SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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)
(781) 828-9300
(Registrant's telephone number, including area code)
The registrant (1) has filed all reports to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such
period that the registrant was required to file such reports), and (2) has been
subject to filing such reports for the past 90 days.
YES [X] NO
The number of shares outstanding of the registrant's common stock as of August
2, 1997, was 13,914,300.
1
J. BAKER, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
August 2, 1997 (unaudited) and February 1, 1997
August 2, February 1,
Assets 1997 1997
------ -------- -------
Current assets:
Cash and cash equivalents $ 1,711,896 $ 3,969,116
Accounts receivable:
Trade, net 14,459,203 14,771,734
Other 1,532,264 1,737,786
---------- ----------
15,991,467 16,509,520
---------- ----------
Merchandise inventories 164,268,910 146,045,496
Prepaid expenses 9,649,621 6,031,033
Deferred income taxes 36,159,000 37,548,000
Assets held for sale - 62,255,582
------------ -----------
Total current assets 227,780,894 272,358,747
----------- -----------
Property, plant and equipment, at cost:
Land and buildings 19,340,925 19,340,925
Furniture, fixtures and equipment 77,245,839 74,244,548
Leasehold improvements 24,280,284 23,100,973
----------- -----------
120,867,048 116,686,446
Less accumulated depreciation and amortization 45,734,247 40,032,801
----------- -----------
Net property, plant and equipment 75,132,801 76,653,645
----------- -----------
Deferred income taxes 26,199,000 26,199,000
Other assets, at cost, less accumulated amortization 12,367,151 7,309,411
----------- -----------
$341,479,846 $382,520,803
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 2,035,817 $ 2,012,327
Accounts payable 48,720,653 57,006,085
Accrued expenses 11,365,859 29,837,310
Income taxes payable 1,198,881 1,380,664
----------- -----------
Total current liabilities 63,321,210 90,236,386
----------- -----------
Other liabilities 3,180,149 6,203,073
Long-term debt, net of current portion 129,225,814 140,787,673
Senior subordinated debt 1,470,761 2,951,411
Convertible subordinated debt 70,353,000 70,353,000
Stockholders' equity 73,928,912 71,989,260
----------- -----------
$341,479,846 $382,520,803
=========== ===========
See accompanying notes to consolidated financial statements.
2
J. BAKER, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
For the quarters ended August 2, 1997 and August 3, 1996
(Unaudited)
Quarter Quarter
Ended Ended
August 2, 1997 August 3, 1996
-------------- --------------
Sales $143,929,357 $231,805,391
Cost of sales 80,139,384 130,378,579
----------- -----------
Gross profit 63,789,973 101,426,812
Selling, administrative and general expenses 53,926,913 88,310,932
Depreciation and amortization 3,500,451 7,454,120
---------- ----------
Operating income 6,362,609 5,661,760
Net interest expense 3,242,501 3,224,038
----------- -----------
Earnings before income taxes 3,120,108 2,437,722
Income tax expense 1,216,000 952,000
----------- -----------
Net earnings $ 1,904,108 $ 1,485,722
=========== ===========
Net earnings per common share:
Primary $ 0.14 $ 0.11
============ ============
Fully diluted $ 0.14 $ 0.11
============ ============
Number of shares used to compute net earnings per common share:
Primary 13,912,934 13,891,265
=========== ===========
Fully diluted 13,970,527 13,928,732
=========== ===========
Dividends declared per share $ 0.015 $ 0.015
============ ============
See accompanying notes to consolidated financial statements.
3
J. BAKER, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
For the six months ended August 2, 1997 and August 3, 1996
(Unaudited)
August 2, 1997 August 3, 1996
-------------- --------------
Sales $281,279,618 $427,335,600
Cost of sales 155,491,836 235,287,939
----------- -----------
Gross profit 125,787,782 192,047,661
Selling, administrative and general expenses 109,621,742 167,595,023
Depreciation and amortization 6,153,844 14,662,623
---------- ----------
Operating income 10,012,196 9,790,015
Net interest expense 6,450,077 6,001,733
----------- -----------
Earnings before income taxes 3,562,119 3,788,282
Income tax expense 1,389,000 1,477,000
----------- -----------
Net earnings $ 2,173,119 $ 2,311,282
=========== ===========
Net earnings per common share:
Primary $ 0.16 $ 0.17
============ ============
Fully diluted $ 0.16 $ 0.17
============ ============
Number of shares used to compute net earnings per common share:
Primary 13,902,952 13,882,729
=========== ===========
Fully diluted 13,959,598 13,903,376
=========== ===========
Dividends declared per share $ 0.030 $ 0.030
============ ============
See accompanying notes to consolidated financial statements.
4
J. BAKER, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended August 2, 1997 and August 3, 1996
(Unaudited)
August 2, 1997 August 3, 1996
-------------- --------------
Cash flows from operating activities:
Net earnings $ 2,173,119 $ 2,311,282
Adjustments to reconcile net earnings to cash
used in operating activities:
Depreciation and amortization:
Fixed assets 5,701,470 10,054,455
Deferred charges, intangible assets and
deferred financing costs 471,724 4,627,518
Deferred income taxes 1,389,000 1,520,370
Change in:
Accounts receivable (931,947) (5,443,623)
Merchandise inventories (25,112,428) (24,276,016)
Prepaid expenses (3,618,588) (4,035,130)
Accounts payable (8,285,432) (9,293,968)
Accrued expenses (16,671,451) (10,856,406)
Income taxes payable/receivable (181,783) 7,236,732
Other liabilities 36,908 111,558
------------ -----------
Net cash used in operating
activities (45,029,408) (28,043,228)
------------ -----------
Cash flows from investing activities: Capital expenditures for:
Property, plant and equipment (4,180,626) (10,450,045)
Other assets (1,313,109) (15,660)
Payments received on notes receivable 1,450,000 2,438,000
----------- -----------
Net cash used in investing activities (4,043,735) (8,027,705)
----------- -----------
Cash flows from financing activities:
Repayment of senior debt (1,500,000) (1,500,000)
Proceeds (repayment) of other long-term debt (11,287,947) 37,000,000
Repayment of mortgage payable (250,422) -
Payment of mortgage escrow, net (47,076) -
Proceeds from sales of footwear businesses 60,134,835 -
Proceeds from issuance of common stock 183,646 210,887
Payment of dividends (417,113) (416,566)
----------- -----------
Net cash provided by financing activities 46,815,923 35,294,321
----------- -----------
Net decrease in cash (2,257,220) (776,612)
Cash and cash equivalents at beginning of year 3,969,116 3,287,141
----------- -----------
Cash and cash equivalents at end of period $ 1,711,896 $ 2,510,529
========== ==========
Supplemental disclosure of cash flow information Cash paid (received) for:
Interest $ 3,342,945 $5,888,750
Income taxes 181,783 2,997,370
Income taxes refunded - (8,315,483)
=========== ===========
See accompanying notes to consolidated financial statements
5
J. BAKER, INC. AND SUBSIDIARIES
NOTES
1] The accompanying unaudited consolidated financial statements, in the opinion
of management, include all adjustments necessary for a fair presentation of the
Company's financial position and results of operations. The results for the
interim periods are not necessarily indicative of results that may be expected
for the entire fiscal year.
2] 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 such period. Included in this
calculation is the dilutive effect of stock options and warrants. The Common
Stock issuable under the 7% convertible subordinated notes was not included in
the calculation for the quarters and six months ended August 2, 1997 and August
3, 1996 because its effect would be antidilutive.
3] During the fourth quarter of fiscal 1997, the Company recorded a
restructuring charge related to its footwear operations. In connection with the
restructuring, the Company has reduced its investment in its Licensed Discount
footwear division, and, in March, 1997, the Company completed the sales of its
Shoe Corporation of America ("SCOA") and Parade of Shoes businesses.
On March 5, 1997, the Company announced that it had sold its SCOA division
to an entity formed by CHB Capital Partners of Denver, Colorado along with
Dennis B. Tishkoff, President of SCOA, and certain members of SCOA management.
Net cash proceeds from the transaction of approximately $40.1 million were used
to pay down the Company's bank debt. Sales in the Company's SCOA division
totaled $0 and $44.5 million for the quarters ended August 2, 1997 and August 3,
1996, respectively, and $9.5 million and $89.2 million for the six months ended
August 2, 1997 and August 3, 1996, respectively.
On March 10, 1997, the Company completed the sale of its Parade of Shoes
division to Payless ShoeSource, Inc. of Topeka, Kansas. Net cash proceeds from
the transaction of approximately $20 million were used to pay down the Company's
bank debt. Sales in the Company's Parade of Shoes division totaled $0 and $38.1
million for the quarters ended August 2, 1997 and August 3, 1996, respectively,
and $8.2 million and $65.8 million for the six months ended August 2, 1997 and
August 3, 1996, respectively.
4] On May 30, 1997, the Company replaced its $145 million credit facility by
obtaining two separate revolving credit facilities, both of which are guaranteed
by J. Baker, Inc. One facility, which finances the Company's apparel businesses,
is a $100 million revolving credit facility with Fleet National Bank,
BankBoston, N.A., The Chase Manhattan Bank, Imperial Bank, USTrust, Wainwright
Bank & Trust Company and Bank Polska Kasa Opieki S.A. (the "Apparel Credit
Facility"). The Apparel Credit Facility is secured by all of the capital stock
of The Casual Male, Inc. and three other subsidiaries of the Company. The
aggregate commitment under the Apparel Credit Facility will be automatically
reduced by $10 million, $12.5 million and $12.5 million on December 31, 1997,
December 31, 1998 and December 31, 1999, respectively. Borrowings under the
Apparel Credit Facility bear interest at variable rates and can be in the form
of loans, bankers' acceptances and letters of credit. This facility expires on
May 31, 2000.
To finance its Licensed Discount footwear business, the Company obtained a
$55 million revolving credit facility, secured by substantially all of the
assets of the Licensed Discount division, with GBFC, Inc. and Fleet National
Bank (the "Footwear Credit Facility"). The aggregate commitment under the
Footwear Credit Facility was reduced by $5 million on June 30, 1997. Aggregate
borrowings under the Footwear Credit Facility are limited to an amount
determined by a formula based on various percentages of eligible inventory and
accounts receivable. Borrowings under the Footwear Credit Facility bear interest
at variable rates and can be in the form of loans or letters of credit. This
facility expires on May 31, 2000.
6
5] On June 23, 1995, Bradlees Stores, 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 assuming the existing license agreement with the
Company or 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 quarter and six months ended August 2, 1997 were $14.1 million and
$23.5 million, respectively.
6] On October 18, 1995, Jamesway Corporation ("Jamesway"), then a licensor of
the Company, filed for protection under Chapter 11 of the United States
Bankruptcy Code. Jamesway liquidated its inventory, fixed assets and real estate
and ceased 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. Because Jamesway ceased operation of its business, the Company's
license agreement was rejected. The Company has negotiated a settlement of the
amount of its claim with Jamesway, which has been approved by the Bankruptcy
Court. The Jamesway plan of liquidation was confirmed on June 6, 1997, and the
Company received a partial distribution of the amount owed to the Company under
the settlement during the second quarter of fiscal 1998. In August, 1997, the
Company received a fee from a third party by assigning its rights to any future
distributions from Jamesway.
7] On November 10, 1993, the United States District Court for the District of
Minnesota returned a jury verdict assessing royalty damages 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 patent for a system used to
connect pairs of shoes. The jury verdict was based on a finding that three
different shoe connection systems used by the Company infringed Ms. Maxwell's
patent. Post trial motions for treble damages, attorney's fees and injunctive
relief were granted on March 10, 1995. The Company appealed the judgment. On
June 11, 1996, the United States Court of Appeals for the Federal Circuit
reversed in part and affirmed in part and vacated the award of treble damages,
attorney's fees and injunctive relief. The appellate court's ruling was based on
its holding that as a matter of law two of the three shoe connection systems
used by the Company did not infringe the patent. A request by Ms. Maxwell for a
rehearing en banc was denied by an order dated August 28, 1996. Ms. Maxwell
petitioned the United States Supreme Court for a writ of certiorari, which
petition was denied on March 17, 1997. The case has been remanded to the trial
court for a redetermination of damages consistent with the opinion of the
appellate court. The issues for trial on remand include a determination of what,
if anything, is a reasonable royalty for the one shoe connection system that was
not subject to the reversal by the Court of Appeals, how many pairs of shoes
having the patented system did the Company sell, and whether the Company's sale
of shoes having the patented system, after actual notice of the patent and while
the Company was changing to the two systems found to be non-infringing,
constitutes willful infringement in which event damages payable by the Company
may at the discretion of the Court be doubled or trebled. The trial on remand
commenced on September 8, 1997 and is expected to conclude by the end of
September, 1997.
A complaint was also filed by Ms. Maxwell in November, 1992 against Morse
Shoe, Inc. ("Morse"), a subsidiary of the Company, alleging infringement of the
patent referred to above. The trial has been stayed pending the outcome of the
aforementioned trial.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
All references herein to fiscal 1998 and fiscal 1997 relate to the years ending
January 31, 1998 and February 1, 1997, respectively.
Results of Operations
FIRST SIX MONTHS OF FISCAL 1998 VERSUS FIRST SIX MONTHS OF FISCAL 1997
The Company's net sales decreased by $146.0 million to $281.3 million in
the first six months of fiscal 1998 from $427.3 million in the first six months
of fiscal 1997, primarily due to the disposition of the Company's SCOA and
Parade of Shoes businesses in March, 1997. Sales in the Company's apparel
operations increased by $8.0 million primarily due to an increase in the number
of Casual Male Big & Tall stores in operation during the first six months of
fiscal 1998 as compared to the first six months of fiscal 1997 and a 1.0%
increase in comparable apparel store sales. (Comparable 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 relevant comparison periods.) Excluding net sales produced by the
Company's SCOA and Parade of Shoes businesses of $17.7 million in the first six
months of fiscal 1998 and $155.0 million in the first six months of fiscal 1997,
sales produced by the Company's Licensed Discount shoe department operations
decreased by $16.8 million to $128.2 million in the first six months of fiscal
1998 from $145.0 million in the first six months of fiscal 1997. This decrease
was primarily due to a reduction in the number of Licensed Discount shoe
departments in operation during the first six months of fiscal 1998 as compared
to the first six months of fiscal 1997 and a 3.0% decrease in comparable retail
footwear store sales. (Comparable retail footwear store sales
increases/decreases are based upon comparisons of weekly sales volume in
Licensed Discount shoe departments which were open in corresponding weeks of the
relevant comparison periods.)
The Company's cost of sales constituted 55.3% of sales in the first six
months of fiscal 1998 as compared to 55.1% of sales in the first six months of
fiscal 1997. Cost of sales in the Company's apparel operations was 52.4% of
sales in the first six months of fiscal 1998 as compared to 50.8% of sales in
the first six months of fiscal 1997. The increase in such percentage was
primarily attributable to higher markdowns as a percentage of sales and a lower
initial markup on merchandise purchases. Cost of sales in the Company's footwear
operations was 57.9% of sales in the first six months of fiscal 1998 as compared
to 56.9% of sales in the first six months of fiscal 1997. The increase in such
percentage, which was partially offset by a change in the Company's method of
financing its foreign merchandise purchases with bank borrowings in the first
six months of fiscal 1998 versus the use of bankers' acceptances in the first
six months of fiscal 1997, was primarily due to the increased proportion of
Licensed Discount shoe department sales to total footwear sales in the first six
months of fiscal 1998 versus the first six months of fiscal 1997. As a
percentage of sales, Licensed Discount shoe department sales have a higher cost
of sales than the aggregate cost of sales in the divested SCOA and Parade of
Shoes businesses.
Selling, administrative and general expenses decreased $58.0 million, or
34.6%, to $109.6 million in the first six months of fiscal 1998 from $167.6
million in the first six months of fiscal 1997 primarily due to the disposition
of the Company's SCOA and Parade of Shoes businesses in March, 1997 and the
downsizing of the Company's Licensed Discount shoe division and its
administrative areas and facilities, coupled with the benefit realized from the
curtailment of the Company's defined benefit pension plan in the first six
months of fiscal 1998. As a percentage of sales, selling, administrative and
general expenses were 39.0% of sales in the first six months of fiscal 1998 as
compared to 39.2% of sales in the first six months of fiscal 1997. Selling,
administrative and general expenses in the Company's apparel operations were
41.3% of sales in the first six months of fiscal 1998 as compared to 43.5% of
sales in the first six months of fiscal 1997. This decrease was primarily due to
a lower corporate overhead allocation, resulting from a portion of corporate
overhead costs for the first six months of fiscal 1998 being allocated to the
Company's divested SCOA and Parade of Shoes businesses. Selling, administrative
and general expenses in the Company's footwear operations were 36.8% of sales in
the first six months of fiscal 1998 as compared to 37.4% of sales in the first
six months of fiscal 1997. This decrease was primarily due to the increased
proportion of Licensed Discount shoe department sales to total footwear sales in
the first six months of
8
fiscal 1998 versus the first six months of fiscal 1997. The Company's Licensed
Discount shoe division has lower selling, administrative and general expenses as
a percentage of sales than the aggregate selling, administrative and general
expenses as a percentage of sales in the divested SCOA and Parade of Shoes
businesses.
Depreciation and amortization expense decreased by $8.5 million in the
first six months of fiscal 1998 as compared to the first six months of fiscal
1997 primarily due to the write-off of certain fixed and intangible assets in
the fourth quarter of fiscal 1997 related to the overall restructuring of the
Company's footwear businesses. This decrease was partially offset by capital
expenditures for depreciable and amortizable assets.
As a result of the above described effects, the Company's operating income
increased by 2.3% to $10.0 million in the first six months of fiscal 1998 from
$9.8 million in the first six months of fiscal 1997. As a percentage of sales,
operating income was 3.6% in the first six months of fiscal 1998 as compared to
2.3% in the first six months of fiscal 1997.
Net interest expense increased $448,000 to $6.5 million in the first six
months of fiscal 1998 from $6.0 million in the first six months of fiscal 1997
primarily due to a change in the Company's method of financing foreign
merchandise purchases with bank borrowings in the first six months of fiscal
1998 versus the use of bankers' acceptances in the first six months of fiscal
1997, partially offset by lower levels of bank borrowings in the first six
months of fiscal 1998.
Taxes on earnings for the first six months of fiscal 1998 were $1.4
million as compared to taxes of $1.5 million in the first six months of fiscal
1997, yielding an effective tax rate of 39.0% in each case.
Net earnings for the first six months of fiscal 1998 were $2.2 million, as
compared to net earnings of $2.3 million in the first six months of fiscal 1997,
a decrease of 6.0%.
SECOND QUARTER OF FISCAL 1998 VERSUS SECOND QUARTER OF FISCAL 1997
The Company's net sales decreased by $87.9 million to $143.9 million in
the second quarter of fiscal 1998 from $231.8 million in the second quarter of
fiscal 1997. Sales in the Company's apparel operations increased by $4.3 million
primarily due to an increase in the number of Casual Male Big & Tall stores in
operation during the second quarter of fiscal 1998 as compared to the second
quarter of fiscal 1997 and a 1.6% increase in comparable apparel store sales.
Excluding net sales produced by the Company's SCOA and Parade of Shoes
businesses of $82.6 million in the second quarter of fiscal 1997, sales produced
by the Company's Licensed Discount shoe department operations decreased by $9.6
million to $74.6 million in the second quarter of fiscal 1998 from $84.2 million
in the second quarter of fiscal 1997. This decrease was primarily due to a
reduction in the number of Licensed Discount shoe departments in operation
during the second quarter of fiscal 1998 as compared to the second quarter of
fiscal 1997 and a 3.0% decrease in comparable retail footwear store sales.
The Company's cost of sales constituted 55.7% of sales in the second
quarter of fiscal 1998 as compared to 56.2% of sales in the second quarter of
fiscal 1997. Cost of sales in the Company's apparel operations was 52.1% of
sales in the second quarter of fiscal 1998 as compared to 51.0% of sales in the
second quarter of fiscal 1997. The increase in such percentage was primarily
attributable to higher markdowns as a percentage of sales and a lower initial
markup on merchandise purchases. Cost of sales in the Company's footwear
operations was 59.0% of sales in the second quarter of fiscal 1998 as compared
to 58.3% of sales in the second quarter of fiscal 1997. The increase in such
percentage, which was partially offset by a change in the Company's method of
financing its foreign merchandise purchases with bank borrowings in the second
quarter of fiscal 1998 versus the use of bankers' acceptances in the second
quarter of fiscal 1997, was primarily due to higher markdowns as a percentage of
sales and a lower initial markup on merchandise purchases in the Company's
Licensed Discount shoe division, coupled with an increased proportion of
Licensed Discount shoe department sales to total footwear sales in the second
quarter of fiscal 1998 versus the second quarter of fiscal 1997. As a percentage
of sales, Licensed Discount shoe department sales have a higher cost of sales
than the aggregate cost of sales in the divested SCOA and Parade of Shoes
businesses.
9
Selling, administrative and general expenses decreased $34.4 million, or
38.9%, to $53.9 million in the second quarter of fiscal 1998 from $88.3 million
in the second quarter of fiscal 1997 primarily due to the disposition of the
Company's SCOA and Parade of Shoes businesses in March, 1997 and the downsizing
of the Company's Licensed Discount shoe division and its administrative areas
and facilities. As a percentage of sales, selling, administrative and general
expenses were 37.5% of sales in the second quarter of fiscal 1998 as compared to
38.1% of sales in the second quarter of fiscal 1997. Selling, administrative and
general expenses in the Company's apparel operations were 41.4% of sales in the
second quarter of fiscal 1998 as compared to 44.2% of sales in the second
quarter of fiscal 1997. This decrease was primarily due to a lower corporate
overhead allocation and the increase in comparable apparel store sales. Selling,
administrative and general expenses in the Company's footwear operations were
33.8% of sales in the second quarter of fiscal 1998 as compared to 35.7% of
sales in the second quarter of fiscal 1997. This decrease was primarily due to
the increased proportion of Licensed Discount shoe department sales to total
footwear sales in the second quarter of fiscal 1998 versus the second quarter of
fiscal 1997. The Company's Licensed Discount shoe division has lower selling,
administrative and general expenses as a percentage of sales than the aggregate
selling, administrative and general expenses as a percentage of sales in the
divested SCOA and Parade of Shoes businesses.
Depreciation and amortization expense decreased by $4.0 million in the
second quarter of fiscal 1998 as compared to the second quarter of fiscal 1997
primarily due to the write-off of certain fixed and intangible assets in the
fourth quarter of fiscal 1997 related to the overall restructuring of the
Company's footwear businesses. This decrease was partially offset by capital
expenditures for depreciable and amortizable assets.
As a result of the above described effects, the Company's operating income
increased by 12.4% to $6.4 million in the second quarter of fiscal 1998 from
$5.7 million in the second quarter of fiscal 1997. As a percentage of sales,
operating income was 4.4% in the second quarter of fiscal 1998 as compared to
2.4% in the second quarter of fiscal 1997.
Net interest expense increased $18,000 to $3.2 million in the second
quarter of fiscal 1998 from $3.2 million in the second quarter of fiscal 1997
primarily due to a change in the Company's method of financing foreign
merchandise purchases with bank borrowings in the second quarter of fiscal 1998
versus the use of bankers' acceptances in the second quarter of fiscal 1997,
partially offset by lower levels of bank borrowings in the second quarter of
fiscal 1998.
Taxes on earnings for the second quarter of fiscal 1998 were $1.2 million,
yielding an effective tax rate of 39.0%, as compared to taxes of $952,000,
yielding an effective tax rate of 39.1%, in the second quarter of fiscal 1997.
Net earnings for the second quarter of fiscal 1998 were $1.9 million, as
compared to net earnings of $1.5 million in the second quarter of fiscal 1997,
an increase of 28.2%.
Financial Condition
AUGUST 2, 1997 VERSUS FEBRUARY 1, 1997
The increase in merchandise inventories at August 2, 1997 from February 1,
1997 was primarily due to a seasonal increase in the average inventory level per
location.
The decrease in assets held for sale at August 2, 1997 from February 1,
1997 was due to the receipt of the cash proceeds from the divestitures of the
Company's SCOA and Parade of Shoes businesses in March, 1997.
The increase in other assets at August 2, 1997 from February 1, 1997 was
primarily the result of the establishment of escrow accounts related to the
divestitures of the Company's SCOA and Parade of Shoes businesses.
The decrease in accounts payable at August 2, 1997 from February 1, 1997
was primarily due to an increase in direct import merchandise purchases, which
are paid for sooner than domestic merchandise purchases, coupled
10
with the Company's decision to eliminate bankers' acceptance financing of
foreign merchandise purchases in its footwear operations. The ratio of accounts
payable to merchandise inventory was 29.7% at August 2, 1997, as compared to
39.0% at February 1, 1997.
The decrease in accrued expenses at August 2, 1997 from February 1, 1997
was primarily due to payments of costs related to the restructuring of the
Company's footwear operations, including the sales of the Company's SCOA and
Parade of Shoes businesses, and the downsizing and restructuring of its Licensed
Discount shoe division and the Company's administrative areas and facilities.
The decrease in other liabilities at August 2, 1997 from February 1, 1997
was due to payment of $3.0 million to former stockholders of SCOA in order to
satisfy a contractual contingent payment obligation, based on earnings, to such
former SCOA stockholders.
The decrease in long-term debt, net of current portion, at August 2, 1997
from February 1, 1997 was due to the repayment of the Company's bank debt with
the net cash proceeds from the sales of the Company's SCOA and Parade of Shoes
businesses. The decrease was partially offset by additional borrowings to meet
seasonal working capital needs and to fund capital expenditures.
Liquidity and Capital Resources
In the first six months of fiscal 1998, the Company's primary sources of
capital to finance its cash needs were the proceeds received on the sales of the
Company's SCOA and Parade of Shoes businesses, and borrowings under bank credit
facilities.
On May 30, 1997, the Company replaced its $145 million credit facility by
obtaining two separate revolving credit facilities, both of which are guaranteed
by J. Baker, Inc. One facility, which finances the Company's apparel businesses,
is a $100 million revolving credit facility with Fleet National Bank,
BankBoston, N.A., The Chase Manhattan Bank, Imperial Bank, USTrust, Wainwright
Bank & Trust Company and Bank Polska Kasa Opieki S.A. (the "Apparel Credit
Facility"). The Apparel Credit Facility is secured by all of the capital stock
of The Casual Male, Inc. and three other subsidiaries of the Company. The
aggregate commitment under the Apparel Credit Facility will be automatically
reduced by $10 million, $12.5 million and $12.5 million on December 31, 1997,
December 31, 1998 and December 31, 1999, respectively. Borrowings under the
Apparel Credit Facility bear interest at variable rates and can be in the form
of loans, bankers' acceptances and letters of credit. This facility expires on
May 31, 2000.
To finance its Licensed Discount footwear business, the Company obtained a
$55 million revolving credit facility, secured by substantially all of the
assets of the Licensed Discount division, with GBFC, Inc. and Fleet National
Bank (the "Footwear Credit Facility"). The aggregate commitment under the
Footwear Credit Facility was reduced by $5 million on June 30, 1997. Aggregate
borrowings under the Footwear Credit Facility are limited to an amount
determined by a formula based on various percentages of eligible inventory and
accounts receivable. Borrowings under the Footwear Credit Facility bear interest
at variable rates and can be in the form of loans or letters of credit. This
facility expires on May 31, 2000.
As of August 2, 1997, the Company had aggregate borrowings outstanding
under its Apparel Credit Facility and its Footwear Credit Facility totaling
$84.1 million and $42.0 million, respectively, consisting of loans and
obligations under letters of credit.
Net cash used in operating activities for the first six months of fiscal
1998 was $45.0 million compared to $28.0 million for the first six months of
fiscal 1997. The $17.0 million increase was due primarily to expenditures
related to the footwear restructuring and the receipt of an $8.3 million federal
income tax refund in the first six months of fiscal 1997.
Net cash provided by financing activities for the first six months of
fiscal 1998 was $46.8 million compared to $35.3 million for the first six months
of fiscal 1997. The $11.5 million increase was primarily attributable to the
receipt of $60.1 million in proceeds from the sales of the Company's SCOA and
Parade of Shoes businesses, offset by repayments of debt of $13.0 million in the
first six months of fiscal 1998, as compared to the receipt of
11
$35.5 million in net proceeds of debt in the first six months of fiscal 1997.
The Company invested $4.2 million and $10.5 million in capital
expenditures during the first six months of fiscal years 1998 and 1997,
respectively, which generally related to new store and licensed shoe department
openings and the remodeling of existing stores and departments, coupled with
expenditures for general corporate purposes. The Company expects to spend
approximately an additional $4.0 million to $6.0 million in capital expenditures
in the last six months of fiscal 1998, and expects that its total budgeted
capital expenditures for fiscal 1999 will be approximately $10.0 million to
$12.0 million. Such estimates of future expenditures reflect costs expected to
be incurred for new and remodeled stores and licensed shoe departments, and for
general corporate purposes.
Following is a table showing actual and planned store openings by division
for fiscal 1998:
Actual Openings Planned Openings Total
First - Second Third - Fourth Actual/Planned
Division Quarters of Fiscal 1998 Quarters of Fiscal 1998 Openings
-------- ----------------------- ----------------------- --------
Casual Male 20 15 35
Work 'n Gear 0 2 2
Licensed Discount 9 2 11
Offsetting the above actual and planned store openings, the Company closed
4 Casual Male stores, 1 Work 'n Gear store and 83 Licensed Discount shoe
departments during the first six months of fiscal 1998. The Company has plans to
close approximately an additional 2 Casual Male stores, 1 Work 'n Gear store and
4 Licensed Discount shoe departments during the second half of fiscal 1998.
The Company believes that amounts available under its revolving credit
facilities, along with other potential sources of funds and cash flows from
operations, will be sufficient to meet its foreseeable operating and capital
requirements through the end of the current fiscal year. From time to time, the
Company evaluates potential acquisition candidates in pursuit of strategic
initiatives and growth goals in its niche apparel markets. Financing of
potential acquisitions will be determined based on the financial condition of
the Company at the time of such acquisitions, and may include borrowings under
current or new commercial credit facilities or the issuance of publicly issued
or privately placed debt or equity securities.
This Form 10-Q contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements and may fluctuate between
operating periods. The information on store openings and closings reflects
management's current plans and should not be interpreted as an assurance of
actual future developments. The actual number of store openings and closings
will depend on the availability of attractively priced sites for openings of
apparel stores, the ability of the Company to negotiate leases on favorable
terms, operating results of each site and the actions of the Company's
licensors.
12
PART II - OTHER INFORMATION
Item 1. Legal proceedings
-----------------
On November 10, 1993, the United States District Court for the District
of Minnesota returned a jury verdict assessing royalty damages 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
patent for a system used to connect pairs of shoes. The jury verdict
was based on a finding that three different shoe connection systems
used by the Company infringed Ms. Maxwell's patent. Post trial motions
for treble damages, attorney's fees and injunctive relief were granted
on March 10, 1995. The Company appealed the judgment. On June 11, 1996,
the United States Court of Appeals for the Federal Circuit reversed in
part and affirmed in part and vacated the award of treble damages,
attorney's fees and injunctive relief. The appellate court's ruling was
based on its holding that as a matter of law two of the three shoe
connection systems used by the Company did not infringe the patent. A
request by Ms. Maxwell for a rehearing en banc was denied by an order
dated August 28, 1996. Ms. Maxwell petitioned the United States Supreme
Court for a writ of certiorari, which petition was denied on March 17,
1997. The case has been remanded to the trial court for a
redetermination of damages consistent with the opinion of the appellate
court. The issues for trial on remand include a determination of what,
if anything, is a reasonable royalty for the one shoe connection system
that was not subject to the reversal by the Court of Appeals, how many
pairs of shoes having the patented system did the Company sell, and
whether the Company's sale of shoes having the patented system, after
actual notice of the patent and while the Company was changing to the
two systems found to be non-infringing, constitutes willful
infringement in which event damages payable by the Company may at the
discretion of the Court be doubled or trebled. The trial on remand
commenced on September 8, 1997 and is expected to conclude by the end
of September, 1997.
A complaint was also filed by Ms. Maxwell in November, 1992 against
Morse Shoe, Inc. ("Morse"), a subsidiary of the Company, alleging
infringement of the patent referred to above. The trial has been
stayed pending the outcome of the aforementioned trial.
The Company is unable to predict the ultimate outcome of these cases or
the likely monetary exposure to the Company. However, a determination
adverse to the Company in such proceedings could have a material
adverse effect on the Company's business, financial condition and
results of operations.
The Company is also involved in various claims and lawsuits incidental
to its business. The Company does not believe that these claims and
lawsuits in the aggregate will have a material adverse effect on the
Company's business, financial condition and results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The registrant's annual meeting of stockholders was held on June 10,
1997 (the "Meeting").
(b) Ms. Nancy Ryan and Mr. Douglas J. Kahn were elected Class II directors
at the Meeting for a three year term. The term of office for the
following directors continued after the Meeting: Sherman N. Baker, J.
Christopher Clifford, Ervin D. Cruce, David Pulver, Melvin M.
Rosenblatt and Alan I. Weinstein.
(c) The stockholders voted on the ratification of the selection of KPMG
Peat Marwick LLP as independent auditors for the fiscal year ending
January 31, 1998.
13
The following votes were cast at the Meeting with respect to each
nominee for Class II director:
Total vote for Total vote withheld
each director from each director
--------------- -------------------
Douglas J. Kahn 12,338,346 109,625
Nancy Ryan 12,338,446 109,525
The following votes were cast at the Meeting with respect to the
ratification of auditors:
For: 12,352,339
Against: 11,205
Abstain: 84,427
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) The Exhibits in the Exhibit Index are filed as part of this report.
(b) No reports on Form 8-K were filed by the registrant during the quarter
for which this report is filed.
14
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.
By:/s/Alan I. Weinstein
Alan I. Weinstein
President and Chief Executive
Officer
Date: Canton, Massachusetts
September 15, 1997
By:/s/Philip Rosenberg
Philip Rosenberg
Executive Vice President, Chief
Financial Officer and Treasurer
Date: Canton, Massachusetts
September 15, 1997
15
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------
EXHIBITS
Filed with
Quarterly Report on Form 10-Q
of
J. BAKER, INC.
555 Turnpike Street
Canton, MA 02021
For the Quarter ended August 2, 1997
16
EXHIBIT INDEX
Exhibit Page No.
10. Material Contracts
(.01) Executive Employment Agreement dated as of April 1, 1997 *
between James D. Lee and J. Baker, Inc.
(.02) Executive Employment Agreement dated as of June 5, 1997 *
between Roger J. Osborne and J. Baker, Inc.
11. Computation of Primary and Fully Diluted Earnings Per Share, attached. *
27. Financial Data Schedule **
* Included herein
** This exhibit has been filed with the Securities and Exchange
Commission as part of J. Baker, Inc.'s electronic submission of this
Form 10-Q under EDGAR filing requirements. It has not been included
herein.