<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 26, 1996
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 0-15934
JAY JACOBS, INC.
(Exact name of registrant as specified in its charter)
Washington 91-0698077
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1530 Fifth Avenue, Seattle, Washington 98101
(Address of Principal Executive Offices) (Zip code)
Registrant's telephone number,
including area code: (206) 622-5400
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 ---
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of October 26, 1996
(Common Stock, 6,126,871 shares)
Page 1 of 12 pages
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
JAY JACOBS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(Dollar amounts in thousands)
(Unaudited)
October 26, January 27,
ASSETS 1996 1996
---------- ----------
Current assets:
Cash and cash equivalents $ 78 $ 705
Accounts receivable 528 442
Inventories 7,706 7,323
Prepaid expenses 244 219
------- -------
Total current assets 8,556 8,689
------- -------
Property and equipment, net 5,648 5,558
------- -------
$14,204 $14,247
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,431 $ 1,402
Accrued payroll 237 529
Accrued reorganization liability 2,725 3,188
Other accrued expenses 1,168 550
Short term bank debt 2,781 0
------- -------
Total current liabilities 11,342 5,669
------- -------
Deferred rental credits 549 995
------- -------
Accrued reorganization liability 666 4,249
------- -------
Shareholders' equity:
Preferred stock:
Authorized - 5,000,000 shares; Issued and
outstanding - none - -
Common stock:
Authorized - 20,000,000 shares; Issued and
outstanding - 6,126,871 and 6,007,283
shares 12,991 12,920
Retained earnings (11,344) (9,586)
------- -------
1,647 3,334
------- -------
$14,204 $14,247
------- -------
------- -------
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PART I. FINANCIAL INFORMATION
JAY JACOBS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(In thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
October October October October
1996 1995 1996 1995
---- ---- ---- ----
Net sales $13,479 $18,357 $43,776 $54,261
------- ------- ------- -------
Operating costs and expenses:
Cost of sales, buying and
occupancy costs 10,883 13,599 34,579 41,845
Selling, general and
administrative expenses 4,197 5,327 13,081 15,720
Interest expense 60 (74) 228 (232)
------- ------- ------- -------
Net operating expenses 15,140 18,852 47,888 57,333
------- ------- ------- -------
Income (loss) before income taxes (1,661) (495) (4,112) (3,072)
Federal income tax payment (refund) 2,355 - 2,355 -
Income tax provision (benefit) - - - -
------- ------- ------- -------
Net income (loss) $ 694 (495) (1,757) (3,072)
------- ------- ------- -------
------- ------- ------- -------
Earnings (loss) per share $ 0.11 (0.08) $(0.29) $(0.51)
------- ------- ------- -------
------- ------- ------- -------
Weighted average number of
shares outstanding 6,127 6,007 6,093 6,007
------- ------- ------- -------
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<PAGE>
PART I. FINANCIAL INFORMATION
JAY JACOBS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
Nine months ended
October 26 October 28
----------------------
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,758) $(3,072)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 968 1,050
Non-cash restructuring items 313
Change in deferred rents (446) (255)
Change in assets and liabilities:
Accounts receivable (86) (141)
Inventories (383) (3,657)
Prepaid expenses and other (25) (266)
Accounts payable 3,029 3,033
Accrued payroll (292) (392)
Other accrued expenses 618 (211)
Obligations subject to compromise (4,046) (3,489)
-------- --------
(2,421) (7,087)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in property and equipment (1,058) (560)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing from line of credit 2,781 0
Proceeds from options exercised 71 0
Proceeds from sales of fixed assets 0 0
Net change in cash and cash equivalents (627) (7,647)
Cash and cash equivalents - beginning of period 705 8,745
-------- --------
Cash and cash equivalents - end of period $ 78 $ 1,098
-------- --------
-------- --------
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JAY JACOBS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1. Financial Presentation:
The attached unaudited condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. As a result, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes that the disclosures made are
adequate to make the information not misleading and that the information
furnished reflects all material adjustments which are, in the opinion of
management, necessary to present fairly its results for the interim periods
reported and that all such adjustments are of normal recurring nature. The
consolidated financial statements should be read in conjunction with the
financial statements and related notes included in the Company's Form 10-K
filed with the Securities and Exchange Commission on April 26, 1996, as
amended by Form 10-K/A on April 29, 1996 and May 28, 1996.
Note 2. Earnings (Loss) Per Share
Earnings (loss) per share is based on the weighted average number of
shares outstanding during the quarter as adjusted to take into account the
effect of outstanding options to purchase common stock unless the effect of
including such options is anti-dilutive. The effect of the outstanding
options is computed using the treasury stock method. The weighted average
number of shares and equivalents outstanding were 6,126,871 and 6,007,283
for the quarter ended October 26, 1996 and October 28, 1995, respectively.
The weighted average number of shares and equivalents outstanding were
6,093,186 and 6,007,283 for the nine months ended October 26, 1996 and
October 28, 1995, respectively.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
All references herein to fiscal 1996, 1995 and 1994 relate to the
twelve months ended January 27, 1996, the eleven months ended January 28,
1995 and the twelve months ended February 26, 1994. References to third
quarter 1997 and 1996 relate to the three months ended October 26, 1996 and
October 28, 1995, respectively. References to the first three fiscal
quarters of fiscal years 1997 and 1996 relate to the nine months ended
October 26, 1996 and October 28, 1995, respectively. The Company made the
decision, during fiscal 1995, to change its fiscal year to end on the last
Saturday in January, as opposed to the last Saturday in February. This
change was made to align the Company's fiscal calendar to the seasonal
patterns that it experiences, as well as to enhance comparability of its
fiscal quarter and year end results with similar retail companies in its
industry segment.
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SEASONALITY
The Company's business is seasonal. During fiscal year 1994 and
earlier fiscal years, fall and "back to school" shopping by the Company's
customers, generally have resulted in the largest sales in the second
quarter ending in late August. Sales also historically have been greater in
the holiday season, but earnings in the fourth quarter were adversely
affected by markdowns of unsold holiday merchandise and generally lower
sales in January and February.
The Company changed its fiscal year ending date as of the end of
fiscal 1995 and as a result the seasonal pattern mentioned in the prior
paragraph has changed. The Company's fourth quarter, ending late January,
has generated the largest sales and earnings followed by its third quarter
ending in late October.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of net sales:
Percentage of net sales
-----------------------
Three months ended Nine months ended
October October October October
1996 1995 1996 1995
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, buying and
occupancy costs 80.7 74.1 79.0 77.1
Selling, general and
administrative expenses 31.1 29.0 29.9 29.0
Interest expense 0.5 (0.4) 0.5 (0.4)
Net operating expenses 112.3% 102.7% 109.4% 105.7%
Income (loss) before income
taxes (12.3)% (2.7)% (9.4)% (5.7)%
------ ------ ------ ------
Federal Income Tax Refund 17.4 0 5.4 0
Net income (loss) 5.1 % (2.7)% (4.0)% (5.7)%
------ ------ ------ ------
------ ------ ------ ------
QUARTER ENDED OCTOBER 26,1996 COMPARED TO QUARTER ENDED OCTOBER 28, 1995
Net sales decreased by $4.9 million, or 26.6%, in the quarter ended
October 26, 1996 as compared to the same period in 1995. This decrease was
primarily due to store closures. Comparable store sales decreased by 16%
during the quarter as a result of inventory levels that were approximately
33% below same store levels of a year earlier. During the third quarter the
Company closed two stores. The Company operated 130 stores at the end of
the third quarter of fiscal year 1997. The Company operated twenty-five
fewer stores at the beginning of the third quarter of fiscal 1997 (132)
than it did at the beginning of the third quarter of 1996 (157), a decline
of 16%.
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Cost of sales, buying and occupancy costs increased as a percentage
of sales by 6.6%. Cost of sales related to merchandise sold was the same as
last year. The increase in this category was a result of a 5.6% increase in
occupancy cost as a percentage of sales as a result of the significant
decline in comparable store sales which, in turn, resulted in fewer
dollars over which to leverage fixed rental and other occupancy costs.
Depreciation increased by 1.0% of sales as a result of the decline in
comparable store sales.
Selling, general and administrative expenses increased as a
percentage of sales by 2.1%, primarily as a result of the comparable store
sales decline which resulted in less sales to leverage cost expenses over,
partially offset by expense reductions during the quarter.
Interest expense as a percent of sales was 0.4% in the third quarter
of fiscal 1997 compared to interest income of (0.4%) of sales in the third
quarter of fiscal 1996. This was a result of the decline in cash and
increase in short term borrowing during the quarter.
The Company incurred a gain of $694,000 during the third quarter of
1997, or $0.11 per share compared to a loss of $495,000 in the third
quarter of 1996 or $0.08 per share. The gain is due to a federal income tax
refund of $2.4 million received in October 1996, the result of net
operating loss carrybacks.
NINE MONTHS ENDED OCTOBER 26, 1996 COMPARED TO NINE MONTHS ENDED OCTOBER
28, 1995
Net sales decreased $10.5 million, or 19.0% in the nine months ended
October 26, 1996 as compared to the same period in 1995. This decrease was
primarily due to store closures. The Company operated 16% fewer stores
during the period than it did one year earlier. In addition to the store
closures, the Company attributes a portion of the sales decline to a 7%
decrease in comparable store sales. Comparable store sales declined as a
result of the decline in comparable store sales of 16% in the third
quarter, which was a result of the 33% decline in inventory. Sales
declined as a result of a generally soft demand for apparel merchandise
during the first quarter of 1997, particularly during the month of April
when comparable store sales declined 11%.
Cost of sales, buying and occupancy costs increased as a percentage
of net sales by 1.9%. Cost of sales, as a percentage to sales, related to
merchandise sold was the same as last year. The increase in this category
was a result of a 1.6% increase in occupancy cost as a percentage of sales,
as a result of the decline in comparable store sales which resulted in
fewer dollars over which to leverage fixed rental and other occupancy
costs. Depreciation increased 0.3% of sales as a result of the decline in
comparable store sales.
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Selling, general and administrative expenses increased as a
percentage of net sales by 0.9%, primarily as a result of the decline in
comparable store sales during the first quarter of fiscal 1997, partially
offset by expense reductions during the second and third quarters of fiscal
1997.
Interest expense as a percent of sales was 0.5% for the first nine
months of fiscal 1997 compared to interest income of (0.4%) in the first
nine months of fiscal 1996. This was a result of the decline in cash and
increase in short term borrowing during the first nine months.
The Company incurred a loss of $1.76 million during the first nine
months ended October 26, 1996 compared to a $3.07 million during the nine
months ended October 28, 1995. The loss can be primarily attributed to the
decline in store count and decline in comparable store sales, offset by the
income tax recovery noted above.
LIQUIDITY AND CAPITAL RESOURCES
THE LASALLE FACILITY
On November 29, 1995, the Bankruptcy Court approved a financing
agreement on a revolving credit basis between the Company and LaSalle
National Bank ("LaSalle"). The LaSalle Facility provides for borrowing and
letters of credit, the aggregate of which cannot exceed the lower of $10
million or a computed borrowing base based on 50% of inventory and
outstanding letters of credit. Letters of credit are limited to a maximum
of $5 million. A first and only lien is granted to LaSalle on all Company
assets (excluding capitalized leases and excluding permitted liens up to
$400,000). The Company must maintain a scheduled minimum tangible net worth
and may not declare or pay dividends or other distributions on account of
any equity interest in the Company until payment or satisfaction in full of
liabilities under the LaSalle Facility and termination of the financing
agreement. Interest is charged at LaSalle's announced prime rate. The
Company is charged an annual fee of 1% of the aggregate loan limit, normal
audit fees, and a letter of credit fee of 1.25% per annum on the aggregate
undrawn face amount of letters of credit outstanding. The agreement has a
three-year term and was signed on December 4, 1995.
As of the end of the third quarter of 1997 the Company had
$2,781,000 of direct borrowing and $37,000 of outstanding letters of
credit.
GENERAL
The Company's principal needs for liquidity are to finance the
purchase of merchandise inventories, fund its operations and make payments
under its Plan of Reorganization.
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Net cash used for operations for the first three quarters of fiscal
years 1997 and 1996 was $2.4 and $7.1 million, respectively. The use of
cash during the third quarter of 1997 resulted primarily from operating
losses.
Payments under the Plan of Reorganization of $2,289,000 were made
for Allowed Claims in late January 1996, subsequent to fiscal year end.
Additional payments were made during the nine months ended October 26,
1996 for Allowed Priority Tax Claims, disputed claims that were
subsequently settled and other costs associated with the Plan of
Reorganization in the aggregate amount of $1,757,000.
Property and equipment expenditures were $1,058,000 (primarily in
the first fiscal quarter of 1997) and $560,000 respectively. The
expenditures during the first quarter of fiscal 1997 were the result of
opening 15 stores and converting 5 stores to new formats. Future
expenditures on property and equipment were curtailed during the third
quarter until additional working capital is available.
The Company had a working capital deficit of $2,786,000 on October
26, 1996 compared to a working capital of $7,773,000 on October 28, 1995.
The working capital declined $10,559,000 primarily due to losses incurred
during the first nine months, payments made under the Plan of
Reorganization or to be made in January 1997 (of which $2,725,000 is
classified as a current liability) and acquisition of fixed assets. The
working capital deficit declined since the end of the first half of fiscal
1997 as a result of the receipt of a federal income tax refund. During the
third quarter, the Company applied for and received a refund of $2,355,000
(net of fees) for a carryback of net operating losses for its fiscal year
1996. The carryback is subject to review by the Internal Revenue Service.
The Company anticipates that a portion of the losses incurred in the
current fiscal year will be available for carryback to prior years. The
amount, however, will not be determined until subsequent to the Company's
fiscal year end.
During the first three quarters the Company's accounts payable
increased by $3,030,000. This is a result of an increased accounts payable
base due vendors at the end of October 1996, compared to the end of January
1996; an increase in payment terms negotiated with some of the Company's
vendors; and payables that were not made within normal terms as a result of
the Company's working capital deficit.
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The second payment to the unsecured creditors is payable in January
1997. The amount of the payment was dependent upon the election made by
each unsecured creditor on July 15, 1996. The claim value of creditors
electing to take the note option under the Company's Plan of Reorganization
was $390,000. As a result of this election, $2,485,000 is payable in
January 1997 for the second and final cash payment. The long term
installment note payable over four years bearing interest of 9.5% and
maturity in January 2001 is $164,000 (which represents 42% of the claim
value). The Company has begun discussions with the unsecured creditors'
committee of its unsecured creditors regarding appropriate alternatives for
the payment due in January 1997. There can be no assurance that such
discussions will result in negotiations or terms acceptable to the Company,
if at all.
During the fiscal year ended February 1, 1997 the Company will be
obligated to pay approximately $240,000 to Allowed Priority Tax Claims.
At October 26, 1996 the Company had $78,000 in cash and cash
equivalents. The Company had approximately $990,000 of potential liquidity
under terms of its LaSalle Facility based on its borrowing base formula.
The amount of capital resources combined with cash flow from operations
reflect a significantly declined position from year end. Subsequent to the
end of the first quarter 1997, the Company experienced a reduction in
inventory flow, as a result of reduced capital available under the LaSalle
Facility. As a result of the decline in sales, primarily related to the
first quarter, the Company's liquidity continues to be under pressure. This
is hampering the Company's ability to fund ongoing operations. Plans for
expansion have been put on hold. The Company is currently seeking
additional sources of capital to strengthen its working capital position.
On a going forward basis, the Company's liquidity and ability to
make all remaining Plan payments is dependent on cash flow from operations,
successful negotiations with creditors and management's ability to secure
additional financing. There can be no assurance that commercial or
corporate finance will be available, or if available, on terms acceptable
to the Company. If sufficient working capital cannot be secured in a timely
fashion or results of operations do not improve, the Company may not be
able to pay its obligations in a timely manner.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Item 2. CHANGES IN RIGHTS OF SECURITY HOLDERS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
By letter dated May 31, 1996, Nasdaq officially notified the
Company of its determination to de-list the Company's shares of common
stock from the Nasdaq National Market effective June 10, 1996. This was a
result of the Company's failure to meet certain requirements for continued
listing on the Nasdaq National Market relating to net tangible assets. On
June 7, 1996, the Company filed notice requesting an appeal, pending
temporarily the de-listing process until a formal hearing. The Company was
notified on June 27, 1996 that its appeal for continued inclusion on the
Nasdaq National Market was denied. The Company's stock was subsequently de-
listed on June 28, 1996.
The Nasdaq Board of Governors reviewed the decision to de-list
the Company in October 1996 and upheld its earlier decision. The Company's
shares currently trade on the OTC Bulletin Board or Pink Sheets, subject to
the interest of market makers. There can be no assurance that a public or
liquid trading market for the Company's shares will be available.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
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SIGNATURES
Pursuant to 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.
JAY JACOBS, INC.
December 10, 1996 /s/ William L. Lawrence, Jr.
-------------------------------------------------------------
William L. Lawrence, Jr.,Senior Vice President and
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REGISTRANT'S
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THIS QUARTER ENDED
OCTOBER 26, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> JUL-28-1996
<PERIOD-END> OCT-26-1996
<CASH> 78
<SECURITIES> 0
<RECEIVABLES> 528
<ALLOWANCES> 0
<INVENTORY> 7706
<CURRENT-ASSETS> 8556
<PP&E> 27464
<DEPRECIATION> 21814
<TOTAL-ASSETS> 14204
<CURRENT-LIABILITIES> 11342
<BONDS> 0
0
0
<COMMON> 12991
<OTHER-SE> (11344)
<TOTAL-LIABILITY-AND-EQUITY> 14204
<SALES> 13479
<TOTAL-REVENUES> 13479
<CGS> 10883
<TOTAL-COSTS> 15140
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 694
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<INCOME-CONTINUING> 694
<DISCONTINUED> 0
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<NET-INCOME> 694
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</TABLE>
