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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Thirteen Weeks Ended November 1, 1997
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COMMISSION FILE NUMBER 1-9647
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JAN BELL MARKETING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 59-2290953
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
14051 N.W. 14TH STREET, SUNRISE, FLORIDA 33323
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(954) 846-2776
(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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
25,965,837 COMMON SHARES ($.0001 PAR VALUE)
AS OF DECEMBER 16, 1997
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FORM 10-Q
QUARTERLY REPORT
THIRTEEN WEEKS ENDED NOVEMBER 1, 1997
TABLE OF CONTENTS
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PART I: FINANCIAL INFORMATION
PAGE NO.
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Item 1. Consolidated Financial Statements
A. Consolidated Balance Sheets.........................................................3
B. Consolidated Statements of Operations...............................................4
C. Consolidated Statements of Cash Flows...............................................6
D. Notes to Consolidated Financial Statements..........................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................9
PART II: OTHER INFORMATION
Items 1, 2, 3, 4 and 5 have been omitted because they are not
applicable with respect to the current reporting period.
Item 6. Exhibits and Reports on Form 8-K.....................................................15
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PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
JAN BELL MARKETING, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts shown in thousands except share and per share data)
November 1, February 1,
1997 1997
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24,015 $ 23,525
Accounts receivable, net 4,987 6,162
Inventories 101,569 79,893
Other current assets 1,558 1,260
-------- --------
Total current assets 132,129 110,840
Property, net 18,964 21,481
Excess of cost over fair value of
net assets acquired 2,563 2,860
Other assets 3,452 4,204
-------- --------
$157,108 $139,385
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 30,683 $ 8,222
Accrued expenses 6,262 5,790
-------- --------
Total current liabilities 36,945 14,012
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value,
50,000,000 shares authorized,
25,932,504 and 25,894,428 shares
issued and outstanding, respectively 3 3
Additional paid-in capital 180,532 180,448
Accumulated deficit (58,594) (53,338)
Foreign currency translation adjustment (1,778) (1,740)
-------- --------
120,163 125,373
-------- --------
$157,108 $139,385
======== ========
See notes to consolidated financial statements.
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JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts shown in thousands except share and per share data)
Thirteen Weeks Thirteen Weeks
Ended Ended
November 1, November 2,
1997 1996
---------------------- -------------------
(Unaudited)
Net sales $ 45,219 $ 44,706
Cost of sales and
occupancy costs 35,127 34,846
-------------- -------------
Gross profit 10,092 9,860
Store and warehouse
operating and selling expenses 7,612 7,628
General and administrative expenses 3,658 3,256
Depreciation and amortization 1,504 2,006
Currency exchange gain (21) (11)
-------------- -------------
Operating loss (2,661) (3,019)
Interest and other income 437 203
Interest expense -- 14
-------------- -------------
Loss before income taxes (2,224) (2,830)
Income taxes 83 80
-------------- -------------
Net loss $ (2,307) $ (2,910)
============== =============
Net loss per common share $ (0.09) $ (0.11)
Weighted average shares outstanding 25,916,240 25,875,725
See notes to consolidated financial statements.
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JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts shown in thousands except share and per share data)
Thirty-Nine Thirty-Nine
Weeks Weeks
Ended Ended
November 1, November 2,
1997 1996
--------------------- -------------------
(Unaudited)
Net sales $ 145,505 $ 147,308
Cost of sales and
occupancy costs 113,126 115,646
------------- ------------
Gross profit 32,379 31,662
Store and warehouse
operating and selling expenses 23,261 23,215
General and administrative expenses 10,114 8,365
Other charges -- 2,643
Depreciation and amortization 5,349 6,482
Currency exchange gain (19) (16)
------------- ------------
Operating loss (6,326) (9,027)
Interest and other income 1,261 952
Interest expense -- 998
------------- ------------
Loss before income taxes (5,065) (9,073)
Income taxes 191 85
------------- ------------
Net loss $ (5,256) $ (9,158)
============= ============
Net loss per common share $ (0.20) $ (0.35)
Weighted average shares outstanding 25,903,944 25,852,733
See notes to consolidated financial statements.
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JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts shown in thousands)
Thirty-Nine Weeks Thirty-Nine Weeks
Ended Ended
November 1, 1997 November 2, 1996
---------------------- ---------------------
(Unaudited)
Cash flows from operating activities:
Cash received from customers $ 146,679 $ 148,464
Cash paid to suppliers and employees (145,709) (135,146)
Interest and other income received 1,260 977
Interest paid -- (987)
Income taxes paid (49) (43)
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Net cash provided by operating activities 2,181 13,265
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Cash flows from investing activities:
Capital expenditures (1,389) (2,164)
Acquisition of Manhattan Diamond stores -- (500)
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Net cash used in investing activities (1,389) (2,664)
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Cash flows from financing activities:
Debt repayment -- (17,500)
Payment of annual commitment fee (400) (450)
Other 59 (390)
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Net cash used in financing activities (341) (18,340)
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Effect of exchange rate changes 39 (135)
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Net increase (decrease) in cash and cash equivalents 490 (7,874)
Cash and cash equivalents at beginning of period 23,525 14,955
--------- ---------
Cash and cash equivalents at end of period $ 24,015 $ 7,081
========= =========
Reconciliation of net loss to net cash provided by
operating activities:
Net loss $ (5,256) $ (9,158)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 5,349 6,482
Currency exchange gain (19) (16)
(Increase) Decrease in assets:
Accounts receivable (net) 1,174 1,157
Inventories (21,655) (7,777)
Other (341) 161
Increase (Decrease) in liabilities:
Accounts payable 22,453 21,872
Accrued expenses 476 544
--------- ----------
Net cash provided by operating activities $ 2,181 $ 13,265
========= =========
See notes to consolidated financial statements.
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JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. Unaudited Financial Statements
The Company's consolidated financial statements for the thirteen and
thirty-nine week periods ended November 1, 1997 ("fiscal 1997") and November 2,
1996 ("fiscal 1996") have not been audited by certified public accountants, but
in the opinion of management of the Company, reflect all adjustments (which
include only normal recurring accruals) necessary to present fairly the
financial position, results of operations and cash flows for those periods.
Results of the thirteen and thirty-nine week periods ended November 1, 1997 and
November 2, 1996 are not necessarily indicative of annual results because of the
seasonality of the Company's business.
The accompanying consolidated financial statements should be read in
conjunction with the Company's annual consolidated financial statements and the
notes thereto for the year ended February 1, 1997.
B. Relationship with Sam's Wholesale Club
The Company operates an exclusive leased department at all existing and
future domestic and Puerto Rican Sam's Wholesale Club ("Sam's") locations under
an agreement which expires February 1, 2001. The Company pays Sam's a tenancy
fee of 9% of net sales. During the thirteen and thirty-nine weeks ended November
1, 1997, approximately 93% and 92% of the Company's net sales were from Sam's
customers and for the foreseeable future it is expected that the substantial
portion of net sales will be generated through this agreement. The Company and
Sam's each have determined that the present relationship is in need of
modification and believe that there is a basis to have a mutually beneficial
relationship beyond 2001. Both the Company and Sam's would like to evaluate the
mix of responsibilities to take better advantage of each company's expertise in
merchandising and retailing. While the agreement as presently structured will
not be extended beyond its primary term, the Company and Sam's intend to proceed
in order to hopefully implement specific terms of a modified relationship prior
to the expiration date.
During fiscal 1995, a dispute arose between Sam's and the Company
related to certain wholesale sales and returns, primarily relating to certain
claims by Sam's for credits for certain merchandise returns. The Company
considers this matter to be in nature and magnitude outside the normal course of
business. The total difference between the amount of credits that Sam's
originally claimed and the amount the Company believes is appropriate is
approximately $6.7 million. The Company and Sam's have held discussions and
negotiations regarding this matter; however, no final resolution has been
reached. While the Company believes that no further amounts are owed to Sam's,
the outcome remains uncertain. The financial statements do not include a
provision for any loss that may result from the resolution of this matter.
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JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
C. Inventories:
November 1, February 1,
1997 1997
------------------------- ------------------------------
(Amounts shown in thousands)
Company Held on Company Held on
Owned Consignment Owned Consignment
------- ----------- ------- -----------
Precious and semi-precious gem jewelry-
related merchandise (and associated gold):
Raw materials $ 9,295 $ -- $ 6,257 $ --
Finished goods 44,213 837 39,054 1,378
Gold jewelry-related merchandise 19,808 377 12,639 705
Watches 12,893 -- 10,414 --
Other consumer products 15,360 4 11,529 --
-------- -------- --------- -------
$101,569 $ 1,218 $ 79,893 $ 2,083
======== ======== ========= =======
D. Income Taxes
The Company's provision for income taxes for fiscal 1997 and fiscal
1996 is related to domestic operations and the operations of foreign
subsidiaries. The federal portion of the income tax provision relates to the
federal alternative minimum tax. Federal and state tax benefits have not been
recognized for the domestic loss for fiscal 1997 and fiscal 1996 due to the fact
that all loss carrybacks have been fully utilized and, under SFAS No. 109,
"Accounting for Income Taxes", the Company has determined that it is more likely
than not that the deferred tax asset will not be realized.
E. Other Charges
Other charges of $2.6 million for the thirty-nine weeks ended November
2, 1996 represent severance payments to the Company's former President and Chief
Executive Officer of $1.97 million and a write-off of $630,000 of financing
costs in connection with the Company's repayment of senior noteholders, both of
which occurred in the thirteen weeks ended August 3, 1996.
F. Litigation
The Company is presently a defendant in a lawsuit alleging copyright
infringement in the procurement and sale of certain non-jewelry products. The
general issues involved in this lawsuit are now being reviewed in a separate
case involving other parties by the United States Supreme Court, which is
expected to rule in the first or second quarter of 1998. There can be no
assurance as to the outcome or potential business and financial impact of these
cases; however, adverse rulings could have significant negative business and
financial impact as well as the potential of other similar litigation involving
other non-jewelry products.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The discussion and analysis below contain trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The
Company's actual results could differ materially from those anticipated in any
forward-looking statements as a result of certain factors set forth below and
elsewhere in this report.
The Company operates an exclusive leased department at all existing and
future domestic and Puerto Rican Sam's Wholesale Club ("Sam's") locations under
an agreement which expires February 1, 2001. The Company pays Sam's a tenancy
fee of 9% of net sales. During the thirteen and thirty-nine weeks ended November
1, 1997, approximately 93% and 92% of the Company's net sales were from Sam's
customers and for the foreseeable future it is expected that the substantial
portion of net sales will be generated through this agreement. The Company and
Sam's each have determined that the present relationship is in need of
modification and believe that there is a basis to have a mutually beneficial
future relationship beyond 2001. Both the Company and Sam's would like to
evaluate the mix of responsibilities to take better advantage of each company's
expertise within the merchandising and retailing disciplines. While the
agreement as presently structured will not be extended beyond its primary term,
the Company and Sam's intend to proceed in order to hopefully implement specific
terms of a modified relationship prior to the expiration date.
Net sales were $45.2 million and $145.5 million for the thirteen and
thirty-nine week periods ended November 1, 1997 compared to $44.7 million and
$147.3 million for the thirteen and thirty-nine week periods ended November 2,
1996. Net sales in the retail locations for the thirteen and thirty-nine week
periods ended November 1, 1997 were $42.6 million and $135.9 million compared to
$42.3 million and $138.1 million for the thirteen and thirty-nine week periods
ended November 2, 1996. Comparable retail sales for locations open for more than
one year for the thirteen and thirty-nine week periods ended November 1, 1997
were $41.5 million and $132.8 million compared to $41.3 million and $135.0
million for the thirteen and thirty-nine week periods ended November 2, 1996.
The increase in revenues for the thirteen weeks ended November 1, 1997 is mainly
attributable to increased sales from the Company's diamond and gold jewelry
product categories. The decline in revenues for the thirty-nine weeks ended
November 1, 1997 is mainly attributable to decreased sales within the Company's
watch, sunglass and collectibles categories.
Sales in the future may be adversely impacted by general economic
conditions, the level of spending in the wholesale club environment and changes
to the Company's existing relationship with Sam's. The retail jewelry market is
particularly subject to the level of consumer discretionary income and the
subsequent impact on the type and value of goods purchased. With the
consolidation of the retail industry, the Company believes that competition both
within the warehouse club industry and with other competing general and
specialty retailers and discounters will continue to increase.
Gross profit was $10.1 million or 22.3% of net sales for the thirteen
weeks ended November 1, 1997 compared to $9.9 million or 22.1% of net sales for
the thirteen weeks ended November 2, 1996. Gross profit was $32.4 million or
22.3% of net sales for the thirty-nine weeks ended November 1, 1997 compared to
$31.7 million or 21.5% of net sales for the thirty-nine weeks ended November 2,
1996. The increase in gross profit as a percentage of net sales for the thirteen
and thirty-nine weeks ended November 1, 1997 was primarily attributable to
margin improvements that are being recognized in the Company's retail locations
because of a shift in merchandising strategies that emphasize higher margin
diamond, semi-precious gem, gold and watch jewelry products in place of other
lower margin non-jewelry products and categories and improvements as a
percentage of sales in product handling costs and inventory shrinkage. The
Company has certain discontinued inventory items which it expects to sell at
reduced margins over the next several thirteen week periods. Although the
Company has provided reserves related to discontinued and slow moving
merchandise, and does not expect that its gross margin will be significantly
affected, there can be no assurances as to the margin impact of the liquidation
of this merchandise.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Management recognizes that continued improvement in the contribution of
gross margin dollars from increased net sales must be achieved for the Company
to improve profitability.
Store and warehouse operating and selling expenses were $7.6 million
and $23.3 million for the thirteen and thirty-nine weeks ended November 1, 1997
compared to $7.6 million and $23.2 million for the thirteen and thirty-nine
weeks ended November 2, 1996. These expenses as a percentage of net sales have
remained relatively consistent during these respective periods.
General and administrative expenses were $3.7 million and $10.1 million
for the thirteen and thirty-nine weeks ended November 1, 1997 compared to $3.3
million and $8.4 million for the thirteen and thirty-nine weeks ended November
2, 1996. The increase in the thirteen and thirty-nine week period ended November
1, 1997 is primarily attributable to severance pay related to terminated
employees and an accrual for annual management bonuses which are determined
based upon the year end profitability of the Company.
Other charges of $2.6 million for the thirty-nine weeks ended November
2, 1996 represent severance payments to the Company's former President and Chief
Executive Officer of $1.97 million and a write-off of $630,000 of financing
costs in connection with the Company's pay-off of senior noteholders both of
which occurred in the thirteen weeks ended August 3, 1996.
Depreciation and amortization expense was $1.5 million and $5.3 million
for the thirteen and thirty-nine weeks ended November 1, 1997 compared to $2.0
million and $6.5 million for the thirteen and thirty-nine weeks ended November
2, 1996. The decrease in the thirteen week period is primarily attributed to the
significant fixed asset expenditures made to satisfy the requirements of the
retail business during 1992 becoming fully depreciated during May 1997. In
addition, a currently vacant, held for sale, corporate building was being
depreciated during the prior year but not the current year which has contributed
to the decrease in depreciation expense in both the thirteen and thirty-nine
week periods ended November 1, 1997. The decrease in the thirty-nine week period
ended November 1, 1997 is primarily attributable to the write-off of financing
costs in the second quarter of 1996 and the fully depreciated assets discussed
above.
Interest and other income was $.4 million and $1.3 million for the
thirteen and thirty-nine week periods ended November 1, 1997 and $.2 million and
$1 million for the thirteen and thirty-nine weeks ended November 2, 1996. The
increases during fiscal 1997 are primarily a result of higher average cash
balances generated from operations available for investment during the third
quarter of 1997. Cash balances were lower during the third quarter of 1996
primarily because of the Company's greater investment in inventories and the
timing of the Company's prepayment of $17.5 million in the senior notes in July
1996. There was no interest expense during the thirteen and thirty-nine week
periods ended November 1, 1997. Interest expense was $14,000 and $1 million for
the thirteen and thirty-nine weeks ended November 2, 1996. The decrease in
interest expense is primarily attributable to the absence of debt throughout
fiscal 1997 as a result of prepayment of the senior notes in July 1996.
The retail jewelry business is seasonal in nature with a higher
proportion of sales and significant portion of earnings generated during the
fourth quarter holiday selling season. As a result, operating results for the
thirteen and thirty-nine weeks ended November 1, 1997 are not necessarily
indicative of results of operations for the entire fiscal year.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of November 1, 1997, cash and cash equivalents totaled $24.0
million, an increase of $0.5 million from February 1, 1997 which resulted
primarily from cash flows generated from operating activities net of capital
expenditures. The Company had no short-term borrowings outstanding as of
November 1, 1997 under its $40 million working capital facility outstanding as
of November 1, 1997 and was in compliance with all the facility's financial
ratios and performance covenants. This working capital facility expires in May
1998.
The Company's working capital requirements are directly related to the
amount of inventory required to support its retail operations. During the
thirteen and thirty-nine weeks ended November 1, 1997, the inventory increase of
$21.7 million reflects a build up in anticipation of holiday sales.
For the remainder of fiscal 1997, based on discussions with Sam's, the
Company expects a very limited increase in the number of leased departments it
operates, and with the exception of the normal short term build for the holiday
selling season, the Company does not foresee a need for a significant increase
in inventory. Capital expenditures for fiscal 1997 are projected not to exceed
$2.5 million.
The Company's business is highly seasonal, with seasonal working
capital needs peaking in October and November before the holiday selling season.
The Company has operations in Mexico and Israel. In Israel, the
functional currency exchange rate between the Israeli shekel and U.S. dollar is
government regulated and not currently subject to significant currency exchange
rate fluctuations. In Mexico, the U.S. dollar is the functional currency since
the economy is being considered highly inflationary. Changes in the exchange
rates for the Mexican peso relative to the U.S. dollar result in direct charges
or credits to the income statement.
The Company manages the Mexican peso currency exchange rate exposure
to minimize the effect of exchange rate gains and losses on its cash flows
through the use of forward sales contracts, generally for periods not exceeding
three months. Forward sales contracts entered into to hedge potential exchange
rate fluctuations are accounted for on a mark to market basis.
The Company believes that its cash on hand, projected cash from
operations and availability under the working capital facility will be
sufficient to meet its anticipated working capital and capital expenditure needs
for the remainder of fiscal 1997. There can be no assurance that the Company's
future operating results will be sufficient to sustain any working capital
needs.
NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt the following Statement of Financial Accounting
Standards ("SFAS") in the thirteen weeks ending January 31, 1998.
SFAS No. 128 "Earnings Per Share" establishes financial accounting and
reporting standards for earnings per share. SFAS No. 128, which supersedes
Accounting Principles Board ("APB") Opinion No. 15, requires a dual presentation
of basic and diluted earnings per share on the face of the income statement and
is effective for financial statements issued for periods ending after December
15, 1997. As a result of the Company's net loss for the thirteen weeks and
thirty-nine weeks ended November 1, 1997 and the thirteen weeks and thirty-nine
weeks ended November 2, 1996, basic and diluted net loss per share, as computed
under SFAS No. 128, would not differ from the net loss per share shown in the
accompanying consolidated financial statements.
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12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The Company will adopt the following two Statement of Financial
Accounting Standards during the thirteen weeks ending May 2, 1998.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was
issued. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that a company (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. The Company has not determined the effect, if any, that SFAS No. 130
will have on its consolidated financial statements.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise
and related Information", was issued. SFAS No. 131 establishes standards for the
way that public companies report selected information about operating segments
in annual financial statements and requires that those companies report selected
information about segments in interim and annual financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131,
which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise", but retains the requirement to report information about major
customers, requires that a public company report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 requires that a public company report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. However, SFAS No. 131 does not require the reporting of
information that is not prepared for internal use if reporting it would be
impractical. SFAS No. 131 also requires that a public company report descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company has not determined the effect, if any, SFAS No. 131 will have on the
disclosures in its consolidated financial statements.
FUTURE OPERATING RESULTS
The future operating results of the Company may be affected by a number
of factors, including without limitation the following:
The Company is focusing on strategic business development and has
incurred expenses for the initial phase of the project of approximately
$800,000. A portion of those costs were expensed by the Company during the
thirty-nine weeks ended November 1, 1997. The Company is currently unable to
determine to what extent the strategies will be implemented or the impact of any
potential growth opportunities on its future operating results or capital
requirements.
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13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The Company markets its products principally through Sam's Club, a
division of Wal-Mart, Inc., pursuant to an arrangement whereby the Company
operates an exclusive leased department at all of Sam's existing and future
domestic and Puerto Rican locations through February 1, 2001. Accordingly, the
Company is dependent on Sam's in the conduct of its business, and the loss of
the leased department arrangement with Sam's would have a material adverse
effect on the business of the Company. The Company is focused on developing
retail opportunities outside its traditional core business within Sam's.
Whether by acquisition or by developing alternative retail concepts,
management believes that the Company needs to be in a diversified position if it
is to successfully renegotiate or absorb the expiration of its Sam's Club lease
in 2001. The pursuit of any such opportunity will require a significant
investment of capital and attention by management. Such business development is
subject to all risks inherent to establishing or acquiring an additional
business, including competition and consumer uncertainties.
On November 9, 1995, the Company opened its first "Jewelry Depot", a
6,071 square foot value oriented jewelry and luxury gift store in Framingham,
Massachusetts. Subsequently, the Company also opened two "Jewelry Depot
Outlets", a 2,207 square foot facility in Vero Beach, Florida and a 891 square
foot store in Worcester, Massachusetts. The "Jewelry Depot" and "Jewelry Depot
Outlets" each were opened as prototypes for potential stand-alone jewelry
operations that the Company has evaluated as possible long term sources of
additional revenue growth. The Framingham and Worcester locations have not been
successful and in January 1997 the Company decided it would close those
operations. The Worcester location was closed during November 1997 and the
Framingham location is expected to close in January 1998. Additionally, during
the third quarter of 1996, the Company acquired from Andin International, Inc.
its three Manhattan Diamond outlet locations in the Potomac Mills, Gurnee Mills
and Orlando Belz outlet malls. The Company currently is unable to determine the
impact of these stand-alone jewelry operations on its future operating results
or capital requirements.
The Company's retail operation requires expertise in the areas of
merchandising, sourcing, selling, personnel, training, systems and accounting.
The Company must look to increases in the number of retail locations to occur,
thereby increasing the Company's customer base, for expansion. The retail
jewelry market is particularly subject to the level of consumer discretionary
income and the subsequent impact on the type and value of goods purchased. With
the consolidation of the retail industry, the Company believes that competition
both within the warehouse club industry and with other competing general and
specialty retailers and discounters will continue to increase. Further
consolidation of the warehouse club industry due to geographic constraints and
market consolidation might also adversely affect the Company's existing
relationship with Sam's and the Company's business. The opening and success of
the leased locations and locations to be opened in later years, if any, will
depend on various factors, including general economic and business conditions
affecting consumer spending, the performance of the Company's retail programs
and concepts, and the ability of the Company to manage the leased operations and
future expansion and hire and train personnel.
The Company purchases diamonds and other gemstones directly in
international markets located in Tel Aviv, New York, Antwerp and elsewhere. The
Company seeks to meet its diamond requirements with purchases on a systemic
basis throughout the year. Hedging is not available with respect to possible
fluctuations in the price of gemstones. If such fluctuations should be unusually
large or rapid and result in prolonged higher or lower prices, there is no
assurance that the necessary price adjustments could be made quickly enough to
prevent the Company from being adversely affected. Further, the continued
availability of diamonds to the Company is dependent, to some degree, upon the
political and economic situation in South Africa and Russia, which have been
unstable. Several other countries also are major suppliers of diamonds,
including Botswana and Zaire. In the event of an interruption of diamond
supplies, or a material or prolonged reduction in the world supply of finished
diamonds, the Company could be adversely affected.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Although purchases of several critical raw materials, notably gold and
gemstones, are made from a limited number of sources, the Company believes that
there are numerous alternative sources for all raw materials used in the
manufacture of its finished jewelry, and the failure of any principal supplier
would not have a material adverse effect on operations. Any changes in foreign
or domestic laws and policies affecting international trade may have a material
adverse effect on the availability or price of the diamonds, other gemstones,
precious metals and non-jewelry products purchased by the Company. Because
supplies of parallel marketed products are not always readily available, it can
be a difficult process to match the customer demand to market availability.
The Company utilizes the services of independent suppliers and customs
agents to comply with U.S. customs laws in connection with its purchases of
gold, diamonds and other raw materials from domestic and foreign sources. The
Company bears certain risks in purchasing parallel marketed goods which includes
certain watches and other products such as fragrances and collectibles. Parallel
marketed goods are products to which trademarks are legitimately applied but
which were not necessarily intended by their foreign manufacturers to be
imported and sold in the United States. The laws and regulations governing
transactions involving such goods lack clarity in significant respects. From
time to time, trademark or copyright holders and their licensees initiate
private suits or administrative agency proceedings seeking damages or injunctive
relief based on alleged trademark or copyright infringement by purchasers and
sellers of parallel marketed goods. While the Company believes that its
practices and procedures with respect to the purchase of parallel marketed goods
lessen the risk of significant litigation or liability, the Company is from time
to time involved in such proceedings and there can be no assurance that
additional claims or suits will not be initiated against the Company or any of
its affiliates, and there can be no assurances regarding the results of any
pending or future claims or suits. The Company is presently a defendant in a
lawsuit alleging copyright infringement in the procurement and sale of certain
non-jewelry products. The general issues involved in this lawsuit are now being
reviewed in a separate case involving other parties by the United States Supreme
Court, which is expected to rule in the first or second quarter of 1998. There
can be no assurance as to the outcome or potential business and financial impact
of these cases; however, adverse rulings could have a significant negative
business and financial impact as well as the potential of other similar
litigation involving other non-jewelry products. Further, legislation has been
introduced in Congress in recent years regarding parallel marketed goods.
Certain legislative or regulatory proposals, if enacted, could materially limit
the Company's ability to sell parallel marketed goods in the United States.
There can be no assurances as to whether or when any such proposals might be
acted upon by Congress or that future judicial, legislative or administrative
agency action will restrict or eliminate these sources of supply. The Company
has identified alternate sources of supply or categories of similar products,
although the cost of certain products may increase or their availability may be
lessened.
Many computer systems in use today were designed and developed using
two digits, rather than four, to specify the year. As a result, such systems
will recognize the year 2000 as "00". This could cause many computer
applications to fail completely or to create erroneous results unless corrective
measures are taken. The Company utilizes software and related computer
technologies essential to its operations that will be affected by the year 2000
issue. The Company is studying what actions will be necessary to make its
computer systems year 2000 compliant. The expense associated with these actions
cannot presently be determined, but could be material.
The agreements related to the Company's amended working capital
facility contain covenants which require the Company to maintain financial
ratios related to earnings, working capital, inventory turnover, trade payables
and tangible net worth, limit capital expenditures and the incurrence of
additional debt, and prohibit the payment of dividends. There can be no
assurance that the Company's future operating results will be sufficient to meet
the requirements of the foregoing covenants.
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15
PART II: OTHER INFORMATION
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) 27.1 Financial Data Schedule (for SEC use only).
(b) The Company did not file any reports on Form 8-K during the quarter
ended November 1, 1997.
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.
JAN BELL MARKETING, INC.
-----------------------------------
(Registrant)
By: DAVID P. BOUDREAU
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CHIEF FINANCIAL OFFICER
Date: December 16, 1997
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