plan* (4) 10.8 BJ's Wholesale Club, Inc. Executive Retirement Plan* (4) 10.9 BJ's Wholesale Club, Inc. 1997 Replacement Stock Incentive Plan* (4)
10.10 BJ's Wholesale Club, Inc. 1997 Stock Incentive Plan* (4) 10.11 BJ's Wholesale Club, Inc. General Deferred Compensation Plan* (4) 10.12 Employment Agreement, dated as of July 28, 1997 with Herbert J. Zarkin* (4) 10.13 Employment Agreement, dated as of July 28, 1997 with John J. Nugent* (4) 10.14 Employment Agreement, dated as of July 28, 1997 with Edward J. Weisberger* (4) 10.15 Employment Agreement, dated as of July 28, 1997 with Frank D. Forward* (4) 10.16 Employment Agreement, dated as of July 28, 1997 with Michael T. Wedge* (4) 10.17 Employment Agreement, dated as of July 28, 1997 with Laura J. Sen* (4) 10.18 Employment Agreement, dated as of July 28, 1997 with Sarah M. Gallivan* (4) 10.19 Form of Change of Control Severance Agreement between the Company and officers of the Company* (4) 10.20 Form of Indemnification Agreement between the Company and officers of the Company* (4) 10.21 BJ's Wholesale Club, Inc. Change of Control Severance Benefit Plan for Key Employees* (4) 10.22 Credit Agreement, dated July 9, 1997, among the Company and certain banks (4) 10.22a First Amendment dated as of December 19, 1997 to Credit Agreement dated July 9, 1997 10.23 Indemnification Agreement, dated as of April 18, 1997, between the Company and The TJX Companies, Inc. (5) 21.0 Subsidiaries of the Company 23.0 Consent of Independent Accountants 27.0 Financial Data Schedule
- ---------- *Management contract or other compensatory plan or arrangement.
(1) Incorporated herein by reference to the Company's Registration Statement on Form S-8, dated July 10, 1997 (Commission File No. 333-31015)
(2) Incorporated herein by reference to the Company's Report on Form 8-A, dated July 10, 1997 (Commission File No. 1-13143)
(3) Incorporated herein by reference to the Current Report on Form 8-K, dated July 28, 1997, of HomeBase, Inc. (Commission File No. 1-10259)
(4) Incorporated herein by reference to the Company's Report on Form 10-Q for the fiscal quarter ended July 26, 1997 (Commission File No. 1-13143)
(5) Incorporated herein by reference to the Company's Form S-1 (Commission File No. 333-25511)
C. The Registrant has not filed any reports on Form 8-K during the last quarter of the period covered by this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BJ'S WHOLESALE CLUB, INC.
Dated: April 21, 1998 /s/ JOHN J. NUGENT --------------------------- John J. Nugent President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ JOHN J. NUGENT /s/ HERBERT J. ZARKIN - ----------------------------------------- ----------------------------------- John J. Nugent, President Herbert J. Zarkin, Chairman Chief Executive Officer and Director of the Board and Director (Principal Executive Officer)
/s/ FRANK D. FORWARD /s/ S. JAMES COPPERSMITH - ----------------------------------------- ----------------------------------- Frank D. Forward, Executive Vice President S. James Coppersmith, Director and Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ KERRY L. HAMILTON /s/ ALLYN L. LEVY - ----------------------------------------- ----------------------------------- Kerry L. Hamilton, Director Allyn L. Levy, Director
/s/ THOMAS J. SHIELDS /s/ LORNE R. WAXLAX - ----------------------------------------- ----------------------------------- Thomas J. Shields, Director Lorne R. Waxlax, Director
/s/ EDWARD J. WEISBERGER - ----------------------------------------- Edward J. Weisberger, Director
Dated: April 21, 1998