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 November 1, 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 November
1, 1997, was 13,918,890.
J. BAKER, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
November 1, 1997 (unaudited) and February 1, 1997
Assets November 1, 1997 February 1, 1997
------ ---------------- -----------------
Current assets:
Cash and cash equivalents $ 1,359,287 $ 3,969,116
Accounts receivable:
Trade, net 16,007,794 14,771,734
Other 2,438,180 1,737,786
---------- ----------
18,445,974 16,509,520
---------- ----------
Merchandise inventories 178,433,257 146,045,496
Prepaid expenses 8,632,857 6,031,033
Deferred income taxes 37,043,000 37,548,000
Assets held for sale - 62,255,582
------------- -----------
Total current assets 243,914,375 272,358,747
----------- -----------
Property, plant and equipment, at cost:
Land and buildings 19,340,925 19,340,925
Furniture, fixtures and equipment 79,015,917 74,244,548
Leasehold improvements 24,777,115 23,100,973
----------- -----------
123,133,957 116,686,446
Less accumulated depreciation and amortization 49,063,423 40,032,801
----------- -----------
Net property, plant and equipment 74,070,534 76,653,645
----------- -----------
Deferred income taxes 26,199,000 26,199,000
Other assets, at cost, less accumulated amortization 12,598,304 7,309,411
----------- -----------
$356,782,213 $382,520,803
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 2,047,965 $ 2,012,327
Accounts payable 53,577,009 57,006,085
Accrued expenses 15,359,251 29,837,310
Income taxes payable 1,096,857 1,380,664
----------- -----------
Total current liabilities 72,081,082 90,236,386
----------- -----------
Other liabilities 3,014,033 6,203,073
Long-term debt, net of current portion 137,504,434 140,787,673
Senior subordinated debt 1,480,436 2,951,411
Convertible subordinated debt 70,353,000 70,353,000
Stockholders' equity 72,349,228 71,989,260
----------- -----------
$356,782,213 $382,520,803
=========== ===========
See accompanying notes to consolidated financial statements.
J. BAKER, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
For the quarters ended November 1, 1997 and November 2, 1996
(Unaudited)
Quarter Quarter
Ended Ended
November 1, 1997 November 2, 1996
---------------- ----------------
Sales $139,148,124 $222,763,576
Cost of sales 76,562,167 126,579,222
----------- -----------
Gross profit 62,585,957 96,184,354
Selling, administrative and general expenses 54,010,203 83,321,536
Depreciation and amortization 3,900,151 7,513,198
Litigation settlement charges 3,432,000 --
---------- ----------
Operating income 1,243,603 5,349,620
Net interest expense 3,510,296 3,025,257
----------- -----------
Earnings (loss) before income taxes (2,266,693) 2,324,363
Income tax expense (benefit) (884,000) 906,000
----------- -----------
Net earnings (loss) $ (1,382,693) $ 1,418,363
=========== ===========
Net earnings (loss) per common share:
Primary $ (0.10) $ 0.10
============= =============
Fully diluted $ (0.10) $ 0.10
============= =============
Number of shares used to compute net earnings per common share:
Primary 13,918,898 13,892,318
=========== ===========
Fully diluted 13,972,810 13,898,704
=========== ===========
Dividends declared per share $ 0.015 $ 0.015
============= =============
See accompanying notes to consolidated financial statements.
J. BAKER, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
For the nine months ended November 1, 1997 and November 2, 1996
(Unaudited)
November 1, 1997 November 2, 1996
---------------- ---------------
Sales $420,427,742 $650,099,176
Cost of sales 232,054,003 361,867,161
----------- -----------
Gross profit 188,373,739 288,232,015
Selling, administrative and general expenses 163,631,945 250,916,559
Depreciation and amortization 10,053,995 22,175,821
Litigation settlement charges 3,432,000 --
----------- ----------
Operating income 11,255,799 15,139,635
Net interest expense 9,960,373 9,026,990
----------- -----------
Earnings before income taxes 1,295,426 6,112,645
Income tax expense 505,000 2,383,000
----------- -----------
Net earnings $ 790,426 $ 3,729,645
============ ===========
Net earnings per common share:
Primary $ 0.06 $ 0.27
============= =============
Fully diluted $ 0.06 $ 0.27
============= =============
Number of shares used to compute net earnings per common share:
Primary 13,908,267 13,885,926
=========== ============
Fully diluted 13,948,367 13,900,010
=========== ============
Dividends declared per share $ 0.045 $ 0.045
============= =============
See accompanying notes to consolidated financial statements.
J. BAKER, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended November 1, 1997 and November 2, 1996
(Unaudited)
November 1, 1997 November 2, 1996
---------------- ----------------
Cash flows from operating activities:
Net earnings $ 790,426 $ 3,729,645
Adjustments to reconcile net earnings to cash
used in operating activities:
Depreciation and amortization:
Fixed assets 9,030,645 15,215,304
Deferred charges, intangible assets and
deferred financing costs 1,053,375 6,989,542
Deferred income taxes 505,000 2,248,650
Change in:
Accounts receivable (4,111,454) (10,189,402)
Merchandise inventories (39,276,775) (33,431,336)
Prepaid expenses (2,601,824) (3,704,513)
Accounts payable (3,429,076) (12,615,726)
Accrued expenses (12,678,059) (11,098,428)
Income taxes payable/receivable (283,807) 7,236,732
Other liabilities (99,292) (722,385)
------------- -----------
Net cash used in operating
activities (51,100,841) (36,341,917)
------------ -----------
Cash flows from investing activities: Capital expenditures for:
Property, plant and equipment (6,447,534) (13,360,182)
Other assets (1,867,729) (1,037,195)
Payments received on notes receivable 2,175,000 3,163,000
----------- -----------
Net cash used in investing activities (6,140,263) (11,234,377)
----------- ------------
Cash flows from financing activities:
Repayment of senior debt (1,500,000) (1,500,000)
Proceeds (repayment) of other long-term debt (2,867,694) 48,500,000
Repayment of mortgage payable (379,907) -
Payment of mortgage escrow, net (325,501) -
Proceeds from sales of footwear businesses 60,134,835 -
Proceeds from issuance of common stock 195,440 213,081
Payment of dividends (625,898) (624,947)
----------- ------------
Net cash provided by financing activities 54,631,275 46,588,134
---------- ------------
Net decrease in cash (2,609,829) (988,160)
Cash and cash equivalents at beginning of year 3,969,116 3,287,141
----------- -----------
Cash and cash equivalents at end of period $ 1,359,287 $ 2,298,981
=========== ===========
Supplemental disclosure of cash flow information Cash paid (received) for:
Interest $ 8,796,379 $ 7,728,559
Income taxes 283,807 4,631,650
Income taxes refunded - (8,315,483)
=============== ===========
See accompanying notes to consolidated financial statements.
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 nine months ended November 1, 1997 and
November 2, 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 $43.7 million for the quarters ended November 1, 1997 and
November 2, 1996, respectively, and $9.5 million and $132.9 million for the nine
months ended November 1, 1997 and November 2, 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 $32.0
million for the quarters ended November 1, 1997 and November 2, 1996,
respectively, and $8.2 million and $97.8 million for the nine months ended
November 1, 1997 and November 2, 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 BankBoston Retail Finance Inc.
(formerly known as 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.
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 nine months ended November 1, 1997 were $11.9 million
and $35.4 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 negotiated a settlement of the
amount of its claim with Jamesway, which was 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 assigned its rights to any further distributions from Jamesway to a
third party and received, in consideration therefor, an additional percentage of
the amount owed to the Company under the Company's settlement of its claim with
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 was remanded to the trial court
for a redetermination of damages consistent with the opinion of the appellate
court.
A complaint was also filed by Ms. Maxwell in November, 1992 against Morse
Shoe, Inc., a subsidiary of the Company, alleging infringement of the patent
referred to above.
On September 17, 1997, the parties agreed to settle the matters described
above. Pursuant to the proposed settlement agreement, the Company expects both
cases to be dismissed with prejudice with no admissions of liability and the
parties to execute a mutual release of all claims. Under the terms of the
settlement, the Company will agree to make payments to Ms. Maxwell of
$4,137,000, in the aggregate, over a three year period and, in connection
with the settlement, has recorded a one-time charge to earnings of $3.4
million ($2.1 million on an after-tax basis) during the third quarter of
fiscal 1998 reflecting costs of the settlement not previously accrued for.
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 Nine Months of Fiscal 1998 versus First Nine Months of Fiscal 1997
The Company's net sales decreased by $229.7 million to $420.4 million in
the first nine months of fiscal 1998 from $650.1 million in the first nine
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 $11.9 million primarily due to an increase in the number
of Casual Male Big & Tall stores in operation during the first nine months of
fiscal 1998 as compared to the first nine 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 nine
months of fiscal 1998 and $230.7 million in the first nine months of fiscal
1997, sales produced by the Company's Licensed Discount shoe department
operations decreased by $28.6 million to $193.8 million in the first nine months
of fiscal 1998 from $222.4 million in the first nine 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 nine months of fiscal 1998 as
compared to the first nine months of fiscal 1997 and a 5.2% 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 55.2% of sales in the first nine
months of fiscal 1998 as compared to 55.7% of sales in the first nine months of
fiscal 1997. Cost of sales in the Company's apparel operations was 52.3% of
sales in the first nine months of fiscal 1998 as compared to 50.9% of sales in
the first nine 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 58.1% of sales in the first nine months of fiscal 1998 as
compared to 57.7% of sales in the first nine 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 nine months of fiscal 1998 versus the use of bankers' acceptances in
the first nine months of fiscal 1997, was primarily due to the increased
proportion of Licensed Discount shoe department sales to total footwear sales in
the first nine months of fiscal 1998 versus the first nine 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 $87.3 million, or
34.8%, to $163.6 million in the first nine months of fiscal 1998 from $250.9
million in the first nine 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 nine
months of fiscal 1998. As a percentage of sales, selling, administrative and
general expenses were 38.9% of sales in the first nine months of fiscal 1998 as
compared to 38.6% of sales in the first nine months of fiscal 1997. Selling,
administrative and general expenses in the Company's apparel operations were
41.4% of sales in the first nine months of fiscal 1998 as compared to 42.1% of
sales in the first nine 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 nine 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 36.5% of sales in
the first nine months of fiscal 1998 as compared to 37.1% of sales in the first
nine 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 nine months of fiscal 1998 versus the first nine 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 $12.1 million in the
first nine months of fiscal 1998 as compared to the first nine 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
depreciation recorded on fiscal 1998 capital expenditures.
During the nine months ended November 1, 1997, the Company recorded
litigation settlement charges of $3.4 million ($2.1 million on an after-tax
basis) related to the settlement of a patent infringement suit brought against
the Company, reflecting costs of the settlement not previously accrued for.
As a result of the above described effects, the Company's operating income
decreased by 25.7% to $11.3 million in the first nine months of fiscal 1998 from
$15.1 million in the first nine months of fiscal 1997. As a percentage of sales,
operating income was 2.7% in the first nine months of fiscal 1998 as compared to
2.3% in the first nine months of fiscal 1997.
Net interest expense increased $933,000 to $10.0 million in the first nine
months of fiscal 1998 from $9.0 million in the first nine 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 nine months of fiscal
1998 versus the use of bankers' acceptances in the first nine months of fiscal
1997, partially offset by lower interest rates on bank borrowings and lower
levels of bank borrowings in the first nine months of fiscal 1998 versus the
first nine months of fiscal 1997.
Taxes on earnings for the first nine months of fiscal 1998 were $505,000
as compared to taxes of $2.4 million in the first nine months of fiscal 1997,
yielding an effective tax rate of 39.0% in each case.
Net earnings for the first nine months of fiscal 1998 were $790,000,
as compared to net earnings of $3.7 million in the first nine months of
fiscal 1997.
Third Quarter of Fiscal 1998 versus Third Quarter of Fiscal 1997
The Company's net sales decreased by $83.6 million to $139.1 million in
the third quarter of fiscal 1998 from $222.8 million in the third quarter of
fiscal 1997. Sales in the Company's apparel operations increased by $3.9 million
primarily due to an increase in the number of Casual Male Big & Tall stores in
operation during the third quarter of fiscal 1998 as compared to the third
quarter of fiscal 1997 and a 0.9% increase in comparable apparel store sales.
Excluding net sales produced by the Company's SCOA and Parade of Shoes
businesses of $75.7 million in the third quarter of fiscal 1997, sales produced
by the Company's Licensed Discount shoe department operations decreased by $11.8
million to $65.6 million in the third quarter of fiscal 1998 from $77.4 million
in the third quarter of fiscal 1997. This decrease was primarily due to a
reduction in the number of Licensed Discount shoe departments in operation
during the third quarter of fiscal 1998 as compared to the third quarter of
fiscal 1997 and an 8.8% decrease in comparable retail footwear store sales.
The Company's cost of sales constituted 55.0% of sales in the third
quarter of fiscal 1998 as compared to 56.8% of sales in the third quarter of
fiscal 1997. Cost of sales in the Company's apparel operations was 52.0% of
sales in the third quarter of fiscal 1998 as compared to 51.1% of sales in the
third 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 58.4% of sales in the third quarter of fiscal 1998 as compared to
59.4% of sales in the third quarter of fiscal 1997. The decrease in such
percentage was primarily attributable to a change in the Company's method of
financing its foreign merchandise purchases with bank borrowings in the third
quarter of fiscal 1998 versus the use of bankers' acceptances in the third
quarter of fiscal 1997, coupled with a higher initial markup on merchandise
purchases in the third quarter of fiscal 1998 versus the third quarter of fiscal
1997.
Selling, administrative and general expenses decreased $29.3 million,
or 35.2%, to $54.0 million in the third quarter of fiscal 1998 from $83.3
million in the third 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 38.8% of sales in the third quarter of
fiscal 1998 as compared to 37.4% of sales in the third quarter of fiscal 1997.
Selling, administrative and general expenses in the Company's apparel operations
were 41.4% of sales in the third quarter of fiscal 1998 as compared to 39.5% of
sales in the third quarter of fiscal 1997. This increase was primarily due to an
increase in store expenses. Selling, administrative and general expenses
in the Company's footwear operations were 35.9% of sales in the third quarter of
fiscal 1998 as compared to 36.5% of sales in the third 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 third quarter of fiscal
1998 versus the third 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 $3.6 million in the
third quarter of fiscal 1998 as compared to the third 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
depreciation recorded on fiscal 1998 capital expenditures.
During the third quarter of fiscal 1998, the Company recorded litigation
settlement charges of $3.4 million ($2.1 million on an after-tax basis) related
to the settlement of a patent infringement suit brought against the Company,
reflecting costs of the settlement not previously accrued for.
As a result of the above described effects, the Company's operating income
decreased by 76.8% to $1.2 million in the third quarter of fiscal 1998 from
operating income of $5.3 million in the third quarter of fiscal 1997. As a
percentage of sales, operating income was 0.9% in the third quarter of fiscal
1998 as compared to 2.4% in the third quarter of fiscal 1997.
Net interest expense increased $485,000 to $3.5 million in the third
quarter of fiscal 1998 from $3.0 million in the third quarter of fiscal 1997
primarily due to a change in the Company's method of financing foreign
merchandise purchases with bank borrowings in the third quarter of fiscal 1998
versus the use of bankers' acceptances in the third quarter of fiscal 1997,
partially offset by lower interest rates on bank borrowings and lower levels of
bank borrowings in the third quarter of fiscal 1998 versus the third quarter of
fiscal 1997.
For the third quarter of fiscal 1998, the Company recorded an income tax
benefit of $884,000, yielding an effective tax rate of 39.0%, as compared to
income tax expense of $906,000 in the third quarter of fiscal 1997, yielding an
effective tax rate of 39.0%.
Net loss for the third quarter of fiscal 1998 was $1.4 million,
as compared to net earnings of $1.4 million in the third quarter of fiscal 1997.
Financial Condition
November 1, 1997 versus February 1, 1997
The increase in merchandise inventories at November 1, 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 November 1, 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 November 1, 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 November 1, 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 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 30.0% at November 1, 1997, as compared to 39.0% at
February 1, 1997.
The decrease in accrued expenses at November 1, 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.
This decrease was partially offset by an accrual for litigation settlement
charges recorded in the third quarter of fiscal 1998.
The decrease in other liabilities at November 1, 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 November 1,
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 nine 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 BankBoston Retail Finance Inc.
(formerly known as 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 November 1, 1997, the Company had aggregate borrowings outstanding
under its Apparel Credit Facility and its Footwear Credit Facility totaling
$87.9 million and $43.1 million, respectively, consisting of loans and
obligations under letters of credit.
Net cash used in operating activities for the first nine months of fiscal
1998 was $51.1 million compared to $36.3 million for the first nine months of
fiscal 1997. The $14.8 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 nine months of fiscal 1997.
Net cash provided by financing activities for the first nine months of
fiscal 1998 was $54.6 million compared to $46.6 million for the first nine
months of fiscal 1997. The $8.0 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 $4.7 million in
the first nine months of fiscal 1998, as compared to the receipt of $47.0
million in net proceeds of debt in the first nine months of fiscal 1997.
The Company invested $6.4 million and $13.4 million in capital
expenditures during the first nine 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 $2.0 million to
$3.0 million in capital expenditures in the last three 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 - Third Fourth Actual/Planned
Division Quarters of Fiscal 1998 Quarters of Fiscal 1998 Openings
-------- ----------------------- ----------------------- --------
Casual Male 31 1 32
Work 'n Gear 2* 0 2
Licensed Discount 10 0 10
Offsetting the above actual and planned store openings, the Company closed
6 Casual Male stores, 1 Work 'n Gear store and 86 Licensed Discount shoe
departments during the first nine months of fiscal 1998. The Company has plans
to close approximately an additional 6 Casual Male stores, 1 Work 'n Gear store
and 4 Licensed Discount shoe departments during the fourth quarter 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 operating and capital
requirements for the foreseeable future. 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. The following factors, among others, in some cases have affected and
in the future could affect the Company's financial performance and actual
results for fiscal 1998 and beyond to differ materially from those expressed or
implied in any such forward-looking statements: r hanges in consumer spending
patterns, consumer preferences and overall economic conditions, availability of
credit, interest rates, the impact of competition and pricing, the weather, 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 and appropriate terms and
ability to hire and train associates.
* The stores opened in the Company's Work `n Gear division sell exclusively
healthcare apparel under the name "RX Uniforms".
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 was remanded to the trial court for a redetermination of
damages consistent with the opinion of the appellate court.
A complaint was also filed by Ms. Maxwell in November, 1992
against Morse Shoe, Inc., a subsidiary of the Company, alleging
infringement of the patent referred to above.
On September 17, 1997, the parties agreed to settle the matters
described above. Pursuant to the proposed settlement agreement, the
Company expects both cases to be dismissed with prejudice with no
admissions of liability and the parties to execute a mutual release of
all claims. Under the terms of the settlement, the Company will agree
to make payments to Ms. Maxwell of $4,137,000, in the aggregate, over a
three year period and, in connection with the settlement, has
recorded a one-time charge to earnings for $3.4 million ($2.1
million on an after-tax basis) during the third quarter of fiscal
1998 reflecting costs of the settlement not previously accrued
for.
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.
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
December 15, 1997
By/s/ Philip Rosenberg
Philip Rosenberg
Executive Vice President, Chief
Financial Officer and Treasurer
Date: Canton, Massachusetts
December 15, 1997
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 November 1, 1997
EXHIBIT INDEX
Exhibit Page No.
10. Material Contracts
(.01) Credit Agreement by and among The Casual Male, Inc., TCM Holding *
Company, Inc., WGS Corp., TCMB&T, Inc., J. Baker, Inc. and Fleet
National Bank and BankBoston, N.A., et al, dated May 30, 1997,
attached.
(.02) Performance Share Award granted to James D. Lee, dated June 5, 1997, *
attached.
(.03) Forgivable Promissory Note made by James D. Lee in favor of J. Baker, *
Inc., dated November 24, 1997, attached.
(.04) Executive Employment Agreement between J. Baker, Inc. and Stuart *
M. Glasser, dated September 15, 1997, attached.
(.05) Performance Share Award granted to Stuart M. Glasser, dated *
September 15, 1997, attached.
(.06) Amendment to Employment Agreement between J. Baker, Inc. and *
Alan I. Weinstein, dated September 1, 1997, attached.
(.07) Performance Share Award granted to Roger J. Osborne, dated June 5, *
1997, attached.
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.