Item 1. Business
General
BJ's Wholesale Club introduced the warehouse club concept to New England in 1984 and has since expanded in the eastern United States and the state of Ohio. As of January 29, 2000, BJ's operated 107 warehouse clubs in 14 states and had over 5.8 million members. The table below shows the number of BJ's locations by state.
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, BJ's business had operated as a division of Waban.
The fiscal year ended January 29, 2000 is referred to as "1999" or "fiscal 1999" below. Other fiscal 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, supercenters, department stores, drug stores, 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 full truckloads of merchandise 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 sales volumes and rapid inventory turnover, warehouse clubs 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 vendor payment terms 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. 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 seeks to establish and maintain the leading industry position in each market where it operates. Second, by clustering its clubs, BJ's achieves the benefit of name recognition and maximizes the efficiencies of management support, distribution and marketing activities. Finally, BJ's places added focus on the retail customer, its Inner Circle(R) member, through merchandising strategies that emphasize a customer-friendly shopping experience. BJ's creates an exciting shopping experience for its members with a constantly changing mix of food and general merchandise items and carries a broader product assortment than its warehouse club competitors. 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 operator to accept manufacturers' coupons, which provides added value for its members, and to accept VISA(R), MasterCard(R) and Discover(R) payment cards chainwide. In 2000, BJ's plans to equip its clubs to process on-line debit transactions. Management believes these strategies aimed at the general consumer allow BJ's to achieve higher warehouse club operating margins than its warehouse club competitors.
Expansion
Since the beginning of 1994, BJ's has grown from 52 clubs to 107 clubs in operation at January 29, 2000. Approximately 53% of BJ's 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 approximately ten to eleven new clubs and relocate one club in the current year, expanding its presence in the Carolinas, Florida, and Ohio and continuing to fill in existing markets. Longer term, BJ's plans to increase the square footage of the chain by an average of 10% annually.
Store Profile
As of January 29, 2000, BJ's operated 93 traditional size "big box" warehouse clubs that averaged approximately 112,000 square feet and 14 smaller format warehouse clubs that averaged approximately 69,000 square feet. The smaller format clubs are 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 club requires nine to eleven acres of land. The smaller version typically requires approximately eight acres. BJ's clubs are located in both free-standing locations and shopping centers.
Construction and site development costs for a full-sized BJ's club average approximately $5.5 million. Land acquisition costs for a club generally range from $3.0 million to $5.5 million, but can be significantly
higher in some locations. BJ's also invests approximately $2.6 million for fixtures and equipment and $2 million for inventory (net of accounts payable), and incurs approximately $.8 million for preopening costs in a new full-sized club.
Merchandising
BJ's services its existing 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, supercenters and specialty retail operations. BJ's limits the items offered in each product line to fast selling styles, sizes and colors, carrying an average of approximately 6,000 active stock-keeping units (SKU's). By contrast, supermarkets normally stock approximately 25,000 SKU's, and discount stores typically stock up to 60,000 SKU's. 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 1999, food accounted for approximately 59% of BJ's sales. The remaining 41% 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 and flowers, 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.
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.
BJ's expanded its private label program during 1999. Products are sold under two labels: "Executive Choice(TM)" for products targeted to business members, and "Berkley and Jensen(TM)" for products targeted to BJ's Inner Circle members. BJ's private label products are premium quality only and generally are priced 20% lower than the top branded competing product. Private label products include paper towels, bath tissue, diapers, juices, frozen vegetables, cookies, pet food, detergents, analgesics, vitamins and supplements, jeans, athletic socks and luggage. BJ's expects its private label products to represent an increasing percentage of total revenues over time.
BJ's also offers a number of specialty services that are designed to enable members to complete more of their shopping at BJ's and to encourage more frequent trips to the clubs. Most of these services are provided by outside operators in space leased from BJ's. Specialty services include full-service optical stores, food courts, some of which offer brand name fast food service, one-hour photo service, a selection of garden sheds and gazebos, a propane tank filling service, and a muffler and brake service operated in conjunction with Monro Muffler/Brake and Speedy Auto Service, and Tuffy Automobile Service Centers. A test of a mini-branch bank concept continues in three of BJ's clubs. In addition, BJ's began marketing home and business alarm systems in 1999 through Protection One(R).
As of January 29, 2000, BJ's has opened gas stations at nineteen of its clubs. The gas stations are self-service, relying on "pay at the pump" technology that accepts MasterCard, VISA, Discover and debit card transactions. Both regular and premium gas are available. BJ's has generally maintained its price at 6 to 10 cents per gallon less than the average prices in each market. Results to date have shown significant increases in sales and membership at clubs with gas stations. BJ's plans to expand this service in 2000.
The Company's "BJ's Premier Benefits(TM)" program is designed to enhance the value of BJ's membership, particularly to business members. Included in the program are discounted payroll processing, payment processing of all major credit cards, participation in an established preferred medical provider network that provides comprehensive health care services at discounted rates, local and long-distance phone and Internet
access, rebates on the buying and selling of residential real estate, travel services and printing of business forms, checks and signs. Participation in Premier Benefits is open to all BJ's members and is included in the regular cost of BJ's membership.
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 types of members: business members and Inner Circle members. BJ's Inner Circle members are likely to be home owners who have incomes which are above the average for the Company's trading areas. BJ's believes that a significant percentage of its business members also shops BJ's actively for their personal needs. The Company had over 5.8 million members (including supplemental cardholders) at January 29, 2000.
BJ's charges $35 per year for a primary Inner Circle membership that includes one free supplemental membership. Members in the same household may purchase additional supplemental memberships for $15 each. A business membership also costs $35 per year and includes one free supplemental membership. Additional supplemental business memberships cost $15 each. BJ's membership is open to all, whereas the Company's wholesale 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 direct mail, public relations efforts, new store marketing programs, and limited vendor-funded television and radio advertising during the holiday season. BJ's also employs 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 retailers.
Warehouse Club Operations
BJ's ability to achieve profitable operations depends upon high sales volumes and the efficient operation of its warehouse clubs. 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 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 the majority of its purchases through cross-docking facilities which break down truckload quantity shipments from manufacturers and reallocate these goods for shipment to individual clubs, generally on a same-day basis. BJ's efficient distribution systems result in better volume discounts, reduced freight expenses and lower receiving costs.
The Company works closely with manufacturers to minimize the amount of handling required once merchandise is received at a club. Most merchandise is pre-marked by the manufacturer with the universal product code (UPC) so that it does not require ticketing at the club. 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 other retailers by strictly controlling the exits of its clubs, by generally limiting customers to members and by using state-of-the-art electronic article surveillance technology. BJ's inventory shrinkage was less than .20% of net sales in both 1998
and 1999. Problems associated with payments by check have been insignificant, as members who issue dishonored checks are restricted to cash-only terms. BJ's policy is to accept returns of merchandise within 30 days after purchase.
In October 1995, BJ's became the first warehouse club chain to accept the MasterCard credit card and in September 1997, became the first warehouse club chain to accept VISA. Additionally, BJ's members may pay for their purchases by cash, check or Discover Card. BJ's intends to equip its clubs to process on- line debit transactions in 2000.
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 operator to introduce scanning devices which work in conjunction with its electronic point of sale (EPOS) terminals and intends to roll out "360 degree" scanning at the checkout stations in its clubs in 2000. 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 information 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, supercenters, 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 Wholesale Corporation and Sam's Clubs (a division of Wal-Mart Stores, Inc.).
A large number of competitive membership warehouse clubs exists in BJ's markets. Approximately 86% of BJ's 93 "big box" warehouse clubs have at least one competitive membership warehouse club in their trading areas at a distance of about ten miles or less. None of the smaller format clubs has direct competition from other warehouse clubs within ten miles.
BJ's believes price is the major competitive factor in the markets in which it competes. Other competitive factors include store location, merchandise selection, member services 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 fourth quarter holiday season and lowest in the first quarter of each fiscal year.
Employees
As of January 29, 2000, BJ's had approximately 13,650 employees ("team members") of whom approximately 300 were considered part-time employees (persons who work less than 20 hours per week). Approximately 800 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 a union. BJ's considers its relations with its team members to be excellent.
Item 2.
Item 2. Properties
BJ's operated 107 warehouse club locations as of January 29, 2000, of which 65 are leased under long-term leases and 32 are owned. BJ's owns the buildings at the remaining 10 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 one to 41 years, and average approximately 14 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 21 years. These leases require fixed monthly rental payments which are subject to various adjustments. Certain leases require payment of a percentage of the warehouse club's gross sales in excess of certain amounts. Generally, 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, 2006, with options to extend these leases through January 31, 2011. 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. To support BJ's growth, the Company plans, by the spring of 2001, to relocate its cross-docking facility serving southeastern, middle Atlantic and midwest markets to a new facility that would be approximately twice the size of its existing location.
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, 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.
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 29, 2000.
Item 4A. Executive Officers of the Registrant
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 is listed on the New York Stock Exchange (symbol "BJ"). The quarterly high and low stock prices for the fiscal years ended January 29, 2000 and January 30, 1999, adjusted for the effect of the two-for-one stock split on March 2, 1999, were:
The approximate number of stockholders of record at March 31, 2000 was 2,400. The Company has never declared or 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.
Unless noted otherwise, the fiscal year ended January 29, 2000 is referred to as "1999." Other fiscal years are referred to in a similar manner.
Accounting Principle Changes
During 1998 (the fiscal year ended January 30, 1999), the Company adopted changes in methods of accounting for membership fee revenues and preopening expenses. The Company had previously recognized membership fee revenues as income when received. Under its new accounting method, the Company recognizes membership fee revenues as income over the life of the membership, which is typically twelve months. Previously, preopening expenses were charged ratably to operations between the date a new club opened and the end of the fiscal year. In implementing American Institute of CPA's Statement of Position ("AICPA SOP") 98-5, "Reporting on the Costs of Start-up Activities," the Company now recognizes club preopening expenses when incurred.
The Company has incorporated these accounting changes in its financial statements for 1999 and 1998. The cumulative effect of these accounting changes on prior years was recorded as of the beginning of the first quarter of 1998. Results for 1997 are not restated. For additional information on these accounting principle changes, see Note A of Notes to Consolidated Financial Statements.
The following pro forma information gives effect to the retroactive application of 1998's accounting changes for all periods presented:
Stock Split
On February 4, 1999, the Company's Board of Directors declared a two-for-one stock split effected in the form of a 100% stock dividend, which was distributed on March 2, 1999 to stockholders of record on February 16, 1999. The split was effected by reissuing the 803,638 treasury shares held by the Company and issuing 36,098,862 additional shares of common stock on the distribution date. The stock split is recorded in the financial statements for the fiscal year ended January 30, 1999. All historical earnings per share amounts have been restated to reflect the stock split. Reference to stock activity before the distribution of the split has not been restated unless otherwise noted.
Results of Operations
Net sales increased by 18.4% from 1998 to 1999 and by 10.0% from 1997 to 1998. 1997 was a 53-week fiscal year. The increases in both years were due to the opening of new stores and to comparable store sales increases. Comparable store net sales (on a same-week basis) increased by 7.3% from 1998 to 1999 and by 5.2% from 1997 to 1998. The Company's strong comparable store sales performance in 1999 was driven by a healthy consumer spending environment, favorable weather conditions throughout the year and millennium-related demand in the fourth quarter. Additionally, the Company expanded the number of gas stations it operates from five at the end of 1998 to 19 at the end of 1999.
Total revenues included membership fees of $79.3 million in 1999 and $65.5 million in 1998, and pro forma membership fees of $56.4 million in 1997. Membership fees in the last two years benefited from the addition of new stores and an increase in the fee for Inner Circle, or retail, members from $30 to $35, effective February 1, 1998, and an increase in the fee for business members from $30 to $35, effective February 1, 1999.
Cost of sales (including buying and occupancy costs) was 90.5% of net sales in 1999, 90.7% in 1998 and 90.9% in 1997. The decreases in the cost of sales percentage resulted from the Company's ability to introduce higher margin products into the merchandise mix and from leveraging fixed buying and occupancy costs against increased comparable store sales.
Selling, general and administrative ("SG&A") expenses were 7.1% of net sales in 1999 and 7.3% of net sales in each of 1998 and 1997. The SG&A percentage was favorably impacted in the last two years by leveraging fixed expenses against both increased comparable store sales and a growing number of clubs, and by effective control over other operating expenses. In 1999, the Company also realized cost savings from a new medical plan for employees that became effective on January 1, 1999. Credit expenses as a percentage of sales have risen in the last two years due to the increased level of credit card sales resulting mainly from the Company's acceptance of VISA beginning in September 1997 and to increased costs in 1998 for the Company's co-branded MasterCard. The Company also incurred incremental marketing costs in 1998 to support its entry into the Ohio market and higher general and administrative expenses after July 1997 as a result of operating as an independent publicly owned entity.
Preopening expenses were $9.5 million in 1999 and $7.7 million in 1998; pro forma preopening expenses were $5.0 million in 1997. The Company opened eleven new clubs in 1999, twelve in 1998 and four in 1997. A portion of 1999's preopening expenses was incurred for a club which opened in February 2000, and a portion of 1997's preopening expenses was incurred for two clubs which opened in February 1998.
During 1998, the Company recorded a pre-tax charge of $1.5 million in connection with the termination of the Waban Inc. Retirement Plan, in which certain of the Company's employees participated. On a post-tax basis, this charge amounted to $.9 million, or $.01 per diluted share.
The components of net interest (income) expense in the last three fiscal years were as follows:
Net interest income in 1999 increased primarily because of higher levels of investments and lower borrowing levels than those of 1998. As described in more detail below, interest expense after July 28, 1997 was reduced because borrowing levels and interest rates applied to those borrowings were significantly lower after the spin-off.
The Company's income tax provision was 38.7% of pre-tax income in 1999, 39.3% in 1998 and 39.0% in 1997. The decrease in the rate in 1999 was due to a reduction in the effective state income tax rate.
Net income was $111.1 million, or $1.47 per diluted share, in 1999 versus income before the cumulative effect of accounting principle changes of $81.8 million, or $1.07 per diluted share, in 1998 and pro forma net income of $65.7 million, or $.87 per diluted share, in 1997. The cumulative effect of accounting principle changes reduced net income in 1998 by $19.3 million, or $.25 per diluted share. Net income in 1998 was $62.5 million, or $.82 per diluted share.
BJ's Wholesale Club, Inc. commenced operations as a separate entity immediately following its July 28, 1997 spin-off from Waban. Therefore, reported financial results through the first half of 1997 reflect BJ's historical position as a division of Waban and, as such, are not indicative of performance after the spin-off. As a separate, publicly owned company, BJ's incurs SG&A costs which are higher than the amounts included in the historical financial statements for periods preceding the spin-off. However, interest on intercompany borrowings charged at an annual rate of 10% prior to the spin-off was replaced by interest on bank borrowings at significantly lower rates and the level of debt was reduced substantially by the contribution to capital of approximately $101 million of BJ's intercompany debt immediately prior to the spin-off.
The following table: 1) restates 1997's historical results for the effects of the spin-off noted in the preceding paragraph; 2) presents data on a pro forma basis, as if the accounting principles for membership fees and preopening expenses adopted in 1998 had been in effect for all periods shown; and 3) excludes the pension termination charge from 1998's results:
During 1999, the Company increased the number of gas stations in operation from five at the beginning of the year to 19 at the end of the year. Although the gas stations themselves operate at a much lower margin rate than the rest of BJ's business, they have had a very positive effect on club sales and membership. Consequently, where it is possible to do so, the Company plans to include a gas station in its new clubs and will continue to add gas stations in existing clubs.
Year 2000 Compliance
The Company worked for several years to prepare its financial, merchandising and other information technology ("IT") systems for the Year 2000. Major non-IT systems, including refrigeration, security and utilities systems were also reviewed for Year 2000 issues. The Company also worked with key vendors and other third parties with whom it does business to minimize the potential adverse impact on the Company if they failed to address the Year 2000 issue successfully.
As of the date of this report, the Company has not encountered any significant Year 2000 issues. Based on information available at this time, the Company does not believe that Year 2000 issues will have a material adverse effect on the Company's results of operations, financial position or cash flows.
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 fourth quarter holiday season and lowest in the first quarter of each fiscal year.
Recently Issued Accounting Standards
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. The adoption of this statement, which currently becomes effective in 2001, is not expected to have a material impact on the Company's results of operations, financial position or cash flows, or to produce any major changes in current disclosures.
Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 101 was released on December 3, 1999 and provides the staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company's implementation date for SAB 101 is the second quarter of 2000. The Company does not believe that the implementation of SAB 101 will have a material effect on its results of operations, financial position or cash flows.
Liquidity and Capital Resources
Net cash provided by operating activities was $184.5 million in 1999 compared with $113.8 million in 1998. This increase resulted mainly from an increase in cash provided by net income before depreciation and amortization of $35.0 million and a decrease in cash used for the growth in inventories net of accounts payable of $28.0 million.
Cash expended for property additions was $87.5 million in 1999 versus $78.3 million in 1998. The Company opened eleven new clubs in 1999 and twelve new clubs in 1998. One of the 1999 openings was at an owned location. Two of the 1998 openings were at owned locations and a third owned building was opened at a location that is subject to a long-term ground lease. The Company also opened 14 new gas stations in 1999 versus five gas stations in 1998.
The Company's capital expenditures are estimated to total approximately $115 million in 2000, based on opening approximately ten to eleven new clubs, relocating one club, opening 15 to 20 gas stations, and relocating the Company's current cross-docking facility outside of Philadelphia. The new 630,000 square foot facility will be approximately twice the size of the current facility and is projected to open in the spring of 2001. The timing of actual location 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.
In August 1999, the Company completed its repurchase of $50 million of its common stock, which had been authorized by the Board of Directors in August 1998. On September 16, 1999, the Board authorized the repurchase of an additional $50 million of the Company's common stock. During 1999, the Company repurchased 1,190,702 shares of common stock for $35.0 million, or an average price of $29.41 per share. As of January 29, 2000, the Company's remaining repurchase authorization was $34.0 million.
The Company has a $200 million unsecured credit agreement with a group of banks which expires July 9, 2002. The agreement includes a $50 million sub- facility for letters of credit, of which $3.4 million was outstanding at January 29, 2000. The Company is required to pay an annual facility fee which is currently 0.10% 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 0.25%, (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 prohibit the payment of cash dividends on the Company's common stock. In September 1999, the agreement was amended to generally limit the cumulative repurchase of the Company's common stock to $50 million plus 50% of Net Income (as defined by the agreement) earned after January 30, 1998.
The Company also maintains a separate $33 million facility for letters of credit, primarily to support the purchase of inventories, of which $11.4 million was outstanding at January 29, 2000, and an additional $20 million uncommitted credit line for short-term borrowings.
Increases in inventories and accounts payable from January 30, 1999 to January 29, 2000 were due to the addition of new clubs and to the earlier purchase of certain seasonal merchandise this year.
Cash and cash equivalents totaled $60.4 million as of January 29, 2000, and there were no borrowings outstanding on that date. The Company expects that its current resources, together with anticipated cash flow from operations, will be sufficient to finance its operations through February 3, 2001. 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 planned capital expenditures, planned store, gas station and distribution facility openings, plans to begin accepting debit cards and introduce improved scanning devices at checkout stations, plans to expand BJ's private label program, exposure to market risk 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," "estimates," "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. The Company does not assume any obligations to update any forward-looking statements herein.
BJ's warehouse clubs are located in the eastern United States, primarily in the Northeast. The Company's business may be adversely affected from time to time by economic downturns in its markets. In addition, the Company may be impacted by state and local regulation in its markets and temporarily impacted by weather conditions prevailing 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.
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 43 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 thereafter it will indemnify TJX for 50% of such liabilities. 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 minimum 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.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company believes that its potential exposure to market risk as of January 29, 2000 is not material because of the short contractual maturities of its cash and cash equivalents. No bank debt was outstanding at January 29, 2000. The Company has not used derivative financial instruments. See Summary of Accounting Policies--Disclosures about Fair Value of Financial Instruments and Note C in Notes to the Consolidated Financial Statements.
Item 8.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
BJ'S WHOLESALE CLUB, INC.
CONSOLIDATED STATEMENTS OF INCOME
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
Through January 30, 1999, the Company's fiscal year ended each year on the last Saturday in January. Beginning with the fiscal year ended January 29, 2000, the Company's fiscal year ended on the Saturday closest to January 31. The first fiscal year that will end on a different day as a result of this change will be the fiscal year ending February 3, 2001. The fiscal years ended January 29, 2000 and January 30, 1999 included 52 weeks. The fiscal year ended January 31, 1998 included 53 weeks.
Cash Equivalents and Marketable Securities
The Company considers highly liquid investments with a maturity of three months or less at time of purchase to be cash equivalents. Investments with maturities exceeding three months are classified as marketable securities. The Company's marketable securities at January 30, 1999 consisted of U.S. government debt securities and were carried at cost, which approximated fair value.
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
Effective with the fiscal year ended January 30, 1999, membership income is recognized over the life of the membership, which is typically twelve months. (See Note A.)
Preopening Costs
Preopening costs consist of direct incremental costs of opening a facility and, effective with the fiscal year ended January 30, 1999, are charged to operations as incurred. (See Note A.)
Interest (Income) Expense, Net
Interest (income) expense, net in the statements of income includes interest income of $4,045,000 in 1999, $1,404,000 in 1998 and $463,000 in 1997.
Capitalized Interest
The Company capitalizes interest related to the development of owned facilities. Interest in the amount of $302,000, $657,000 and $430,000 was capitalized in 1999, 1998 and 1997, respectively.
Stock-Based Compensation
The Company applies the accounting provisions prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related Interpretations in accounting for its stock-based compensation.
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.)
Recently Issued Accounting Standards
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. The adoption of this statement, which currently becomes effective in 2001, is not expected to have a material impact on the Company's results of operations, financial position or cash flows, or to produce any major changes in current disclosures.
Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 101 was released on December 3, 1999 and provides the staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company's implementation date for SAB 101 is the second quarter of 2000. The Company does not believe that the implementation of SAB 101 will have a material effect on its results of operations, financial position or cash flows.
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.
A. Accounting Principle Changes
During the fiscal year ended January 30, 1999, the Company adopted changes in methods of accounting for membership fee revenues and preopening expenses.
The Company had previously recognized membership fee revenues as income when received. Under its new accounting method, the Company now recognizes membership fee revenues as income over the life of the membership, which is typically twelve months. The Company recorded a noncash charge of $18,216,000 (after reduction for income taxes of $11,646,000), or $.24 per diluted share, as of the beginning of 1998 to reflect the cumulative effect of this change on prior years.
Prior to 1998, preopening expenses were charged ratably to operations between the date a new club opened and the end of the fiscal year. In implementing the provisions of the American Institute of CPA's Statement of Position 98-5, "Reporting on the Costs of Start-up Activities," the Company now recognizes club preopening expenses when incurred. The Company recorded a noncash charge of $1,110,000 (after reduction for income taxes of $710,000), or $.01 per diluted share, as of the beginning of 1998 to reflect the cumulative effect of this change on prior years.
Although results for the fiscal year ended January 31, 1998 were not restated, the pro forma amounts at the bottom of the consolidated statements of income reflect the post-tax results as if the newly adopted accounting principles had been in effect during all periods presented.
B. Spin-off of the Company from Waban Inc. and Related Party Transactions
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.
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 to 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.
Prior to the spin-off, Waban loaned funds to the Company as needed and 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).
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 totaled $2,246,000 in 1997 (all of which was incurred in the first half of the fiscal year) and were generally allocated based on specific identification and management's estimates of the time devoted to supporting the Company.
Since the spin-off, the Company has provided certain services to Waban (which has since changed its name to 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
The Company has a $200 million unsecured credit agreement with a group of banks which expires July 9, 2002. The agreement includes a $50 million sub- facility for letters of credit, of which $3.4 million was outstanding at January 29, 2000. The Company is required to pay an annual facility fee which is currently 0.10% 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 0.25%, (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 prohibit the payment of cash dividends on the Company's common stock. In September 1999, the agreement was amended to generally limit the cumulative repurchase of the Company's common stock to $50 million plus 50% of Net Income (as defined by the agreement) earned after January 30, 1998.
The Company also maintains a separate line in the amount of $33 million for letters of credit, primarily to support the purchase of inventories, of which $11.4 million was outstanding at January 29, 2000, and an additional $20 million uncommitted credit line for short-term borrowings.
There were no bank borrowings outstanding at January 29, 2000 versus $30 million outstanding at January 30, 1999. The weighted-average interest rate on bank borrowings was 5.12% at January 30, 1999. These borrowings were 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 rentals based on a percentage of sales or increases in the Consumer Price Index. The real estate leases range up to 45 years and have varying renewal options. The fixture and equipment leases range up to 5 years.
Future minimum lease payments as of January 29, 2000 were:
Rental expense under operating leases (including contingent rentals, which were not material) amounted to $57,148,000, $48,226,000 and $43,558,000 in 1999, 1998 and 1997, 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, 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 43 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
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.
On February 4, 1999, the Company's Board of Directors declared a two-for-one stock split effected in the form of a 100% stock dividend, which was distributed on March 2, 1999 to stockholders of record on February 16, 1999. The split was effected by reissuing the 803,638 treasury shares held by the Company at that time and issuing 36,098,862 additional shares of common stock on the distribution date. The stock split is recorded in the financial statements for the fiscal year ended January 30, 1999. All historical earnings per share amounts have been restated to reflect the stock split. Reference to stock activity before the distribution of the split has not been restated unless otherwise noted.
The Company has a shareholder rights plan, originally adopted in 1997 and amended in 1999, pursuant to which shareholders are issued one-half of a Right (as adjusted for the two-for-one stock split) 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 to date. 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 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 each entitled to receive ongoing annual dividends of $200 per share. The minority interest in this subsidiary is equal to the preferred shares' preference in an involuntary liquidation of $277,200 and is included in other noncurrent liabilities in the Company's consolidated balance sheets at January 29, 2000 and January 30, 1999.
F. Stock Incentive Plans
All references in this footnote to historical awards, outstanding awards and available shares for future grants under the Company's stock incentive plans and related per share amounts reflect the two-for-one stock split distributed on March 2, 1999.
Under its 1997 Stock Incentive Plan, the Company has granted certain key employees options to purchase common stock at prices equal to 100% of market price on the grant date. These options, which expire ten years from the grant date, are exercisable 25% per year starting one year after the grant date. At the Company's Annual Meeting of Stockholders in May 1999, an amendment to increase the maximum number of shares issuable under the 1997 Stock Incentive Plan by 2,000,000 shares was approved. The maximum number of shares of common stock issuable under this plan is now 5,249,402 shares, plus shares subject to awards granted under the BJ's Wholesale Club, Inc. 1997 Replacement Stock Incentive Plan (the "Replacement Plan") which are not actually issued because such awards expire or are canceled. Under the Replacement Plan, which expired on January 28, 1998, BJ's employees who held Waban stock options and restricted stock were granted replacement BJ's options and restricted stock, which preserved the same inherent value, vesting terms and expiration dates as the Waban awards they replaced in connection with the spin-off.
Under its 1997 Director Stock Option Plan, BJ's external directors are granted options to purchase common stock at prices equal to 100% of market price on the grant date. These options expire ten years from the grant date and are exercisable in three equal annual installments beginning on the first day of the month which includes the first anniversary of the date of grant. A maximum of 300,000 shares may be issued under the 1997 Director Stock Incentive Plan.
The Company applies APB 25 and related Interpretations in accounting for its stock-based compensation. Total pre-tax compensation cost recognized in the statements of income for stock-based employee compensation awards to the Company's employees was $19,000 in 1999, $163,000 in 1998 and $171,000 in 1997 and consisted entirely of restricted stock expense, which is charged to income ratably over the periods during which the restrictions lapse. No restricted stock was issued in 1999. During 1998, 2,000 shares of
restricted stock were issued at a weighted-average grant-date fair value of $19.72. No restricted stock (other than 7,890 replacement shares) was issued in 1997. No compensation cost was recognized under APB 25 for the Company's stock options because the exercise price equaled the market price of the underlying stock on the date of grant.
Pro forma information regarding net income and earnings per share is required by SFAS 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 6.19%, 5.16% and 6.01% in 1999, 1998 and 1997, respectively; volatility factor of the expected market price of the Company's common stock of .42 in 1999 and .35 in 1998 and 1997; and expected life of the options of 5 years in 1999, 1998 and 1997. 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 period. The Company's pro forma information follows:
The effects of applying the provisions of SFAS 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 SFAS 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 29, 2000. Also shown is a summary of activity related to Waban stock options held by Company employees for the six-month period ended July 26, 1997:
Additional information related to stock options outstanding at January 29, 2000 is presented below:
As of January 29, 2000 and January 30, 1999, respectively, 2,635,708 and 1,314,982 shares were reserved for future stock awards under the Company's stock incentive plans.
G. Earnings Per Share
The following details the calculation of earnings per share for the last three fiscal years:
Options to purchase a total of 589,700 shares at an exercise price of $29.75 were outstanding at January 29, 2000, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares during the year then ended.
H. Income Taxes
Through 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 files its own tax returns as a separate taxpayer for periods subsequent to July 26, 1997.
The provision for income taxes includes the following:
The following is a reconciliation of the statutory federal income tax rates and the effective income tax rates:
Significant components of the Company's deferred tax assets and liabilities as of January 29, 2000 and January 30, 1999 are as follows:
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.
I. Pensions
The Company participated in the Waban Inc. Retirement Plan, a non- contributory defined benefit retirement plan covering full-time employees who had attained twenty-one years of age and had completed one year of service. Effective July 26, 1997, this plan was terminated. The Company recorded a pre- tax charge applicable to its participants of $1,521,000 in 1998 when the plan was settled through lump-sum cash payments and through the purchase of nonparticipating annuity contracts. No benefits had accrued under this plan since July 4, 1992, when it was frozen. The Company's expense under this plan amounted to $34,000 in 1997.
Waban does not segregate plan assets or liabilities by each participating subsidiary company and, as a result, the tables which follow present disclosures for the Waban plan.
Net periodic pension benefit cost included the following components:
The following tables present reconciliations of the projected benefit obligation (PBO) and plan assets for the fiscal year ended January 30, 1999 (dollars in thousands):
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 $2,657,000, $2,471,000 and $2,382,000 in 1999, 1998 and 1997, respectively.
As of the spin-off, 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 $856,000, $718,000 and $650,000 in 1999, 1998 and 1997, respectively.
J. 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 included the following components:
The following table sets forth the funded status of the Company's postretirement medical plan and the amount recognized in the balance sheets at January 29, 2000 and January 30, 1999:
The following tables present reconciliations of the APBO and plan assets for the fiscal years ended January 29, 2000 and January 30, 1999:
The following table sets forth the impact of changes in the assumed health care cost trend rates for the fiscal year ended January 29, 2000:
K. Accrued Expenses and Other Current Liabilities
The major components of accrued expenses and other current liabilities are as follows:
L. Selected Quarterly Financial Data (Unaudited)
- -------- (a) Gross earnings equals total revenues less cost of sales, including buying and occupancy costs.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of BJ's Wholesale Club, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of changes in stockholders' equity present fairly, in all material respects, the financial position of BJ's Wholesale Club, Inc. and its subsidiaries at January 29, 2000 and January 30, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 29, 2000, in conformity with accounting principles generally accepted in the United States. 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 of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note A to the consolidated financial statements, the Company changed its methods of accounting for membership fee revenue and preopening expenses during the year ended January 30, 1999.
PricewaterhouseCoopers LLP Boston, Massachusetts February 28, 2000 [SIGNATURE OF PRICEWATERHOUSECOOPERS LLP]
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 accounting principles generally accepted in the United States 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 PricewaterhouseCoopers LLP, whose opinion as to their fair presentation in accordance with accounting principles generally accepted in the United States appears above.
[SIGNATURE OF FRANK D. FORWARD] [SIGNATURE OF JOHN J. NUGENT]
John J. Nugent Frank D. Forward President and Executive Vice President and Chief Executive Officer Chief Financial Officer
February 28, 2000
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 29, 2000 (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 under "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934."
Item 11.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the Proxy Statement under "Compensation of Directors" and "Executive Compensation." However, information under "Executive Compensation Committee's Report on Executive Compensation" in this 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 under "Beneficial Ownership of Common Stock."
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from the Proxy Statement under "Relationship with HomeBase; Conflicts of Interest."
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 16. Schedules 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.
- -------- * Management contract or other compensatory plan or arrangement. (1) Incorporated herein by reference to the Company's Registration Statement on Form S-8, (Commission File No. 333-31015) (2) Incorporated herein by reference to the Company's Registration Statement on Form 8-A, dated July 10, 1997 (Commission File No. 001-13143) (3) Incorporated herein by reference to the Current Report on Form 8-K, dated July 28, 1997, of HomeBase, Inc. (Commission File No. 001-10259) (4) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 26, 1997 (Commission File No. 001- 13143) (5) Incorporated herein by reference to the Company's Registration Statement on Form S-1 (Commission File No. 333-25511)
(6) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998 (Commission file No. 001- 13143) (7) Incorporated herein by reference to the Company's Amendment No. 1 to Registration Statement on Form 8-A/A, dated March 5, 1999 (Commission File No. 001-13143) (8) Incorporated herein by reference to the Company's Current Report on Form 8-K, dated as of April 7, 1999 (Commission File No. 001-13143) (9) Incorporated herein by reference to the Company's Definitive Schedule 14A filed April 23, 1999 (Commission File No. 001-13143) (10) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 30, 1999 (Commission File No. 001-13143)
C. The Registrant did not file 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 14, 2000 /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.
Dated: April 14, 2000