SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended February 3, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission file Number 0-14681 J. BAKER, INC. (Exact name of registrant as specified in its charter) Massachusetts 04-2866591 (State of Incorporation) (I.R.S. Employer Identification Number) 555 Turnpike Street, Canton, Massachusetts 02021 (Address of principal executive offices) (617) 828-9300 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.50 per share 7% Convertible Subordinated Notes Due 2002 Preferred Stock Purchase Rights (Title of Class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No The aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $97,438,470 as of April 1, 1996 (based on the last reported sales price of the registrant's stock in the over-the-counter market on such date). The number of shares outstanding of the registrant's common stock as of April 1, 1996 was 13,878,261. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the definitive proxy statement for the 1996 Annual Meeting of Stockholders are incorporated by reference in Part III. J. Baker, Inc. Form 10-K Report Year Ended February 3, 1996 Part I DESCRIPTION OF BUSINESS General J. Baker, Inc. ("J. Baker" or the "Company", which term shall include all subsidiaries of the Company) is engaged in the retail sale of footwear and apparel. The Company sells footwear through self-service licensed shoe departments in mass merchandising department stores, through full and semi-service licensed shoe departments in department and specialty stores and through its Parade of Shoes chain of women's shoe stores. In all of these operations, the Company emphasizes the sale of quality footwear at comparatively low prices. The Company is engaged in the retail sale of apparel through its chain of Casual Male Big & Tall men's stores which sells sportswear to the larger size man, and through its chain of Work 'n Gear work clothing stores which sell utility workwear, uniforms and personalized work clothes, as well as uniforms for laboratory and medical purposes. On September 5, 1995, the Company announced its intent to dispose of its Fayva footwear division by the end of fiscal 1996. For additional information on the disposal of the Fayva division, see Industry Segments, Footwear, Disposal of Fayva and Note 2 to the Consolidated Financial Statements. The Company's businesses are seasonal, with its largest footwear volume generated in the Easter, back to school and Christmas seasons. The Casual Male Big & Tall division does its largest sales volumes in June (Father's Day) and the Christmas season, and the Work 'n Gear stores generate their largest sales volume during the second half of the fiscal year. On a combined basis, sales during the second half of each fiscal year have consistently exceeded those during the first half of the year. Unseasonable weather may affect sales of shoes and boots as well as of work clothing, especially during the traditional high-volume periods. The Company is required to carry a substantial inventory in order to provide prompt deliveries to its licensed shoe departments, Parade of Shoes, Casual Male Big & Tall, and Work 'n Gear stores. Order backlogs, however, are not material to the Company's business. The inventories needed in the operation of the Company's footwear and apparel businesses are currently available from a number of domestic and overseas sources, with no single source accounting for more than eight percent of the Company's merchandise. The Company benefits by "most favored nation" provisions in trade agreements between the United States and certain countries in which the Company's suppliers are located. From time to time, the United States Congress has proposed legislation which could result in such provisions being struck from particular trade agreements, which could, in turn, result in higher costs to the Company. There has been extensive Congressional debate with respect to the "most favored nation" provision of the trade agreement between the United States and China which was renewed for one year in July, 1992 and has since been extended through June, 1996. The failure of this provision to be renewed would likely result in substantially increased costs to the Company in the purchase of footwear from China. However, the Company believes that all of its competitors in the footwear industry would be similarly affected. Industry Segments The Company is engaged in the sale of footwear and apparel manufactured by others. Financial information with respect to the Company's industry segments can be found in Note 15 to the Consolidated Financial Statements. Footwear Licensed Shoe Department Operations In a licensed shoe department operation, the store and the Company enter into a license agreement under which the Company has the exclusive right to operate a shoe department in the store for a period of years. The department is operated under the store name in space supplied by the store, and the store collects payments from customers and credits the Company. The Company pays the store a license fee, generally a percentage of net sales, for the right to operate the department and for the use of the space. The license fee ordinarily covers utilities, janitorial service, cash collection and handling, packaging and advertising. In its licensed shoe department operations, the Company sells a wide variety of family footwear, including men's, women's and children's dress, casual and athletic footwear as well as work shoes and slippers. Most of the shoes offered by the Company in its licensed departments are sold under the Company's trademarks or on an unbranded basis, although the Company also sells name brand merchandise at discounted prices in its mass merchandising licensed accounts. On January 30, 1993, the Company acquired all of the outstanding stock of Morse Shoe, Inc. ("Morse"), in a merger whereby Morse became a wholly owned subsidiary of the Company. As an operator of licensed footwear departments and of the Fayva chain of family shoe stores, the merger of Morse into the Company resulted in the addition of approximately 500 licensed shoe departments operated by the Company. On November 19, 1993, the Company acquired majority ownership of the outstanding stock of Tishkoff Enterprises, Inc. ("TEI"), an operator of full service, semi-service and self service licensed shoe departments in department and specialty stores. The remaining shares of TEI were acquired by the Company on December 13, 1993 and pursuant to a merger and thereafter, the corporate name of TEI was changed to Shoe Corporation of America ("SCOA"). As of February 3, 1996, SCOA operated 505 licensed footwear departments in sixteen chains with locations in 36 states throughout the United States. Sales in SCOA licensed departments accounted for 18% of the Company's revenue in the fiscal year ended February 3, 1996. For additional information on the acquisition of SCOA, see Note 3 to the Consolidated Financial Statements. On April 19, 1996, the Company announced that it had executed a letter of intent for the sale of its SCOA division to an entity to be formed by Bain Capital along with Dennis B. Tishkoff, SCOA's President, and division management. The transaction is subject to certain conditions, including the negotiation and execution of a definitive purchase agreement. The transaction should result in a positive impact on liquidity, although the Company may incur a one-time restructuring charge should the transaction be consummated. Sales in the Company's SCOA division were $183.6 million for the fiscal year ended February 3, 1996. Merchandise sold by the Company's SCOA division is predominantly in conventional, full service department stores and includes a strong representation of national brands complemented by private label merchandise. A small portion of the licensed department business conducted by SCOA is in specialty apparel accounts. The Company's licensed shoe departments in mass merchandising department stores are operated on a self-service basis, but those departments operated by SCOA in conventional department and specialty stores are on a semi-service, full service or self-service basis. The Company's personnel employed in particular departments are responsible for stocking and layout of shelves, responding to customer inquiries and related administrative tasks. The Company and its predecessors have operated licensed shoe departments in mass merchandising department stores for more than forty years. The Company's SCOA division has operated licensed shoe departments in mass merchandising and conventional department and specialty stores for approximately ten years. Sales in all licensed departments accounted for 52.5%, 48.9% and 46.5% of the Company's total revenues in the years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. At February 3, 1996, the Company operated a total of 1,592 licensed shoe departments under license agreements with 40 different department and specialty store operators. During fiscal 1996, the Company opened 126 departments and closed 224, representing a net decrease of 98 units for the year. The Company's licensed departments are located in forty-three states and in the District of Columbia. The Company conducts its licensed department operations under written agreements for fixed terms. Of the 1,592 licensed shoe departments which the Company operated at February 3, 1996, 1,254, or 79% are covered by agreements with terms expiring in less than five years, 31 or 2% are covered by agreements with terms expiring in five to ten years, and 307, or 19% are covered by agreements with terms expiring in more than ten years. Of the Company's licensed departments at February 3, 1996, 307 were operated under license with Ames Department Stores, Inc. ("Ames"), a major mass merchandising retailer in the eastern United States. For the fiscal year ended February 3, 1996, Ames accounted for 9.4% of the Company's total revenues. On June 23, 1995, Bradlees, Inc. ("Bradlees"), a licensor of the Company, filed for protection under Chapter 11 of the United States Bankruptcy Code. At the time of the bankruptcy filing, the Company had outstanding accounts receivable of approximately $1.8 million due from Bradlees. Under bankruptcy law, Bradlees has the option of continuing (assuming) the existing license agreement with the Company or terminating (rejecting) that agreement. If the license agreement is assumed, Bradlees must cure all defaults under the agreement and the Company will collect in full the outstanding past due receivable. The Company has no assurance that the agreement will be assumed or that Bradlees will continue in business. Although the Company believes that the rejection of the license agreement or the cessation of Bradlees' business is not probable, in the event that the agreement is rejected or Bradlees does not continue in business, the Company believes it will have a substantial claim for damages. If such a claim is necessary, the amount realized by the Company, relative to the carrying values of the Company's Bradlees-related assets, will be based on the relevant facts and circumstances. The Company does not expect this filing under the Bankruptcy Code to have a material adverse effect on future earnings. The Company's sales in the Bradlees chain for the fiscal year ended February 3, 1996 were $59.8 million. On October 18, 1995, Jamesway ("Jamesway"), then a licensor of the Company, filed for protection under Chapter 11 of the United States Bankruptcy Code and announced its intention to liquidate its inventory, fixed assets and real estate and to cease operation of its business in all of its 90 stores. The Company participated in Jamesway's going out of business sales and liquidated substantially all of its footwear inventory in the 90 Jamesway stores during the going out of business sales. At the time of the bankruptcy filing, the Company had outstanding accounts receivable of approximately $1.4 million due from Jamesway. Since Jamesway ceased operation of its business, the Company believes that rejection of its license agreement is probable and has asserted a substantial claim for damages. The Company does not expect the closing of the Jamesway stores to have a material adverse effect on future earnings. The Company's sales in the Jamesway chain for the fiscal year ended February 3, 1996 were $24.3 million. The Company's licensed shoe department business faces competition at two levels: (1) for sales to retail customers and (2) for the business of the department store chains which are its shoe licensor customers. The Company's retail shoe businesses compete with the shoe departments of department store chains, conventional shoe chains, specialty stores and independent retailers. The Company's success in its licensed department operations is substantially dependent upon the success of the department store chains in which the Company operates licensed departments. Within the particular market that is served by the mass merchandising department store chains, the Company believes that the primary competitive factors are the price and the breadth and suitability of the selection of footwear that is offered. The Company also faces potential competition from the in-house operational capabilities of its licensors. Because of the large scale of many licensing arrangements and years of commitment that are involved, the Company has observed that changes in these arrangements do not frequently occur and are more often initiated by external factors such as mergers or acquisitions involving the licensors or business terminations by other licensees, rather than by competition among licensees for the business of a licensor. To the extent that there is active competition for new business in this area, the Company believes that the principal factors weighed by a potential licensor are the quality of the licensee's operations, as reflected by sales results, and the price paid to the licensor in the form of the license fee. Due to a general contraction in the retail industry, the filing for protection under Chapter 11 of the United States Bankruptcy Code by certain of the Company's licensors and the possible sale of the Company's SCOA division, the Company may experience declines in the number of licensed departments that it operates. Parade of Shoes Operations The Company's Parade of Shoes chain emphasizes the retail sale of quality, primarily leather, women's shoes. The stores generally occupy 2,000 to 3,000 square feet of retail space located in suburban strip shopping centers, regional malls and downtown urban locations in major metropolitan areas. The stores feature dress, casual and athletic footwear at every day value prices available for selection in a casual, self-service atmosphere. Sales from Parade of Shoes stores accounted for 11.3%, 11.3% and 9.6% of the Company's total revenues in the years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. A total of 168 Parade of Shoes stores were in operation in thirteen states in the eastern and midwestern United States and the District of Columbia on February 3, 1996. During the year, the Company opened 8 stores and closed 31 stores. The Company believes that the same competitive factors that affect its licensed department operations, as well as the availability of leather and brand name shoes and the general style and quality of merchandise, are present in the market that is served by the Company's Parade of Shoes chain. Among competitors of Parade of Shoes are department stores and other specialty shoe chains. The Company may experience increased direct competition with Parade of Shoes based on comparable merchandising approaches in the future. In deciding to open a Parade store, the Company reviews market demographics, store occupancy costs and costs to build and stock each location. Based on these factors and others, management of the Company projects sales volumes and estimates operating costs for each location and decides to open a store if such projections demonstrate that an acceptable return on the Company's inventory and fixed asset investment can be realized. Parade of Shoes stores require an average inventory and fixed asset investment of approximately $200,000. Decisions are made to close Parade locations when management of the Company believes that these locations are not generating acceptable profit levels. Most store closings occur at lease expiration, and costs to close stores are expensed at time of closing. Disposal of Fayva On September 5, 1995, the Company announced its intent to dispose of its Fayva footwear division by the end of fiscal 1996. When the Company acquired Morse in early 1993, it did so primarily for the strategic fit of the Morse and Baker licensed footwear divisions. In addition, the Company believed, at that time, that it could improve the operations of Morse's Fayva division. Fayva's profitability had suffered in the years prior to the Company's acquisition of Morse due, in part, to the financial difficulties of Morse. The Company believed that by bringing additional financial resources to Fayva, along with making divisional management changes, it could restore the division to profitability. However, after operating Fayva for two and one half years, the Company decided to dispose of Fayva due to the continued operating losses generated by the division, along with Fayva's declining market share in an already crowded discount retail footwear industry. During the third quarter of fiscal 1996, the Company recorded restructuring charges of $69.3 million ($41.6 million or $3.00 per share on an after tax basis) related to the disposal of Fayva. Such charges include the costs to exit from and dispose of the Fayva division, including the loss on the disposal of inventory, severance payments, the write off of fixed assets and the costs to dispose of store leases. As part of its Fayva exit strategy, the Company engaged a third party to maximize the Company's net recovery from the liquidation of the Fayva inventory. All of Fayva's inventory was liquidated by the end of fiscal 1996. The Company also hired a consultant to mitigate the disposition costs of the Fayva store leases. For additional information on the disposal of the Fayva division, see Note 2 to the Consolidated Financial Statements. Apparel Casual Male Big & Tall According to retailer and manufacturer estimates, big (42" waist or larger) and tall (6'3" or taller) men represent an estimated 10% to 13% of the adult male population in the United States. The Company believes the clothing demands of these customers have not been met. The big and tall customer frequently has difficulty finding an adequate selection of apparel in his size at department and men's specialty stores. Furthermore, only a limited number of big and tall specialty stores exist, and these typically have a narrow selection of current sportswear fashions. The majority of big and tall specialty stores are operated by companies with less than five units. Casual Male Big & Tall stores offer brand name and private label sportswear in a wider variety of styles, colors and fabrics than most other big and tall retailers. Merchandise is generally priced lower than department stores and other traditional retailers of big and tall apparel. The Company started fiscal 1996 with 319 stores and ended the year with 400 stores (including three licensed departments), having opened 81 stores. The 400 stores are located in forty-four states throughout the United States. Sales in the Casual Male Big & Tall stores accounted for 21.0%, 17.4% and 16.1% of the Company's total revenues for the years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. In deciding to open a Casual Male store, the Company reviews market demographics, store occupancy costs and costs to build and stock each location. Based on these factors and others, management of the Company projects sales volumes and estimates operating costs for each location and decides to open a store if such projections demonstrate that an acceptable return on the Company's inventory and fixed asset investment can be realized. Casual Male stores require an average inventory and fixed asset investment of approximately $200,000. Decisions are made to close Casual Male locations when management of the Company believes that these locations are not generating acceptable profit levels. Most store closings occur at lease expiration, and costs to close stores are expensed at time of closing. The Company's Casual Male Big & Tall stores face competition from department stores, specialty stores, discount stores, mail order companies and off-price and other retailers who sell big and tall merchandise. While competition exists on a local level from smaller chains, Casual Male faces competition on a national scale from Repp, Ltd., a division of Edison Brothers, Inc. There can be no assurance that other retailers will not adopt purchasing and marketing concepts similar to those of the Casual Male Big & Tall chain. The Company believes the fashion and selection of its merchandise, its favorable prices and its ability to obtain desirable store locations are important factors in enabling it to compete effectively. Work 'n Gear Currently located in thirteen states throughout the Northeastern United States, the Work 'n Gear stores sell utility workwear and footwear which is generally used by persons engaged in outdoor labor activities. The Work 'n Gear stores also sell laboratory and medical uniforms as well as personalized uniforms for maintenance and other uses. The Company operated 69 Work 'n Gear stores at February 3, 1996, having opened nine stores and closed one store during fiscal 1996. Traditional competition for utility workwear has existed in certain large, full-service department stores, which, increasingly, are discontinuing this line of apparel. Competition also exists from local Army and Navy stores but, to the Company's knowledge, no specific specialty store of the Work 'n Gear variety exists on a national basis. Competition in the medical uniform business of Work 'n Gear is found in small storefront vendors of medical and laboratory uniforms as well as in several larger companies, such as Life Uniform Stores, Z & H Uniforms and WearGuard Corporation, which sells primarily through its catalog. Neither the utility workwear nor the uniform businesses of the Work 'n Gear stores are dependent upon any one supplier for its inventory. The customer base is the diverse population of working men and women in the United States, and no specific customer accounts for any substantial portion of the business. Sales in the Work 'n Gear stores accounted for 4.8%, 4.2% and 3.9% of the Company's total revenues for the years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. Trademarks The Company has no patents, franchises or concessions, except for agreements granting it the right to operate licensed departments. The Company owns certain trademarks which it uses in its business. The Company does not consider these trademarks to be materially important to its business. Research and Development The Company does not engage in any Company-sponsored research or customer-sponsored research. Environment The Company has not been required to make any material capital equipment expenditures, or suffered any material effect on its earnings or competitive position, as a result of compliance with federal, state or local environmental laws. Employees As of February 3, 1996, the Company employed approximately 5,678 persons full-time and 5,901 persons part-time, of whom approximately 4,425 full-time and 5,884 part-time employees were engaged in retail operations at the store level. Approximately 465 of the Company's full-time and part-time employees are covered by collective bargaining agreements. The Company believes that its employee relations are good. Executive Officers of the Company Name Age Office Sherman N. Baker 76 Chairman of the Board Jerry M. Socol 54 President and Chief Executive Officer Alan I. Weinstein 53 Senior Executive Vice President, Chief Financial Officer, Chief Administrative Officer and Secretary David A. Levin 44 Senior Executive Vice President, Director of Shoe Merchandising and Operations, Acting President of Parade of Shoes and General Manager of International Shoe Operations Larry I. Kelley 53 Executive Vice President and President and Chief Executive Officer of The Casual Male, Inc. James Lee 49 Executive Vice President and President of the Licensed Discount Division Stuart M. Needleman 48 Executive Vice President and President of Work 'n Gear Dennis B. Tishkoff 53 Executive Vice President and President and Chief Executive Officer of Shoe Corporation of America Mr. Baker has been the Chairman of the Board of the Company since March, 1990. From 1970 until March, 1990, Mr. Baker served as Chief Executive Officer of the Company and its predecessor. Mr. Socol has been President of the Company since September, 1988 and Chief Executive Officer of the Company since March, 1990. Prior to joining the Company in 1988, Mr.Socol was President and Chief Executive Officer of Filene's Department Stores, a division of the May Department Stores Company, from May to June, 1988. Mr. Socol was Chairman and Chief Executive Officer of Filene's Department Stores, a division of Federated Department Stores, Inc., from August, 1987 to May, 1988. From January, 1984 to August, 1987, Mr. Socol was President of Filene's Department Stores. Mr. Weinstein has held the positions of Senior Executive Vice President, Chief Financial Officer and Secretary of the Company since July, 1985. He was also appointed Chief Administrative Officer in 1988. Mr. Weinstein joined the Company's predecessor in 1968 as Assistant Controller and has held a variety of positions of increasing responsibility in finance and administration since that time. Mr. Levin has held the positions of Senior Executive Vice President, Director of Shoe Merchandising and Operations, Acting President of Parade of Shoes and General Manager of International Shoe Operations since June, 1995. Prior to joining the Company, Mr. Levin was President of Outlet Stores, a division of Revlon. Previously, Mr. Levin was Senior Vice President, General Merchandise Manager of Payless Shoe Source, a division of the May Department Stores Company. Mr. Kelley has held the positions of Executive Vice President of the Company and President and Chief Executive Officer of The Casual Male, Inc. since June, 1991. Before joining the Company, Mr. Kelley was President of Weathervane Stores from September, 1988 to May, 1991. From June, 1987 to September, 1988, Mr. Kelley was the President of Brauns Fashion. Mr. Lee has held the positions of Executive Vice President of the Company and President of the Company's Licensed Discount Division since January, 1995. From August, 1994 through December, 1994, Mr. Lee was Senior Vice President and Director of Distribution for the Company's Fayva division. Prior to joining the Company, Mr. Lee was Senior Vice President and General Merchandise Manager of Caldor Stores. Mr. Needleman has held the positions of Executive Vice President of the Company and President of the Company's Work 'n Gear division since October, 1993. From 1989 through October, 1993, Mr Needleman held the position of Senior Vice President and Director of Operations of The Casual Male, Inc. Mr. Tishkoff has held the positions of Executive Vice President of the Company and President of the Company's SCOA division since November, 1993, when SCOA was acquired by the Company. Before joining the Company, Mr. Tishkoff was Chairman, President and Chief Executive Officer of Tishkoff Enterprises, Inc. d/b/a Shoe Corporation of America. PROPERTIES The Company's executive, buying and general offices and one of its footwear distribution centers ("home office") are located in Canton, Massachusetts. This facility is located at 555 Turnpike Street, Canton, Massachusetts on 37 acres of land and is owned by the Company. The home office contains approximately 750,000 square feet of space, including approximately 150,000 square feet of office space. The Company leases a building at 40 Industrial Drive, Canton, Massachusetts that serves as a warehouse for its Massachusetts footwear operations. The building contains approximately 33,000 square feet of warehouse space. The lease on this facility expires on June 30, 1997. The Company has one two-year option to renew the lease. The Company leases a building at 65 Sprague Street, Readville, Massachusetts that serves as the administrative offices for Casual Male and Work 'n Gear, and as the distribution center for the Casual Male Big & Tall and Work 'n Gear stores. The building contains approximately 75,000 square feet of office space and approximately 375,000 square feet of warehouse/distribution space. The lease on this facility expires on May 31, 1999. The Company has two consecutive five year options to renew the lease. The headquarters for the Company's SCOA division and SCOA's footwear distribution center is located at 2035 Innis Road, Columbus, Ohio. The facility is on 17.4 acres of land and is owned by the Company. The building contains approximately 355,000 square feet, including approximately 18,000 square feet of office space and 337,000 square feet of warehouse/distribution space. As of February 3, 1996, the Company had 168 Parade of Shoes stores, all operating in leased premises ranging from 1,250 to 11,900 square feet, with average space of approximately 2,400 square feet per store and total space of approximately 400,000 square feet. The leases run for initial terms of between three and ten years and average approximately seven years. A majority of the leases are renewable at the option of the Company for terms of three to five years. As of February 3, 1996, the Company operated 400 Casual Male Big & Tall stores, all in leased premises ranging from 1,875 to 6,900 square feet, with average space of approximately 3,200 square feet and total space of approximately 1,290,000 square feet. A majority of the leases run for initial terms of five years. Most are renewable at the option of the Company for one or more five year terms. As of February 3, 1996, the Company operated 69 Work 'n Gear stores, all in leased premises ranging from 3,300 square feet to 6,200 square feet, with average space of approximately 4,300 square feet and total space of approximately 296,000 square feet. A majority of the leases run for initial terms of five years. Most are renewable at the option of the Company for one or more five year terms. See "DESCRIPTION OF BUSINESS - Industry Segments, Footwear, Licensed Shoe Department Operations", for information regarding the Company's licenses to operate shoe departments in retail stores of its licensors. LEGAL PROCEEDINGS The Company is engaged in the following significant litigation: On November 10, 1993, a federal jury in Minneapolis, MN returned a verdict assessing royalties of $1,550,000, and additional damages of $1,500,000, against the Company in a patent infringement suit brought by Susan Maxwell with respect to a device used to connect pairs of shoes. Certain post trial motions were filed by Susan Maxwell seeking treble damages, attorney's fees and injunctive relief, which motions were granted on March 10, 1995. Judgment has been entered for Maxwell. The Company has appealed the judgment and believes it has substantial legal arguments to justify the judgment being overturned in whole or in part at the appellate level. In the event the Company were not to prevail, however, total damages, including attorney's fees and interest, are estimated to be approximately $11 million. A complaint was also filed by Susan Maxwell in November, 1992 against Morse Shoe, Inc. ("Morse"), a subsidiary of the Company, alleging infringement of the patent referred to above. The discovery phase of the case has concluded, and a trial date will likely be set in the next several months. The Company believes that Ms. Maxwell's recovery against Morse, if any, will be less than her recovery against the Company because the number of allegedly infringing pairs of shoes is substantially less than those involved in the Company's case. Other than as described above, the Company is not a party to any material legal proceedings. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. Market Information The Company's Common Stock is traded in the over-the-counter market and is quoted on the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") under the symbol "JBAK". The following table sets forth the high and low last reported sales prices, as reported by NASDAQ, for the Company's Common Stock for each quarterly period during the years ended February 3, 1996 and January 28, 1995. The prices set forth below do not include retail mark-ups, mark-downs or commissions. Year Ended February 3, 1996 High Low First Quarter $15 13/16 $12 1/2 Second Quarter 13 1/2 9 7/8 Third Quarter 10 6 1/8 Fourth Quarter 6 5/8 4 3/8 Year Ended January 28, 1995 High Low First Quarter $22 $18 1/8 Second Quarter 21 3/4 18 Third Quarter 21 1/8 17 1/8 Fourth Quarter 17 14 Holders The approximate number of holders of record of the Company's Common Stock as of April 1, 1996 was 470. The Company believes that the actual number of beneficial owners of the Company's Common Stock is substantially greater than the stated number of holders of record, because a portion of the Common Stock outstanding is held in "street name". Dividends On March 2, 1987, the Board of Directors of the Company adopted a policy of paying quarterly dividends. For each quarter thereafter, the Company has paid a 1 1/2 cents per share dividend. The Company's unsecured revolving credit agreement and its senior subordinated notes agreement limit the amount of cash dividends that may be paid to stockholders. For additional information see Note 8 of the Notes to Consolidated Financial Statements. Other On December 15, 1994, the Board of Directors of the Company adopted a Shareholder Rights Agreement (the "Rights Agreement") designed to enhance the Company's ability to protect shareholder interests and to ensure that shareholders receive fair treatment in the event any coercive takeover attempt of the Company is made in the future. Pursuant to the Rights Agreement, the Board of Directors declared a dividend distribution of one preferred stock purchase right (the "Right") for each outstanding share of common stock of the Company to shareholders of record as of the close of business on January 6, 1995. Each right entitles the holder to purchase from the Company a unit consisting of one ten thousandth (1/10,000) of a share of Series A Junior Participating Cumulative Preferred Stock, par value $1.00 per share, at a cash exercise price of $70 per unit, subject to adjustment, upon the occurrence of certain events as are set forth in the Rights Agreement. These events include the earliest to occur of (i) acquisition of 15% or more of the outstanding shares of common stock of the Company by any person or group (ii) the commencement of a tender or exchange offer that would result upon its consummation in a person or a group becoming the beneficial owner of 15% or more of the outstanding common stock of the Company or (iii) the determination by the Board of Directors that any person is an "Adverse Person", as defined in the Rights Agreement. The Rights are not exercisable until or following the occurrence of one of the above events and will expire on December 14, 2004, unless previously redeemed or exchanged by the Company as provided in the Rights Agreement. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for the Company are derived from the financial statements that have been audited and reported on by KPMG Peat Marwick LLP, independent certified public accountants, and are qualified in their entirety by reference to the more detailed consolidated financial statements and the independent auditors' report thereon appearing elsewhere in this Form 10-K. J. Baker has acquired a number of specialty retail businesses in recent years, and has disposed of its Fayva division during fiscal 1996. The Company has also experienced a number of licensor bankruptcy filings in recent years. These acquisitions, the disposal of Fayva and licensor bankruptcy filings affect the comparability of the financial information herein. For further discussions see "DESCRIPTION OF BUSINESS" and Notes 2, 3, 4 and 6 to the Consolidated Financial Statements. J. BAKER, INC. SELECTED CONSOLIDATED FINANCIAL DATA (Dollars in thousands, except per share amounts) Year Ended ---------------------------------------------------------------- 2/03/96 1/28/95 1//29/94 1/30/93 2/01/92 Income Statement Data: (53 weeks) Net sales $1,020,413 $1,042,979 $918,878 $532,256 $493,542 Cost of sales 580,067 579,735 516,855 313,703 291,945 --------- --------- ------- ------- ------- Gross profit 440,346 463,244 402,023 218,553 201,597 Selling, administrative and general expenses 392,586 389,362 336,283 174,658 165,711 Depreciation and amortization 32,428 27,883 21,874 14,688 12,709 Restructuring charges 69,300 - - - - -------- -------- ------- ------- ------- Operating income (loss) (53,968) 45,999 43,866 29,207 23,177 Interest income 526 635 704 80 73 Interest expense (10,983) (9,735) (8,146) (8,211) (10,352) ------- ------ ------ ------ ------- Earnings (loss) before taxes and extraordinary item (64,425) 36,899 36,424 21,076 12,898 Income tax expense (benefit) (25,823) 13,283 13,113 7,798 4,874 ------- ------- ------ ------ ------ Earnings (loss) before extraordinary item (38,602) 23,616 23,311 13,278 8,024 Extraordinary item, net of income tax benefit - - - (2,444) - ------- ------- ------- -------- ------- Net earnings (loss) $(38,602) $ 23,616 $ 23,311 $ 10,834 $ 8,024 ======= ======= ======= ======== ======= Earnings (loss) per common share: Primary: Earnings (loss) before extraordinary item $ (2.79) $ 1.71 $ 1.70 $ 1.25 $ .78 Extraordinary item - - - (.23) - -------- ------- ------- ------- ------ $ (2.79) $ 1.71 $ 1.70 $ 1.02 $ .78 ======= ======= ======= ======= ====== Fully diluted: Earnings (loss) before extraordinary item $ (2.79) $ 1.46 $ 1.45 $ 1.11 $ .78 Extraordinary item - - - (.18) - -------- -------- -------- ------- ------- $ (2.79) $ 1.46 $ 1.45 $ .93 $ .78 ======== ======= ======= ======= ======= J. BAKER, INC. SELECTED CONSOLIDATED FINANCIAL DATA (Dollars in thousands, except per share amounts) As At ------------------------------------------------------------------------- 2/03/96 1/28/95 1/29/94 1/30/93 2/01/92 Balance Sheet Data: Working capital $205,080 $235,948 $187,095 $138,385 $ 99,110 Total assets 526,082 578,618 502,496 431,798 296,704 Long-term debt 207,766 204,518 154,665 95,864 79,515 Stockholders' equity 184,037 223,317 200,086 172,610 105,012 ======== ======== ======= ======== ======== Cash dividends declared per common share $ .06 $ .06 $ .06 $ .06 $ .06 ======== ======== ======= ======= ======== Store Openings and Closings: Footwear* Apparel -------------------------------------------------------------- --------------------------- Total Parade Licensed Licensed of Total Casual Work Total Discount SCOA Shoe Dept. Shoes Fayva Footwear Male 'n Gear Apparel Total -------------------------------------------------------------- ---------------------------- ----- Stores open at January 30, 1993 1,446 - 1,446 136 425 2,007 214 38 252 2,259 Openings 46 162 208 30 3 241 40 14 54 295 Closings (124) - (124) (4) (33) (161) - - - (161) ----- ---- ----- ---- ---- ----- --- --- ---- ----- Stores open at January 29, 1994 1,368 162 1,530 162 395 2,087 254 52 306 2,393 Openings 71 321 392 46 2 440 65 9 74 514 Closings (197) (35) (232) (17) (29) (278) - - - (278) ----- ---- ----- ---- --- ----- ---- --- ---- ------ Stores open at January 28, 1995 1,242 448 1,690 191 368 2,249 319 61 380 2,629 Openings 27 99 126 8 6 140 81 9 90 230 Closings (182) (42) (224) (31) (374) (629) - (1) (1) (630) ----- ----- ----- ---- ----- ----- ---- --- ---- ----- Stores open at February 3, 1996 1,087 505 1,592 168 - 1,760 400 69 469 2,229 ===== ==== ===== ==== ==== ===== ==== === ==== ===== * Excludes wholesale footwear departments serviced by the Company (all of which were closed during the year ended January 28, 1995). MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. All references herein to fiscal 1996, fiscal 1995 and fiscal 1994 relate to the years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. To the extent that the Company may have incurred increased costs resulting from inflation, the Company believes that it has been able to offset these costs through higher revenues. Accordingly, the Company believes that inflation has had no significant impact on the operations of the Company. Results of Operations During the year ended February 3, 1996, the Company has experienced comparable store sales declines in its footwear and apparel businesses. Management believes that these comparable store sales declines are primarily due to the weak domestic retail environment. While the Company does not expect the retail sector to rebound quickly, J. Baker has taken steps intended to manage its businesses in a manner consistent with the soft economic environment. These steps include reducing estimates of future sales, increasing management's focus on merchandise planning and distribution, cutting expenditures and reducing store openings. Due to comparable store sales declines, the Company has attempted to generate additional sales and keep inventories in line by increasing promotional activities, which have generated additional markdowns. These additional markdowns were the primary reason for the increase in the Company's cost of sales. Comparable store sales declines have also been a reason for the increase in selling, administrative and general expenses as a percentage of sales. As part of management's continuing strategic evaluation of its businesses, during fiscal 1996 the Company disposed of its Fayva shoe division. For additional information on the disposal of Fayva, see Description of Business, Industry Segments, Footwear, Disposal of Fayva in Part I of this Form 10-K, and Note 2 to the Consolidated Financial Statements. Also, on April 19, 1996, the Company signed a letter of intent for the sale of its SCOA division. For additional information, see Note 19 to the Consolidated Financial Statements. These transactions have and, should the SCOA sale be consummated, will allow the Company to focus its future efforts on its Casual Male, Parade of Shoes, Licensed Discount and Work 'n Gear divisions, with the goal of improving the results of these core businesses. Fiscal 1996 versus Fiscal 1995 In fiscal 1996, net sales decreased by $22.6 million or 2.2% from net sales in fiscal 1995. Sales in the Company's footwear operations decreased by $61.1 million due to a sales decrease in the Company's Fayva division (which is primarily the result of the closing of all 357 Fayva stores in the third quarter of fiscal 1996), the elimination of wholesale footwear sales (which is a result of the closing of all wholesale footwear departments serviced by the Company during the second quarter of fiscal 1995), a 7.0% decrease in comparable retail footwear store sales (Comparable retail footwear store sales increases/decreases are based upon comparisons of weekly sales volume in licensed departments and Parade of Shoes and Fayva shoe stores which were open in corresponding weeks of the two comparison periods), and a decrease in the number of discount licensed shoe departments in operation during fiscal 1996 versus fiscal 1995 (which was due in large part to Jamesway ceasing operations). This decrease was partially offset by a sales increase in the Company's SCOA licensed shoe division as a result of SCOA's beginning business in new licensed departments since the first quarter of fiscal 1995. Sales in the Company's specialty apparel operations increased by $38.6 million due to an increase in the number of Casual Male Big & Tall stores and Work 'n Gear stores in operation at the end of fiscal 1996 over fiscal 1995, partially offset by a 2.7% decrease in comparable specialty apparel store sales. (Comparable specialty apparel store sales increases/decreases are based upon comparisons of weekly sales volume in Casual Male Big & Tall stores and Work 'n Gear stores which were open in corresponding weeks of the two comparison periods.) Cost of sales constituted 56.8% of sales in fiscal 1996 as compared to 55.6% in fiscal 1995. Cost of sales in the Company's footwear operations was 58.8% of sales in fiscal 1996 as compared to 56.8% of sales in fiscal 1995. The increase in such percentage was primarily attributable to higher markdowns as a percentage of sales and a decrease in the initial markup on merchandise purchases, partially offset by the elimination of wholesale footwear sales, which have a higher cost of sales than retail footwear sales. Cost of sales in the Company's apparel operations was 51.2% of sales in fiscal 1996 as compared to 51.0% of sales in fiscal 1995. The increase in such percentage was primarily attributable to higher markdowns as a percentage of sales, partially offset by a higher initial markup on merchandise purchases. Selling, administrative and general expenses increased $3.2 million or 0.8% over fiscal 1995, primarily due to a relative decrease in sales in the licensed discount division which has lower selling, administrative and general expenses than the Company's other divisions. As a percentage of sales, selling, administrative and general expenses were 38.5% in fiscal 1996 as compared to 37.3% in fiscal 1995. Selling, administrative and general expenses in the Company's footwear operations were 38.5% in fiscal 1996 as compared to 37.2% of sales in fiscal 1995. This increase was primarily the result of a change in the relative mix of footwear sales and a decline in comparable retail footwear sales. Selling, administrative and general expenses in the Company's apparel operations were 38.5% of sales in fiscal 1996 as compared to 37.9% of sales in fiscal 1995, primarily due to an increase in store level expenses from new stores openings, coupled with comparable store sales declines. Depreciation and amortization expense increased by $4.5 million in fiscal 1996 over fiscal 1995 due to an increase in average depreciable and amortizable assets. During the fiscal year ended February 3, 1996, the Company recorded restructuring charges of $69.3 million ($41.6 million on an after tax basis) related to the disposal of its Fayva footwear division. Such charges included the costs to exit from and dispose of Fayva, including the loss on disposal of inventory, severance payments, the write off of fixed assets and the costs to dispose of store leases. As a result of the above described effects, the Company reported an operating loss of $54.0 million (operating income of $15.3 million excluding the restructuring charges) in fiscal 1996 versus operating income of $46.0 million in fiscal 1995. Net interest expense increased $1.4 million to $10.5 million in fiscal 1996 as compared to $9.1 million in fiscal 1995, primarily due to higher average levels of borrowings and higher interest rates on borrowings in fiscal 1996 as compared to fiscal 1995. For fiscal 1996, the Company reported a tax benefit of $25.8 million, resulting in an effective tax rate of 40.1%, as compared to tax expense of $13.3 million, yielding an effective tax rate of 36.0% in fiscal 1995. See Note 9 to the Consolidated Financial Statements for further discussion of taxes on earnings. Net loss for fiscal 1996 was $38.6 million as compared to net earnings of $23.6 million in fiscal 1995. Fiscal 1995 versus Fiscal 1994 In fiscal 1995, net sales increased by $124.1 million or 13.5% over net sales in fiscal 1994. Sales in the Company's footwear operations increased by $83.4 million primarily as a result of sales in the newly-acquired SCOA licensed shoe division, coupled with an increase in the number of Parade of Shoes stores in operation during fiscal 1995 versus fiscal 1994. The sales increase in footwear operations was partially offset by a 3.0% decrease in comparable retail footwear store sales, a decrease in the number of discount licensed shoe departments and Fayva shoe stores in operation during fiscal 1995 versus fiscal 1994 and a $23.6 million decrease in wholesale footwear sales (which is a result of the closing of 149 wholesale footwear departments during the second quarter of fiscal 1995). Sales in the Company's specialty apparel operations increased by $40.7 million as a result of an increase in the number of Casual Male Big & Tall stores and Work 'n Gear stores in operation at the end of fiscal 1995 over fiscal 1994, and a 3.5% increase in comparable specialty apparel store sales. Cost of sales constituted 55.6% of sales in fiscal 1995 as compared to 56.2% in fiscal 1994. This decrease was attributable primarily to a relative increase in sales in divisions which have lower costs of sales. Cost of sales in the Company's footwear operations was 56.8% of sales in fiscal 1995 as compared to 57.5% of sales in fiscal 1994. The decrease in such percentage was primarily attributable to a lower cost of sales in the newly acquired SCOA licensed shoe division as compared to the Company's other shoe divisions, partially offset by higher markdowns as a percentage of sales, and a lower initial markup on merchandise purchases. Cost of sales in the Company's apparel operations was 51.0% of sales in fiscal 1995 as compared to 51.3% of sales in fiscal 1994. An increase in initial markup on merchandise purchases in apparel operations was partially offset by an increase in markdowns as a percentage of sales. Selling, administrative and general expenses increased $53.1 million or 15.8% over fiscal 1994, primarily due to the newly acquired SCOA division and the increase in the number of Parade of Shoes stores, Casual Male Big & Tall stores and Work 'n Gear stores in operation during fiscal 1995 versus fiscal 1994. As a percentage of sales, selling, administrative and general expenses were 37.3% in fiscal 1995 as compared to 36.6% in fiscal 1994. This increase was due primarily to the relative decrease in sales in the licensed discount shoe division as compared to the other shoe divisions, the increase in sales in specialty apparel and shoe stores and the decrease in wholesale footwear sales, which have lower selling, administrative and general expenses than retail sales. Selling, administrative and general expenses in the Company's footwear operations were 37.2% as compared to 36.6% of sales in fiscal 1994 primarily as a result of a change in the relative mix of sales (the Company's licensed discount and wholesale shoe divisions have lower selling, administrative and general expenses as compared to those in the Company's other footwear divisions). Selling, administrative and general expenses in the Company's apparel operations were 37.9% of sales in fiscal 1995 as compared to 36.6% of sales in fiscal 1994, primarily due to an increase in store level expenses. Depreciation and amortization expense increased by $6.0 million in fiscal 1995 over fiscal 1994 due to an increase in depreciable and amortizable assets. As a result of the above described effects, the Company's operating income increased 4.9% to $46.0 million from $43.9 million in fiscal 1994. As a percentage of sales, operating income was 4.4% in fiscal 1995 as compared to 4.8% in fiscal 1994. Net interest expense was $9.1 million in fiscal 1995 as compared to $7.4 million in fiscal 1994, primarily due to higher average levels of borrowings and higher interest rates on borrowings in fiscal 1995 as compared to fiscal 1994. Taxes on earnings for fiscal 1995 were $13.3 million, yielding an effective tax rate of 36.0%, as compared to taxes of $13.1 million, yielding an effective rate of 36.0% in fiscal 1994. See Note 9 to the Consolidated Financial Statements for further discussion of taxes on earnings. Net earnings for fiscal 1995 were $23.6 million as compared to net earnings of $23.3 million in fiscal 1994, an increase of 1.3%. Financial Condition February 3, 1996 versus January 28, 1995 Accounts receivable at February 3, 1996 decreased from the balance at January 28, 1995 primarily due to the reduction in the number of units operated in January, 1996 as compared to January, 1995 in the Company's licensed shoe divisions. Merchandise inventories at February 3, 1996 were lower than at January 28, 1995 primarily due to the closing of the Fayva division, including the liquidation of all of Fayva's inventory, by the end of the fourth quarter of fiscal 1996. The income tax receivable of $7.2 million at February 3, 1996 is primarily due to the estimated federal income tax refund due which is related to the federal income tax carryback benefits resulting from the disposal of the Fayva division. The decrease in net property, plant and equipment is the result of the net write-off of $18.5 million of furniture, fixtures and leasehold improvements as a result of the closing of the Company's Fayva division, coupled with the recording of $22.0 million in depreciation expense during fiscal 1996, partially offset by the Company incurring capital expenditures of $28.1 million in fiscal 1996, primarily for the opening of new stores and the renovation of existing units. The decrease in other assets is primarily due to the recording of amortization expense in fiscal 1996. The decrease in accounts payable is primarily due to the reduction in inventory levels as a result of the disposal of the Company's Fayva division. The ratio of accounts payable to merchandise inventory was 36.8% at February 3, 1996 as compared to 36.2% at January 28, 1995. Accrued expenses at February 3, 1996 increased from the balance at January 28, 1995 primarily due to accruals for lease termination costs as a result of the disposal of the Company's Fayva division. Liquidity and Capital Resources The Company currently has a $240 million revolving credit facility on an unsecured basis with Fleet National Bank of Massachusetts, The First National Bank of Boston, Natwest Bank, N.A., The Yasuda Trust and Banking Company, Ltd., Bank Hapoalim B.M., National City Bank, Columbus, Standard Chartered Bank and Citizens Bank of Massachusetts (the "Banks"). As amended to date, the aggregate commitment amount under this revolving credit facility will be reduced by $10 million on December 29, 1996. Borrowings under the revolving credit facility bear interest at variable rates and, at the discretion of the Company, can be in the form of loans, bankers' acceptances and letters of credit. This facility expires in June, 1997. Consistent with prior practices, the Company will attempt to extend or renegotiate the revolving credit facility prior to the end of fiscal 1997. As of February 3, 1996, the Company had outstanding obligations under the revolving credit facility of $181.7 million, consisting of loans, obligations under bankers' acceptances and letters of credit. In June, 1992 the Company issued $70 million of 7% convertible subordinated notes due 2002. The notes are convertible at a conversion price of $16.125 per share, subject to adjustment in certain events. The Company used the net proceeds to repay all of the $20 million outstanding principal amount of its 10.53% senior term notes, $27.5 million principal amount of its 11.21% senior subordinated notes, and a portion of outstanding bank indebtedness under its unsecured revolving credit facility. In connection with repayment of the senior term notes and senior subordinated notes, the Company paid redemption premiums totalling approximately $2.0 million. The Company expects to open approximately 40 Casual Male Big & Tall stores (13 of which are conversions of former Fayva locations) and approximately 43 Parade of Shoes stores (all of which are conversions of former Fayva locations), and to close approximately three Casual Male Big & Tall stores, eight Parade of Shoes stores, and three Work 'n Gear stores in fiscal 1997. The Company believes that amounts available under its revolving credit facility, along with internally generated funds, will be sufficient to meet its current operating and capital requirements under ordinary circumstances through the end of the current fiscal year. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Form 10-K or made by management of the Company involve risks and uncertainties, and are subject to change based on various important factors. The following factors, among others, in some cases have affected and in the future could affect the Company's financial performance and actual results, and could cause actual results for fiscal 1997 and beyond to differ materially from those expressed or implied in any such forward-looking statements: changes in consumer spending patterns, consumer preferences and overall economic conditions, the impact of competition and pricing, changes in weather patterns, the financial condition of the retailers in whose stores the Company operates licensed shoe departments, changes in existing or potential duties, tariffs or quotas, availability of suitable store locations at appropriate terms and ability to hire and train associates. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA J. BAKER, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements Consolidated Financial Statements: PAGE Independent Auditors' Report 17 Consolidated balance sheets as of February 3, 1996 and January 28, 1995 18 Consolidated statements of earnings for the years ended February 3, 19 1996, January 28, 1995 and January 29, 1994 Consolidated statements of stockholders' equity for the years ended 20 February 3, 1996, January 28, 1995 and January 29, 1994 Consolidated statements of cash flows for the years ended February 3, 21 1996, January 28, 1995 and January 29, 1994 Notes to consolidated financial statements 22 All schedules have been omitted as they are inapplicable or not required, or the information has been included in the consolidated financial statements or in the notes thereto. Independent Auditors' Report The Board of Directors and Stockholders J. Baker, Inc.: We have audited the accompanying consolidated balance sheets of J. Baker, Inc. and subsidiaries as of February 3, 1996 and January 28, 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended February 3, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of J. Baker, Inc. and subsidiaries as of February 3, 1996 and January 28, 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended February 3, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts March 13, 1996, except for Note 19, as to which the date is April 19, 1996 J. BAKER, INC. AND SUBSIDIARIES Consolidated Balance Sheets February 3, 1996 and January 28, 1995 Assets 1996 1995 ---- ---- Current assets: Cash and cash equivalents $ 3,287,141 $ 4,915,491 Accounts receivable: Trade, net 19,514,985 21,549,133 Other 3,219,862 4,000,371 --------- ---------- 22,734,847 25,549,504 ---------- ---------- Merchandise inventories 285,703,289 333,686,950 Prepaid expenses 8,600,990 7,946,144 Income tax receivable 7,236,732 - Deferred income taxes 9,198,000 2,120,000 ---------- ---------- Total current assets 336,760,999 374,218,089 ----------- ----------- Property, plant and equipment, at cost: Land and buildings 25,064,423 24,988,513 Furniture, fixtures and equipment 115,099,770 119,614,758 Leasehold improvements 43,442,932 47,448,521 ---------- ---------- 183,607,125 192,051,792 Less accumulated depreciation and amortization 62,524,262 58,271,956 ---------- ----------- Net property, plant and equipment 121,082,863 133,779,836 ----------- ----------- Deferred income taxes 6,939,000 - Other assets, at cost, less accumulated amortization 61,298,880 70,620,341 ----------- ----------- $526,081,742 $578,618,266 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 1,500,000 $ 1,500,000 Accounts payable 105,113,721 120,792,457 Accrued expenses 25,066,874 15,504,950 Income taxes payable - 472,357 ---------- ----------- Total current liabilities 131,680,595 138,269,764 ----------- ----------- Deferred income taxes - 6,136,000 Other liabilities 2,598,026 6,377,762 Long-term debt, net of current portion 133,000,000 128,300,000 Senior subordinated debt 4,412,711 5,864,835 Convertible subordinated debt 70,353,000 70,353,000 Stockholders' equity: Common stock, par value $.50 per share, authorized 40,000,000 shares, 13,872,647 shares issued and outstanding in 1996 (13,840,647 in 1995) 6,936,324 6,920,324 Preferred stock, par value $1.00 per share, authorized 2,000,000 shares (none issued and outstanding) - - Series A junior participating cumulative preferred stock, par value $1.00 per share, authorized 100,000 shares (none issued and outstanding) - - Additional paid-in capital 115,213,017 115,074,822 Retained earnings 61,888,069 101,321,759 ----------- ----------- Total stockholders' equity 184,037,410 223,316,905 ----------- ----------- $526,081,742 $578,618,266 =========== =========== See accompanying notes to consolidated financial statements. J. BAKER, INC. AND SUBSIDIARIES Consolidated Statements of Earnings For the years ended February 3, 1996, January 28, 1995 and January 29, 1994 1996 1995 1994 ---- ---- ---- Net sales $1,020,412,703 $1,042,978,875 $918,877,733 Cost of sales 580,067,086 579,734,911 516,854,748 ----------- ----------- ----------- Gross profit 440,345,617 463,243,964 402,022,985 Selling, administrative and general expenses 392,585,851 389,362,380 336,283,342 Depreciation and amortization 32,428,001 27,882,778 21,873,610 Restructuring charges 69,300,000 - - ---------- ----------- ----------- Operating income (loss) (53,968,235) 45,998,806 43,866,033 Interest income 526,188 635,574 703,778 Interest expense (10,983,067) (9,735,209) (8,145,769) ----------- ---------- --------- Earnings (loss) before taxes (64,425,114) 36,899,171 36,424,042 Income tax expense (benefit) (25,823,000) 13,283,000 13,113,000 ---------- ---------- ---------- Net earnings (loss) $(38,602,114) $ 23,616,171 $ 23,311,042 =========== =========== =========== Earnings (loss) per common share: Primary $ (2.79) $ 1.71 $ 1.70 =========== =========== =========== Fully Diluted $ (2.79) $ 1.46 $ 1.45 =========== =========== =========== Number of shares used to compute earnings (loss) per common share: Primary 13,858,273 13,831,552 13,674,553 ========== ========== ========== Fully diluted 13,905,545 18,363,042 18,286,267 ========== ========== ========== See accompanying notes to consolidated financial statements. J. BAKER, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity For the years ended February 3, 1996, January 28, 1995 and January 29, 1994 Additional Total Common Stock Paid-in Retained Stockholders' Shares Amount Capital Earnings Equity --------- -------- ----------- -------- ------------- Balance, January 30, 1993 13,474,165 $6,737,083 $109,827,161 $56,046,071 $172,610,315 Net income for the year ended January 29, 1994 - - - 23,311,042 23,311,042 Shares issued in connection with acquisition of Shoe Corporation of America, Inc. 51,428 25,714 944,990 - 970,704 Exercise of stock options 129,232 64,616 1,089,955 - 1,154,571 Shares purchased by former Casual Male stockholders 88,044 44,022 1,793,922 - 1,837,944 Conversion of convertible debt 49,820 24,910 998,392 - 1,023,302 Retirement of stock (42) (21) (3) - (24) Dividends paid ($.06 per share) - - - (821,380) (821,380) ---------- ---------- ------------ ----------- ------------ Balance, January 29, 1994 13,792,647 6,896,324 114,654,417 78,535,733 200,086,474 ---------- ---------- ----------- ----------- ----------- Net income for the year ended January 28, 1995 - - - 23,616,171 23,616,171 Exercise of stock options 48,000 24,000 420,405 - 444,405 Dividends paid ($.06 per share) - - - (830,145) (830,145) ---------- ---------- ----------- ---------- ---------- Balance, January 28, 1995 13,840,647 6,920,324 115,074,822 101,321,759 223,316,905 ---------- ---------- ----------- ----------- ----------- Net loss for the year ended February 3, 1996 - - - (38,602,114) (38,602,114) Exercise of stock options 32,000 16,000 138,195 - 154,195 Dividends paid ($.06 per share) - - - (831,576) (831,576) ---------- ---------- ----------- ----------- ----------- Balance, February 3, 1996 13,872,647 $6,936,324 $115,213,017 $ 61,888,069 $184,037,410 ========== ========== =========== =========== =========== See accompanying notes to consolidated financial statements J. BAKER, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended February 3, 1996, January 28, 1995 and January 29, 1994 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net earnings (loss) $ (38,602,114) $ 23,616,171 $ 23,311,042 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization: Fixed assets 21,985,599 19,015,776 14,161,472 Deferred charges, intangible assets and deferred financing costs 10,490,278 8,922,497 7,758,674 Deferred income taxes (20,153,000) 7,955,364 9,886,000 Loss on disposal of Fayva assets 29,900,000 - - Change in: Accounts receivable 3,088,464 8,466,255 (427,878) Merchandise inventories 36,583,661 (56,854,448) (52,930,182) Prepaid expenses (3,030,223) (1,449,914) (2,109,595) Accounts payable (15,678,736) 12,529,534 (5,463,796) Accrued expenses 9,561,924 (9,986,666) (12,878,976) Income taxes payable/receivable (7,709,089) 1,165,288 (1,796,559) Other liabilities (4,045,342) (7,267,692) (7,451,093) ---------- ---------- ---------- Net cash provided by (used in) operating activities 22,391,422 6,112,165 (27,940,891) ---------- ---------- ---------- Cash flows from investing activities: Capital expenditures for: Property, plant and equipment (28,062,433) (44,513,548) (24,115,405) Other assets (1,379,958) (12,000,475) (2,480,695) Net cash paid in acquisition of Shoe Corp. of America - - (2,698,507) Payments received on note receivable 2,900,000 - - ---------- ----------- ---------- Net cash used in investing activities (26,542,391) (56,514,023) (29,294,607) ---------- ----------- ---------- Cash flows from financing activities: Repayment of senior debt (1,500,000) (2,636,300) - Proceeds from other long term debt 4,700,000 51,300,000 52,262,950 Release of restricted cash - 3,455,357 - Proceeds from issuance of common stock, net of retirements 154,195 444,405 2,992,493 Payment of dividends (831,576) (830,145) (821,380) ---------- ---------- ---------- Net cash provided by financing activities 2,522,619 51,733,317 54,434,063 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (1,628,350) 1,331,459 (2,801,435) Cash and cash equivalents at beginning of year 4,915,491 3,584,032 6,385,467 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 3,287,141 $ 4,915,491 $ 3,584,032 =========== =========== =========== See accompanying notes to consolidated financial statements J. BAKER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements February 3, 1996, January 28, 1995 and January 29, 1994 (1) Summary of Significant Accounting Policies Nature of Operations J. Baker, Inc. and subsidiaries (the "Company") is engaged in the retail sale of footwear and apparel through 2,229 locations in 48 states and the District of Columbia. The Company sells footwear through 1,087 self-service licensed shoe departments in mass merchandising department stores, through a total of 505 full and semi-service licensed shoe departments in department and specialty stores and through its Parade of Shoes chain of 168 women's shoe stores. In all of these operations, the Company emphasizes the sale of quality footwear at comparatively low prices. The Company is engaged in the retail sale of apparel through its 400 store chain of Casual Male Big & Tall men's stores which sells sportswear to the larger size man, and through its 69 store chain of Work 'n Gear work clothing stores which sell utility workwear, uniforms and personalized work clothes, as well as uniforms for laboratory and medical purposes. Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of consolidated 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. Actual results could differ from these estimates. Fiscal Year The Company follows a 52 - 53 week fiscal year ending on the Saturday nearest January 31. The fiscal year ended February 3, 1996 contained 53 weeks, and the fiscal years ended January 28, 1995 and January 29, 1994 contained 52 weeks. Fair Value of Financial Instruments The carrying amount of cash, cash equivalents, trade receivables and trade payables approximate fair value because of the short maturity of these financial instruments. The fair value of the Company's long-term instruments is estimated based on market values for similar instruments. At February 3, 1996, the difference between the carrying value of long-term instruments and their estimated fair value is not material. Cash and Cash Equivalents Cash equivalents consist of highly liquid instruments with maturities of three months or less and are stated at cost which approximates market. Merchandise Inventories Merchandise inventories, which consist entirely of finished goods, are valued at the lower of cost or market, principally by the retail inventory method. Depreciation and Amortization of Property, Plant and Equipment Depreciation and amortization of the Company's property, plant and equipment are provided on the straight-line method over the following periods: Furniture and fixtures 7 years Machinery and equipment 7 years Leasehold improvements 10 years Building, building improvements and land improvements 40 years Maintenance and repairs are charged to expense as incurred. Major renewals or replacements are capitalized. When properties are retired or otherwise disposed of, the asset and related reserve account are relieved and the resulting gain or loss, if any, is credited or charged to earnings. J. BAKER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Earnings Per Common Share Earnings per common share of the Company is based on the weighted average number of shares of common stock outstanding during the applicable period. Primary earnings per share is based on the weighted average number of shares of common stock outstanding during such period. Stock options and warrants are excluded from the calculation since they have less than a 3% dilutive effect. Fully diluted earnings per share is based on the weighted average number of shares of common stock outstanding during the applicable period. Included in this calculation is the dilutive effect of stock options and warrants. Included in this calculation for the periods ended January 28, 1995 and January 29, 1994 is the dilutive effect of common stock issuable under the 7% convertible subordinated notes due 2002. The common stock issuable under the 7% convertible subordinated notes was not included in the calculation for the period ended February 3, 1996 because its effect would be antidilutive. Revenue Recognition The Company recognizes revenue at the time of sale in its retail stores and at the time of shipment in its wholesale division. Store Opening and Closing Costs Direct incremental store opening costs are amortized to expense over a twelve month period. All costs related to store closings are expensed at the time of closing. Deferred Lease Acquisition Costs Costs incurred in connection with the acquisition of license agreements have been classified as deferred lease acquisition costs and are being amortized over the terms of the respective leases, which range from three to twenty years. The Company periodically reviews deferred lease acquisition costs to assess recoverability based on the likelihood and level of ongoing value of each licensor's agreement. Impairments in value would be recognized in operating results if a permanent diminution were to occur (see Notes 4 and 7). Income Taxes Deferred taxes are provided for using the asset and liability method for temporary differences between financial and tax reporting. Recent Accounting Pronouncements On October 23, 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The provisions of this statement are effective for fiscal years beginning after December 15, 1995. As permitted under SFAS No. 123, the Company has elected not to adopt the fair value based method of accounting for its stock-based compensation plans, but will continue to account for such compensation under the provisions of APB Opinion No. 25. The Company will comply with the disclosure requirements of SFAS No. 123 in fiscal 1997. The Company is required to implement Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of" in fiscal 1997. As the Company continually evaluates the realizability of long-lived assets, including goodwill, lease acquisition costs and other intangible assets, the adoption of SFAS No. 121 is not anticipated to have a material effect on the Company's financial statements. Reclassifications Certain reclassifications have been made to the consolidated financial statements of prior years to conform to the 1996 presentation. J. BAKER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (2) Disposition of Fayva Shoe Division In the year ended February 3, 1996, the Company recorded restructuring charges of $69.3 million (which had an after-tax effect of $41.6 million or $3.00 per share) as a result of the liquidation of the Company's Fayva footwear division. Restructuring charges include actual costs for employee severance and other benefits of $3.5 million (a total of 2,545 full and part-time employees were terminated), fixed asset write-offs of $18.5 million and a loss on the disposal of inventory of $20.5 million. Also included in restructuring charges is a charge of $26.8 million for costs related to the disposition of the Fayva store leases. Accrued at February 3, 1996 are severance and lease termination costs of $13.3 million. These costs are expected to be paid by the end of the next fiscal year. (3) Acquisition of Shoe Corporation of America, Inc. On November 19, 1993, the Company acquired 83% of the outstanding common stock and all of the outstanding preferred stock of Tishkoff Enterprises, Inc. of Columbus, Ohio ("TEI"), an operator of full-service, semi- service and self-service licensed shoe departments in department stores, specialty stores and discount stores. The 83% interest in the outstanding common stock was acquired from certain TEI stockholders in exchange for a total of 57,341 shares of the Company's common stock (6,001 of which shares are being issued to former TEI stockholders in the fiscal year ending February 1, 1997) and the right to receive payments equal in the aggregate to 8.3% of the consolidated pre-tax earnings of TEI over a six year period commencing January 29, 1994 (the "TEI Contingent Payment"), with a maximum aggregate payment of $4,980,000. The acquisition of all of the outstanding preferred stock of TEI was made for a payment of $650,000 in cash. On December 13, 1993, the stockholders of TEI approved the merger of JBAK Acquisition Corp., an Ohio corporation and a wholly owned subsidiary of the Company, with and into TEI (the "Merger") and TEI became a wholly owned subsidiary of the Company. In connection with the Merger, the Company paid cash consideration to the remaining TEI stockholders in the amount of $442,000, in payment for the remaining 17% interest in TEI common stock. Subsequent to the Merger, the corporate name of TEI was changed to Shoe Corporation of America, Inc. ("SCOA"). The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of operations of SCOA are included in the consolidated statements of earnings since the date of acquisition. The purchase price of $3,822,000, which includes $500,000 of direct costs associated with the Merger, was allocated to the assets and liabilities of SCOA based on their respective fair values at November 19, 1993. During the fiscal years ended February 3, 1996 and January 28, 1995, the excess of cost over net assets acquired was adjusted by $266,000 and $970,000, respectively, for amounts accrued for the TEI Contingent Payment right. In addition, during the fiscal year ended January 28, 1995, the Company completed its analysis of the allocation of the purchase price and adjusted downward the preliminary estimate of the fair value of the acquired net assets by $1,764,000 as follows: Adjustments to reflect fair value of net assets: Merchandise inventories $(2,282,000) Deferred income taxes 1,065,000 Accrued expenses (547,000) $(1,764,000) As a result, the increase in the excess of cost over net assets acquired is included in Other Assets and is being amortized on a straight-line basis over twenty years. SCOA operated 505, 448 and 162 licensed footwear departments at February 3, 1996, January 28, 1995 and January 29, 1994, respectively. The increase in the number of licensed departments was primarily a result of the acquisition of new accounts. On April 19, 1996, the Company announced that it had executed a letter of intent for the sale of its SCOA division. For further information, see Note 19. J. BAKER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (4) Bankruptcy Filings of Licensors On June 23, 1995, Bradlees Stores, Inc. ("Bradlees") filed for protection under Chapter 11 of the United States Bankruptcy Code. At the time of the bankruptcy filing, the Company had outstanding accounts receivable of approximately $1.8 million due from Bradlees. Under bankruptcy law, Bradlees has the option of continuing (assuming) the existing license agreement with the Company or terminating (rejecting) that agreement. If the license agreement is assumed, Bradlees must cure all defaults under the agreement and the Company will collect in full the outstanding past due receivable. The Company has no assurance that the agreement will be assumed or that Bradlees will continue in business. Although the Company believes that the rejection of the license agreement or the cessation of Bradlees' business is not probable, in the event that the agreement is rejected or Bradlees does not continue in business, the Company believes it will have a substantial claim for damages. If such a claim is necessary, the amount realized by the Company, relative to the carrying values of Bradlees-related assets, will be based on the relevant facts and circumstances. The Company does not expect this filing under the Bankruptcy Code to have a material adverse effect on future earnings. The Company's sales in the Bradlees chain for the fiscal year ended February 3, 1996 were $59.8 million. On October 18, 1995, Jamesway ("Jamesway"), then a licensor of the Company, filed for protection under Chapter 11 of the United States Bankruptcy Code and announced its intention to liquidate its inventory, fixed assets and real estate and to cease operation of its business in all of its 90 stores. The Company participated in Jamesway's going out of business sales and liquidated substantially all of its footwear inventory in the 90 Jamesway stores during the going out of business sales. At the time of the bankruptcy filing, the Company had outstanding accounts receivable of approximately $1.4 million due from Jamesway. Since Jamesway ceased operation of its business, the Company believes that rejection of its license agreement is probable and has asserted a substantial claim for damages. The Company does not expect the closing of the Jamesway stores to have a material adverse effect on future earnings. The Company's sales in the Jamesway chain for the fiscal year ended February 3, 1996 were $24.3 million. On April 26, 1990, Ames Department Stores, Inc., and related entities ("Ames"), a significant licensor of the Company (see Notes 7 and 14), filed for protection under Chapter 11 of the United States Bankruptcy Code. On December 18, 1992, the Company and Ames executed Amendment No. 2 to the Ames license agreement and the Company and Ames executed a certain Stipulation which was filed with the United States Bankruptcy Court for the Southern District of New York and approved on January 6, 1993, the consummation date of Ames' Plan of Reorganization. The Stipulation provided that the license agreement between Ames and the Company shall be modified and amended and the license agreement assumed by Ames. Further, pursuant to the Stipulation, the Company settled its $13.7 million pre-petition claim with Ames and, in return, the Company received $5 million in cash and a promissory note issued by Ames in the amount of $8.7 million bearing interest at the rate of 6.0% per annum and having a final maturity on December 1, 1997. At February 3, 1996, the outstanding balance of the Ames promissory note is $5.8 million. The Stipulation further provided for a mortgage lien on and security interest in the real property and buildings in Rocky Hill, Connecticut comprising the executive offices of Ames, which mortgage lien and security interest shall be used as security in repayment of the promissory note, and which shall be senior to all other liens and security interests except those granted in favor of certain banks under a credit agreement with such banks. Carried on the balance sheet at February 3, 1996 in Other Assets (see Note 7) are deferred lease acquisition costs of $19.3 million attributable to the Ames license agreement, which expires in 2009, subject to earlier termination upon failure to meet certain operating requirements. The Company is amortizing the deferred lease acquisition costs of the Ames license agreement over the remaining term of the license agreement, since the Company believes, based on its assessment of the likelihood and level of ongoing business with Ames, that the value of the license agreement supports the historical carrying cost at February 3, 1996. Any net store closing by Ames will likely reduce the value of the Ames license agreement to a level below the current carrying value of the deferred lease acquisition costs. This would result in a non-cash write-down of the asset, which would be reflected in the Company's earnings. The amount of the write-down would depend on the Company's historical sales volume in the closed stores. J. BAKER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) Accounts Receivable Trade accounts receivable are principally comprised of amounts due from landlords of the Company's licensed shoe departments. The Company performs regular credit evaluations of its licensors, and generally does not require collateral from its licensors. The following is a summary of the activity affecting the allowance for doubtful accounts receivable for the years ended February 3, 1996, January 28, 1995 and January 29, 1994: 1996 1995 1994 ---- ---- ---- Balance, beginning of year $1,972,723 $ 521,922 $ 382,417 Additions charged to expense 1,413,580 1,450,801 285,000 Write-offs, net of recoveries (169,054) - (145,495) -------- -------- ------- Balance, end of year $3,217,249 $1,972,723 $ 521,922 ========= ========= ========= (6) Acquisition of The Casual Male On February 2, 1991, the Company acquired the Casual Male, Inc. pursuant to Casual Male's Plan of Reorganization under Chapter 11 of the United States Bankruptcy Code. Former Casual Male stockholders who elected to receive a contingent payment right in lieu of $.25 per common share, up to a maximum of $1,000 per stockholder, were entitled to receive a percentage of the net earnings of Casual Male for the seven year period ending January 30, 1998, with a maximum aggregate payment of $5.0 million (the "Contingent Payment"). On April 12, 1993 the Contingent Payment Agreement was amended to provide that participants in the Contingent Payment would instead receive an aggregate of $2.4 million immediately in satisfaction of the obligation of the Company to make the Contingent Payment. The excess of net assets over the cost of the acquired business has been reduced by the $2.4 million Contingent Payment, and the balance is being amortized on a straight line basis over fifteen years. (7) Other Assets Other assets, net of accumulated amortization, at February 3, 1996 and January 28, 1995 were comprised of: 1996 1995 ---- ---- Deferred lease acquisition costs, net of accumulated amortization of $18,628,527 and $14,906,951 $ 29,799,508 $33,483,667 Systems development costs, net of accumulated amortization of $9,566,062 and $6,674,202 14,165,479 15,910,645 Excess of costs over net assets acquired, net of accumulated amortization of $1,828,479 and $1,211,133 10,131,228 10,482,967 Notes Receivable, net of current portion of $2,900,000 and $2,900,000 3,888,000 6,741,000 Other intangible assets and deferred charges, net of accumulated amortization of $2,556,558 and $2,925,233 2,372,428 3,115,002 Cash surrender value of officers' life insurance, net 539,306 474,128 Deposits 402,931 412,932 ----------- ----------- $ 61,298,880 $ 70,620,341 =========== =========== Deferred lease acquisition costs consist primarily of payments made in connection with the acquisition of license agreements and are being amortized over the terms of the respective license agreements (see Notes 1 and 4). Systems development costs are being amortized on a straight line basis over eight years. The excess of costs over net assets acquired is the result of the acquisitions of various businesses and is being amortized over periods of fifteen to twenty years. Notes receivable consist of a 6.0% note from Ames maturing on December 1, 1997 J. BAKER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (see Note 4), and a $988,000 ($941,000 at January 28, 1995), 10.25% note from Hills Department Store Company ("Hills") maturing on September 30, 2003. Other intangible assets and deferred charges consist primarily of costs incurred for the issuance of debt and are being amortized over periods of three to ten years. (8) Debt Long-Term Debt Long-term debt at February 3, 1996 and January 28, 1995 was comprised of: 1996 1995 ---- ---- Loans under revolving credit facility $133,000,000 $128,300,000 Weighted average interest rate 7.89% 6.75% The Company has a $240 million revolving credit facility on an unsecured basis with Fleet National Bank of Massachusetts, The First National Bank of Boston, Natwest Bank, N.A., The Yasuda Trust and Banking Company, Ltd., Bank Hapoalim B.M., National City Bank, Columbus, Standard Chartered Bank and Citizens Bank of Massachusetts (the "Banks"). As amended to date, the aggregate commitment amount under this revolving credit facility will be reduced by $10 million on December 29, 1996. Borrowings under the revolving credit facility can, at the discretion of the Company, be in the form of any combination of loans, bankers' acceptances and letters of credit. Loans under the revolving credit facility bear interest, at the Company's discretion, at Fleet National Bank of Massachusetts' corporate base rate or at the London Interbank Offered Rate (LIBOR) plus a margin. The margin amount, as well as a commitment fee, is determined based on a financial ratio as defined in the revolving credit facility. This facility expires in June, 1997. At February 3, 1996, the Company had $58.3 million available for borrowing under this facility. Senior Subordinated Debt In June 1989, the Company issued $35 million of senior subordinated notes with detachable warrants which enable the holders to purchase 600,000 shares of the Company's common stock at a price of $20 per share, subject to adjustments. At February 3, 1996, the detachable warrants enable holders to purchase approximately 640,000 shares at $18.80 per share. Subject to certain conditions, the Company may repurchase all, but not less than all, of the outstanding warrants for 150% of the then per share warrant exercise price. The senior subordinated notes of $5,912,711 at February 3, 1996 ($7,364,835 at January 28, 1995) are presented net of $87,289 ($135,165 at January 28, 1995), which reflects the unaccreted portion of the $1,710,000 value originally assigned to the detachable warrants. The value of the warrants was recorded as additional paid-in capital and is being accreted using the effective interest method. The senior subordinated debt was reduced by $27.5 million in June 1992 with proceeds from the $70 million 7% convertible subordinated notes referred to below. The senior subordinated notes are due in installments of $1.5 million per year beginning in May 1995 with a final payment in May 1999. Interest, at 11.21%, is payable semiannually. Convertible Subordinated Debt Convertible subordinated debt at February 3, 1996 and January 28, 1995 was comprised of: 1996 1995 ---- ---- 7% convertible subordinated notes $70,000,000 $70,000,000 Convertible debentures 353,000 353,000 ---------- ---------- $70,353,000 $70,353,000 ========== ========== In June 1992, the Company issued $70 million of 7% convertible subordinated notes due 2002. The notes are convertible into common stock at a conversion price of $16.125 per share, subject to adjustment in certain events. The Company used the net proceeds to repay all of the $20 million outstanding principal amount of its senior J. BAKER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements term notes, $27.5 million principal amount of its senior subordinated notes, and a portion of outstanding bank indebtedness under its unsecured revolving credit facility. Prior to the Company's acquisition of Morse Shoe, Inc. ("Morse"), 94% of the Morse convertible debentures converted into Morse common stock. Since the acquisition of Morse on January 30, 1993, holders of $2.7 million of additional Morse convertible debentures converted their debt into 49,820 shares of J. Baker common stock. The remaining balance of $353,000 convertible debentures accrue no interest until January 15, 1997, at which time the rate will be 8%, and no principal will be payable until January 15, 2002. The debt is subject, under certain circumstances, to mandatory conversion. Approximately 6,500 shares of J. Baker common stock are reserved for any future conversions of the remaining Morse convertible debentures. The Company's revolving credit facility and senior subordinated notes contain various covenants and restrictive provisions, including restrictions on the incurrence of additional indebtedness and liens, the payment of dividends and the maintenance of specified financial ratios, minimum levels of working capital and other financial criteria. At February 3, 1996, the Company was in compliance with such covenants. The Company is restricted, under various debt agreements, from paying cash dividends unless tangible net worth exceeds certain required levels. As defined by the most restrictive of those agreements, minimum tangible net worth, as so defined, was $183 million at February 3, 1996. At February 3, 1996, the Company's tangible net worth, as so defined, was approximately $202 million. Scheduled principal repayments of long-term debt, senior subordinated notes and convertible subordinated debt for the next five fiscal years and thereafter are as follows: Fiscal year ending January 1997 $ 1,500,000 1998 134,500,000 1999 1,500,000 2000 1,500,000 2001 - Thereafter 70,353,000 (9) Taxes on Earnings Income tax expense (benefit) attributable to income (loss) from continuing operations consists of: Current Deferred Total ------- -------- ------- Year ended February 3, 1996: Federal $(7,311,000) $(13,271,000) $(20,582,000) State and city 1,641,000 (6,882,000) (5,241,000) ---------- ----------- ----------- $(5,670,000) $(20,153,000) $(25,823,000) =========== =========== =========== Year ended January 28, 1995: Federal $ 4,132,000 $ 5,308,000 $ 9,440,000 State and city 2,100,000 1,743,000 3,843,000 ---------- ----------- ----------- $ 6,232,000 $ 7,051,000 $13,283,000 ========== ========== ========== Year ended January 29, 1994: Federal $ 1,773,000 $ 9,827,000 $11,600,000 State and city 1,454,000 59,000 1,513,000 ---------- ----------- ---------- $ 3,227,000 $ 9,886,000 $13,113,000 ========== =========== =========== J. BAKER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The following is a reconciliation between the statutory federal income tax rate and the Company's effective rate for the years ended February 3, 1996, January 28, 1995 and January 29, 1994: 1996 1995 1994 ---- ---- ---- Statutory federal income tax rate (35.0%) 35.0% 35.0% State income taxes, net of federal income tax benefit (5.3%) 6.8% 1.5% Jobs tax credits (0.6%) (1.6%) (1.4%) Change in beginning of year balance of the valuation allowance for deferred tax assets - (2.6%) 5.7% Change in federal tax rate - - (1.2%) Other 0.8% (1.6%) (3.6%) ------ ----- ----- (40.1%) 36.0% 36.0% ====== ===== ===== The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at February 3, 1996 and January 28, 1995 are presented below: 1996 1995 ---- ---- Deferred tax assets: Accounts receivable, principally due to greater acquired tax bases $ 550,000 $ 550,000 Inventory, principally due to additional costs capitalized for tax purposes and greater acquired tax bases 1,500,000 3,500,000 Intangible assets (71,000) (105,000) Other assets 516,000 573,000 Nondeductible accruals and reserves 9,154,000 7,304,000 Operating loss and credit carryforwards 42,443,000 21,897,000 ---------- ---------- Total gross deferred tax assets 54,092,000 33,719,000 Less valuation allowance (14,969,000) (14,969,000) ----------- ---------- Net deferred tax assets 39,123,000 18,750,000 ----------- ---------- Deferred tax liabilities: Fixed assets, principally due to accelerated tax depreciation and lesser acquired tax bases (13,970,000) (13,767,000) Intangible assets, principally due to lesser acquired tax bases (6,426,000) (6,723,000) Other liabilities (2,590,000) (2,276,000) ---------- ---------- Total gross deferred tax liabilities (22,986,000) (22,766,000) ---------- ---------- Net deferred tax asset (liability) $ 16,137,000 $ (4,016,000) =========== =========== At February 3, 1996 and January 28, 1995, the net deferred tax asset (liability) consisted of the following: 1996 1995 ---- ---- Deferred tax asset - current $ 9,198,000 $ 2,120,000 Deferred tax asset (liability) - noncurrent 6,939,000 (6,136,000) ----------- ----------- $ 16,137,000 $ (4,016,000) =========== =========== The valuation allowance for deferred tax assets as of January 28, 1995 was $14,969,000. There was no change in the total valuation allowance for the year ended February 3, 1996. At February 3, 1996, the Company has net operating loss carryforwards and general business credit carryforwards for federal income tax purposes of approximately $87.0 million and $1.3 million, respectively, which expire in years ended January, 2002 through January, 2011. The Company also has minimum tax credit carryforwards of approximately $4.0 million available to reduce future regular federal income taxes, if any, over an indefinite period. J. BAKER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (10) Pension and Profit Sharing Plans The Company has a noncontributory pension plan (the "Pension Plan") which covers substantially all non-union employees and is administered by Trustees who are officers of the Company. The following table sets forth the Pension Plan's funded status at February 3, 1996 and January 28, 1995: 1996 1995 ---- ---- Actuarial present value of benefit obligations: Vested $11,420,000 $ 7,637,000 Nonvested 1,053,000 704,000 ---------- ---------- Total accumulated benefit obligations $12,473,000 $ 8,341,000 ========== ========== Plan assets at fair value $12,137,000 $10,183,000 Actuarial present value of projected benefit obligations (17,100,000) (12,823,000) ----------- ----------- Deficiency of plan assets over projected benefit obligations (4,963,000) (2,640,000) Unrecognized prior service benefit (494,000) (90,000) Unrecognized net transitional liability 1,100,000 1,221,000 Unrecognized net actuarial loss 2,612,000 229,000 ---------- ----------- Accrued pension cost $(1,745,000) $(1,280,000) ========== ========== In December 1993, the Board of Directors of the Company established a Supplemental Retirement plan (the "Supplemental Plan") to provide benefits attributable to compensation in excess of $150,000, but less than $254,064. The following table sets forth the Supplemental Retirement plan's funded status at February 3, 1996 and January 28, 1995: 1996 1995 ---- ---- Actuarial present value of benefit obligation: Vested $ 203,000 $ 23,000 Nonvested 89,000 10,000 -------- -------- Total accumulated benefit obligations $ 292,000 $ 33,000 ======== ======== Plan assets at fair value $ - $ - Actuarial present value of projected benefit obligations (829,000) (791,000) --------- --------- Deficiency of plan assets over projected benefit obligations (829,000) (791,000) Unrecognized prior service cost 433,000 594,000 Unrecognized net actuarial loss 80,000 10,000 --------- --------- Accrued pension cost $(316,000) $(187,000) ======== ========= Assumptions used to develop the plans' funded status were discount rate (7.25% in 1996, 8.5% in 1995) and increase in compensation levels (4.5%). Plan assets of both the Pension Plan and the Supplemental Plan consist primarily of common stock, U.S. government obligations, mutual funds and insurance contracts. J. BAKER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Net pension cost for the years ended February 3, 1996, January 28, 1995 and January 29, 1994 included the following components: 1996 1995 1994 ---- ---- ---- Service cost - benefits earned during the year $1,260,000 $1,223,000 $ 767,000 Interest cost on projected benefit obligation 1,199,000 1,056,000 869,000 Actual return on plan assets (1,528,000) (66,000) (763,000) Net amortization and deferral 655,000 (565,000) 234,000 --------- ---------- --------- Net pension cost $1,586,000 $1,648,000 $1,107,000 ========= ========== ========= Assumptions used to develop the net periodic pension cost for fiscal 1996 were discount rate (8.5%), expected long-term return on assets (9.0%) and increase in compensation levels (5.0%). In January 1992, the Company implemented a qualified 401(k) profit sharing plan available to full-time employees who meet the plan's eligibility requirements. Under the 401(k) plan, the Company matches 25% (50% for the years ended January 28, 1995 and January 29, 1994) of the qualified employee's contribution up to 3% of the employee's salary. The total cost of the matching contribution was $441,000, $915,000 and $1,033,000 for the years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. The Company has established incentive bonus plans for certain executives and employees. The bonus calculations are based on the achievement of certain profit levels, as defined in the plans. For the years ended February 3, 1996, January 28, 1995 and January 29, 1994, $50,000, $940,000 and $1,025,000, respectively, was provided for bonuses under the plans. The Company does not provide post-retirement benefits other than pensions as defined under SFAS #106. (11) Stock Options The Company has options outstanding under the Amended and Restated 1985 Stock Option Plan, the 1992 Directors' Stock Option Plan and the 1994 Equity Incentive Plan (the "Stock Option Plans"). In addition, the Company has granted options which are not part of any Stock Option Plan. The Amended and Restated 1985 Stock Option Plan provided for the issuance of incentive and non-qualified stock options to key employees at an option price of not less than 100% of the fair market value of a share on the date of grant of the option. Under this plan, there are no shares of common stock available for grant at February 3, 1996 as no options could be granted under this plan after June, 1995. In fiscal 1995, the Company established the 1994 Equity Incentive Plan, which provides for the issuance of one million shares of common stock to officers and employees in the form of stock options (both incentive options and non-qualified options), grants of restricted stock, grants of performance shares and unrestricted grants of stock. At February 3, 1996, 75,000 shares of common stock are reserved for grants of performance shares, and 676,800 shares of common stock remain available for grant. Options under the Amended and Restated 1985 Stock Option Plan and the 1994 Equity Incentive Plan become exercisable either ratably over four years or upon grant, at the discretion of the Board of Directors, and expire ten years from the date of grant. The 1992 Directors' Stock Option Plan provides for the automatic grant of an option to purchase 2,500 shares of the Company's common stock upon initial election to the Board of Directors and, in addition, at the close of business on the fifth business day following the Company's annual meeting of stockholders. Options under the Directors' Plan are granted at a price equal to the closing price of the Company's common stock on the date of grant. They are exercisable in full as of the date of grant and expire ten years from the date of grant. Under this plan, there are 32,500 shares of common stock available for grant at February 3, 1996. J. BAKER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Data with respect to stock options granted is as follows: Stock Option Plans Non-plan ------------------ --------- Shares Price Range Shares Price Range ------ ----------- ------ ----------- January 30, 1993, options outstanding 570,177 $ .95 - 17.38 62,500 $6.75 - 16.63 Granted 452,500 16.50 - 23.75 - - Exercised (129,232) .95 - 17.00 - - Cancelled (71,025) 4.88 - 21.75 - - ------- ------------- ------- ------------- January 29, 1994, options outstanding 822,420 .95 - 23.75 62,500 6.75 - 16.63 Granted 336,025 14.38 - 21.00 - - Exercised (48,000) 4.88 - 17.00 - - Cancelled (81,550) 4.88 - 21.75 - - ------- ------------- ------ ------------- January 28, 1995, options outstanding 1,028,895 .95 - 23.75 62,500 6.75 - 16.63 Granted 288,000 5.50 - 13.25 50,000 13.00 Exercised (22,000) .95 - 6.00 (10,000) 6.75 Cancelled (221,225) 4.88 - 23.75 - - --------- ------------- ------ ------------ February 3, 1996, options outstanding 1,073,670 $ 4.88 - 22.38 102,500 $6.75 - 16.63 ========= ============= ======= ============= Exercisable at February 3, 1996 486,602 $ 4.88 - 22.38 102,500 $6.75 - 16.63 ========= ============= ======= ============= (12) Commitments and Contingent Liabilities Leases The Company operates mainly from leased premises under license agreements generally requiring payment of annual rentals contingent upon sales. The Company leases its computers, vehicles and certain of its offices and warehouse facilities, in addition to its retail stores. At February 3, 1996, minimum rental commitments under operating leases are as follows: Fiscal Year ending January Net minimum rentals Minimum sub-rentals -------------- -------------------- ------------------- (in thousands) 1997 $ 44,138 $ 89 1998 40,847 83 1999 35,321 83 2000 26,174 73 2001 19,175 44 Thereafter 51,886 4 ------- ----- $217,541 $ 376 ======= ===== Rent expense for the years ended February 3, 1996, January 28, 1995 and January 29, 1994 was as follows: 1996 1995 1994 ---- ----- ---- (in thousands) Minimum rentals $ 52,284 $ 53,189 $ 46,012 Contingent rentals 93,289 90,275 78,694 ------- ------- ------- 145,573 143,464 124,706 Less sublease rentals 336 409 332 ------- ------- ------- Net rentals $145,237 $143,055 $124,374 ======= ======= ======= J. BAKER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Other Commitments and Contingencies The Company has employment agreements with certain of its officers under which it is committed to pay an aggregate of approximately $4.3 million through April, 1998. During fiscal 1996, the Company's Board of Directors adopted executive severance agreements which create certain liabilities in the event of the termination of the covered executives within three years following a change of control of the Company or the termination of certain key executives of the Company. The aggregate commitment amount under these executive severance agreements, should all twelve covered employees be terminated, is approximately $1.8 million. The Company also has consulting agreements under which it is required to pay an aggregate of approximately $1.2 million through fiscal 2001. At February 3, 1996 and January 28, 1995, the Company was contingently liable under letters of credit totalling $18.8 million and $31.8 million, respectively. These letters of credit, which have terms of one month to one year, are used primarily to collateralize the Company's obligations to third parties for the purchase of inventory. The fair value of these letters of credit is estimated to be the same as the contract values based on the nature of the fee arrangements with the issuing banks. No material loss is anticipated due to the non-performance by counterparties to these arrangements. On November 10, 1993, a federal jury in Minneapolis, MN returned a verdict assessing royalties of $1,550,000, and additional damages of $1,500,000, against the Company in a patent infringement suit brought by Susan Maxwell with respect to a device used to connect pairs of shoes. Certain post trial motions were filed by Susan Maxwell seeking treble damages, attorney's fees and injunctive relief, which motions were granted on March 10, 1995. Judgment has been entered for Maxwell. The Company has appealed the judgment and believes it has substantial legal arguments to justify the judgment being overturned in whole or in part at the appellate level. In the event the Company were not to prevail, however, total damages, including attorney's fees and interest, are estimated to be approximately $11 million. A complaint was also filed by Susan Maxwell in November, 1992 against Morse Shoe, Inc. ("Morse"), a subsidiary of the Company, alleging infringement of the patent referred to above. The discovery phase of the case has concluded, and a trial date will likely be set in the next several months. The Company believes that Ms. Maxwell's recovery against Morse, if any, will be less than her recovery against the Company because the number of allegedly infringing pairs of shoes is substantially less than those involved in the Company's case. Morse has filed a breach of contract lawsuit against a former wholesale customer. There can be no assurance of what amount the Company will realize as a result of this lawsuit. (13) Stockholders' Equity The Board of Directors of the Company is authorized by vote or votes, from time to time adopted, to provide for the issuance of Preferred Stock in one or more series and to fix and state the voting powers, designations, preferences and relative participating, optional or other special rights of the shares of each series and the qualifications, limitations and restrictions thereof. On December 15, 1994, the Board of Directors of the Company adopted a Shareholder Rights Agreement (the "Rights Agreement") designed to enhance the Company's ability to protect shareholder interests and to ensure that shareholders receive fair treatment in the event any coercive takeover attempt of the Company is made in the future. Pursuant to the Rights Agreement, the Board of Directors declared a dividend distribution of one preferred stock purchase right (the "Right") for each outstanding share of common stock of the Company to shareholders of record as of the close of business on January 6, 1995. Each right entitles the holder to purchase from the Company a unit consisting of one ten thousandth (1/10,000) of a share of Series A Junior Participating Cumulative Preferred Stock, par value $1.00 per share, at a cash exercise price of $70 per unit, subject to adjustment, upon the occurrence of certain events as are set forth in the Rights Agreement. These events include the earliest to occur of (i) acquisition of 15% or more of the outstanding shares of common stock of the Company J. BAKER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements by any person or group (ii) the commencement of a tender or exchange offer that would result upon its consummation in a person or a group becoming the beneficial owner of 15% or more of the outstanding common stock of the Company or (iii) the determination by the Board of Directors that any person is an "Adverse Person", as defined in the Rights Agreement. The Rights are not exercisable until or following the occurrence of one of the above events and will expire on December 14, 2004, unless previously redeemed or exchanged by the Company as provided in the Rights Agreement. (14) Principal Licensor Sales in licensed departments operated under the Ames license agreement accounted for 9.4%, 9.5% and 11.5% of the Company's net sales in the years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. (15) Segment Information The Company is a specialty retailer conducting business through retail stores in two business segments: footwear and apparel. Information about operations for each of these segments is summarized as follows: Year Ended -------------------------------------------------------------- February 3, 1996 January 28, 1995 January 29, 1994 ---------------- ---------------- ---------------- (53 weeks) ($ in thousands) Footwear Net sales $757,091 $818,220 $734,827 Restructuring costs (69,300) - - Operating profit (loss) (51,768) 44,993 43,382 Identifiable assets 377,530 456,552 396,958 Depreciation and amortization 20,524 20,363 15,075 Additions to property, equipment and leasehold improvements 13,271 31,298 13,814 Apparel Net sales $263,322 $224,759 $184,051 Operating profit 24,814 26,974 23,802 Identifiable assets 104,923 89,111 65,842 Depreciation and amortization 6,973 4,130 2,373 Additions to property, equipment and leasehold improvements 10,461 11,570 8,654 Consolidated Net sales $1,020,413 $1,042,979 $918,878 Restructuring costs (69,300) - - Operating profit (loss) before general corporate expense (26,954) 71,967 67,184 General corporate expense (27,014) (25,968) (23,318) Interest expense, net (10,457) (9,100) (7,442) Earnings (loss) before income taxes $ (64,425) $ 36,899 $ 36,424 Identifiable assets $482,453 $545,663 $462,800 Corporate assets 43,629 32,955 39,696 Total assets $526,082 $578,618 $502,496 Depreciation and amortization $ 32,428 $ 27,883 $ 21,874 Additions to property, equipment and leasehold improvements $ 28,062 $ 44,514 $ 24,115 J. BAKER, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (16) Selected Quarterly Financial Data (Unaudited) First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------- (In thousands, except per share data) Year ended February 3, 1996 Net sales $231,385 $272,520 $245,255 $271,253 $1,020,413 Gross profit 103,532 120,202 104,600 112,012 440,346 Net earnings (loss) $ 638 $ 1,397 $(41,328) $ 691 $ (38,602) ======= ======= ======== ======= ========= Earnings (loss) per common share: Primary $ .05 $ .10 $ (2.98) $ .05 $ (2.79) ======= ======= ======= ======= ========= Fully diluted $ .05 $ .10 $ (2.98) $ .05 $ (2.79) ======= ======= ======= ======= ========= Year ended January 28, 1995 Net sales $221,338 $256,336 $262,015 $303,290 $1,042,979 Gross profit 97,219 117,289 119,349 129,387 463,244 Net earnings $ 3,197 $ 7,134 $ 6,592 $ 6,693 $ 23,616 ======= ======= ======== ======= ======== Earnings per common share: Primary $ .23 $ .52 $ .47 $ .49 $ 1.71 ======= ======= ======= ======= ========= Fully diluted $ .22 $ .43 $ .40 $ .41 $ 1.46 ======= ======= ======= ======= ========= (17) Advertising Costs Advertising costs are charged to expense as incurred. The Company incurred advertising costs of $20.5 million, $20.1 million and $16.5 million in the years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. (18) Supplemental Schedules to Consolidated Statements of Cash Flows 1996 1995 1994 ---- ---- ---- Cash paid for interest $ 11,069,341 $ 8,765,653 $ 6,799,091 Cash paid for income taxes $ 2,039,089 $ 4,162,348 $ 5,022,668 =========== ============ ============ Common stock issued in connection with the acquisition of Shoe Corporation of America (see Note 3) $ 970,704 ============ Non-cash financing activities: Conversion of subordinated debt (see Note 8) $ 2,707,000 ============ Non-cash investing activities: Notes receivable (see Notes 4 and 7) $ 47,000 $ 95,000 $ 846,000 ============ =========== ============ (19) Subsequent Event On April 19, 1996, the Company announced that it had executed a letter of intent for the sale of its SCOA division to an entity to be formed by Bain Capital along with Dennis B. Tishkoff, SCOA's President, and division management. The transaction is subject to certain conditions, including the negotiation and execution of a definitive purchase agreement. The transaction should result in a positive impact on liquidity, although the Company may incur a one-time restructuring charge should the transaction be consummated. Sales in the Company's SCOA division were $183.6 million for the fiscal year ended February 3, 1996. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing in the Proxy Statement under the captions "ELECTION OF DIRECTORS", "Information About Board of Directors and Committees", "Executive Compensation" and "Employment Arrangements" is incorporated herein by this reference. EXECUTIVE COMPENSATION The information appearing in the Proxy Statement under the caption "Executive Compensation", "Employment Arrangements" and "Information About Board of Directors and Committees" is incorporated herein by this reference. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing in the Proxy Statement under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is incorporated herein by this reference. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing in the Proxy Statement under the caption "Certain Relationships and Related Transactions" is incorporated herein by this reference. PART IV EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1,2.The financial statements, notes thereto, and independent auditors' report listed in the Index to Consolidated Financial Statements set forth in Item 8. 3. The Exhibits listed in the Exhibit Index. (b) None. 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. J. Baker, Inc. Registrant) By/s/Sherman N. Baker By/s/Jerry M. Socol Sherman N. Baker Jerry M. Socol Chairman of the Board President and Chief Executive Officer By/s/Philip G. Rosenberg By/s/Alan I. Weinstein Philip G. Rosenberg Alan I. Weinstein First Senior Vice President Senior Executive Vice President and Principal Accounting Officer and Principal Financial Officer April 30, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated: /s/Sherman N. Baker /s/J. Christopher Clifford Sherman N. Baker, Director J. Christopher Clifford, Director /s/Ervin Cruce /s/Douglas Kahn Ervin Cruce, Director Douglas Kahn, Director /s/David Pulver /s/Melvin M. Rosenblatt David Pulver, Director Melvin M. Rosenblatt, Director /s/Nancy Ryan /s/Stanley Simon Nancy Ryan, Director Stanley Simon, Director /s/Jerry M. Socol Jerry M. Socol, Director All as of April 30, 1996 EXHIBITS Filed with Annual Report on Form 10-K of J. BAKER, INC. 555 Turnpike Street Canton, MA 02021 For the Year Ended February 3, 1996 EXHIBIT INDEX Exhibit Page No. 3. Articles of Organization and By-Laws (.01) Amended and Restated Articles of Organization of the Company, * as filed with the Secretary of the Commonwealth of Massachusetts on September 26, 1990 (filed as Exhibit 3.01 to the Company's Form 10-K Report for the year ended February 2, 1991). (.02) By-Laws of the Company, as amended by the Board of Directors * on September 11, 1990 (filed as Exhibit 19.01 to the Company's Form 10-Q Report for the quarter ended November 3, 1990). 4. Instruments Defining the Rights of Security Holders, Including Indentures (.01) Senior Notes and Senior Subordinated Notes with Stock Purchase * Warrants dated as of May 1, 1989 (filed as Exhibit 4.01 to the Company's Form 10-Q Report for the quarter ended July 29, 1989). (.02) Amendment dated as of November 13, 1995 to Senior Subordinated * Note Agreement dated May 1, 1989 (filed as Exhibit 4.02 to the Company's Form 10-Q Report for the quarter ended October 28, 1995). (.03) Indenture dated as of January 15, 1992 by and between Morse Shoe, * Inc. and State Street Bank and Trust Company as Trustee with respect to Convertible Subordinated Debentures due 2002 (filed as Exhibit 4.12 to the Company's Form 10-K Report for the year ended January 30, 1993). (.04) First Supplemental Indenture dated as of January 30, 1993 to * the Indenture dated January 15, 1992 under which Convertible Subordinated Debentures Due 2002 were issued by Morse Shoe, Inc. (filed as Exhibit 4.01 to the Company's Form 10-Q Report for the quarter ended May 1, 1993). (.05) Indenture dated as of June 12, 1992 by and between J. Baker, Inc. * and The First National Bank of Boston as Trustee with respect to 7% Convertible Subordinated Notes due 2002 (filed as Exhibit 4.08 to the Company's Form 10-Q Report for the quarter ended August 1, 1992). (.06) Revolving Credit and Loan Agreement by and among JBI, Inc., J. * Baker, Inc. and Fleet National Bank of Massachusetts, et al (formerly Shawmut Bank, N.A.), dated as of February 1, 1993 (filed as Exhibit 4.03 to the Company's Form 10-K Report for the year ended January 30, 1993). (.07) Guarantee Agreement dated as of February 1, 1993, between J. * Baker, Inc., Fleet National Bank of Massachusetts, et al, and subsidiaries of J. Baker, Inc. (filed as Exhibit 4.09 to the Company's Form 10-K Report for the year ended January 30, 1993). * Incorporated herein by reference ** Included herein Exhibit Page No. (.08) Security Agreement dated as of February 1, 1993, between JBI, * Inc., J. Baker, Inc., and Fleet National Bank of Massachusetts, et al (filed as Exhibit 4.10 to the Company's Form 10-K Report for the year ended January 30, 1993). (.09) Stock Pledge Agreement dated as of February 1, 1993 by and * between JBI, Inc., J. Baker, Inc., Fleet National Bank of Massachusetts, et al, and subsidiaries of J. Baker, Inc. (filed as Exhibit 4.11 to the Company's Form 10-K Report for the year ended January 30, 1993). (.10) First Amendment and Waiver Agreement by and among JBI, Inc., J. * Baker, Inc, and Fleet National Bank of Massachusetts, et al, dated as of November 19, 1993 (filed as Exhibit 4.01 to the Company's Form 10-Q Report for the quarter ended October 30, 1993). (.11) Assumption Agreement by Tishkoff Enterprises, Inc. dated as * of November 19, 1993 (filed as Exhibit 4.02 to the Company's Form 10-Q Report for the quarter ended October 30, 1993). (.12) First Amendment to Pledge Agreement by and among JBI, Inc., J. * Baker, Inc. and Fleet National Bank of Massachusetts, et al, dated as of November 19, 1993 (filed as Exhibit 4.03 to the Company's Form 10-Q Report for the quarter ended October 30, 1993). (.13) Second Amendment to Pledge Agreement by and among JBI, Inc., J. * Baker, Inc. and Fleet National Bank of Massachusetts, et al, dated as of December 30, 1993 (filed as Exhibit 4.14 to the Company's Form 10-K Report for the year ended January 29, 1994). (.14) Assumption Agreement by Shoe Corporation of America, Inc. dated as * of December 30, 1993 (filed as Exhibit 4.15 to the Company's Form 10-K Report for the year ended January 29, 1994). (.15) Second Amendment Agreement to Revolving Credit and Loan Agreement * by and among JBI, Inc, J. Baker, Inc. and Fleet National Bank of Massachusetts, et al, dated as of April 29, 1994 (filed as Exhibit 4.01 to the Company's Form 10-Q Report for the quarter ended April 30, 1994). (.16) Third Amendment Agreement to Revolving Credit and Loan Agreement * by and among JBI, Inc., J. Baker, Inc., and Fleet National Bank of Massachusetts, et al, dated as of December 1, 1994 (filed as Exhibit 4.01 to the Company's Form 10-Q Report for the quarter ended October 29, 1994). (.17) Fourth Amendment Agreement to Revolving Credit and Loan Agreement * by and among JBI, Inc., J. Baker, Inc. and Fleet National Bank of Massachusetts, et al, dated as of March 6, 1995 (filed as Exhibit 4.16 to the Company's Form 10-K Report for the year ended January 28, 1995). * Incorporated herein by reference ** Included herein Exhibit Page No. (.18) Fifth Amendment Agreement to Revolving Credit and Loan Agreement * by and among JBI, Inc., J. Baker, Inc. and Fleet National Bank of Massachusetts, et al, dated as of May 19, 1995 (filed as Exhibit 4.01 to the Company's Form 10-Q Report for the quarter ended April 29, 1995). (.19) Assumption Agreement between TCMB&T and Fleet National Bank * of Massachusetts, et al, dated as of May 19, 1995 (filed as Exhibit 4.02 to the Company's Form 10-Q Report for the quarter ended April 29, 1995). (.20) Second Amendment Agreement to Pledge Agreement among JBI, Inc., * J. Baker, Inc. and Fleet National Bank of Massachusetts, et al, dated as of May 19, 1995 (filed as Exhibit 4.03 to the Company's Form 10-Q Report for the quarter ended April 29, 1995). (.21) Sixth Amendment Agreement to Revolving Credit and Loan Agreement * by and among JBI, Inc., J. Baker, Inc. and Fleet National Bank of Massachusetts, et al, dated as of September 12, 1995 (filed as Exhibit 4.01 to the Company's Form 10-Q Report for the quarter ended July 29, 1995). (.22) Seventh Amendment Agreement to Revolving Credit and Loan * Agreement by and among JBI, Inc., J. Baker, Inc. and Fleet National Bank of Massachusetts, et al, dated as of November 17, 1995 (filed as Exhibit 4.01 to the Company's Form 10-Q Report for the quarter ended October 28, 1995). (.23) Shareholder Rights Agreement between J. Baker, Inc. and Fleet * National Bank of Massachusetts, dated as of December 15, 1994 (filed as Exhibit 4.01 to the Company's Form 8-K Report dated December 15, 1994). 10. Material Contracts (.01) License Agreement between Ames Department Stores, Inc., et al and * JBI Holding Company, Inc. (filed as Exhibit 10.01 to the Company's Form 10-K Report for the year ended January 30, 1988). (.02) Agreement between JBI Holding Company, Inc. and JBI, Inc. re: * Assignment of Ames License Agreement (filed as Exhibit 10.02 to the Company's Form 10-K Report for the year ended January 30, 1988). (.03) Amendment No. 1 dated April 29, 1989 to Agreement between Ames * Department Stores, Inc. and JBI Holding Company, Inc. (filed as Exhibit 10.04 to the Company's Form 10-Q Report for the quarter ended April 29, 1989). * Incorporated herein by reference ** Included herein Exhibit Page No. (.04) Amendment No. 2 dated December 18, 1992, to Agreement between * Ames Department Stores, Inc. and JBI Holding Company, Inc. (filed as Exhibit 10.04 to the Company's Form 10-K Report for the year ended January 30, 1993). (.05) Guaranty and Indemnity Agreement dated April 28, 1989 between J. * Baker, Inc. and Ames Department Stores, Inc. (filed as Exhibit 10.05 to the Company's Form 10-Q Report for the quarter ended April 29, 1989). (.06) Plan of Reorganization of The Casual Male Corporation dated * November 1, 1990 as revised November 20, 1990 (filed as Exhibit 2.01 to the Company's Form 10-Q Report for the quarter ended November 3, 1990). (.07) Executive Employment Agreement dated March 25, 1993 between * Sherman N. Baker and J. Baker, Inc. (filed as Exhibit 10.01 to the Company's Form 10-Q Report for the quarter ended July 31, 1993). (.08) Amendment to Employment Agreement between J. Baker, Inc. and * Sherman N.Baker, dated March 31, 1995 (filed as Exhibit 4.10 to the Company's Form 10-K Report for the year ended January 28, 1995). (.09) Amendment to Employment Agreement between J. Baker, Inc. and ** Sherman N. Baker, dated March 31, 1996, attached. (.10) Executive Employment Agreement between J. Baker, Inc. and Alan * I. Weinstein, dated March 25, 1993 (filed as Exhibit 10.04 to the Company's Form 10-Q Report for the quarter ended July 31, 1993). (.11) Amendment to Employment Agreement between J. Baker, Inc. and Alan * I. Weinstein, dated April 27, 1994 (filed as Exhibit 10.01 to the Company's Form 10-Q Report for the quarter ended July 30, 1994). (.12) Amendment to Employment Agreement between J. Baker, Inc. and Alan * I. Weinstein, dated April 25, 1995 (filed as Exhibit 10.01 to the Company's Form 10-Q Report for the quarter ended April 29, 1995). (.13) Amendment to Employment Agreement between J. Baker, Inc. and Alan ** I. Weinstein, dated March 7, 1996, attached. (.14) Amendment to Employment Agreement between J. Baker, Inc. and Alan ** I. Weinstein, dated April 5, 1996, attached. (.15) Executive Employment Agreement between J. Baker, Inc. and Jerry * M. Socol, dated March 25, 1993 (filed as Exhibit 10.11 to the Company's Form 10-K Report for the year ended January 29, 1994). * Incorporated herein by reference ** Included herein Exhibit Page No. (.16) Amendment to Employment Agreement between J. Baker, Inc. and Jerry * M. Socol, dated June 9, 1994 (filed as Exhibit 10.01 to the Company's Form 10-Q Report for the quarter ended July 29, 1995). (.17) Amendment to Employment Agreement between J. Baker, Inc. and Jerry * M. Socol, dated July 14, 1995 (filed as Exhibit 10.02 to the Company's Form 10-Q Report for the quarter ended July 29, 1995). (.18) Amendment to Employment Agreement between J. Baker, Inc. and Jerry ** M. Socol, dated March 7, 1996, attached. (.19) Amendment to Employment Agreement between J. Baker, Inc. and Jerry ** M. Socol, dated April 5, 1996, attached. (.20) Executive Employment Agreement between J. Baker, Inc. and Larry I. * Kelley, dated March 25, 1993 (filed as Exhibit 10.06 to the Company's Form 10-Q Report for the quarter ended July 31, 1993). (.21) Amendment to Employment Agreement between J. Baker, Inc. and Larry * I. Kelley, dated April 27, 1994 (filed as Exhibit 10.02 to the Company's Form 10-Q Report for the quarter ended July 30, 1994). (.22) Amendment to Employment Agreement between J. Baker, Inc. and Larry * I. Kelley, dated May 2, 1995 (filed as Exhibit 10.02 to the Company's Form 10-Q Report for the quarter ended April 29, 1995). (.23) Amendment to Employment Agreement between J. Baker, Inc. and Larry * I. Kelley, dated November 7, 1995 (filed as Exhibit 10.03 to the Company's Form 10-Q Report for the quarter ended October 28, 1995) (.24) Amendment to Employment Agreement between J. Baker, Inc. and Larry ** I. Kelley, dated April 5, 1996, attached. (.25) Promissory Note of Larry I. Kelley dated June 3, 1991 (filed as * Exhibit 10.33 to the Company's Form 10-K Report for the year ended February 1, 1992). (.26) Promissory Note of Larry I. Kelley dated February 2, 1993 (filed * as Exhibit 10.15 to the Company's Form 10-K Report for the year ended January 29, 1994). (.27) Promissory Note of Larry I. Kelley dated April 30, 1993 (filed as * Exhibit 10.16 to the Company's Form 10-K Report for the year ended January 29, 1994). (.28) Executive Employment Agreement dated as of November 1, 1993 * between Stuart M. Needleman and J. Baker, Inc. (filed as Exhibit 10.03 to the Company's Form 10-Q Report for the quarter ended October 30, 1993). * Incorporated herein by reference ** Included herein Exhibit Page No. (.29) Amendment to Employment Agreement between J. Baker, Inc. and * Stuart M. Needleman, dated February 13, 1995 (filed as Exhibit 10.24 to the Company's Form 10-K Report for the year ended January 28, 1995). (.30) Amendment to Employment Agreement between J. Baker, Inc. and * Stuart M. Needleman, dated November 10, 1995 (filed as Exhibit 10.04 to the Company's Form 10-Q Report for the quarter ended October 28, 1995). (.31) Executive Employment Agreement dated as of November 19, 1993 * between Dennis B. Tishkoff and J. Baker, Inc. (filed as Exhibit 10.04 to the Company's Form 10-Q Report for the quarter ended October 30, 1993). (.32) Amendment to Employment Agreement between J. Baker, Inc. and * Dennis B. Tishkoff, dated February 8, 1995 (filed as Exhibit 10.26 to the Company's Form 10-K Report for the year ended January 28, 1995). (.33) Amendment to Employment Agreement between J. Baker, Inc. and * Dennis B. Tishkoff, dated April 25, 1995 (filed as Exhibit 10.03 to the Company's Form 10-Q Report for the quarter ended April 29, 1995). (.34) Amendment to Employment Agreement between J. Baker, Inc. and * Dennis B. Tishkoff, dated November 26, 1995 (filed as Exhibit 10.05 to the Company's Form 10-Q Report for the quarter ended October 28, 1995). (.35) Executive Employment Agreement between J. Baker, Inc. and James * Lee, dated January 26, 1995 (filed as Exhibit 10.27 to the Company's Form 10-K Report for the year ended January 28, 1995). (.36) Amendment to Employment Agreement between J. Baker, Inc. and * James D. Lee, dated November 6, 1995 (filed as Exhibit 10.02 to the Company's Form 10-Q Report for the quarter ended October 28, 1995). (.37) Forgiveness Loan made by James Lee in favor of Morse Shoe, Inc., * dated August 26, 1994 (filed as Exhibit 10.03 to the Company's Form 10-Q Report for the quarter ended July 29, 1995). (.38) Promissory Note made by James Lee in favor of J. Baker, Inc., * dated May 19, 1995 (filed as Exhibit 10.04 to the Company's Form 10-Q Report for the quarter ended July 29, 1995). (.39) Executive Employment Agreement between J. Baker, Inc. and David ** A. Levin, dated June 12, 1995, attached. * Incorporated herein by reference ** Included herein Exhibit Page No. (.40) Amendment to Employment Agreement between J. Baker, Inc. and ** David A. Levin, dated April 5, 1996, attached. (.41) Severance Compensation Agreement between J. Baker, Inc. and ** Philip G. Rosenberg, dated November 1, 1995, attached. (.42) J. Baker, Inc. Amended and Restated 1985 Stock Option Plan (filed * as Exhibit 19.02 to the Company's Form 10-Q Report for the quarter ended August 1, 1992). (.43) J. Baker, Inc. 1994 Equity Incentive Plan dated as of March 29, * 1994 (filed as Exhibit 10.23 to the Company's Form 10-K Report for the year ended January 29, 1994). (.44) J. Baker, Inc. 1992 Directors Stock Option Plan dated as of * April 13, 1992 (filed as Exhibit 19.03 to the Company's Form 10-Q Report for the quarter ended August 1, 1992). (.45) Stock Purchase Agreement by and among J. Baker, Inc. and Tishkoff * Enterprises, Inc. and certain stockholders of Tishkoff Enterprises, Inc. dated November 19, 1993 (filed as Exhibit 2.01 to the Company's Form 10-Q Report dated October 30, 1993). (.46) Mortgage and Security Agreement dated as of December 30, 1992 by * and between JBI Holding Company, Inc. and Ames Department Stores, Inc., (filed as Exhibit 10.22 to the Company's Form 10-K Report for the year ended January 30, 1993). (.47) Promissory Note dated as of December 30, 1992 made by Ames * Department Stores, Inc. in favor of JBI Holding Company, Inc. (filed as Exhibit 4.14 to the Company's Form 10-K Report for the year ended January 30, 1993). (.48) Agreement and Plan of Reorganization by and among J. Baker, Inc., * Morse Acquisition, Inc. and Morse Shoe, Inc. dated October 22, 1992, as amended by Letter Amendments dated December 7, 1992 and December 10, 1992 (filed as Exhibits 2.01-2.03 to the Company's Form 10-Q Report dated October 31, 1992). (.49) Agreement of Merger among J. Baker, Inc., JBAK Acquisition Corp. * and Tishkoff Enterprises, Inc. dated December 3, 1993 (filed as Exhibit 10.30 to the Company's Form 10-K Report for the year ended January 29, 1994). (.50) Agency Agreement by and between Gordon Brothers Partners, Inc. * and Morse Shoe, Inc., dated September 22, 1995 (filed as Exhibit 10.01 to the Company's Form 10-Q Report for the quarter ended October 28, 1995). * Incorporated herein by reference ** Included herein Exhibit Page No. 11. Statement re: Computation of Primary and Fully Diluted Earnings ** Per Share, attached. 12. Statement re: Computation of Earnings to Fixed Charges, attached. ** 22. Subsidiaries of the Registrant, attached. ** 23. Consent of KPMG Peat Marwick, attached. ** 27. Financial Data Schedule, attached. ** * Incorporated herein by reference ** Included herein