SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 October 31, 1998
------------------------
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) (IRS Employer Identification Number)
555 Turnpike Street, Canton, Massachusetts 02021
(Address of principal executive offices)
(781) 828-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether 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 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 [ ]
14,062,139 shares of common stock were outstanding on October 31, 1998.
J. BAKER, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
October 31 1998 (unaudited) and January 31, 1998
October 31, January 31,
Assets 1998 1998
------ ------- ------
Current assets:
Cash and cash equivalents $ 916,379 $ 3,995,995
Accounts receivable:
Trade, net 15,173,597 9,576,156
Other 4,384,201 9,485,578
---------- ----------
19,557,798 19,061,734
---------- -----------
Merchandise inventories 187,500,067 159,407,002
Prepaid expenses 8,416,866 4,418,171
Deferred income taxes, net 1,972,981 5,230,000
----------- -----------
Total current assets 218,364,091 192,112,902
----------- -----------
Property, plant and equipment, at cost:
Land and buildings 19,532,487 19,532,487
Furniture, fixtures and equipment 78,426,565 72,359,381
Leasehold improvements 26,890,405 24,832,306
----------- -----------
124,849,457 116,724,174
Less accumulated depreciation and amortization 53,991,249 44,595,098
----------- -----------
Net property, plant and equipment 70,858,208 72,129,076
----------- -----------
Deferred income taxes, net 55,254,380 55,950,000
Other assets, at cost, less accumulated amortization 10,850,947 14,875,434
----------- -----------
$355,327,626 $335,067,412
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,095,413 $ 2,060,387
Accounts payable 45,662,662 52,108,352
Accrued expenses 12,624,490 14,176,048
Income taxes payable 618,416 979,560
----------- -----------
Total current liabilities 61,000,981 69,324,347
----------- -----------
Other liabilities 2,883,016 4,229,800
Long-term debt, net of current portion 141,166,939 114,407,640
Senior subordinated debt - 1,490,111
Convertible subordinated debt 70,353,000 70,353,000
Stockholders' equity 79,923,690 75,262,514
---------- -----------
$355,327,626 $335,067,412
=========== ===========
See accompanying notes to consolidated financial statements.
J. BAKER, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
For the quarters ended October 31, 1998 and November 1, 1997
(Unaudited)
Quarter Quarter
Ended Ended
October 31, 1998 November 1, 1997
---------------- ----------------
Net sales $138,256,958 $139,148,124
Cost of sales 76,036,967 76,562,167
----------- ------------
Gross profit 62,219,991 62,585,957
Selling, administrative and general expenses 52,977,574 54,010,203
Depreciation and amortization 4,213,978 3,900,151
Litigation settlement charges - 3,432,000
----------- -----------
Operating income 5,028,439 1,243,603
Net interest expense 3,820,757 3,510,296
----------- -----------
Earnings (loss) before income taxes 1,207,682 (2,266,693)
Income tax expense (benefit) 471,000 (884,000)
----------- ----------
Net earnings (loss) $ 736,682 $(1,382,693)
=========== ==========
Net earnings (loss) per common share:
Basic $ 0.05 $ (0.10)
=========== ===========
Diluted $ 0.05 $ (0.10)
=========== ===========
Number of shares used to compute net earnings (loss) per common share:
Basic 14,061,928 13,918,898
=========== ===========
Diluted 14,174,445 13,918,898
=========== ===========
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 October 31, 1998 and November 1, 1997
(Unaudited)
October 31, 1998 November 1, 1997
---------------- ----------------
Net sales $411,389,847 $420,427,742
Cost of sales 224,047,898 232,054,003
----------- ------------
Gross profit 187,341,949 188,373,739
Selling, administrative and general expenses 159,060,895 163,631,945
Depreciation and amortization 10,918,464 10,053,995
Litigation settlement charges - 3,432,000
------------ -----------
Operating income 17,362,590 11,255,799
Net interest expense 11,055,400 9,960,373
------------ -----------
Earnings before income taxes 6,307,190 1,295,426
Income tax expense 2,460,000 505,000
----------- -----------
Net earnings $ 3,847,190 $ 790,426
=========== ==========
Net earnings per common share:
Basic $ 0.28 $ 0.06
=========== ===========
Diluted $ 0.27 $ 0.06
=========== ===========
Number of shares used to compute net earnings per common share:
Basic 13,987,131 13,908,267
=========== ===========
Diluted 14,154,177 13,948,367
=========== ===========
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 October 31, 1998 and November 1, 1997
(Unaudited)
October 31, 1998 November 1, 1997
---------------- ----------------
Cash flows from operating activities:
Net earnings $ 3,847,190 $ 790,426
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization:
Fixed assets 9,396,151 9,030,645
Deferred charges, intangible assets and
deferred financing costs 1,528,237 1,053,375
Deferred income taxes, net 3,952,639 505,000
Change in:
Accounts receivable 522,686 (4,111,454)
Merchandise inventories (28,093,065) (39,276,775)
Prepaid expenses (3,998,695) (2,601,824)
Accounts payable (6,445,690) (3,429,076)
Accrued expenses (1,551,558) (12,678,059)
Income taxes payable/receivable (361,144) (283,807)
Other liabilities (1,253,080) (99,292)
------------ -----------
Net cash used in operating activities (22,456,329) (51,100,841)
------------ -----------
Cash flows from investing activities:
Capital expenditures for:
Property, plant and equipment (8,125,283) (6,447,534)
Other assets (530,278) (1,867,729)
Payments received on notes receivable - 2,175,000
Proceeds from sales of footwear businesses 2,902,335 60,134,835
----------- -----------
Net cash provided by (used in) investing activities (5,753,226) 53,994,572
----------- -----------
Cash flows from financing activities:
Repayment of senior debt (1,500,000) (1,500,000)
Proceeds from (repayment of) other long-term debt 27,213,825 (2,867,694)
Repayment of mortgage payable (419,500) (379,907)
Payment of mortgage escrow, net 40,378 (325,501)
Issuance of common stock, net of retirements 425,843 195,440
Payment of dividends (630,607) (625,898)
----------- ------------
Net cash provided by (used in) financing activities 25,129,939 (5,503,560)
----------- -----------
Net decrease in cash (3,079,616) (2,609,829)
Cash and cash equivalents at beginning of year 3,995,995 3,969,116
----------- -----------
Cash and cash equivalents at end of period $ 916,379 $ 1,359,287
=========== ===========
Supplemental disclosure of cash flow information
Cash paid (received) for:
Interest $ 9,838,597 $ 8,796,379
Income taxes 361,144 283,807
Income taxes refunded (1,673,367) -
=========== ============
Schedule of non-cash financing activity:
Common stock issued for performance share awards 255,563 -
Stock issued for executive stock plans in exchange for
notes receivable 1,018,750 -
========== ============
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] In February, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
Per Share" ("EPS"), which the Company adopted in fiscal 1998. Basic EPS is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted EPS is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding, after giving effect to all dilutive
potential common shares, during the period.
For the quarter and nine months ended October 31, 1998 and the nine months
ended November 1, 1997, the calculation of diluted earnings per common share
includes the dilutive effect of outstanding stock options and warrants. Also
included in the calculation of diluted earnings per common share is the dilutive
effect of performance share awards for the quarter and nine months ended October
31, 1998. The common stock issuable under the 7% convertible subordinated notes
due 2002 and the convertible debentures was not included in the calculation for
the quarters and nine months ended October 31, 1998 and November 1, 1997 because
its effect would be antidilutive. All net earnings (loss) per common share
amounts for all periods presented have been restated to conform to SFAS No.
128 requirements.
Net earnings (loss) and shares used to compute net earnings (loss) per
common share, basic and diluted, are reconciled below:
Quarters Ended Nine Months Ended
------------------------------ ----------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
---------- ----------- ---------- ----------
Net earnings (loss), basic and diluted $ 736,682 $(1,382,693) $ 3,847,190 $ 790,426
=========== ========== ========== ==========
Weighted average common shares:
Basic 14,061,928 13,918,898 13,987,131 13,908,267
Effect of dilutive securities:
Stock options and performance
share awards 112,517 - 167,046 40,100
---------- ---------- --------- ---------
Diluted 14,174,445 13,918,898 14,154,177 13,948,367
========== ========== ========== ==========
3] The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), effective February 1, 1998.
SFAS No. 130 requires that items defined as other comprehensive income be
separately classified in the financial statements. As the Company has no other
comprehensive income in the current period, nor does it have accumulated other
comprehensive income from prior periods, adoption of SFAS No. 130 has no effect
on the Company's financial statements.
4] In June, 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"), which is effective for the Company's fiscal 1999 year ending
January 30, 1999. SFAS No. 131 establishes new standards for reporting
information about operating segments. Adoption of SFAS No. 131 relates to
disclosure within the financial statements and is not expected to have a
material effect on the Company's financial statements. The Company will adopt
the provisions of this standard in the fourth quarter of fiscal 1999.
5] In April, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5
("SOP 98-5"), "Reporting on the Costs of Start-Up Activities". SOP 98-5, which
is effective for fiscal years beginning after December 15, 1998, requires
entities to expense as incurred all start-up and pre-opening costs not otherwise
capitalizable as long-lived assets. Restatement of previously issued annual
financial statements is not permitted by SOP 98-5, and entities are not
permitted to report the pro forma effects of the retroactive application of the
new accounting standard. The Company believes adoption of SOP 98-5 will not have
a material impact on its financial statements.
6] During the fourth quarter of fiscal 1997, the Company restructured its
footwear operations. In connection with the restructuring, the Company downsized
its JBI Footwear division (formerly known as the Licensed Discount footwear
division), and in March, 1997, completed the sales of its Shoe Corporation of
America ("SCOA") and Parade of Shoes divisions.
On March 5, 1997, the Company announced 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 $40.0 million were used to pay
down the Company's bank debt. Sales in the Company's SCOA division totaled $9.5
million for the nine months ended November 1, 1997.
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 $20.0 million were used to pay down the
Company's bank debt. Sales in the Company's Parade of Shoes division totaled
$8.2 million for the nine months ended November 1, 1997.
7] On May 30, 1997, the Company replaced its $145 million credit facility with
two separate revolving credit facilities, both of which are guaranteed by J.
Baker, Inc. One facility, which finances the Company's apparel businesses, was 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 the capital stock of The Casual Male,
Inc. and three other subsidiaries of the Company. The aggregate commitment
amount under the Apparel Credit Facility was reduced from $100 million to $90
million on December 31, 1997, by amendment was increased to $95 million on April
3, 1998 and will automatically reduce by $10 million on each of December 31,
1998 and December 31, 1999. 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 JBI Footwear business, the Company obtained a $55 million
revolving credit facility, secured by substantially all of the assets of JBI,
Inc. and Morse Shoe, Inc., with BankBoston Retail Finance Inc. (formerly known
as GBFC, Inc.) and Fleet National Bank (the "Footwear Credit Facility"). The
aggregate commitment amount 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.
8] 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 continuing (assuming) the existing license
agreement with the Company or terminating (rejecting) the agreement. On April
13, 1998, Bradlees filed its Joint Plan of Reorganization and Disclosure
Statement (the "Plan") with the United States Bankruptcy Court for the Southern
District of New York, which, as amended, was confirmed on November 18, 1998. It
is anticipated that Bradlees will emerge from bankruptcy on or about February 1,
1999. Throughout the Bradlees bankruptcy proceedings, the Company has engaged in
negotiations with Bradlees with respect to certain amendments to its license
agreement, the conditions on which the agreement would be assumed and the terms
on which the Company's outstanding accounts receivable of approximately $1.8
million would be paid as a cure of Bradlees' default under the agreement.
Although an amendment to the agreement has not yet been signed, the Company and
Bradlees have agreed that, upon the effective date of the Plan, the license
agreement shall be modified and amended and the agreement assumed by Bradlees.
Pursuant to the amended agreement, Bradlees shall make a cash distribution to
the Company in the amount of $360,000 on the effective date and shall pay the
balance of the Company's pre-petition claim in thirty-six equal monthly
installments commencing thirty (30) days after the first payment, with interest
on such outstanding balance commencing seven months after the first payment.
9] On September 17, 1997, the Company settled a patent infringement lawsuit
brought against the Company and its Morse Shoe, Inc. subsidiary by Susan
Maxwell. Pursuant to the settlement agreement, both cases were dismissed with
prejudice with no admissions of liability and the parties executed a mutual
release of all claims. Under the terms of the settlement, the Company agreed to
make payments to Ms. Maxwell of $4,137,000, in the aggregate, over a three-year
period and in connection with the settlement 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.
STATEMENTS MADE OR INCORPORATED INTO THIS QUARTERLY REPORT INCLUDE A NUMBER OF
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934.
FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONTAINING
THE WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FUTURE" AND WORDS OF
SIMILAR IMPORT, WHICH EXPRESS MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENT
REGARDING THE COMPANY'S FUTURE PERFORMANCE. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MAY CAUSE SUCH DIFFERENCES ARE DESCRIBED IN THE SECTION ENTITLED
"CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS" FOUND ON PAGE 13 OF THIS
QUARTERLY REPORT.
All references herein to fiscal 1999 and 1998 relate to the years ending January
30, 1999 and January 31, 1998, respectively.
Results of Operations
First Nine Months of Fiscal 1999 versus First Nine Months of Fiscal 1998
The Company's net sales decreased by $9.0 million to $411.4 million in
the first nine months of fiscal 1999 from $420.4 million in the first nine
months of fiscal 1998. Sales in the Company's apparel operations increased by
$13.8 million to $222.7 million in the first nine months of fiscal 1999 from
$208.9 million in the first nine months of fiscal 1998, primarily due to a 4.5%
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 two comparison periods) and an increase in sales generated by Work
'n Gear to its corporate customers. Excluding net sales in the Company's SCOA
and Parade of Shoes businesses of $17.7 million for the nine months ended
November 1, 1997, sales in the Company's footwear operations decreased by $5.1
million to $188.7 million in the first nine months of fiscal 1999 from $193.8
million in the first nine months of fiscal 1998, primarily due to a 2.0%
decrease in comparable retail footwear store sales (comparable retail footwear
store sales increases/decreases are based upon comparisons of weekly sales
volume in licensed footwear departments which were open in corresponding weeks
of the two comparison periods).
The Company's cost of sales constituted 54.5% of sales in the first
nine months of fiscal 1999, as compared to 55.2% of sales in the first nine
months of fiscal 1998. Cost of sales in the Company's apparel operations was
51.5% of sales in the first nine months of fiscal 1999, as compared to 52.3% of
sales in the first nine months of fiscal 1998. The decrease in such percentage
was primarily attributable to lower markdowns as a percentage of sales and a
higher initial markup on merchandise purchases. Cost of sales in the Company's
footwear operations was 58.0% of sales in the first nine months of fiscal 1999,
as compared to 58.1% of sales in the first nine months of fiscal 1998. Cost of
sales in the Company's JBI Footwear division was 58.0% of sales in the first
nine months of fiscal 1999, as compared to 58.5% of sales in the first nine
months of fiscal 1998. The decrease in such percentage was primarily
attributable to a higher initial markup on merchandise purchases, partially
offset by higher markdowns as a percentage of sales.
Selling, administrative and general expenses decreased $4.6 million, or
2.8%, to $159.1 million in the first nine months of fiscal 1999 from $163.6
million in the first nine months of fiscal 1998, primarily due to the
disposition of the Company's SCOA and Parade of Shoes businesses in March, 1997.
The decrease was partially offset by a $5.2 million increase in selling,
administrative and general expenses in the Company's apparel operations. As a
percentage of sales, selling, administrative and general expenses were 38.7% of
sales in the first nine months of fiscal 1999, as compared to 38.9% of sales in
the first nine months of fiscal 1998. Selling, administrative and general
expenses in the Company's apparel operations were 41.1% of sales in the first
nine months of fiscal 1999 as compared to 41.4% of sales in the first nine
months of fiscal 1998. This decrease was primarily attributable to the increase
in comparable apparel store sales. Selling, administrative and general expenses
in the Company's footwear operations were 35.8% of sales in the first nine
months of fiscal 1999, as compared to 36.5% of sales in the first nine months of
fiscal 1998. This decrease was primarily due to the increased proportion of JBI
Footwear department sales to total footwear sales in the first nine months of
fiscal 1999 versus the first nine months of fiscal 1998. The
Company's JBI Footwear 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 divisions.
Depreciation and amortization expense increased by $864,000 to $10.9
million in the first nine months of fiscal 1999 from $10.1 million in the first
nine months of fiscal 1998, primarily due to an increase in depreciable and
amortizable assets.
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, the Company's operating income increased to
$17.4 million in the first nine months of fiscal 1999 from $11.3 million in the
first nine months of fiscal 1998. As a percentage of sales, operating income was
4.2% in the first nine months of fiscal 1999 as compared to 2.7% in the first
nine months of fiscal 1998.
Net interest expense increased by $1.1 million to $11.1 million in the
first nine months of fiscal 1999 from $10.0 million in the first nine months of
fiscal 1998, primarily due higher interest rates on bank borrowings and higher
levels of bank borrowings in the first nine months of fiscal 1999 versus the
first nine months of fiscal 1998.
Taxes on earnings for the first nine months of fiscal 1999 were $2.5
million, as compared to taxes on earnings of $505,000 for the first nine months
of fiscal 1998, yielding an effective tax rate of 39.0% in both periods.
Net earnings for the first nine months of fiscal 1999 were $3.8 million, as
compared to net earnings of $790,000 in the first nine months of fiscal 1998.
Third Quarter of Fiscal 1999 versus Third Quarter of Fiscal 1998
The Company's net sales decreased by $891,000 to $138.3 million in the
third quarter of fiscal 1999 from $139.1 million in the third quarter of fiscal
1998. Sales in the Company's apparel operations increased by $1.6 million to
$75.1 million in the third quarter of fiscal 1999 from $73.5 million in the
third quarter of fiscal 1998, primarily due to a 1.5% increase in comparable
apparel store sales and an increase in sales generated by Work 'n Gear to its
corporate customers. Sales in the Company's footwear operations decreased by
$2.5 million to $63.1 million in the third quarter of fiscal 1999 from $65.6
million in the third quarter of fiscal 1998, primarily due to a 4.1% decrease in
comparable retail footwear store sales.
The Company's cost of sales constituted 55.0% of sales in the third
quarter of fiscal 1999, which was comparable to 55.0% of sales in the third
quarter of fiscal 1998. Cost of sales in the Company's apparel operations was
52.3% of sales in the third quarter of fiscal 1999 as compared to 52.0% of sales
in the third quarter of fiscal 1998. Cost of sales in the Company's footwear
operations was 58.2% of sales in the third quarter of fiscal 1999, as compared
to 58.4% of sales in the third quarter of fiscal 1998.
Selling, administrative and general expenses decreased $1.0 million, or
1.9%, to $53.0 million in the third quarter of fiscal 1999 from $54.0 million in
the third quarter of fiscal 1998. As a percentage of sales, selling,
administrative and general expenses were 38.3% of sales in the third quarter of
fiscal 1999, as compared to 38.8% of sales in the third quarter of fiscal 1998.
Selling, administrative and general expenses in the Company's apparel operations
were 40.7% of sales in the third quarter of fiscal 1999, as compared to 41.4% of
sales in the third quarter of fiscal 1998. This decrease was primarily due to
the increase in comparable apparel store sales. Selling, administrative and
general expenses in the Company's footwear operations were 35.5% of sales in the
third quarter of fiscal 1999 as compared to 35.9% of sales in the third quarter
of fiscal 1998. This decrease was primarily due to a decrease in store level
expenses.
Depreciation and amortization expense increased by $314,000 to $4.2
million in the third quarter of fiscal 1999 from $3.9 million in the third
quarter of fiscal 1998, primarily due to an increase in depreciable and
amortizable assets.
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, the Company's operating income increased to
$5.0 million in the third quarter of fiscal 1999 from $1.2 million in the third
quarter of fiscal 1998. As a percentage of sales, operating income was 3.6% in
the third quarter of fiscal 1999 as compared to 0.9% in the third quarter of
fiscal 1998.
Net interest expense increased by $310,000 to $3.8 million in the third
quarter of fiscal 1999 from $3.5 million in the third quarter of fiscal 1998,
primarily due to higher interest rates on bank borrowings and higher levels of
bank borrowings in the third quarter of fiscal 1999 versus the third quarter of
fiscal 1998.
Taxes on earnings for the third quarter of fiscal 1999 were $471,000,
as compared to an income tax benefit of $884,000 for the third quarter of fiscal
1998, yielding an effective tax rate of 39.0% in both periods.
Net earnings for the third quarter of fiscal 1999 were $737,000, as
compared to a net loss of $1.4 million in the third quarter of fiscal 1998.
Financial Condition
October 31, 1998 versus January 31, 1998
The increase in merchandise inventories at October 31, 1998 from January
31, 1998 was primarily due to a seasonal increase in the average inventory level
per location.
The decrease in other assets at October 31, 1998 was primarily due to the
receipt of funds held in escrow related to the sales of the footwear businesses.
The decrease in accounts payable at October 31, 1998 from January 31,
1998 was primarily due to an increase in direct import merchandise purchases,
which are paid for sooner than domestic merchandise purchases. The ratio of
accounts payable to merchandise inventory was 24.4% at October 31, 1998, as
compared to 32.7% at January 31, 1998 and 30.0% at November 1, 1997.
The increase in long-term debt, net of current portion, at October 31,
1998 from January 31, 1998 was primarily due to additional bank borrowings to
meet seasonal working capital needs and to fund capital expenditures.
Liquidity and Capital Resources
On May 30, 1997, the Company replaced its $145 million credit facility
with two separate revolving credit facilities, both of which are guaranteed by
J. Baker, Inc. One facility, which finances the Company's apparel businesses,
was 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 the capital stock of
The Casual Male, Inc. and three other subsidiaries of the Company. The aggregate
commitment under the Apparel Credit Facility was reduced from $100 million to
$90 million on December 31, 1997, by amendment was increased to $95 million on
April 3, 1998, and will automatically reduce by $10 million on each of December
31, 1998 and December 31, 1999. 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 JBI Footwear business, the Company obtained a $55
million revolving credit facility, secured by substantially all of the assets of
JBI, Inc. and Morse Shoe, Inc., 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 October 31, 1998, the Company had aggregate borrowings
outstanding under its Apparel Credit Facility and its Footwear Credit Facility
totaling $86.3 million and $45.8 million, respectively, consisting of loans and
obligations under letters of credit.
Net cash used in operating activities for the first nine months of
fiscal 1999 was $22.5 million, as compared to net cash used in operating
activities of $51.1 million for the first nine months of fiscal 1998. The $28.6
million change was primarily due to lower inventory expenditures and lower
payments related to the restructuring of the Company's footwear operations in
the first nine months of fiscal 1999 versus the first nine months of fiscal
1998, and a decrease in net accounts receivable in the first nine months of
fiscal 1999 versus an increase in net accounts receivable in the first nine
months of fiscal 1998.
Net cash used in investing activities for the first nine months of
fiscal 1999 was $5.7 million, as compared to net cash provided by investing
activities of $54.0 million in the first nine months of fiscal 1998. The $59.7
million change was primarily due to the receipt of $60.1 million in proceeds
from the sales of the SCOA and Parade of Shoes businesses in the first nine
months of fiscal 1998 versus the receipt of $2.9 million in sale proceeds in the
first nine months of fiscal 1999.
Net cash provided by financing activities for the first nine months of
fiscal 1999 was $25.1 million, as compared to net cash used in financing
activities of $5.5 million in the first nine months of fiscal 1998. The $30.6
million change was primarily due to the borrowing of $27.2 million under the
Company's revolving lines of credit during the first nine months of fiscal 1999
versus the repayment of $2.9 million in bank borrowings during the first nine
months of fiscal 1998.
The Company invested $8.1 million and $6.4 million in capital
expenditures during the first nine months of fiscal 1999 and fiscal 1998,
respectively. The Company's capital expenditures generally relate to new store
and licensed footwear department openings and remodeling of existing stores and
departments, coupled with expenditures for general corporate purposes.
Following is a table showing actual and planned store openings by
division for fiscal 1999:
Actual Openings Planned Openings Total
First through Third Fourth Actual/Planned
Division Quarters Fiscal 1999 Quarter Fiscal 1999 Openings
-------- -------------------- ------------------- --------
Casual Male 9 1 10
Work 'n Gear 1 0 1
JBI Footwear 29 0 29
Offsetting the above actual and planned store openings, the Company
closed 11 Casual Male stores and 11 JBI Footwear departments during the first
nine months of fiscal 1999 and has plans to close approximately an additional 4
Casual Male stores and 1 JBI Footwear department during the fourth quarter of
fiscal 1999.
The Company believes 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
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.
Year 2000 Compliance
The Company is faced with "Year 2000" remediation issues. Many computer
programs were written with a two-digit date field, which, if not made Year 2000
compliant, will be unable to correctly process date information on or after
January 1, 2000.
The Company's State of Readiness
The Company has established a Year 2000 committee comprised of senior
management of the Company and has engaged an independent consulting firm to
assist in remediation of the Company's Year 2000 issues. The Company has
evaluated its internal computer systems and while the Company's data processing
systems are impacted to some extent, Year 2000 issues are most significant in
connection with various mainframe computer programs. In fiscal 1997, the Company
developed a plan to address Year 2000 issues as they relate to the mainframe
computer programs and began the process to convert such computer programs to be
Year 2000 compliant. The Company has already converted two of its three primary
mainframe computer programs to be Year 2000 compliant and expects its remaining
conversion efforts with respect to such mainframe computer programs to be
completed by the end of fiscal 1999.
The Company is currently taking an inventory of its non-information
technology systems and once the inventory is complete will begin testing whether
such systems are date sensitive. Where appropriate, the Company will make
contingency plans in order to minimize any adverse effect Year 2000 issues may
have on such non-information technology systems. The Company expects the
inventory of its non-information technology systems to be completed by the end
of fiscal 1999.
The Company has communicated with and is in the process of compiling
detailed information regarding its key business partners and major suppliers to
determine to what extent the Company may be vulnerable to third party Year 2000
issues. At this time, the Company is unable to estimate the nature or extent of
any potential adverse impact resulting from the failure of its key business
partners and major suppliers to achieve Year 2000 compliance, although the
Company does not currently anticipate it will experience any material business
interruptions or shipment delays from its key business partners and major
suppliers due to Year 2000 issues. The Company expects to complete the
compilation of information regarding its key business partners and major
suppliers with respect to Year 2000 compliance by December, 1998.
The Company is not dependent on a single source for any products or
services. In the event a material third party is unable to provide products or
services to the Company due to a Year 2000 computer systems failure, the Company
believes it has adequate alternate sources for such products or services. If
alternate sources are used, there can be no guarantee that similar or identical
products or services would be available on the same terms and conditions or that
the Company would not experience some adverse effect as a result of switching to
such alternate sources.
Costs to Address the Year 2000
The Company's total Year 2000 expenditures are estimated to be
approximately $4.0 million, of which approximately $2.0 million are for
incremental costs, and are being funded through operating cash flows. Certain
other non-Year 2000 computer system projects had to be deferred in order to
ensure completion of the Company's Year 2000 compliance efforts. Although
management believes the deferral of such projects has not had a material adverse
effect on the Company's operations, it expects these projects, when implemented,
will positively impact future results. The Company is expensing all costs
associated with Year 2000 computer system changes as the costs are incurred. To
date, the Company has expended approximately $3.0 million on Year 2000 projects.
Risk Analysis
Similar to most large business enterprises, the Company is dependent
upon its own internal computer technology and relies upon timely performance by
its key business partners and major suppliers. Although the full consequences
are unknown, the failure of either the Company's systems or those of material
third parties to conform to the Year 2000, as noted above, could impair the
Company's ability to deliver product to its stores in a timely manner, which
could result in potential lost sales opportunities and additional expenses. The
Company's Year 2000 project seeks to identify and minimize this risk and
includes testing of internally generated systems and purchased hardware and
software to ensure, to the extent feasible, all such systems will function
before and after the year 2000.
Contingency Plans
The Company is in the process of developing contingency plans, which will
attempt to minimize disruption to the Company's operations in the event of Year
2000 computer systems failures. While no assurances can be given, because of the
Company's extensive efforts to formulate and carry out an effective Year 2000
program, the Company believes
its program will be completed on a timely basis and should effectively minimize
disruption to the Company's operations due to the Year 2000.
Certain Factors That May Affect Future Results
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-Q 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 1999 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,
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 footwear departments, changes in existing or potential
duties, tariffs or quotas, availability of suitable store locations at
appropriate terms, ability to hire and train associates and Year 2000 conversion
issues.
PART II - OTHER INFORMATION
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 14, 1998
By:/s/Philip Rosenberg
Philip Rosenberg
Executive Vice President, Chief Financial
Officer and Treasurer
Date: Canton, Massachusetts
December 14, 1998
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 October 31, 1998
EXHIBIT INDEX
Exhibit Page No.
10. Material Contracts
(.01) Executive Employment Agreement between Michael J. Fine *
and J. Baker, Inc., dated as of September 9, 1998, attached.
(.02) Termination Agreement between J. Baker, Inc. and James D. *
Lee, dated as of September 8, 1998, attached.
11. Computation of Net Earnings Per Common 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.