SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE ECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999
-------------
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 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 Registrant was required to file
such reports), and (2) has been subject to filing such reports for the past 90
days.
YES X NO
--- ---
14,064,639 shares of common stock were outstanding on July 31, 1999.
1
J. BAKER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1999 (UNAUDITED) AND JANUARY 30, 1999
JULY 31, JANUARY 30,
ASSETS 1999 1999
------ -------- -----------
Current assets:
Cash and cash equivalents $ 2,163,842 $ 3,679,115
Accounts receivable:
Trade, net 11,761,189 9,979,178
Other 4,142,367 2,768,651
----------- -----------
15,903,556 12,747,829
----------- -----------
Merchandise inventories 190,222,752 164,057,913
Prepaid expenses 7,722,797 3,595,858
Deferred income taxes, net 4,535,000 4,535,000
----------- -----------
Total current assets 220,547,947 188,615,715
----------- -----------
Property, plant and equipment, at cost:
Land and buildings 19,726,648 19,726,648
Furniture, fixtures and equipment 83,216,723 76,008,130
Leasehold improvements 27,966,322 26,869,958
----------- -----------
130,909,693 122,604,736
Less accumulated depreciation and amortization 60,716,281 54,109,006
----------- -----------
Net property, plant and equipment 70,193,412 68,495,730
----------- -----------
Deferred income taxes, net 53,230,254 55,404,641
Other assets, at cost, less accumulated amortization 14,212,076 11,518,573
----------- -----------
$358,183,689 $324,034,659
----------- ----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 10,692,782 $ 2,112,955
Accounts payable 52,006,289 55,830,124
Accrued expenses 16,101,922 8,772,148
Income taxes payable - 1,811,701
----------- -----------
Total current liabilities 78,800,993 68,526,928
----------- -----------
Other liabilities 2,652,118 2,741,591
Long-term debt, net of current portion 114,041,740 104,229,825
Senior subordinated debt 6,918,000 -
Convertible subordinated debt 70,353,000 70,353,000
Stockholders' equity 85,417,838 78,183,315
----------- -----------
$358,183,689 $324,034,659
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
2
J. BAKER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE QUARTERS ENDED JULY 31, 1999 AND AUGUST 1, 1998
(UNAUDITED)
QUARTER QUARTER
ENDED ENDED
JULY 31, 1999 AUGUST 1, 1998
------------- --------------
Net sales $169,247,687 $146,496,325
Cost of sales 91,947,529 79,698,372
----------- -----------
Gross profit 77,300,158 66,797,953
Selling, administrative and general expenses 63,473,743 55,300,865
Depreciation and amortization 4,228,082 3,606,440
---------- ----------
Operating income 9,598,333 7,890,648
Net interest expense 4,326,305 3,637,483
---------- ----------
Earnings before income taxes 5,272,028 4,253,165
Income tax expense 1,898,000 1,659,000
---------- ----------
Net earnings $ 3,374,028 $ 2,594,165
---------- ----------
---------- ----------
Net earnings per common share:
Basic $ 0.24 $ 0.19
---------- ----------
---------- ----------
Diluted $ 0.23 $ 0.18
---------- ----------
---------- ----------
Number of shares used to compute net earnings per common share:
Basic 14,064,619 13,979,160
---------- ----------
---------- ----------
Diluted 14,617,942 14,371,746
---------- ----------
---------- ----------
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 JULY 31, 1999 AND
AUGUST 1, 1998
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JULY 31, 1999 AUGUST 1, 1998
------------- --------------
Net sales $298,440,297 $273,132,889
Cost of sales 160,920,637 148,010,931
------------ -----------
Gross profit 137,519,660 125,121,958
Selling, administrative and general expenses 115,194,128 106,083,321
Depreciation and amortization 7,716,697 6,704,486
------------ ------------
Operating income 14,608,835 12,334,151
Net interest expense 7,804,817 7,234,643
------------ -----------
Earnings before income taxes 6,804,018 5,099,508
Income tax expense 2,450,000 1,989,000
------------ -----------
Net earnings $ 4,354,018 $ 3,110,508
------------ -----------
------------ -----------
Net earnings per common share:
Basic $ 0.31 $ 0.22
------------ -----------
------------ -----------
Diluted $ 0.30 $ 0.22
------------ -----------
------------ -----------
Number of shares used to compute net earnings per common share:
Basic 14,064,573 13,949,728
------------ -----------
------------ -----------
Diluted 14,303,692 14,205,567
------------ -----------
------------ -----------
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 JULY 31, 1999 AND AUGUST 1,
1998
(UNAUDITED)
July 31, 1999 August 1, 1998
------------- --------------
Cash flows from operating activities:
Net earnings $ 4,354,018 $ 3,110,508
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization:
Fixed assets 6,607,275 5,760,015
Deferred charges, intangible assets and
deferred financing costs 1,329,400 948,427
Deferred income taxes, net 2,174,387 2,684,620
Grants of performance share awards - 255,563
Change in:
Accounts receivable (3,155,727) 2,744,172
Merchandise inventories (7,627,839) (18,661,351)
Prepaid expenses (3,234,164) (3,182,118)
Accounts payable (3,823,835) (7,655,544)
Accrued expenses 7,329,774 (1,026,297)
Income taxes payable/receivable (1,811,701) (84,288)
Other liabilities (31,619) (308,761)
------------ ------------
Net cash provided by (used in) operating activities 2,109,969 (15,415,054)
------------ ------------
Cash flows from investing activities: Capital expenditures for:
Property, plant and equipment (5,304,957) (5,472,057)
Other assets (989,648) (542,198)
Proceeds from sales of footwear businesses 887,903 2,902,335
Assets acquired of Repp Ltd. Big & Tall businesses (26,202,347) -
------------ ------------
Net cash used in investing activities (31,609,049) (3,111,920)
------------ ------------
Cash flows from financing activities:
Repayment of senior debt (1,500,000) (1,500,000)
Proceeds from long-term debt 20,191,350 17,935,497
Proceeds from senior subordinated debt 10,000,000 -
Repayment of mortgage payable (299,608) (279,847)
Payment of mortgage escrow, net 11,560 (21,281)
Proceeds from issuance of common stock, net of retirements 2,438 151,342
Payment of dividends (421,933) (419,675)
------------ ------------
Net cash provided by financing activities 27,983,807 15,866,036
------------ ------------
Net decrease in cash (1,515,273) (2,660,938)
Cash and cash equivalents at beginning of year 3,679,115 3,995,995
------------ ------------
Cash and cash equivalents at end of period $ 2,163,842 $ 1,335,057
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 7,667,243 $ 7,250,060
Income taxes 2,087,315 84,288
Income taxes refunded - (914,478)
------------ ------------
------------ ------------
Schedule of non-cash financing activity:
Warrants issued with senior subordinated debt 3,300,000 --
------------ ------------
------------ ------------
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.
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 financial position and results of operations of J. Baker, Inc. (the
"Company"). 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
potentially dilutive common shares outstanding during the period.
For the quarters and six months ended July 31, 1999 and August 1, 1998,
the calculation of diluted earnings per common share includes the dilutive
effect of outstanding stock options and warrants. 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 six months
ended July 31, 1999 and August 1, 1998 because its effect would be antidilutive.
All net earnings per common share amounts for all periods presented have been
restated to conform to SFAS No. 128 requirements.
Net earnings and shares used to compute net earnings per share, basic and
diluted, are reconciled below:
QUARTERS ENDED SIX MONTHS ENDED
--------------------------- -----------------------
JULY 31, AUGUST 1, JULY 31, AUGUST 1,
1999 1998 1999 1998
Net earnings, basic and diluted $ 3,374,028 $ 2,594,165 $ 4,354,018 $ 3,110,508
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares:
Basic 14,064,619 13,979,160 14,064,573 13,949,728
Effect of dilutive securities:
Stock options and performance
share awards 553,323 392,586 239,119 255,839
---------- ---------- ---------- ----------
Diluted 14,617,942 14,371,746 14,303,692 14,205,567
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
3] On May 23, 1999, the Company acquired substantially all of the assets of
the Repp Ltd. Big & Tall and Repp Ltd. By Mail divisions of Edison Brothers
Stores, Inc. ("Edison"). Edison is currently operating as a debtor-in-possession
under Chapter 11 of the United States Bankruptcy Code, as amended. The all cash
purchase price was for the acquisition of 175 United States and Canadian Repp
Ltd. Big & Tall retail locations and the Repp Ltd. By Mail catalog business. The
Company immediately sold Repp's Canadian operation, 16 stores, to
Grafton-Fraser, Inc., a Canadian men's retailer, and commenced the closing of 31
stores in the United States. The Company operates the remaining 128 retail
stores in the United States and the Repp Ltd. By Mail catalog through a new
subsidiary, JBI Apparel, Inc. The transaction was financed primarily through (a)
a new $20 million credit facility and a $5 million term loan provided to JBI
Apparel, Inc. by BankBoston Retail Finance Inc. and Back Bay Capital Funding
LLC, respectively, (both of which have been subsequently amended on August 30,
1999 through a refinancing - see Note 7), (b) the issuance by JBI Apparel, Inc.
of $10 million of senior subordinated notes to a group of investors, which
included investment funds affiliated with Donaldson, Lufkin & Jenrette, Inc.
(the "Investor Group"), and (c) the sale of the Canadian operations and the
liquidation of the inventories in the 31 closing stores. The net purchase price
for the acquired assets, which primarily consisted of inventory and fixed assets
for the 128 retail stores in the United States and the Repp Ltd. By Mail
catalog, is $26.2 million, subject to adjustment. In connection with the $10
million financing provided by the Investor Group, J. Baker issued 5-year
warrants enabling holders to purchase 1,200,000 shares of the Company's common
stock at $5.00 per share. The remaining 128 Repp Ltd. retail stores and the Repp
Ltd. By Mail catalog, which will continue to operate under the Repp Ltd. Big &
Tall trade name, generated sales of $18.4 million in both the quarter and six
months ended July 31, 1999.
6
4] The Company is a specialty retailer conducting business through retail
stores in two business segments: apparel and footwear. The Company's chief
operating decision maker, the Chief Executive Officer, evaluates the performance
of the Company's segments based on operating profit and cash flow. Operating
profit includes all revenues and direct expenses attributable to the segment and
excludes certain expenses that are managed outside the segment, primarily
general corporate expenses. General corporate expenses are comprised primarily
of administrative functions, such as management, finance, information systems
and human resources.
Net sales and operating profits for each of the Company's business
segments are set forth below. There are no material inter-segment revenues.
Quarters Ended Six Months Ended
-------------- ----------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
---- ---- ---- ----
(in thousands) (in thousands)
APPAREL
Net sales $ 97,761 $ 75,556 $ 171,959 $ 147,556
Operating profit 8,965 6,545 15,978 12,427
FOOTWEAR
Net sales $ 71,486 $ 70,940 $ 126,481 $ 125,577
Operating profit 6,272 6,072 9,890 9,533
CONSOLIDATED
Net sales $169,247 $146,496 $298,440 $273,133
Operating profit before general
corporate expense 15,237 12,617 25,868 21,960
General corporate expense (5,639) (4,726) (11,259) (9,625)
Interest expense, net (4,326) (3,638) (7,805) (7,235)
Earnings before income taxes $ 5,272 $ 4,253 $ 6,804 $ 5,100
5] On November 12, 1998 Ames Department Stores, Inc. ("Ames") entered into an
agreement for the acquisition of Hills Stores Company ("Hills"). The Company has
operated licensed footwear departments in each of Ames' and Hills' stores
pursuant to license agreements with each such entity. On December 31, 1998, Ames
acquired control of Hills through its acquisition of substantially more than a
majority of Hills' outstanding common stock and convertible preferred stock and
notes. In March, 1999 Ames consummated the merger of Hills into a subsidiary of
Ames.
At the time of the acquisition, Hills operated 155 discount department
stores in twelve states. In February, 1999, Ames began a program to remodel and
convert 151 of the acquired Hills stores to Ames stores in three sequential
phases of approximately 50 stores each. Upon the completion of the remodeling
and conversion process, all such stores will be incorporated into the Company's
license agreement with Ames on the same terms and conditions as presently exist.
The first stage of remodeling, involving 50 stores, has been completed and the
remodeled stores opened on April 22, 1999. The second stage, involving 54
stores, was completed in July, 1999 and the remodeled stores reopened on July
19, 1999. The final stage, involving 47 stores, is scheduled to be completed in
September, 1999. During these three stages of store closings, the Company
participated in liquidation sales of its footwear inventory in each store. The
three stages of liquidation sales ended on February 22, 1999, May 21, 1999 and
July 26, 1999, respectively. The Company's sales in the combined Ames and Hills
chains for the quarter and six months ended July 31, 1999 were $38.7 million and
$68.7 million, respectively.
6] 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. 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. The Plan
7
became effective on February 2, 1999 (the "Effective Date"), the Company's
license agreement with Bradlees was amended and assumed and the reorganized
Bradlees emerged from bankruptcy. Pursuant to the amended agreement, ten days
after the Effective Date Bradlees made a cash distribution to the Company in the
amount of $360,000 and will pay the unpaid balance of the Company's pre-petition
claim in thirty-six equal monthly installments, which commenced on March 1,
1999, with interest payable on the unpaid balance outstanding commencing with
the seventh monthly payment. As provided in the amended license agreement, upon
the occurrence of certain events, the entire unpaid balance of the Company's
claim shall be paid within 30 days after such occurrence, without penalty or
interest. The Company's sales in the Bradlees chain for the quarter and six
months ended July 31, 1999 were $14.2 million and $23.8 million, respectively.
7] On August 30, 1999, the Company established a total of $184 million in
bank financing arrangements, comprised of a $150 million revolving credit
facility, a $25 million term loan and a $9 million chattel loan. These three
facilities, all of which mature in May 2002, amended or replaced $160 million in
previously existing bank credit facilities which would have otherwise expired in
May 2000 and May 2001.
The $150 million revolving line of credit (the "Revolver") was provided by
a group of lenders led by Bank Boston Retail Finance Inc. Aggregate borrowings
under the Revolver are limited to an amount determined by a formula based on
various percentages of eligible inventory and accounts receivable. Borrowings
under the Revolver bear interest at variable rates and can be in the form of
loans and letters of credit.
The $25 million term loan (the "Term Loan") was provided by Back Bay
Capital Funding LLC. If certain conditions are met, a principal payment of $5
million is due on April 30, 2000, and payments of $2.5 million are due on each
of July 31, 2000 and November 30, 2000. Borrowings under the Term Loan bear
interest at 16% per year.
The $9 million chattel loan (the "Chattel Loan") was provided by
BancBoston Leasing Inc. The Chattel Loan is payable in equal monthly
installments of principal and interest and bears interest at 10.35%.
Each of the Revolver, the Term Loan and the Chattel Loan is secured by
substantially all of the assets of the Company, and amended or replaced the
following previously existing credit facilities:
- - An $85 million revolving credit facility which was used to finance the
Company's Casual Male Big & Tall and Work `n Gear apparel businesses;
- - A $50 million revolving credit facility which was used to finance the
Company's footwear business;
- - A $20 million revolving line of credit and $5 million term loan facility
which were used to finance the Company's Repp Ltd. Big & Tall businesses.
8
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, EXPECTATION OR INTENT
REGARDING THE COMPANY'S FUTURE PERFORMANCE. THE COMPANY'S ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS 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 14 OF THIS QUARTERLY REPORT.
All references herein to fiscal 2000 and fiscal 1999 relate to the years ending
January 29, 2000 and January 30, 1999, respectively.
RESULTS OF OPERATIONS
FIRST SIX MONTHS OF FISCAL 2000 VERSUS FIRST SIX MONTHS OF FISCAL 1999
The Company's net sales increased by $25.3 million to $298.4 in the first
six months of fiscal 2000 from $273.1 million in the first six months of fiscal
1999, primarily due to $18.4 million in sales generated by the Repp Ltd. Big &
Tall stores and the Repp Ltd. By Mail catalog, which were acquired by the
Company on May 23, 1999. Sales in the Company's apparel operations increased by
$24.4 million to $172.0 in the first six months of fiscal 2000 from $147.6
million in the first six months of fiscal 1999, primarily due to sales in the
newly acquired Repp businesses and a 4.7% 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). Sales in the Company's footwear operations increased by $905,000 to
$126.5 million in the first six months of fiscal 2000 from $125.6 million in the
first six months of fiscal 1999, primarily due to a 5.3% increase 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 increase was partially offset by a $5.1 million
decrease in sales due to the temporary closing of the approximately 150 former
Hills stores for a portion of the first six months of fiscal 2000, prior to
their reopening as Ames stores.
The Company's cost of sales constituted 53.9% of sales in the first six
months of fiscal 2000, as compared to 54.2% of sales in the first six months of
fiscal 1999. Cost of sales in the Company's apparel operations was 51.2% of
sales in the first six months of fiscal 2000, which was comparable to the 51.1%
of sales in the first six months of fiscal 1999. Cost of sales in the Company's
footwear operations was 57.7% of sales in the first six months of fiscal 2000,
as compared to 57.9% of sales in the first six months of fiscal 1999. 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 increased $9.1 million, or
8.6%, to $115.2 million in the first six months of fiscal 2000 from $106.1
million in the first six months of fiscal 1999, primarily due to the acquisition
of the Repp businesses. As a percentage of sales, selling, administrative and
general expenses were 38.6% of sales in the first six months of fiscal 2000, as
compared to 38.8% of sales in the first six months of fiscal 1999. Selling,
administrative and general expenses in the Company's apparel operations were
40.4% of sales in the first six months of fiscal 2000 as compared to 41.4% of
sales in the first six months of fiscal 1999. 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 36.2% of sales in the
first six months of fiscal 2000, as compared to 35.9% of sales in the first six
months of fiscal 1999. This increase was primarily due to an increase in store
level expenses.
9
Depreciation and amortization expense increased by $1.0 million to $7.7
million in the first six months of fiscal 2000 from $6.7 million in the first
six months of fiscal 1999, primarily due to an increase in depreciable and
amortizable assets.
As a result of the above, the Company's operating income increased by $2.3
million to $14.6 million in the first six months of fiscal 2000 from $12.3
million in the first six months of fiscal 1999. As a percentage of sales,
operating income was 4.9% in the first six months of fiscal 2000 as compared to
4.5% in the first six months of fiscal 1999.
Net interest expense increased by $570,000 to $7.8 million in the first
six months of fiscal 2000 from $7.2 million in the first six months of fiscal
1999, primarily due to higher interest rates on bank borrowings and higher
average levels of bank borrowings in the first six months of fiscal 2000 versus
the first six months of fiscal 1999, both of which were primarily due to the
acquisition of the Repp Ltd. Big & Tall businesses.
Taxes on earnings for the first six months of fiscal 2000 were $2.5
million, yielding an effective tax rate of 36.0%, as compared to taxes on
earnings of $2.0 million for the first six months of fiscal 1999, yielding an
effective tax rate of 39.0%. The tax rate for the first six months of fiscal
2000 is consistent with that utilized for the entire fiscal year 1999.
Net earnings for the first six months of fiscal 2000 were $4.4 million, as
compared to net earnings of $3.1 million in the first six months of fiscal 1999,
an increase of 40.0%.
SECOND QUARTER OF FISCAL 2000 VERSUS SECOND QUARTER OF FISCAL 1999
The Company's net sales increased by $22.7 million to $169.2 million in
the second quarter of fiscal 2000 from $146.5 million in the second quarter of
fiscal 1999, primarily due to $18.4 million in sales generated by the Repp Ltd.
Big & Tall stores and the Repp Ltd. By Mail catalog acquired by the Company on
May 23, 1999. Sales in the Company's apparel operations increased by $22.2
million to $97.8 million in the second quarter of fiscal 2000 from $75.6 million
in the second quarter of fiscal 1999, primarily due to the aforementioned
acquisition of the Repp Ltd. Big & Tall stores and Repp Ltd. By Mail catalog
businesses in the second quarter of fiscal 2000, and a 5.6% increase in
comparable apparel store sales. Sales in the Company's footwear operations
increased by $547,000 to $71.5 million in the second quarter of fiscal 2000 from
$70.9 million in the second quarter of fiscal 1999, primarily due to a 5.9%
increase in comparable retail footwear store sales. The increase was partially
offset by a $3.1 million decrease in sales due to the temporary closing of
approximately 100 of the 150 former Hills stores for a portion of the second
quarter of fiscal 2000, prior to their reopening as Ames stores.
The Company's cost of sales constituted 54.3% of sales in the second
quarter of fiscal 2000, as compared to 54.4% of sales in the second quarter of
fiscal 1999. Cost of sales in the Company's apparel operations was 51.4% of
sales in the second quarter of fiscal 2000, as compared to 50.7% of sales in the
second quarter of fiscal 1999. The increase in such percentage was primarily
attributable to a lower initial markup on merchandise purchases. Cost of sales
in the Company's footwear operations was 58.3% of sales in the second quarter of
fiscal 2000, as compared to 58.3% of sales in the second quarter of fiscal 1999.
Selling, administrative and general expenses increased $8.2 million, or
14.8%, to $63.5 million in the second quarter of fiscal 2000 from $55.3 million
in the second quarter of fiscal 1999, primarily due to the acquisition of the
Repp businesses. As a percentage of sales, selling, administrative and general
expenses were 37.5% of sales in the second quarter of fiscal 2000, as compared
to 37.7% of sales in the second quarter of fiscal 1999. Selling, administrative
and general expenses in the Company's apparel operations were 39.8% of sales in
the second quarter of fiscal 2000, as compared to 41.1% of sales in the second
quarter of fiscal 1999. 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 34.4% of sales in the second quarter of
fiscal 2000, as compared to 34.2% of sales in the second quarter of fiscal 1999.
This increase was primarily due to an increase in store level expenses.
Depreciation and amortization expense increased by $622,000 to $4.2
million in the second quarter of fiscal 2000 from $3.6 million in the second
quarter of fiscal 1999, primarily due to an increase in depreciable and
amortizable assets.
10
As a result of the above, the Company's operating income increased by $1.7
million to $9.6 million in the second quarter of fiscal 2000 from $7.9 million
in the second quarter of fiscal 1999. As a percentage of sales, operating income
was 5.7% in the second quarter of fiscal 2000, as compared to 5.4% in the second
quarter of fiscal 1999.
Net interest expense increased by $689,000 to $4.3 million in the second
quarter of fiscal 2000 from $3.6 million in the second quarter of fiscal 1999,
primarily due to higher interest rates on bank borrowings and higher average
levels of bank borrowings in the second quarter of fiscal 2000 versus the second
quarter of fiscal 1999, both of which were primarily due to the acquisition of
the Repp Ltd. Big & Tall businesses.
Taxes on earnings for the second quarter of fiscal 2000 were $1.9 million,
yielding an effective tax rate of 36.0%, as compared to taxes on earnings of
$1.7 million for the second quarter of fiscal 1999, yielding an effective tax
rate of 39.0%. The tax rate for the second quarter of fiscal 2000 is consistent
with that utilized for the entire fiscal year 1999.
Net earnings for the second quarter of fiscal 2000 were $3.4 million, as
compared to net earnings of $2.6 million in the second quarter of fiscal 1999,
an increase of 30.1%.
FINANCIAL CONDITION
JULY 31, 1999 VERSUS JANUARY 30, 1999
The increase in accounts receivable at July 31, 1999 from January 30, 1999
was primarily due to an increase in trade receivables due to seasonal factors,
licensed footwear department sales in July being higher than licensed footwear
department sales in January.
The increase in merchandise inventories at July 31, 1999 from January 30,
1999 was primarily due to the acquisition of the Repp Ltd. Big & Tall stores and
the Repp Ltd. By Mail businesses, and a seasonal increase in the average
inventory level per location.
The increase in current portion of long-term debt at July 31, 1999 versus
January 30, 1999 is primarily due to current maturities of portions of the new
bank financing arrangements.
The decrease in accounts payable at July 31, 1999 from January 30, 1999
was primarily due to a decrease in in-transit inventory. The ratio of accounts
payable to merchandise inventory was 27.3% at July 31, 1999, as compared to
34.0% at January 30, 1999 and 25.0% at August 1, 1998.
The increase in accrued expenses at July 31, 1999 from January 30, 1999 is
primarily due to the Repp acquisition.
The increase in long-term debt, net of current portion, at July 31, 1999
from January 30, 1999 was primarily due to additional borrowings for the
acquisition of the Repp businesses, coupled with additional bank borrowings to
meet seasonal working capital needs.
LIQUIDITY AND CAPITAL RESOURCES
On August 30, 1999, the Company established a total of $184 million in
bank financing arrangements, comprised of a $150 million revolving credit
facility, a $25 million term loan and a $9 million chattel loan. These three
facilities, all of which mature in May 2002, amended or replaced $160 million in
previously existing bank credit facilities which would have otherwise expired in
May 2000 and May 2001.
The $150 million revolving line of credit (the "Revolver") was provided by
a group of lenders led by Bank Boston Retail Finance Inc. Aggregate borrowings
under the Revolver are limited to an amount determined by a formula based on
various percentages of eligible inventory and accounts receivable. Borrowings
under the Revolver
11
bear interest at variable rates and can be in the form of loans and letters of
credit.
The $25 million term loan (the "Term Loan") was provided by Back Bay
Capital Funding LLC. If certain conditions are met, a principal payment of $5
million is due on April 30, 2000, and payments of $2.5 million are due on each
of July 31, 2000 and November 30, 2000. Borrowings under the Term Loan bear
interest at 16% per year.
The $9 million chattel loan (the "Chattel Loan") was provided by
BancBoston Leasing Inc. The Chattel Loan is payable in equal monthly
installments of principal and interest and bears interest at 10.35%.
Each of the Revolver, the Term Loan and the Chattel Loan is secured by
substantially all of the assets of the Company, and amended or replaced the
following previously existing credit facilities:
- - An $85 million revolving credit facility which was used to finance the
Company's Casual Male Big & Tall and Work `n Gear apparel businesses;
- - A $50 million revolving credit facility which was used to finance the
Company's footwear business;
- - A $20 million revolving line of credit and $5 million term loan facility
which were used to finance the Company's Repp Ltd. Big & Tall businesses.
As of July 31, 1999, the Company had aggregate borrowings outstanding
under its previously existing credit facilities totaling $116.0 million,
consisting of loans and obligations under letters of credit.
In May, 1999, a new subsidiary of the Company, JBI Apparel, Inc., acquired
the Repp Ltd. Big & Tall retail store business operated in the United States and
the Repp Ltd. By Mail catalog. The purchase price and working capital needs of
the Repp business were financed primarily through (a) a new credit facility
provided to JBI Apparel, Inc. by BankBoston Retail Finance Inc. ("BBRF") and
Back Bay Capital Funding LLC, respectively, and (b) senior subordinated notes
and warrants issued to a group of investors, which included investment funds
affiliated with Donaldson, Lufkin and Jenrette, Inc. (the "Investor Group").
Effective May 21, 1999, a combination $20 million revolving line of credit
and $5 million term loan facility (the "JBI Apparel Credit Facility") was
established with BBRF and Back Bay Capital LLC, respectively. The JBI Apparel
Credit Facility was amended by the Revolver and the Term Loan.
Also effective on May 21, 1999, the Investor Group provided $10 million to
JBI Apparel, Inc. through the issuance of 13% Senior Subordinated Notes.
Detachable warrants were issued in connection with the 13% Senior Subordinated
Notes, which enable the holders to purchase 1,200,000 shares of J. Baker, Inc.
common stock at $5.00 per share. The amount of the 13% Senior Subordinated Notes
at July 31, 1999 has been reduced by $3,082,000, the remaining balance of the
$3,300,000 value assigned to the detachable warrants. The value of the
detachable warrants is included in additional paid-in capital in stockholders'
equity, and is being amortized using the interest method. The 13% Senior
Subordinated Notes mature on December 31, 2001, and the warrants expire on May
21, 2004.
Net cash provided by operating activities for the first six months of
fiscal 2000 was $2.1 million, as compared to net cash used in operating
activities of $15.4 million in the first six months of fiscal 1999. The $17.5
million change was primarily due to a smaller increase in inventory in fiscal
2000 versus fiscal 1999, an increase in net accounts receivable in fiscal 2000
versus a decrease in net accounts receivable in fiscal 1999, which was primarily
due to the receipt of litigation settlement proceeds in the first six months of
fiscal 1999, and an increase in accrued expenses in fiscal 2000, primarily as a
result of the Repp acquisition, versus a decrease in accrued expenses in fiscal
1999.
Net cash used in investing activities for the first six months of fiscal
2000 was $31.6 million, as compared to net cash used in investing activities of
$3.1 million in the first six months of fiscal 1999. The $28.5 million change
was primarily due to the acquisition of Repp assets and the receipt of $888,000
in escrowed proceeds from the earlier sales of the footwear businesses in the
first six months of fiscal 2000 versus receipt of $2.9 million in escrowed
proceeds in the first six months of fiscal 1999.
12
Net cash provided by financing activities for the first six months of
fiscal 2000 was $28.0 million, as compared to net cash provided by financing
activities of $15.9 million in the first six months of fiscal 1999. The $12.1
million change was primarily due to the incurrence of new senior subordinated
debt for the Repp acquisition, coupled with the borrowing of $20.2 million under
the Company's revolving lines of credit during the first six months of fiscal
2000 versus the borrowing of $17.9 million during the first six months of fiscal
1999.
Excluding furniture, fixtures, equipment and leasehold improvements
acquired with the Repp Ltd. Big & Tall businesses, the Company invested $5.3
million and $5.5 million in capital expenditures during the first six months of
fiscal 2000 and fiscal 1999, 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 2000:
Actual Openings Planned Openings Total
First and Second Third and Fourth Actual/Planned
DIVISION QUARTERS FISCAL 2000 QUARTERS FISCAL 2000 OPENINGS
-------- -------------------- -------------------- --------
Casual Male 3 2 5
Work 'n Gear - - -
JBI Footwear 3 24 27
Repp Ltd. Big &Tall 3 6 9
Offsetting the above actual and planned store openings, the Company closed
4 Casual Male stores, 2 Work 'n Gear stores and 12 JBI Footwear departments
during the first six months of fiscal 2000. The Company has plans to close
approximately an additional 7 Casual Male stores, 6 JBI Footwear departments and
3 Repp stores during the third through fourth quarters of fiscal 2000. These
numbers do not reflect the closing and reopening of the approximately 150
Hills/Ames stores during fiscal 2000, nor do they reflect the 128 stores which
were acquired as a result of the Repp acquisition.
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
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.
YEAR 2000 COMPLIANCE
The statements in this section include "Year 2000 Readiness Disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
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 established a Year 2000 committee comprised of senior
management of the Company and also engaged an independent consulting firm to
assist in remediation of the Company's Year 2000 issues. The Company evaluated
its internal computer systems and while the data processing systems were found
to be impacted to some extent, Year 2000 issues were found to be most
significant in connection with various mainframe computer programs. In fiscal
1997, the Company developed a plan to address Year 2000 issues as they related
to the mainframe computer programs and began the process of converting such
computer programs to be Year 2000 compliant. During fiscal 1999, the Company
completed the conversion of its three primary mainframe computer programs to be
Year 2000 compliant.
13
During fiscal 1999, the Company undertook an inventory of its
non-information technology systems. Such inventory is substantially complete
and, where appropriate, the Company has made contingency plans in order to
minimize any adverse effect Year 2000 issues may have on such non-information
technology systems.
During fiscal 1999, the Company communicated with and completed a
compilation of 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. 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, 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.
The Company is not dependent on a single source for any products or
services. In the event a third party is unable to provide material 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 were deferred in order to ensure
completion of the Company's Year 2000 compliance efforts. Although management
believes deferring 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 $3.9 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
not known, 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 fashion, 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 has developed 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
Year 2000 issues.
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.
Company management may also make written or oral forward-looking statements in
other documents it files with the SEC, in its annual report to stockholders, in
press releases and other written materials, and in oral statements made by
officers, directors or employees of the Company. You should not rely on
forward-looking statements, because they involve
14
known and unknown risks, uncertainties and other factors, some of which are
beyond the control of the Company. 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, performance or
achievements of the Company for fiscal 2000 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
on appropriate terms, ability to hire and train associates and costs, timing and
effectiveness of Year 2000 conversion. You should carefully review and consider
all of these factors and should be aware there may be other factors that could
cause these differences. These forward-looking statements were based on
information, plans and estimates at the date of this report, and the Company
does not promise to update any forward-looking statements to reflect changes in
underlying assumptions or factors, new information, future events or other
changes.
15
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The registrant's annual meeting of stockholders was held on June 1, 1999
(the "Meeting").
(b) Messrs. Sherman N. Baker, Theodore M. Ronick and Melvin M. Rosenblatt were
elected Class I directors at the Meeting for a three-year term. The term
of office for the following directors continued after the Meeting: Ms.
Nancy Ryan, Messrs. J. Christopher Clifford, Douglas J. Kahn, Harold
Leppo, David Pulver and Alan I. Weinstein.
(c) The stockholders voted on the ratification of the selection of KPMG LLP as
independent auditors for the fiscal year ending January 29, 2000.
The following votes were cast at the Meeting with respect to each nominee
for Class I director:
Total vote for Total vote withheld
Each Director From Each Director
------------- ------------------
Sherman N. Baker 12,844,993 85,406
Theodore M. Ronick 12,848,529 81,870
Melvin M. Rosenblatt 12,850,643 79,756
The following votes were cast at the Meeting with respect to the
ratification of auditors:
For: 12,924,984
Against: 4,872
Abstain: 543
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.
16
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 14, 1999
By:/s/Philip Rosenberg
-------------------
Philip Rosenberg
Executive Vice President,
Chief Financial Officer
and Treasurer
Date: Canton, Massachusetts
September 14, 1999
17
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 JULY 31, 1999
Exhibit Index
-------------
Exhibit Page No.
- ------- --------
10. Material Contracts
------------------
(.01) 1999 Loan and Security Agreement by and among J. Baker, Inc. *
(as Borrower's representative), Morse Shoe, Inc., JBI Inc., JBI
Apparel, Inc., The Casual Male, Inc., WGS Corp. and TCMB&T, Inc.
and BankBoston Retail Finance Inc., et.al. and Back Bay Capital
Funding LLC, dated August 30, 1999, attached.
(.02) Chattel Promissory Note made by Morse Shoe, Inc., JBI, Inc., The *
Casual Male, Inc., WGS Corp. and TCMB&T, Inc. in favor of
BancBoston Leasing Inc. dated August 26, 1999, attached.
(.03) Master Security Agreement by Morse Shoe, Inc., JBI, Inc., The Casual *
Male, Inc., WGS Corp. and TCMB&T, Inc. in favor of BancBoston Leasing, Inc.
dated August 26, 1999, attached.
(.04) Security Agreement by Morse Shoe, Inc., JBI, Inc., The Casual *
Male, Inc., WGS Corp. and TCMB&T, Inc. in favor of BancBoston Leasing, Inc.
dated August 26, 1999, attached.
11. Computation of Net Earnings Per Common Share, attached. *
--------------------------------------------
27. Financial Data Schedule *
-----------------------
* Included herein