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 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ....... to ........
Commission file number 0-15934
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)
(206) 622-5400
(Registrant's telephone number, including area code)
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 ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. 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 the latest practicable date.
Common Stock: 549,220 shares as of December 14, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
JAY JACOBS, INC. AND SUBSIDIARY
Balance Sheets
(In thousands)
<CAPTION>
October 31 January 31,
1998 1998
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 889 $ 1,567
Accounts receivable 769 336
Inventories 16,094 9,532
Prepaid expenses 1,110 562
------ ------
Total current assets 18,862 11,997
------ ------
Property and equipment, net 5,960 4,409
------ ------
Total Assets $24,822 $16,406
------- -------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 3,962 $ 2,074
Accrued Payroll 0 162
Accrued reorganization expenses 273 400
Other accrued expenses 1,305 988
Line of credit 13,761 5,687
Subordinated debt 2,000 0
------ -
Total current liabilities 21,301 9,311
------ ------
Deferred rental credits 171 171
Federal income tax refund reserve 1,980 1,980
------ ------
Total liabilities $23,452 11,462
------- ------
Series A preferred stock -- 46,000
shares issued and outstanding each
period - mandatorily redeemable
$ 3,814 $ 3,874
Shareholders' equity:
Preferred stock: 5,000,000 shares
authorized; Series B preferred stock
- 25,000 shares issued and outstanding,
each period 2,072 2,072
Common stock: 20,000,000 shares
authorized; 549,220 shares issued and
outstanding at October 31, 1998 and
544,323 at January 31, 1998 16,224 13,257
Retained deficit (18,838) (14,259)
Unrecognized option compensation expense (1,902) 0
------- ------
Total shareholders' equity (Deficit) $(2,444) $ 1,070
------- -------
Total liabilities and shareholders' equity $24,822 $16,406
------- -------
The accompanying notes are an integral part of the financial statements.
</TABLE>
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<PAGE>
<TABLE>
JAY JACOBS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
Oct 31 Nov 1 Oct 31 Nov 1
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales $16,145 $15,238 $44,799 $44,361
------- ------- ------- -------
Operating costs and expenses:
Cost of sales, buying and occupancy costs 11,867 11,284 33,834 33,847
Selling, general and administrative expenses 4,280 3,909 13,001 11,909
Interest expense 421 124 992 416
Option compensation expense 112 0 895 0
------- ------- ------- -------
16,680 15,317 48,722 46,172
------- ------- ------- -------
Loss before extraordinary item (535) (79) (3,923) (1,811)
Extraordinary charge
Debt extinguishment 0 0 522 0
------- ------- ------- -------
Net loss $ (535) $ (79) $(4,445) $(1,811)
------- ------- ------- -------
Basic loss per share:
Loss before extraordinary item $ (1.22) $ (0.19) $ (7,89) $ (4.43)
Extraordinary charge 0 0 (0.95) 0
------- ------- ------- -------
Net loss $ (1.22) $ (0.19) $ (8.84) $ (4.43)
------- ------- ------- -------
Weighted average number of shares outstanding 549 412 549 409
The accompanying notes are an integral part of the financial statements.
</TABLE>
(See Note 2. Earnings (Loss) Per Share - for per share calculation)
Page 3
<PAGE>
<TABLE>
JAY JACOBS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
Oct 31, 1998 Nov 1, 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,445) $ (1811)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,314 860
Option compensation expense 895 0
Change in deferred rental credits 0 (70)
Change in assets and liabilities:
Accounts receivable (433) (137)
Inventories (6,562) (4,667)
Prepaid expenses (904) (292)
Accounts payable 1,888 1,392
Accrued payroll (162) (217)
Other accrued expenses 317 (130)
Accrued reorganization expenses (127) (199)
Federal income tax refund reserve 0 0
--------- --------
Net cash used for operations $ (8,219) $ (5,271)
--------- --------
Cash flows to investing activities:
Net increase in property and equipment (2,349) (84)
--------- --------
Net cash used by investing activities
Cash flows from (to) financing activities:
Net borrowing from line of credit 8,074 5,207
Proceeds from options exercised 10 22
Proceeds from subordinated debt 2,000 0
Preferred stock dividend (194) 0
--------- --------
Net cash from financing activities 9,890 5,229
--------- --------
Net decrease in cash and cash equivalents $ (678) $ (126)
Cash and cash equivalents - beginning of period 1,567 249
--------- --------
Cash and cash equivalents - end of period $ 889 $ 123
--------- --------
The accompanying notes are an integral part of the financial statements.
</TABLE>
Page 4
<PAGE>
JAY JACOBS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1. Financial Presentation
- ------------------------------
The attached 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. Jay Jacobs, Inc. ("Jay Jacobs" or 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 a 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/A filed with the Securities
and Exchange Commission on May 15, 1998. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
Results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year.
The Company's fiscal year ends on the Saturday closest to January 31st of each
year. The current fiscal year ends on January 30, 1999. Each fiscal quarter
contains 13 weeks.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers Disclosures about Pensions and Other Postretirement
Benefits" ("Statement No. 132"), which standardizes the disclosure requirements
for pensions and other postretirement benefits. Statement No. 132 is effective
for fiscal years beginning after December 15, 1997. While this statement may
result in additional financial disclosures, it will not impact the Company's
financial position or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement
No. 133") which establishes accounting and reporting standards for derivative
instruments and hedging activities. Statement No. 133 is effective for all
fiscal years beginning after June 15, 1999. The Company has not yet determined
the effect, if any, Statement No. 133 will have on its financial statements or
the timing of its adoption.
Note 2. Earnings (Loss) Per Share
- ---------------------------------
Basic earnings (loss) per share is based on the weighted average number of
Common Shares outstanding during the period as adjusted to take into account the
effect of options outstanding under the 1998 Stock Incentive Plan (the "Plan")
and warrants to purchase Common Stock unless the effect of including such
options is anti-dilutive. The weighted average number of Common Shares and
equivalents outstanding were 549,000 and 412,000 for the quarters ended October
31, 1998 and November 1, 1997, respectively. All Common Shares and equivalents
have been adjusted for the reverse stock split noted below. The weighted average
number of shares outstanding do not reflect the impact of the conversion feature
of the Series B Preferred Stock or the exercise of warrants attached to the
subordinated debt. If the Series B Preferred Stock were converted to Common
Stock and the warrants exercised, Common Shares outstanding would
Page 5
<PAGE>
increase by 3,888,000 shares. The total Common Shares outstanding after the
conversion and exercise of warrants would be 4,437,000.
On March 24, 1998, the shareholders of the Company approved a 1-for-15 reverse
stock split and the Company's 1998 Stock Incentive Plan. Both items were
approved by the majority of the holders of both classes of the Company's stock.
The reverse stock split was effective on April 3, 1998. As such, all share and
per share amounts presented in the financial statements and related notes
thereto have been retroactively restated to reflect this stock split.
The following represents the reconciliation of numerators and denominators used
to calculate the basic and diluted earnings per share for all periods presented:
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
ended ended ended ended
Oct 31, 1998 Nov 1, 1997 Oct 31, 1998 Nov 1, 1997
<S> <C> <C> <C> <C>
Loss before extraordinary item $ (535) $ (79) $ (3,923) $(1,811)
Less: Accretion of Series A Preferred
Stock to redemption value (38) 0 (114) 0
Less: Series A Preferred Stock dividends (58) 0 (173) 0
Less: Series B Preferred Stock dividends (40) 0 (120) 0
-------- ------- -------- -------
Loss available to common shareholders (671) (79) (4,330) (1,811)
Extraordinary charge
Debt extinguishment 0 0 522 0
-------- ------- -------- -------
Total loss available to common $ (671) $ (79) $ (4,852) $(1,811)
shareholders
-------- ------- -------- -------
Weighted average shares (basic and 549 412 549 409
diluted)
-------- ------- -------- -------
Basic earnings per share:
Loss before extraordinary item $ (1.22) $ (0.19) $ (7.89) $ (4.43)
Extraordinary loss 0 0 (0.95) 0
-------- ------- -------- -------
Net loss $ (1.22) $ (0.19) $ (8.84) $ (4.43)
-------- ------- -------- -------
</TABLE>
The discounts on the increasing rate Series A and Series B Preferred Stock are
equivalent to a prepayment of dividends by the Company, and accordingly are
being amortized using the effective interest method over the period until
January 1, 2003, when the dividend rates increase to 20%. For purposes of
calculating earnings per share, the current period amortization of these
discounts has been added to the stated dividends for the period.
Note 3. 1998 Stock Incentive Plan
- ---------------------------------
During March 1998, the shareholders approved the 1998 Stock Incentive Plan (the
"Plan") for the benefit of senior management and associates. The Plan reserved
1,094,467 shares of non-qualified stock options for issuance at the discretion
of the compensation committee of the board of directors. The options under the
Plan generally vest over five years and expire ten years from the date of grant.
In addition, the shares outstanding under the Company's previous plans were
rolled over into the Plan and all options were priced at an exercise price of
$1.95 per share.
The Company has elected to apply APB 25 and related interpretations in
accounting for the Plan. APB 25 requires that compensation expense be recorded
for the difference between the exercise price and the fair value of the shares,
as defined, on the date of grant. This non-cash compensation expense is charged
to operations 20% (the initial vesting percentage) as of the date of the Plan
approval with the balance charged to operations ratably using a straight line
method, subject to the vesting provisions of the Plan. For the quarter and nine
months ended October 31, 1998, option related compensation expense of $112,000
and $895,000, respectively, was charged to operations.
Page 6
<PAGE>
Note 4. Subordinated Debt
- -------------------------
On March 11, 1998 the Company closed on a financing transaction with two members
of its investor group, Cahill, Warnock & Company, L.L.C. and affiliates, and T.
Rowe Price Recovery Fund II, L.P. The financing transaction provided for
subordinated debt in the amount of $2,000,000. The subordinated debt agreement
provides for interest at the rate of 14% per annum payable June 30, 1998 and
December 31, 1998, together with warrants to purchase 2% of the Company, on a
fully diluted basis. The subordinated debt matures on December 31, 1998, if not
otherwise extended by mutual agreement of both parties.
The warrants associated with the subordinated debt were issued at a redemption
price below the market price. As a result, the Company will incur $200,000 of
non-cash expense over the life of the debt as interest expense. During the
quarter ended October 31, 1998 warrant related interest expense amounted to
$60,000. During the nine months ended October 31, 1998 warrant related interest
expense amounted to $160,000.
Note 5. Federal Income Tax Refund Reserve
- -----------------------------------------
During fiscal 1997, the Company filed a refund claim with the Internal Revenue
Service (the "IRS") resulting from the carry back of certain expenses of its
bankruptcy proceeding. The tentative refund of approximately $2,355,000, which
is net of fees and expenses, was received in October 1996. The tentative refund
is subject to audit by the IRS, which is currently in process. Should the IRS
ultimately determine that the carry back of some or all of the expenses was
inappropriate, the Company may be called upon to repay a portion of the
tentative refund, with interest. A reserve of $1,980,000 was established in the
Company's financial statements related to the tentative refund.
Note 6. Line of Credit
- ----------------------
On June 2, 1998 the Company entered into a new credit facility with FINOVA
Capital Corporation ("FINOVA") providing for borrowings up to $15,000,000. The
new credit facility provides for borrowing and letters of credit based on a
formula, the aggregate of which cannot exceed the lesser of 100% of the net
appraised value of eligible inventory, as defined, and outstanding letters of
credit, or $15,000,000. Letters of credit are limited to a maximum of
$5,000,000. A first lien is granted to FINOVA on all the Company's assets. The
Company must maintain a scheduled minimum earnings before interest, taxes,
depreciation and amortization and a senior debt coverage ratio, 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 FINOVA line of credit and termination of the financing agreement.
Excluded under certain circumstances are dividends to be paid on Series A and
Series B Preferred Stock. Interest is charged at FINOVA's prime rate plus 0.5%
which was 8.5% at October 31, 1998.
As a condition of closing this facility, the Company repaid the previous General
Electric Capital Corporation ("GECC") facility and incurred a $338,000
termination fee. This cost, together with remaining unamortized financing costs
related to the closing of the GECC facility of $184,000, are reflected as an
extraordinary charge for debt extinguishment during the first quarter of fiscal
1999.
Page 7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Forward Looking Statements
- --------------------------
The information in this Report may contain "forward looking statements" within
the meaning of Section 27 A of the Securities Act of 1933, as amended, and
Section 21 E of the Securities Act of 1934, as amended. Such forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties related to the Company's operations. These risks and uncertainties
include, but are not limited to, matters discussed in Item 5 B 1 "Risk Factors"
from the Company's Report on Form 8-K, filed December 15, 1997.
General
- -------
All references herein to fiscal 1999 and fiscal 1998 relate to the twelve months
ending January 30, 1999 and January 31, 1998, respectively. References to the
third quarter of fiscal 1999 and fiscal 1998 relate to the three months ended
October 31, 1998 and November 1, 1997, respectively. References to the nine
months of fiscal 1999 and fiscal 1998 relate to the nine months ended October
31, 1998 and November 1, 1997, respectively.
Overview and Recent Developments
- --------------------------------
Jay Jacobs was incorporated in 1941 and operates a chain of mall-based specialty
apparel stores offering contemporary men's and women's clothing and accessories
at reasonable prices. At the date of this report the Company operates 117 stores
in 21 states. The greatest concentration of stores is in the Pacific Northwest
and Alaska.
In March 1998 the Company closed on a financing transaction with two members of
its investor group, Cahill, Warnock & Company, L.L.C. and affiliates, and T.
Rowe Price Recovery Fund II, L.P. The financing transaction provided for
subordinated debt in the amount of $2,000,000 (See Note 4. Subordinated Debt).
On June 2, 1998 the Company entered into a new credit facility with FINOVA
providing for borrowings up to $15,000,000 (See Note 6. Line of Credit). The
facility provides for the ability to finance eligible inventory and to
facilitate the issuance of letters of credit. The Company had $13,761,000 of
short-term notes outstanding at the end of the third quarter of fiscal 1999. As
a condition of closing the new facility, the Company repaid the GECC facility
and incurred $338,000 in termination fees. This cost, together with remaining
unamortized financing costs related to the closing of the GECC facility of
$184,000, was expensed during the first quarter of fiscal 1999.
During the first quarter of fiscal 1999, the shareholders approved a 1-for-15
reverse stock split and the Company's 1998 Stock Incentive Plan (the "Plan").
The reverse stock split was effective on April 3, 1998. In order to more closely
align the interests of management and employees to those of the shareholders,
the board of directors approved the issuance of 932,000 non-qualified stock
options on March 24, 1998 to employees at an exercise price of $1.95 per share.
Twenty percent of the non-qualified stock options vested immediately and the
balance vest over a five-year period. The Company will incur option related
compensation expense amounting to the difference between the exercise price and
the market price on the date of grant. During the third quarter of fiscal 1999
option related compensation expense of $112,000 was charged to operations.
Option related compensation expense for the first nine months of fiscal 1999
amounted to $895,000 (See Note 3. 1998 Stock Incentive Plan). The Company will
record a charge of $112,000 in each of the next 18 quarters, which represents
the straight line amortization
Page 8
<PAGE>
of option related compensation expense over the vesting period of the stock
options. The charges during the first half of fiscal 1999, as well as future
quarters, represent non-cash expense.
The Company is currently increasing the net store count during the year,
reversing a three-year trend where the store count was significantly reduced, as
a result of the closure of unprofitable stores. Twenty-one new stores were
opened during the first nine months of fiscal 1999. The majority of the new
locations were opened in the combination store format, which features both men's
and women's clothing, and averages 4500 square feet. The combination store
format is the Company's most productive in generating an expected positive cash
flow in the first year of operation. Management expects that the new locations
will generate sufficient cash flow to return the initial investment over a
two-year period. The new stores will be located primarily in existing markets,
focusing generally in the Midwest and Southeastern areas of the United States.
The increase in store count should result in increased sales and operating
income. Annual capital requirements will also increase as a result of the new
store opening program and are estimated at $2,000,000 for fiscal 1999.
In April 1998 the Company signed a five-year contract with SPS Payment Systems
("SPS") to provide the Company with a private label credit card and related
marketing program. SPS will provide third party services for developing,
managing, and marketing the Company's private label credit card to its
customers. SPS will also purchase credit sales on a non-recourse basis. The
Company is responsible for marketing the program in conjunction with SPS and for
a service fee based on a percentage of credit sales. The private label credit
card program was launched in May 1998. The Company will use the private label
credit card program to provide its customers with an exclusive credit line for
use in Jay Jacobs stores. The program will provide the ability to market
directly to private label credit card customers as well as to provide incentives
to them for shopping frequently at its stores. Management believes that this
program is an important element in its strategic plan to improve the
productivity of its new and existing locations.
As a result of the financings that occurred during fiscal 1999, the Company
expects that the increase in interest expense reflected in the results for the
third quarter and first nine months of fiscal 1999 will continue in future
quarters. In addition, dividend obligations on the Preferred Stock, as well as
the convertibility of the Series B Preferred Stock, will affect earnings per
share of Common Stock in future periods.
Seasonality
- -----------
Historically, the Company's operations have been seasonal, with highest-sales
and net income occurring in the fourth fiscal quarter, reflecting increased
demand during the year-end holiday selling season and, to a lesser extent, the
third quarter, reflecting increased demand during the Fall selling season. The
Company has generally recognized net losses during its first and second fiscal
quarters.
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<PAGE>
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, certain consolidated
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Percentage of net sales
Three Months Ended Nine Months Ended
Oct 31, Nov 1, Oct 31, Nov 1,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, buying and occupancy costs 73.5 74.1 75.5 76.3
Selling, general and administrative expenses 26.5 25.6 29.0 26.8
Interest expense 2.6 0.8 2.2 0.9
Option compensation expense 0.7 0.0 2.0 0.0
----- ----- ----- -----
Loss before extraordinary items (3.3) (0.5) (8.7) (4.1)
Extraordinary charge
Debt extinguishment 0 0 1.2 0
----- ----- ----- -----
Net loss (3.3)% (0.5)% (9.9)% (4.1)%
----- ----- ----- -----
</TABLE>
Quarter Ended October 31, 1998 Compared to Quarter Ended November 1, 1997
- -------------------------------------------------------------------------
Net sales increased by $907,000, or 6%, in the third quarter of fiscal 1999
compared to the third quarter of fiscal 1998. This increase was primarily a
result of the 9% comparable store sales increase and opening 16 new locations.
This increase was partially offset by a decline in store count which resulted in
operating 14 fewer stores at the beginning of the third quarter of fiscal 1999
compared to the beginning of the third quarter of fiscal 1998. The increase in
comparable stores sales coupled with the closure of low volume stores resulted
in an increase in average store volume during the quarter of 11% over the same
quarter last year. Comparable store sales increased primarily as a result of the
increasing acceptance by the Company's target customers of the merchandise
concept. During the third quarter of fiscal 1999 the Company opened 16 stores,
the majority during the last six weeks of the quarter, for a total of 117 stores
in operation at the end of the quarter.
Cost of sales, buying and occupancy costs decreased by 0.6% as a percentage of
sales. This decrease was primarily due to increased leverage on fixed occupancy
and buying costs as a result of the increase in average store sales volume.
Selling, general and administrative expenses increased by 0.9% as a percentage
of sales. The increase primarily relates to an increase in staffing of key
positions in the buying and real estate areas of the business associated with
the Company's second half expansion program. In addition, the Company incurred
an increase in store payroll costs associated with training and implementation
of the new store opening program during the third quarter.
The Company recorded option related compensation expense of $112,000 or 0.7% of
sales related to the issuance of 932,000 non-qualified stock options on March
24,1998 (See Note 3. 1998 Stock Incentive Plan).
Interest expense as a percent of sales was 2.6% in the third quarter of fiscal
1999 compared to 0.8% of sales in the third quarter of fiscal 1998. This
increase resulted from greater capacity and borrowings under the line of credit
(See - Liquidity and Capital Resources) and interest incurred under the
subordinated debt transaction closed in March 1998.
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<PAGE>
The Company had a loss of $535,000 for the third quarter of fiscal 1999 or $1.22
per share compared to a loss of $79,000 in the third quarter of fiscal 1998 or
$0.19 per share. The increase in expenses related to option compensation
expense, increased interest costs, and increased costs related to expansion of
the business accounted for the increased loss for the third quarter of fiscal
1999.
Nine Months Ended October 31, 1998 Compared to November 1, 1997
- ---------------------------------------------------------------
Net sales increased by $438,000, or 1%, in the first nine months of fiscal 1999
compared to the first nine months of fiscal 1998. This increase was primarily a
result the 8% increase in comparable store sales and opening 21 new locations.
The increase in comparable store sales coupled with the closure of low volume
stores resulted in an increase in average store volume during the nine-month
period of 11% over the same nine-month period last year. Comparable store sales
increased primarily as a result of the increasing acceptance by the Company's
customers of the merchandise concept. During the first nine months of fiscal
1999 the Company opened 21 stores, closed 12 stores and relocated 15 stores for
a total of 117 stores in operation at the end of the period.
Cost of sales, buying and occupancy costs decreased by 0.8% as a percentage of
sales. This decrease was primarily due to increased leverage on fixed occupancy
and buying costs as a result of the increase in average store sales volume.
Selling, general, and administrative expenses increased by 2.2% as a percentage
of sales. The increase relates primarily to an increase in staffing of key
positions in the buying and real estate areas of the business associated with
the Company's second half expansion program. In addition, the Company incurred
an increase in store payroll costs associated with training and implementation
of the new private label credit card program during the second quarter. The
Company believes that the additional expenses related to marketing and new store
opening program of the third quarter will provide benefits in future quarters.
The Company recorded option related compensation expense of $895,000 or 2.0% of
sales related to the issuance of 932,000 non-qualified stock options on March
24, 1998 (See Note 3. 1998 Stock Incentive Plan).
Interest expense as a percent of sales was 2.2% in the first nine months of
fiscal 1999 compared to 0.9% of sales in the first nine months of fiscal 1998.
This increase resulted from greater capacity and borrowings under the line of
credit (See - Liquidity and Capital Resources) and interest incurred under the
subordinated debt transaction closed in March 1998.
The Company incurred an extraordinary charge during the first nine months of
fiscal 1999 related to the extinguishment of debt of the former GECC facility in
the amount of $522,000. The charge includes termination fees of $338,000 and the
write-off of remaining unamortized financing costs of $184,000 related to the
previous GECC line of credit.
The Company incurred a loss before the extraordinary charge of $3,923,000 for
the first nine months of fiscal 1999 or $7.89 per share compared to a loss of
$1,811,000 in the first nine months of fiscal 1998 or $4.43 per share. The
increase in expenses related to option compensation expense, increased interest
costs, and increased costs related to expansion of the business accounted for
the increased loss for the first nine months of fiscal 1999.
The Company incurred a loss of $4,445,000 (or $8.84 per share) after the
extraordinary charge of $522,000 (or $0.95 per share) related to the
extinguishment of debt.
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<PAGE>
Liquidity and Capital Resources
- -------------------------------
General
- -------
The Company's principal needs for liquidity are to finance the purchase of
merchandise inventories, to fund operations and to fund the Company's expansion
plan.
During the first nine months of fiscal 1999 the Company's primary source of
liquidity was from borrowings under its $15,000,000 secured line of credit with
FINOVA and the $2,000,000 subordinated debt transaction closed in March 1998.
Net cash used for operations for the first nine months of fiscal 1999 was
($8,219,000). This use of cash resulted primarily from an increase in inventory
($6,562,000) and the operating loss during the first nine months of fiscal 1999
($2,236,000, net of non-cash expenses) offset by an increase in accounts payable
($1,888,000). Property and equipment expenditures for the first nine months of
fiscal 1999 were $2,349,000.
The Company had a working capital deficit of $2,439,000 at October 31, 1998
compared to a working capital deficit of $3,747,000 at November 1, 1997. The
working capital deficit decreased primarily through the investment in the
Company which occurred in December 1997.
The Company's current plan is to open 28 stores and relocate 15 stores during
fiscal 1999. In addition, the Company has selected alternatives to its existing
management information system and expects to incur capital expenditures to
replace existing systems during fiscal 1999 and fiscal 2000. The estimated
capital expense during fiscal 1999 is $500,000. These forward-looking statements
will be influenced by the Company's financial position and the number of
advantageous mall store locations that become available. The Company has no
current commitment of any person to provide additional capital and there is no
assurance that such capital will be available if required.
At October 31, 1998 the Company had $889,000 in cash and cash equivalents. The
Company had drawn $13,761,000 and had approximately $1,239,000 of potential
availability under its line of credit based on its borrowing base formula. The
Company's ability to maintain adequate liquidity through the balance of the
fiscal year is dependent on the fourth quarter results of operation and/or the
availability of additional outside capital.
Depending on the ultimate success of its business strategy, the Company may
continue to incur future losses, which could negatively affect working capital,
the extension of credit by the Company's suppliers, the Company's ability to
maintain compliance with its debt covenants, and the ability to raise additional
capital as required in the future.
Year 2000
- ---------
Information Technology Systems and The Year 2000
- ------------------------------------------------
The year 2000 issue results from computer programs being written using two
digits rather than four to define the applicable year. Portions of the Company's
computer information technology systems and their associated software ("IT
Systems") may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or to engage in business activities.
Page 12
<PAGE>
Readiness for Year 2000
- -----------------------
As is the case with most other companies using IT Systems in their operations,
the Company has been in the process of addressing the year 2000 issue. In
connection with a general upgrade of its IT Systems, the Company is installing
new merchandise, financial system software and store point-of-sales packages.
The Company expects to begin using the merchandise and financial systems in May
1999 and store point of sales systems in August 1999. In addition to being year
2000 compliant, management expects the new merchandise systems will allow for
improved merchandise planning, sales tracking and trend analysis. Further, the
Company also expects these systems will allow for improved distribution center
processing and more flexible allocation of merchandise to the Company's stores.
Costs to Address Year 2000 Issues
- ---------------------------------
Management estimates that new year 2000 compliant software packages and related
hardware improvements, which the Company had previously planned to install
irrespective of any year 2000 considerations, will cost approximately $1.9
million. All costs related to year 2000 will be funded through cash flows from
operations and additional future financing.
Risks of Year 2000 Issues
- -------------------------
The Company expects to implement the changes necessary to address the year 2000
issue. The Company presently believes that, with the conversions to new software
and modifications to existing IT Systems, the year 2000 issue will not pose
significant operational problems for the Company's IT Systems and thus will not
have a materially adverse effect on the Company's operations. However, the year
2000 problem is pervasive and complex and can potentially affect any computer
process. Accordingly, no assurance can be given that the year 2000 compliance
can be achieved without additional unanticipated expenditures and uncertainties
that might affect future financial results. Moreover, in its normal course of
operations the Company relies upon vendors, government agencies, utility
companies, telecommunications companies, shipping companies, suppliers and other
third party service providers over which it can assert little control. The
Company's ability to conduct its business is dependent upon the ability of these
third parties to avoid year 2000 related disruptions. The Company has contacted
and will continue to contact its key suppliers and other third party service
providers to inquire as to their year 2000 readiness. If these third parties do
not adequately address their year 2000 issues, the Company's business may be
affected, which could result in a materially adverse effect on the results of
operations and financial condition of the Company.
Contingency Plans
- -----------------
With the exception of the above plans, the Company has not to date developed any
further contingency plans in the event the Company, or any key third party
providers, should fail to become year 2000 compliant.
Page 13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation (Incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1,
Registration No. 33-13112, declared effective May 19, 1987 (the "Form
S-1"))
3.2 Articles of Amendment to the Registrant's Restated Articles of
Incorporation (Incorporated by reference to Exhibit 3.2 to the
Company's Form 10-Q filed June 16, 1998 (the "Form 10-Q"))
3.3 Bylaws (Incorporated by reference to Exhibit 3.3 to the Form S-1)
4.1 Form of Warrant (Incorporated by reference to Exhibit 6 to the
Schedule 13D Amendment Number 1 filed on behalf of Cahill, Warnock
Strategic Partners Fund, L.P.; Strategic Associates, L.P.; Cahill
Warnock Strategic Partners, L.P.; Cahill, Warnock & Co., L.L.C.;
Edward L. Cahill and David L. Warnock on March 23, 1998 (the "Schedule
13D")
4.2 Form of Debenture (Incorporated by reference to Exhibit 4.2 to the
Form 10-Q)
4.3 Registration Rights Agreement (Incorporated by reference to Exhibit 5
to the Schedule 13D)
10.1 Subordinated Debenture Agreement (Incorporated by reference to Exhibit
4.4 to the Company's Form 8-K filed on December 15, 1997)
10.2 FINOVA Line of Credit (Incorporated by reference to Exhibit 10.2 to
the Company's Form 10-Q filed September 15, 1998)
27 Financial Data Schedule
(b) Reports on Form 8-K
None
Page 14
<PAGE>
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 14, 1998
/s/ WILLIAM L. LAWRENCE, JR.
- ----------------------------
William L. Lawrence, Jr.
Executive Vice President, Chief Financial Officer and
Treasurer (Principal Financial and Accounting Officer)
Page 15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the Registrant's
unaudited consolidated financial statements as of and for the quarter ended
October 31, 1998, 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> JAN-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 889
<SECURITIES> 0
<RECEIVABLES> 769
<ALLOWANCES> 0
<INVENTORY> 16,094
<CURRENT-ASSETS> 18,862
<PP&E> 28,413
<DEPRECIATION> 22,453
<TOTAL-ASSETS> 24,822
<CURRENT-LIABILITIES> 21,301
<BONDS> 0
3,814
2,072
<COMMON> 16,224
<OTHER-SE> (20,740)
<TOTAL-LIABILITY-AND-EQUITY> 24,822
<SALES> 16,145
<TOTAL-REVENUES> 16,145
<CGS> 11,867
<TOTAL-COSTS> 16,259
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 421
<INCOME-PRETAX> (535)
<INCOME-TAX> 0
<INCOME-CONTINUING> (535)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (535)
<EPS-PRIMARY> (1.22)
<EPS-DILUTED> 0
</TABLE>
