FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ 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
Commission file number 0-6319
JACOBSON STORES INC.
(Exact name of registrant as specified in its charter)
Michigan 38-0686330
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification Number)
3333 Sargent Road, Jackson, Michigan 49201
(Address of principal executive offices,
including zip code)
(517) 764-6400
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Common Stock ($1 Par Value):
5,788,209-2/3 Shares outstanding as of October 31, 1998
<PAGE>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For Quarter Ended October 31, 1998
INDEX
Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
. Consolidated Balance Sheets - October 31, 1998 and
January 31, 1998 1
. Consolidated Statements of Earnings - Thirteen and
Thirty-Nine Week Periods Ended October 31, 1998 and
October 25, 1997 2
. Consolidated Statements of Cash Flows - Thirty-Nine
Week Periods Ended October 31, 1998 and October 25, 1997 3
. Notes to Consolidated Financial Statements 4
Review by Independent Public Accountants 7
Exhibit:
. Report of Independent Public Accountants 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
All items except those set forth above are
inapplicable and have been omitted.
SIGNATURES 15
INDEX OF EXHIBITS 16
<PAGE>
<TABLE>
<CAPTION>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
October 31, January 31,
ASSETS 1998 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,980 $ 3,883
Receivables from customers, net 28,953 34,124
Merchandise inventories 105,044 86,075
Prepaid expenses and other assets 1,176 1,333
Deferred taxes 3,696 3,696
--------- ---------
Total current assets 142,849 129,111
--------- ---------
PROPERTY AND EQUIPMENT, NET 84,085 83,707
--------- ---------
OTHER ASSETS 20,495 20,461
--------- ---------
$ 247,429 $ 233,279
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,318 $ 3,972
Accounts payable 41,671 32,108
Accrued expenses 15,105 13,856
Accrued income taxes -- 360
--------- ---------
Total current liabilities 59,094 50,296
--------- ---------
LONG-TERM DEBT 118,060 104,138
--------- ---------
DEFERRED TAXES 2,154 5,262
--------- ---------
OTHER LIABILITIES 4,172 4,382
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock 5,975 5,966
Paid-in surplus 7,201 7,109
Retained earnings 51,172 56,525
Treasury stock (399) (399)
--------- ---------
63,949 69,201
--------- ---------
$ 247,429 $ 233,279
========= =========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
- 1 -
<PAGE>
<TABLE>
<CAPTION>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands except per share data)
(unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------------- --------------------------
October 31, October 25, October 31, October 25,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 95,636 $ 94,715 $ 305,717 $ 302,561
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of merchandise sold, buying and
occupancy expenses 63,099 59,587 206,045 204,282
Selling, general and administrative
expenses 35,165 34,421 102,759 98,782
Interest expense, net 1,881 2,148 5,807 6,885
Store closing costs (credit) -- -- -- (340)
Gain on sale of property (659) -- (659) --
--------- --------- --------- ---------
Total costs and expenses 99,486 96,156 313,952 309,609
--------- --------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME
TAXES (3,850) (1,441) (8,235) (7,048)
PROVISION (CREDIT) FOR INCOME
TAXES (1,347) (504) (2,882) (2,467)
--------- --------- --------- ---------
NET EARNINGS (LOSS) $ (2,503) $ (937) $ (5,353) $ (4,581)
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic and diluted $ (0.43) $ (0.16) $ (0.93) $ (0.79)
========= ========= ========= =========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
- 2 -
<PAGE>
<TABLE>
<CAPTION>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Thirty-Nine Weeks Ended
--------------------------
October 31, October 25,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,353) $ (4,581)
Gain on sale of property (659) --
Adjustments to reconcile net loss to cash provided
by operating activities:
Depreciation and amortization 6,336 7,020
Deferred taxes (3,108) (2,439)
Other liabilities (210) 430
Change in:
Receivables from customers, net 5,171 10,913
Merchandise inventories (18,969) (2,049)
Prepaid expenses and other assets 157 1,475
Accounts payable and accrued expenses 10,812 443
Current income taxes (360) 754
-------- --------
Net cash provided by (used in) operating
activities (6,183) 11,966
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property 1,163 --
Additions to property and equipment (7,218) (2,202)
Other non-current assets (34) 131
-------- --------
Net cash used in investing activities (6,089) (2,071)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt 15,559 49,500
Reduction of long-term debt (3,291) (60,562)
Proceeds of exercise of stock options 101 --
-------- --------
Net cash provided by (used in)
financing activities 12,369 (11,062)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 97 (1,167)
Cash and cash equivalents, beginning of period 3,883 4,871
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,980 $ 3,704
======== ========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
- 3 -
<PAGE>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For Quarter Ended October 31, 1998
The condensed consolidated financial statements included herein have
been prepared by the Company without audit and reflect all
adjustments which are, in the opinion of management, necessary to
achieve a fair statement of results for the interim periods. All
adjustments are of a normal and recurring nature.
Because of the nature of the specialty department store business,
the results for the thirty-nine week periods ended October 31, 1998
and October 25, 1997 (which do not include the Christmas holiday
season) are not indicative of the results for the year as a whole.
Certain information in footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles has been condensed or amended, although the
Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these
condensed consolidated financial statements be read in conjunction
with the financial statements and notes to consolidated financial
statements included in the Company's latest annual report on Form
10-K.
(1) STORE CLOSING COSTS/GAIN ON SALE OF PROPERTY
In March 1997, the Company closed under-performing stores in
Jackson, Kalamazoo and Dearborn, Michigan. The Company incurred a
$4,200,000 pre-tax charge in fiscal 1996 to effect the closings and
to state property and equipment at estimated fair value. For the
thirty-nine weeks ended October 31, 1998, store closing reserve
activity was as follows:
<TABLE>
<CAPTION>
(in thousands)
-----------------------------------------------------
<S> <C>
Reserve at January 31, 1998 $ 2,623
Reserve related to property sold (1,630)
Payments against reserve (237)
---------
Reserve at October 31, 1998 $ 756
=========
</TABLE>
- 4 -
<PAGE>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For Quarter Ended October 31, 1998
At October 31, 1998, $605,000 of the store closing reserve is
attributable to property and equipment and is reflected as a
reduction of property and equipment on the consolidated balance
sheets. The balance of the store closing reserve is included in
accrued expenses and represents estimated expense to hold closed
facilities pending disposition.
In the quarter ended October 31, 1998, the Company sold its former
Kalamazoo, Michigan store at an after-tax gain of $428,000.
(2) EARNINGS PER SHARE
Basic earnings per share are computed by dividing reported earnings
available to common shareholders by weighted average common shares
outstanding. Diluted earnings per share give effect to potential
common shares represented by stock options and the Company's 6-3/4%
Convertible Subordinated Debentures due 2011, except if
anti-dilutive. Earnings per common share are calculated as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Thirty-Nine Weeks
------------------- --------------------
(dollars and shares in thousands) 1998 1997 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $(2,503) $ (937) $(5,353) $(4,581)
======= ======= ======= =======
Weighted average common shares
outstanding 5,788 5,779 5,783 5,779
Dilutive stock options 45 65 166 16
------- ------- ------- -------
Shares used to calculate diluted
loss per common share 5,833 5,844 5,949 5,795
======= ======= ======= =======
Loss per common share:
Basic and diluted $ (0.43) $ (0.16) $ (0.93) $ (0.79)
======= ======= ======= =======
</TABLE>
(3) CUSTOMER CREDIT AND RECEIVABLES
Receivables from customers were as follows:
<TABLE>
<CAPTION>
October 31, January 31,
(in thousands) 1998 1998
------------------------------------------------------------------
<S> <C> <C>
Receivables from customers $29,424 $34,761
Less reserve for doubtful accounts 471 637
------- -------
$28,953 $34,124
======= =======
</TABLE>
- 5 -
<PAGE>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For Quarter Ended October 31, 1998
(4) MERCHANDISE INVENTORIES
Merchandise inventories were as follows:
<TABLE>
<CAPTION>
October 31, January 31,
(in thousands) 1998 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Inventories at first-in, first out (FIFO) cost $124,566 $104,708
Less LIFO reserves 19,522 18,633
-------- --------
$105,044 $ 86,075
======== ========
</TABLE>
(5) PROPERTY AND EQUIPMENT
Property and equipment are set forth below:
<TABLE>
<CAPTION>
October 31, January 31,
(in thousands) 1998 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Property and equipment $175,722 $171,808
Less accumulated depreciation and amortization 91,637 88,101
-------- --------
$ 84,085 $ 83,707
======== ========
</TABLE>
(6) STOCK OPTIONS
At their Annual Meeting on May 28, 1998, the Company's shareholders
approved an amendment to the Jacobson Stock Option Plan of 1994
which increased the available shares under the plan to 1,400,000
shares.
(7) PREFERRED STOCK PURCHASE RIGHTS
On August 27, 1998, the Board of Directors declared a dividend of
one Series A Preferred Stock Purchase Right on each Common Share
outstanding. The dividend was payable to shareholders of record on
October 25, 1998 and is payable with respect to certain common
shares issued thereafter. The Company also adopted a Rights
Agreement, effective October 25, 1998, to replace an expiring Rights
Plan, pursuant to which the Rights are issued. Each Right, when it
becomes exercisable, entitles the registered holder to purchase from
the Company one-hundredth of a share of Series A Preferred Stock at
an exercise price of $100, subject to adjustment. The Company has
reserved 100,000 shares of Series A preferred Stock for issuance on
the exercise of the Rights. The Rights trade with the Company's
Common Shares until they become exercisable, which occurs on the
date of public announcement that any
- 6 -
<PAGE>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
PART I: FINANCIAL INFORMATION
For Quarter Ended October 31, 1998
person or group has acquired, or 10 days (or such later date as the
Board of Directors may determine) after the commencement of, or
public announcement of an intention to commence, an offer to acquire
beneficial ownership of 20% or more of the Company's Common Shares
(subject to certain exceptions, including an offer to buy all shares
that is approved by the Company's disinterested directors). After
the Rights become exercisable, each Right (except those of the
acquiring person or group) will entitle the holder to purchase upon
exercise of the Right, at the then current exercise price of the
Right, Company Common Shares having an average market value of twice
the current exercise price of the Right. Alternatively, if the
Company is acquired in a merger or other business combination or if
more than 50% of its assets or earning power are sold to an
acquiring person or in a transaction in which all holders of Common
Shares are not treated alike, each Right (except those of the
acquiring person or group) will entitle the holder to purchase, upon
exercise, at the then current exercise price of the Right, common
shares of the acquiring company having an average market value of
twice the current exercise price of the Right. The Rights may be
redeemed by the Company for one cent per Right prior to the date a
person or group acquires 20% or more of the Company's Common Shares,
and will expire on October 25, 2008, unless extended or earlier
redeemed by the Board of Directors.
(8) SUPPLEMENTARY CASH FLOW INFORMATION
The Company considers all short-term investments with a maturity at
date of purchase of three months or less to be cash equivalents.
Interest paid (net of interest capitalized) totalled $5,328,000 and
$6,524,000 in the thirty-nine week periods ended October 31, 1998
and October 25, 1997, respectively. The Company paid income taxes
totaling $652,000 in the thirty-nine week period ended October 31,
1998 and received income tax refunds of $781,000 in the thirty-nine
week period ended October 25, 1997.
(9) FINANCING
In June 1998, the Company and the lender under its Revolving Credit
Agreement amended the Agreement to extend the maturity date by one
year to March 24, 2001. As amended, each year, beginning in 1999,
the Company may request a one-year extension of the maturity date,
subject to lender approval.
REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, have performed
a limited review of the condensed consolidated financial statements
for the thirty-nine week period ended October 31, 1998. Since they
did not perform an audit, they express no opinion on the financial
statements referred to above.
- 7 -
<PAGE>
EXHIBIT
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To Jacobson Stores Inc.:
We have reviewed the accompanying consolidated balance sheet
of JACOBSON STORES INC. (a Michigan corporation) and
subsidiaries as of October 31, 1998, and the related
consolidated statements of earnings and cash flows for the
thirty-nine week period then ended. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in
scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material
modifications that should be made to the consolidated
financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet of
Jacobson Stores Inc. and subsidiaries as of January 31, 1998,
and the related consolidated statements of earnings,
shareholders' equity and cash flows for the year then ended
(not presented herein), and, in our report dated March 6,
1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance
sheet as of January 31, 1998, is fairly stated, in all
material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan
November 13, 1998
- 8 -
<PAGE>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
PART I: FINANCIAL INFORMATION
For Quarter Ended October 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The registrant, Jacobson Stores Inc., a Michigan corporation
and successor to a business founded in 1868, offers
distinctive apparel and accessories for women, men and
children, as well as decorative accents for the home. The
Company operates 24 specialty stores in Michigan, Indiana,
Kansas, Kentucky, Ohio and Florida, catering to discerning
customers with preferences for quality merchandise and
personalized service provided by knowledgeable sales
associates.
The Company owns a substantial portion of the real property
used in its business, primarily through its consolidated,
wholly-owned real estate subsidiary, Jacobson Stores Realty
Company ("Jacobson Realty"). The Company also has a
consolidated wholly-owned finance subsidiary, Jacobson Credit
Corp. ("Jacobson Credit"). As used in this report, the terms
"registrant", "Company" and "Jacobson's" refer to Jacobson
Stores Inc. and its subsidiaries unless the context indicates
otherwise.
Jacobson's operates in two regions and maintains separate
staffs of buyers for each region in order to better respond to
customers' lifestyles and merchandise preferences. The
principal merchandising and distribution functions are
performed through regional facilities. Functions common to all
stores, such as management coordination, sales promotion, data
processing and accounting, are centralized at the corporate
headquarters in Jackson, Michigan.
a. OPERATING RESULTS: THIRTEEN WEEKS ENDED OCTOBER 31, 1998
COMPARED TO THIRTEEN WEEKS ENDED OCTOBER 25, 1997
Sales for the quarter ended October 31, 1998 totaled
$95,636,000, an increase of 1.0% from 1997. By region, Midwest
sales decreased 1.5% and Florida sales increased 7.5%. In
management's opinion, third quarter sales results were
adversely affected by heightened consumer anxiety due to the
stock market volatility and cool weather arriving late this
season. Additionally, Florida business was adversely affected
by hurricane Georges, which closed five stores anywhere from
one to two days.
The Company's gross profit percentage decreased to 34.0% for
the thirteen weeks this year from 37.1% in 1997, reflecting
principally higher markdowns in the quarter this year and a
favorable inventory shortage result recorded in the quarter
last year.
Selling, general and administrative expenses, expressed as a
percentage of sales, increased to 36.8% in the quarter from
36.3% one year ago. The increase is due primarily to higher
sales promotion expense, partially offset by reduced benefit
expense (pension and health care).
- 9 -
<PAGE>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
PART I: FINANCIAL INFORMATION
For Quarter Ended October 31, 1998
Interest expense, expressed as a percentage of sales,
decreased to 2.0% for the quarter from 2.3% one year ago,
primarily due to lower average borrowings under the revolving
credit facility and other long-term debt.
1998 net loss for the thirteen weeks totalled $2,503,000, or
43 cents per common share, compared to $937,000, or 16 cents
per common share, last year. As a percentage of sales, net
loss was 2.6% in 1998 compared to 1.0% in 1997. 1998 results
included an after-tax gain on sale of property totalling
$428,000, or 7 cents per share.
b. OPERATING RESULTS: THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998
COMPARED TO THIRTY-NINE WEEKS ENDED OCTOBER 25, 1997
Sales for the thirty-nine weeks ended October 31, 1998,
totaled $305,717,000, an increase of 1.0% from 1997. Sales
from comparable stores (excluding stores closed in 1997)
increased 3.7%. By region, Midwest sales decreased 1.0% (3.1%
increase in comparable stores) and Florida store sales
increased 5.0%.
The Company's gross profit percentage increased to 32.6% for
the thirty-nine weeks this year from 32.5% in 1997, reflecting
principally lower markdowns and higher markup this year,
partially offset by a favorable inventory shortage result last
year.
Selling, general and administrative expenses, expressed as a
percentage of sales, increased to 33.6% for the thirty-nine
weeks from 32.6% one year ago. The increase is due primarily
to higher sales promotion expense, partially offset by reduced
benefit expense (pension and health care).
Interest expense, expressed as a percentage of sales,
decreased to 1.9% from 2.3% in 1997, primarily due to lower
average borrowings under the revolving credit facility and
other long-term debt.
The Company established a $4,200,000 reserve in 1996 due to
the closing of three under-performing stores in March 1997. In
the thirty-nine weeks ended October 25, 1997, the Company
recognized a $340,000 pre-tax credit to write-off the
remaining severance and benefit reserves after all payments
were made and to adjust the property and equipment reserve
after sale of a portion of the related property at greater
than the original estimated value.
1998 net loss for the thirty-nine weeks totalled $5,353,000,
or 93 cents per common share, compared to $4,581,000, or 79
cents per common share, last year. As a percent of sales, net
loss was 1.8% in 1998 compared to 1.5% in 1997. 1998 results
included an after-tax gain on sale of property totalling
$428,000, or 7 cents per share.
Store closing promotions conducted at the three stores closed
in March 1997 reduced the net loss for the thirty-nine weeks
last year by $788,000, or 14 cents per share.
- 10 -
<PAGE>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
PART I: FINANCIAL INFORMATION
For Quarter Ended October 31, 1998
c. LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, the Company's current ratio was 2.42 to 1
and working capital totaled $83,755,000, including $3,980,000
of cash and cash equivalents. At January 31, 1998, the current
ratio was 2.57 to 1 and working capital totaled $78,815,000,
including $3,883,000 of cash and cash equivalents.
The Company utilizes cash flows from operations and revolving
credit line borrowings to fund its seasonal working capital
needs. To support its present and planned working capital
requirements, the Company has a $100,000,000 revolving credit
facility under a Revolving Credit Agreement with a commercial
lender. The revolving credit facility currently provides for
borrowings of up to $80,000,000, subject to a borrowing base
limitation and lender reserves. The Company may, at its
option, increase the maximum available borrowings under the
revolving credit facility to up to $100,000,000 in the
aggregate, subject to the borrowing base limitation and lender
reserves. As of October 31, 1998, the Company had borrowed
$50,591,000 under this facility and had $29,409,000 of
borrowing availability. For the thirty-nine weeks ended
October 31, 1998, the daily weighted average interest rate on
borrowings under the Revolving Credit Agreement was 8.1%. In
June 1998, the Agreement was amended to extend the maturity
date by one year to March 24, 2001. As amended, each year,
beginning in 1999, the Company may request a one-year
extension of the maturity date, subject to lender approval.
d. CASH FLOWS
Cash and cash equivalents increased $97,000 in the thirty-nine
weeks ended October 31, 1998, compared to a decrease of
$1,167,000 in the thirty-nine weeks ended October 25, 1997.
Cash flows are impacted by operating, investing and financing
activities. In the thirty-nine weeks this year, cash used in
operating activities totalled $6,183,000, compared to
$11,966,000 provided in 1997, primarily due to planned earlier
receipt of Fall merchandise this year coupled with slow sales
versus reduced inventory and accounts receivable related to
stores closed last year and a higher net loss this year. These
changes were partially offset by increased payables this year
and payments against store closing reserves in 1997.
Investing activities used cash of $6,089,000 in the
thirty-nine weeks this year compared to $2,071,000 used in
1997. Capital expenditures totalled $7,218,000 in the first
thirty-nine weeks of 1998 compared to $2,202,000 in the
comparable 1997 period.
- 11 -
<PAGE>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
PART I: FINANCIAL INFORMATION
For Quarter Ended October 31, 1998
Financing activities provided cash of $12,369,000 in the
thirty-nine weeks this year compared to $11,062,000 used last
year. In the thirty-nine weeks in 1998, the addition to
long-term debt reflects higher Revolving Credit borrowings.
Reduction of long-term debt reflects purchase of $1,695,000 in
principal amount of 6 3/4% Convertible Subordinated Debentures
to satisfy the December 1998 sinking fund requirement and
scheduled debt maturities. In March 1997, the Company borrowed
$49,500,000 under its current Revolving Credit Agreement to
repay the then outstanding principal balance under its former
Credit Agreement. Also in the thirty-nine weeks in 1997,
reduction of long-term debt reflects repayment of $1,908,000
under the current Revolving Credit Agreement, a $5,642,000
principal pre-payment on a mortgage obligation, purchase of
$1,755,000 principal amount of 6 3/4% Convertible Subordinated
Debentures to satisfy the annual sinking fund payment and
scheduled debt maturities.
The Company believes its cash flows from operations, along
with its borrowing capacity and access to financial markets
are adequate to fund its operations and debt maturities.
e. CORPORATE DEVELOPMENT
The Company has no commitments for any new store locations at
the present time. The Company reviews the performance of its
less profitable stores from time to time to determine whether
it would be in the Company's best interest to close any of
these stores. Store closings could have a significant impact
on the Company's sales, expenses and capital requirements and
would likely entail additional significant one-time charges to
effect the closing and to recognize any impairment of assets
resulting from the closing decision.
In 1997, the Company sold its Store for the Home in Grosse
Pointe, Michigan. In July 1998, the Company consolidated
operations in its existing Grosse Pointe apparel store.
The Year 2000 issue results from early computer programming
that used two digits rather than four to define the applicable
year. If not corrected, this defect could, as we move to the
Year 2000, result in systems failures or miscalculations
leading to disruptions in a company's operation. The Company
has taken actions to address this potential problem. In 1997,
the Company established an internal task force which
identified areas of concern, assigned a risk factor and
priority to each area and evaluated the Company's hardware,
software and devices using embedded chips. After completing
this evaluation, it developed specific action plans to fix or
replace all non-compliant software and hardware that could
pose a significant risk to the Company's operations.
- 12 -
<PAGE>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
PART I: FINANCIAL INFORMATION
For Quarter Ended October 31, 1998
The substantial majority of costs to replace non-compliant
systems with Year 2000-compliant systems software and hardware
would have been incurred regardless of the Year 2000 issue to
meet current business needs and take advantage of new lower
cost technology platforms. The Company expects to spend
approximately $800,000 in programming costs, primarily in 1998
and 1999, to make current systems Year 2000-compliant and to
integrate them with new purchased software systems, of which
approximately $200,000 had been spent through October 31,
1998. The work is being performed principally by internal
staff, most of which are existing staff. The Company cannot
reasonably measure the portion of these costs attributable
solely to Year 2000 remediation versus work related to new
systems. As a contingency measure, some non-compliant systems
scheduled for replacement will be made Year 2000-compliant to
ensure that the Company has compliant systems in the event
that new systems aren't ready timely. This cost is included in
the above estimate. The Company is scheduled to have Year
2000-compliant systems tested and implemented by September
1999.
The Company has requested Year 2000 compliance certification
from its hardware and software vendors and from key
merchandise vendors to obtain assurance that they have
addressed Year 2000 issues that might disrupt the Company's
operations or merchandise flow. The Company is evaluating the
responses and will develop contingency plans as necessary to
avoid merchandise flow problems or other disruptions to its
business.
Each of the above statements regarding future revenues,
expenses or business plans (including statements regarding the
sufficiency of the Company's capital resources to fund future
operations) may be a "forward looking statement" within the
meaning of the Securities Exchange Act of 1934. Such
statements are subject to important factors and uncertainties
that could cause actual results to differ materially from
those in the forward-looking statement, including the
continued support of the Company's trade creditors and
factors, the risks inherent in the level of the Company's
long-term debt compared to its equity, the risks inherent in
the Year 2000 computer issue, the Company's ability to reduce
its operating expenses, general trends in retail clothing
apparel purchasing, especially during the Christmas season,
and the factors set forth in this Management's Discussion and
Analysis of Financial Condition and Results of Operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-13-
<PAGE>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
PART II: OTHER INFORMATION
For Quarter Ended October 31, 1998
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(a) Executive Employment Agreement, dated as of July 6, 1998,
between Jacobson Stores Inc. and George P. Kelly
15 Letter from Independent Public Accountants
27 Financial Data Schedule
(b) Reports on Form 8-K
During its fiscal quarter ended October 31, 1998, on October
26, 1998, the Company filed a current Report on Form 8-K,
reporting in Item 5 the Company's declaration of a dividend of
one Series A Preferred Stock Purchase Right on each
outstanding common share of the Company outstanding at the
close of business on October 25, 1998, to replace similar
rights expiring on that date. The report also describes the
new Rights. No financial statements were filed.
All exhibits except as set forth above have been omitted as not applicable or
not required.
-14-
<PAGE>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
For Quarter Ended October 31, 1998
SIGNATURES
Pursuant to the requirements 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.
JACOBSON STORES INC.
-----------------------------------
(Registrant)
Date: December 10 , 1998 BY: /s/ P. Gerald Mills
------------------ ------------------------------------
P. GERALD MILLS
Chairman of the Board, President and
Chief Executive Officer
Date: December 10 , 1998 BY: /s/ Paul W. Gilbert
------------------ ------------------------------------
PAUL W. GILBERT
Vice Chairman of the Board
(Principal Financial Officer)
- 15 -
<PAGE>
JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES
INDEX OF EXHIBITS
10(a) Executive Employment Agreement, dated as of July 6, 1998, between
Jacobson Stores Inc. and George P. Kelly
15 Letter from Independent Public Accountants
27 Financial Data Schedule
All exhibits except as set forth above have been omitted as not
applicable or not required.
-16-
EXHIBIT 10(a)
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into July 6, 1998, between JACOBSON
STORES INC., a Michigan corporation, of Jackson, Michigan (the "Company"),
and George P. Kelly the "Employee").
THE PARTIES AGREE AS FOLLOWS:
1. Employment and Term. The Company employs Employee as Senior
Vice President-General Merchandise Manager, and Employee agrees to serve in
that capacity and/or in such other capacity or capacities as the Chief
Executive Officer of the Company deems advisable, commencing July 6, 1998,
and continuing through April 15, 2000, unless terminated sooner pursuant to
the provisions of paragraph 4, for the salary and on the terms set forth
herein.
2. Compensation. Subject to the provisions of paragraph 4, the
Company agrees to pay Employee salary at an annual rate of $ 200,000.00, in
bi-weekly or other regular periodic installments no less frequent than
monthly.
3. Duties. Employee agrees, as long as employment by the Company
continues, to devote Employee's entire time and best efforts to furthering
the interests of the Company; to comply with all regulations and policies of
the Company; and to perform the duties requested by any officers and
executives of the Company to whom the Employee is directed to report.
4. Termination. Employee's employment under this Agreement shall
terminate on the earliest to occur of the following: (1) immediately upon
Employee's death, (2) at the Company's option, immediately when notice to
Employee of such termination is given after Employee's permanent incapacity
(established to the reasonable satisfaction of the Chief Executive Officer of
the Company), (3) at the Company's option, immediately when notice to
Employee of such termination is given (for any reason or for no reason and
regardless of whether there is good cause for such termination), (4) 30 days
after notice of such termination is given to the Company by Employee, and (5)
April 15, 2000. Notice will be deemed to be given on the earliest of (1) when
delivered, or (2) three business days after mailed by certified or registered
mail, postage prepaid, return receipt requested, or (3) one business day
after sent by recognized overnight courier, if to Employee, to Employee's
address on the Company's corporate records, and if to the Company, to the
address of its principal executive offices. The following events during the
term of this Agreement shall have the following respective effects on the
obligations of the Company pursuant hereto:
(a) If employment is terminated due to Employee's death or
permanent incapacity, the Company shall have no obligation to pay any salary
or other amounts or benefits under this Agreement or otherwise for any period
after the date of termination of employment, but benefits may continue to the
extent provided in any wage continuation program, insurance, or other
employee benefit plans that are generally applicable to all employees of the
Company and that are maintained by the Company at that time.
<PAGE>
(b) Except as otherwise provided in paragraph 4(c), if
employment is terminated by the Company (for any reason or for no reason and
regardless of whether there is good cause for such termination), or if
Employee resigns or retires before or at the expiration of the term, the
Company shall have no obligation to pay any salary or other amounts or
benefits under this Agreement or otherwise for any period after the date of
termination of employment, but benefits may continue to the extent provided
in any severance program, wage continuation program, insurance, or other
employee benefit plans that are generally applicable to all employees of the
Company and that are maintained by the Company at that time.
(c) If (1) a "Change in Control" (as defined below) occurs
during the term of Employee's employment under this Agreement, and (2) either
Employee terminates Employee's employment with the "Entity" (as defined
below) for "Good Reason" (as defined below) or the "Entity" terminates
Employee's employment without "Cause" (as defined below), both within one
year after the Change in Control, Employee will receive an amount equal to
Employee's annual salary at the rate set forth in paragraph 2 for the period
from the date of such termination through the date that is 24 months after
the date such Change in Control occurs. Such payments shall be made at the
times provided in paragraph 2. The Company may withhold from such payments
all federal, state, city and other taxes to the extent such taxes are
required to be withheld by applicable law. The Company's obligation to pay
the salary continuation payments provided in this paragraph 4(c) shall
survive the expiration of the term.
(i) For purposes of this Agreement, a "Change in Control"
occurs on the first day any one or more of the following occurs:
(A) any person (as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), together with all affiliates
and associates of such person (as such terms are defined in
Rule 12b-2 under the Exchange Act) but excluding all "Excluded
Persons" (as defined in paragraph 4(c)(ii)), becomes the
direct or indirect beneficial owner (within the meaning of
Rule 13d-3 under the Exchange Act) of securities of the
Company representing (A) 40% or more of the combined voting
power of all of the Company's outstanding securities entitled
to vote generally in the election of the Company's directors,
or (B) 40% or more of the combined shares of the Company's
capital stock then outstanding, all except in connection with
any merger, consolidation, reorganization or share exchange
involving the Company;
(B) the consummation of any merger, consolidation,
reorganization or share exchange involving the Company, unless
the holders of the Company's capital stock outstanding
immediately before such transaction own more than 50% of the
combined outstanding shares of capital stock and have more
than 50% of the combined voting power in the surviving entity
after such transaction and they own such securities in
substantially the same proportions (relative to each other) as
they owned the Company's capital stock immediately before such
transaction;
(C) the consummation of any sale or other
disposition (in one transaction or a series of related
transactions) of all, or substantially all, of the Company's
assets to a person whose acquisition of 40% or more of the
combined shares of the Company's capital stock then
outstanding would have caused a Change in Control under
paragraph 4(c)(i)(A); or
- 2 -
<PAGE>
(D) the "Continuing Directors" (as defined in
paragraph 4(c)(iii)) cease to be a majority of the Company's
directors.
A determination by the Company's Continuing Directors (by resolution of
at least a majority of the Continuing Directors) as to whether a Change
in Control has occurred for purposes of this Agreement, the date on
which it has occurred or both shall be conclusive for purposes of this
Agreement.
(ii) For purposes of this Agreement, the "Excluded
Persons" are (1) Employee, (2) any "group" (as that term is used in
Section 13(d) of the Exchange Act and the rules thereunder) that
includes Employee or in which Employee is, or has agreed to become, an
equity participant, (3) any entity in which Employee is, or has agreed
to become, an equity participant, (4) the Company, (5) any subsidiary of
the Company, (6) any employee benefit plan of the Company or any
subsidiary of the Company or the related trust, (7) any entity to the
extent it is holding capital stock of the Company for or pursuant to the
terms of any employee benefit plan of the Company or any subsidiary of
the Company, and (8) any director, officer or beneficial owner of at
least 10% of the Company's outstanding Common Stock as of the date of
this Agreement. For purposes of this Agreement, Employee shall not be
deemed an "equity participant" in any group or entity (1) in which
Employee owns for investment purposes only no more than 5% of the stock
of a publicly-traded entity whose stock is either listed on a national
stock exchange or quoted in The NASDAQ National Market, if Employee is
not otherwise affiliated with such group or entity, or (2) if Employee's
participation is fully-disclosed to, and approved by, the Company's
Chief Executive Officer before the Change in Control occurs.
(iii) For purposes of this Agreement, the "Continuing
Directors" are the directors of the Company as of the date of this
Agreement, and any person who subsequently becomes a director if such
person is appointed to be a director by a majority of the Continuing
Directors or if such person's initial nomination for election or initial
election as a director is recommended or approved by a majority of the
Continuing Directors.
(iv) Termination of Employee's employment for "Good
Reason" means Employee's voluntary termination of employment with the
Entity after a Change in Control as a result of (1) any decrease by the
Entity (without Employee's consent) in Employee's salary from Employee's
salary immediately before such Change in Control; provided, that no such
decrease shall constitute "Good Reason" if such decrease is applied in
the same manner to all officers or employees at the same employment
level as Employee (such as all officers or all store managers, as the
case may be), (2) a substantial change by the Entity (without Employee's
consent) in Employee's duties or responsibilities from Employee's duties
and responsibilities immediately before such Change in Control, or (3)
any requirement by the Entity (to which Employee does not consent) that
Employee change Employee's primary place of business. "Good Reason" will
not include Employee's death, permanent incapacity or Retirement (as
defined below), or Employee's resignation other than as provided in the
preceding sentence. For purposes of this Agreement, "Retirement" means
Employee's retirement from the Entity in accordance with the Entity's
normal policies.
(v) The Entity's termination of Employee's employment
without "Cause" means a termination other than for (1) Employee's
continued failure either to (A) devote substantially full time to
Employee's employment duties (except because of Employee's illness or
disability) or (B) make a good faith effort to perform Employee's
employment duties; (2) any other willful act or omission which Employee
knew, or had reason to know, would materially injure the Entity; or (3)
Employee's conviction of a felony involving dishonesty or fraud.
- 3 -
<PAGE>
(vi) For purposes of this Agreement, the "Entity" shall
mean both (1) the Company and (2) in connection with a Change in Control
defined in paragraph 4(c)(i)(B) or paragraph 4(c)(i)(C), the survivor of
the merger, consolidation, reorganization or share exchange involving
the Company and the buyer of all, or substantially all, of the Company's
assets, if such additional entity described in this clause (2) (if other
than the Company) has offered to employ Employee on such terms that
would not constitute "Good Reason" for termination of Employee's
employment if imposed by the Company. Therefore, for purposes of this
paragraph 4(c), Employee shall not be deemed to have terminated
Employee's employment with the Entity for "Good Reason" and the "Entity"
shall not be deemed to have terminated Employee's employment without
"Cause" unless such actions are taken by all entities included within
the definition of "Entity". In addition, for purposes of this paragraph
4(c), Employee shall not be deemed to have terminated Employee's
employment with the Entity for "Good Reason" and the "Entity" shall not
be deemed to have terminated Employee's employment without "Cause" if
(1) the survivor of the merger, consolidation, reorganization or share
exchange involving the Company and the buyer of all, or substantially
all, of the Company's assets has offered to employ Employee on such
terms that would not constitute "Good Reason" for termination of
Employee's employment if imposed by the Company, (2) Employee refuses
such employment, and (3) the Company terminates Employee's employment
for any reason or for no reason.
(d) The severance benefits provided in this paragraph 4 are
exclusive and in lieu of any other severance benefits to which Employee may
be entitled, except for any benefits under the terms of any stock options or
restricted stock agreements Employee may have.
(e) There is not, nor will there be unless in writing signed by
both Employee and the Company, any express or implied agreement as to
Employee's continued employment by the Company after the end of the term of
Employee's employment under this Agreement. Employee's subsequent employment
with the Company, if any, will be employment "at will", and the provisions of
this Agreement will not apply to any such employment.
5. Previous Agreements Superseded. This Agreement supersedes all
previous employment agreements between the parties.
6. Miscellaneous Provisions. This Agreement may be amended only by
written agreement signed by either the Chairman or Vice Chairman of the
Company. It shall be construed according to the laws of Michigan, and shall
be binding on and enforceable by the parties and their successors in
interest.
IN THE PRESENCE OF: JACOBSON STORES INC.
By: /s/ James K. Delaney
- --------------------------- ------------------------------------
Its Vice President, Human Resources
COMPANY
/s/ George P. Kelly
- ---------------------------- ------------------------------------
EMPLOYEE
- 4 -
EXHIBIT 15
ARTHUR ANDERSEN LLP
To Jacobson Stores Inc.:
We are aware that Jacobson Stores Inc. has incorporated by reference in its
Form S-8 Registration Statements File Nos. 033-53469, 333-31989 and 333-59031
and Form S-2 File No. 33-10532 its Form 10-Q for the quarter ended October
31, 1998, which includes our report dated November 13, 1998, covering the
unaudited interim condensed consolidated financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933, that report
is not considered a part of the registration statement prepared or certified
by our firm or a report prepared or certified by our firm within the meaning
of Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
------------------------
ARTHUR ANDERSEN LLP
Detroit, Michigan
December 10, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF JACOBSON STORES INC. AND CONSOLIDATED SUBSIDIARIES AS
OF, AND FOR THE THIRTY-NINE WEEK PERIOD ENDED, OCTOBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> OCT-31-1998
<PERIOD-TYPE> 9-MOS
<CASH> 3,980
<SECURITIES> 0
<RECEIVABLES> 29,424
<ALLOWANCES> 471
<INVENTORY> 105,044
<CURRENT-ASSETS> 142,849
<PP&E> 175,722
<DEPRECIATION> 91,637
<TOTAL-ASSETS> 247,429
<CURRENT-LIABILITIES> 59,094
<BONDS> 118,060
<COMMON> 5,975
0
0
<OTHER-SE> 57,974
<TOTAL-LIABILITY-AND-EQUITY> 247,429
<SALES> 305,717
<TOTAL-REVENUES> 305,717
<CGS> 206,045
<TOTAL-COSTS> 206,045
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,807
<INCOME-PRETAX> (8,235)
<INCOME-TAX> (2,882)
<INCOME-CONTINUING> (5,353)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,353)
<EPS-PRIMARY> (0.93)
<EPS-DILUTED> (0.93)
</TABLE>
