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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 August 1, 1998
Commission File Number 1-9647
JAN BELL MARKETING, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 59-2290953
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(State of Incorporation) (IRS Employer Identification No.)
14051 N.W. 14TH STREET, SUNRISE, FLORIDA 33323
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(Address of principal executive offices) (Zip Code)
(954) 846-2719
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(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.
28,307,158 COMMON SHARES ($.0001 PAR VALUE)
AS OF SEPTEMBER 15, 1998
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FORM 10-Q
QUARTERLY REPORT
THIRTEEN WEEKS ENDED AUGUST 1, 1998
TABLE OF CONTENTS
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PART I: FINANCIAL INFORMATION PAGE
NO.
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....................................... 10
PART II: OTHER INFORMATION
Items 1, 2, 3 and 5 have been omitted because they are
not Applicable with respect to the current
reporting period.
Item 4. Submission of Matters to a Vote of Security Holders....................... 18
Item 6. Exhibits and Reports on Form 8-K.......................................... 18
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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)
August 1, January 31,
1998 1998
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(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,632 $ 48,432
Accounts receivable, net of allowance for doubtful
accounts of $1,333 and $1,786, respectively 26,492 6,271
Inventories 139,837 69,193
Deferred income taxes 2,765 2,625
Other current assets 2,696 1,376
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Total current assets 177,422 127,897
Property, net 24,456 18,143
Goodwill 26,164 2,475
Other assets 6,542 3,197
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$ 234,584 $ 151,712
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 27,440 $ 9,784
Accrued expenses 12,386 6,349
Deferred liabilities 1,364 --
Deferred income taxes 6,587 --
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Total current liabilities 47,777 16,133
Long term debt 40,714 --
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value,
50,000,000 shares authorized,
28,269,524 and 25,981,970 shares
issued and outstanding, respectively 3 3
Additional paid-in capital 191,275 180,649
Accumulated deficit (43,407) (43,295)
Foreign currency translation adjustment (1,778) (1,778)
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146,093 135,579
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$ 234,584 $ 151,712
========= =========
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
August 1, 1998 August 2, 1997
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(Unaudited)
Net sales $60,352 $53,309
Cost of sales and
occupancy costs 46,389 41,365
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Gross profit 13,963 11,944
Store and warehouse
operating and selling expenses 9,460 8,056
General and administrative expenses 3,229 3,070
Depreciation and amortization 1,309 1,828
Currency exchange loss 145 2
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Operating loss (180) (1,012)
Interest and other income 726 433
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Income (loss) before income taxes 546 (579)
Income tax provision 85 64
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Net income (loss) $461 $(643)
============= =============
Net income (loss) per common share $0.02 $(0.02)
Weighted average shares outstanding 26,762,042 25,901,099
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)
Twenty-Six Weeks Twenty-Six Weeks
Ended Ended
August 1, 1998 August 2, 1997
-------------- --------------
(Unaudited)
Net sales $ 112,846 $ 100,286
Cost of sales and
occupancy costs 86,722 77,999
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Gross profit 26,124 22,287
Store and warehouse
operating and selling expenses 18,030 15,648
General and administrative expenses 6,372 6,457
Depreciation and amortization 2,681 3,845
Currency exchange loss 512 2
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Operating loss (1,471) (3,665)
Interest and other income 1,502 824
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Income (loss) before income taxes 31 (2,841)
Income tax provision 142 108
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Net loss $ (111) $ (2,949)
============ ============
Net loss per common share $ 0.00 $ (0.11)
Weighted average shares outstanding 26,490,765 25,897,820
See notes to consolidated financial statements.
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JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts shown in thousands)
Twenty-Six Weeks Twenty-Six Weeks
Ended Ended
August 1, 1998 August 2, 1997
-------------- --------------
(Unaudited)
Cash flows from operating activities:
Cash received from customers $ 113,785 $ 99,615
Cash paid to suppliers and employees (107,210) (97,391)
Interest and other income received 1,502 824
Income taxes (paid) refunded (284) 14
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Net cash provided by operating activities 7,793 3,062
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Cash flows from investing activities:
Investment in Mayor's, net of cash acquired (54,395) --
Capital expenditures (735) (987)
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Net cash used in investing activities (55,130) (987)
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Cash flows from financing activities:
Borrowings under line of credit 5,425
Debt repayment (2,864) --
Proceeds from sale of employee stock plans 2,921 34
Payment of commitment fees (1,018) (400)
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Net cash provided by (used in) financing activities 4,464 (366)
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Effect of exchange rate on cash 72 (7)
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Net increase (decrease) in cash and cash equivalents (42,801) 1,702
Cash and cash equivalents at beginning of period 48,432 23,525
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Cash and cash equivalents at end of period $ 5,631 $ 25,227
========= =========
Reconciliation of net loss to net cash provided by
operating activities;
Net loss $ (111) $ (2,949)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 2,681 3,845
Currency exchange loss 466 2
(Increase) Decrease in assets (net of effect of acquisition in
1998):
Accounts receivable (net) 939 (670)
Inventories 1,680 4,703
Other (13) (164)
Increase (Decrease) in liabilities (net of effect of acquisition
in 1998):
Accounts payable 2,189 (2,120)
Accrued expenses (38) 415
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Net cash provided by operating activities $ 7,793 $ 3,062
========= =========
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
twenty-six week periods ended August 1, 1998 and August 2, 1997 have not been
audited by independent auditors, 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 twenty-six week periods ended
August 1, 1998 and August 2, 1997 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 appearing in the Company's annual report on Form 10-K for the year
ended January 31, 1998, filed with the Securities Exchange Commission, as well
as the Company's Form 8-K/A, which was filed with the Securities and Exchange
Commission on September 15, 1998.
B. MAYOR'S ACQUISITION
In July 1998, Jan Bell consummated the acquisition of Mayor's Jewelers,
Inc. ("Mayor's"). Total consideration consisted of approximately $18 million
cash, 2 million shares of Jan Bell Marketing, Inc. common stock and the
refinancing of Mayor's outstanding debt through a new $80 million working
capital facility with a syndicate of banks led by Citicorp, U.S.A., Inc.
Following the closing, Jan Bell had approximately $40 million outstanding under
its new facility. The accompanying Consolidated Balance Sheet as of August 1,
1998 includes the acquired assets and liabilities of Mayor's and goodwill of
approximately $23.8 million resulting from the Mayor's acquisition. Final
determination of the goodwill balance will be made subsequent to the completion
of certain appraisals and further review. Operating results of Mayor's will be
included in the consolidated operations of Jan Bell for periods subsequent to
August 1, 1998, which is the acquisition date for accounting purposes.
In connection with the Mayor's acquisition, certain former minority
shareholders of Mayor's have filed a lawsuit in state court in Miami, Florida
against Mayor's and Jan Bell claiming that the acquisition and merger violated
their shareholders' rights and that the acquisition of the Mayor's stock was
unlawful. Jan Bell believes the lawsuit to be without merit and intends to
vigorously defend the action.
C. RELATIONSHIP WITH SAM'S CLUB
The Company operates an exclusive leased department at all existing and
future domestic and Puerto Rico Sam's Club ("Sam's") locations under an
agreement which expires February 1, 2001. During the thirteen and twenty-six
weeks ended August 1, 1998, approximately 93% of the Company's net sales were
from Sam's customers. The loss of the leased department arrangement with Sam's
would have a material adverse effect on the business of the Company.
D. NEW ACCOUNTING PRONOUNCEMENT
In June 1997, Statement of Financial Accounting Standards ("SFAS") No.
131, "Disclosures 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 such companies report selected information about
segments in interim financial reports issued to shareholders. SFAS No. 131,
which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," retains the requirements to report information about major
customers and requires that a public company report financial and descriptive
information about its reportable operating segments. Operating segments are
components
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of an enterprise about 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. 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. 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 issued for periods
beginning after December 15, 1997. This statement is not required to be applied
to interim financial statements in the initial year of its application. The
Company has not yet determined the effects, if any, that SFAS No. 131 will have
on the disclosures in its consolidated financial statements.
E. INVENTORIES:
Inventories are summarized as follows:
August 1, January 31,
1998 1998
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Company Held on Company Held on
Owned Consignment Owned Consignment
------- ----------- ------- -----------
(Amounts shown in thousands)
Precious and semi-precious gem jewelry
related merchandise (and associated gold):
Raw materials $ 12,287 $ -- $ 5,439 $ --
Finished goods 65,700 13,103 33,513 1,756
Gold jewelry-related merchandise 18,879 127 13,148 243
Watches 28,343 --- 7,372 ---
Other consumer products 14,628 154 9,721 19
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$139,837 $ 13,384 $ 69,193 $ 2,018
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F. INCOME TAXES
The Company has a deferred tax asset of approximately $15.2 million,
which currently is not reflected in the balance sheet as a result of a $12.4
million valuation allowance. The valuation allowance has been provided to offset
the net deferred tax asset to the amount that the Company believes, after
evaluation of currently available evidence, will more likely than not be
realized. The Company has a Federal net operating loss carryforward of
approximately $26.9 million, and a state net operating loss carryforward of
approximately $118.5 million. The Federal net operating loss carryforward
expires beginning in 2008 through 2011 and the state net operating loss
carryforward expires beginning in 1998 through 2012. The Company also has an
alternative minimum tax credit carryforward of approximately $1.2 million to
offset future Federal income taxes.
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G. COMPREHENSIVE INCOME (LOSS)
Effective February 1, 1998 the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income includes all changes in equity
during a period except those resulting from investment by owners and
distributions to owners. Comprehensive income (loss) was as follows:
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
August 1,1998 August 2, 1997 August 1, 1998 August 2, 1997
------------- -------------- -------------- --------------
Net income (loss) $461 $(643) $(111) $(2,949)
Adjustment to reconcile net income
(loss) to comprehensive income (loss):
Foreign currency translation adjustment -- (64) -- (99)
---- ----- ----- -------
Comprehensive income (loss) $461 $(707) $(111) $(3,048)
==== ===== ===== =======
H. SUPPLEMENTAL INFORMATION OF NONCASH ACTIVITIES
The Statement of Cash Flows for the twenty-six weeks ended August 1,
1998 does not include noncash financing and investing transactions associated
with the issuance of common stock and debt for the acquisition of Mayor's. The
components of the transactions are as follows:
Fair value of assets acquired (including goodwill) $ 129,718
Liabilities assumed 28,628
----------
Net assets acquired 101,090
Cash acquired 990
Issuance of common stock 7,705
Borrowing under working capital facility 38,000
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Cash used to acquire Mayor's $ 54,395
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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, in the Company's annual report on Form 10-K for the
year ended January 31, 1998 filed with the Securities and Exchange Commission
and the Company's Form 8-K filed with the Securities Exchange Commission on
August 10, 1998 and amended on September 15, 1998. Operating results of Mayor's
will be included in the consolidated operations of Jan Bell for periods
subsequent to August 1, 1998, which is the acquisition date for accounting
purposes. Consequently, the results of operations and other matters discussed
below exclude reference to Mayor's.
The Company operates an exclusive leased department at all existing and
future domestic Sam's Wholesale Club ("Sam's") locations and at four Puerto Rico
Sam's Club locations under an agreement which expires February 1, 2001. During
the thirteen and twenty-six weeks ended August 1, 1998, approximately 93% of the
Company's net sales were from Sam's customers.
The results of operations for the thirteen and twenty-six weeks ended August
1, 1998 reflect the Company's ongoing strategy to achieve consistent earnings
improvement in the retail marketplace. The Company has implemented merchandise
strategies that emphasize higher margin diamond, semi-precious gem, gold and
watch products in place of other lower margin non-jewelry products and
categories. Further, the Company has achieved revenue growth in its Sam's Club
departments as a result of obtaining temporary additional retail square footage
for promotional programs, improved merchandise assortment, quality and
distribution which has allowed the Company to generate more gross margin
dollars. In addition, continued emphasis on cash management has allowed the
Company to generate positive cash flows from operations. Finally, the Company's
ongoing efforts to reduce and better balance its inventory levels and reduce the
amount of discontinued inventory in stock and replace it with current
merchandise has resulted in improved inventory turns and reduced average
inventory requirements. Management believes there is additional opportunity for
continued improvements in sales, gross margins and operating cash flows in its
traditional business with Sam's.
Net sales were $60.4 million and $112.8 million for the thirteen and
twenty-six week periods ended August 1, 1998 compared to $53.3 million and
$100.3 million for the thirteen and twenty-six week periods ended August 2,
1997. Net sales in the retail locations for the thirteen and twenty-six week
periods ended August 1, 1998 were $56.7 million and $106.8 million compared to
$48.8 million and $93.3 million for the thirteen and twenty-six week periods
ended August 2, 1997. Comparable retail sales for the thirteen and twenty-six
week periods ended August 1, 1998 were $56.1 million and $105.6 million compared
to $48.5 million and $92.8 million for the thirteen and twenty-six week periods
ended August 2, 1997. The increase in revenues for the thirteen and twenty-six
weeks ended August 1, 1998 is mainly attributable to better merchandising
strategies, improved placement of goods within the Sam's locations, and
additional advertising and marketing in Sam's advertising and marketing
vehicles. The sales increases primarily were in the Company's diamond jewelry,
color jewelry, watch and sunglass product categories.
However, sales in the future may be adversely impacted by general economic
conditions, the level of spending in the wholesale club environment as well as
the Mayor's primarily mall store based environments, and changes to the
Company's existing relationship with Sam's. The retail jewelry market is
particularly subject to the level of
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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 $14.0 million or 23.1% of net sales for the thirteen weeks
ended August 1, 1998 compared to $11.9 million or 22.4% of net sales for the
thirteen weeks ended August 1, 1997. Gross profit was $26.1 million or 23.2% of
net sales for the twenty-six weeks ended August 1, 1998 compared to $22.3
million or 22.2% of net sales for the twenty-six weeks ended August 2, 1997. The
increase in gross profit as a percentage of net sales was primarily attributable
to margin improvements in the Company's gold product categories, improvements as
a percentage of sales in inventory shrinkage, as a result of the Company's
midyear physical inventories and reduced markdowns as a percentage of sales
related to the sale of discontinued and slow moving merchandise.
Store and warehouse operating and selling expenses were $9.5 million and
$18.0 million for the thirteen and twenty-six weeks ended August 1, 1998
compared to $8.1 million and $15.6 million for the thirteen and twenty-six weeks
ended August 2, 1997. The increase in these expenses for the thirteen and
twenty-six weeks ended August 1, 1998 compared to the thirteen and twenty-six
weeks ended August 2, 1997 is primarily attributable to increased store payroll
and increased advertising and marketing in Sam's advertising and marketing
vehicles. The Company believes the investment in these costs contributed to the
increase in sales previously discussed. Also contributing to the increase in
expenses are costs that vary proportionately with sales such as check
authorization charges and chargecard processing fees.
General and administrative expenses were $3.2 million and $6.4 million for
the thirteen and twenty-six weeks ended August 1, 1998 compared to $3.1 million
and $6.5 million for the thirteen and twenty-six weeks ended August 2, 1997. The
increase in these expenses for the thirteen weeks ended August 1, 1998 is
primarily attributable to increased professional fees related to the Company's
legal matters. The decrease for the twenty-six weeks ended August 1, 1998 is
primarily attributable to professional fees related to the Company's strategic
business development which were expensed in the twenty-six weeks ended August 2,
1997.
The decrease in depreciation and amortization expense from $1.8 million and
$3.8 million for the thirteen and twenty-six weeks ended August 2, 1997 to $1.3
million and $2.7 million for the thirteen and twenty-six weeks ended August 1,
1998 is primarily attributable to the significant fixed asset expenditures made
to satisfy the requirements of the retail business during 1992 becoming fully
depreciated during May 1997 as well as less amortization in 1998 related to the
Company's terminated working capital facility with BankBoston Retail, Inc.
The Company has operations in Mexico (the Company supplies selected fine
jewelry, watches and fragrances to Sam's locations in Mexico, a warehouse club
joint venture in Mexico between Wal-Mart Stores and Cifra S.A.) 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 considered highly inflationary. The
economic and political instability of the business environment in Mexico
requires the Company to constantly review its operating strategy. If it is
determined that the business and financial risk in Mexico outweighs the long
term growth benefits, the Company will seek to minimize the impact on the
financial condition of the Company through a divestiture of this entity. Changes
in the exchange rates for the Mexican peso relative to the U.S. dollar resulted
in direct charges or credits to the consolidated statements of operations during
a portion of Fiscal 1997 and during the first and second quarter of 1998. During
the thirteen and twenty-six weeks ended August 1, 1998, there was a foreign
currency exchange loss of $.1 million and $.5 million, respectively. During the
thirteen and twenty-six weeks ended August 2, 1997, there was an insignificant
currency exchange loss.
The increase in interest and other income to $.7 million and $1.5 million
for the thirteen and twenty-six weeks ended August 1, 1998 from $.4 million and
$.8 million for the thirteen and twenty-six weeks ended August 2, 1997 is a
result of higher average cash balances available for investment during the first
and second quarters of 1998.
The retail jewelry business is seasonal in nature with a higher proportion
of sales and a significant portion of earnings generated during the fourth
quarter holiday selling season. As a result, operating results for the thirteen
and
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twenty-six weeks ended August 1, 1998 are not necessarily indicative of results
of operations for the entire fiscal year.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
In July 1998, Jan Bell consummated the acquisition of Mayor's Jewelers, Inc.
("Mayor's"). Total consideration consisted of approximately $18 million cash, 2
million shares of Jan Bell Marketing, Inc. common stock and the refinancing of
Mayor's outstanding debt through a new $80 working capital facility with a
syndicate of banks led by Citicorp, U.S.A., Inc. Following the closing and at
August 1, 1998, Jan Bell had approximately $41 million outstanding under its new
facility and cash and cash equivalents totaling $5.6 million.
The Company has entered into a new working capital facility of $80 million
with the right to request an increase up to $110 million with a syndicate of
banks led by Citicorp, U.S.A., Inc. The agreement contains covenants which
require the Company to maintain financial ratios including leverage ratio, fixed
charge ratio, and tangible net worth, and also limits capital expenditures,
incurrence of additional debt, and prohibits payment of dividends.
The Company's working capital requirements are directly related to the
amount of inventory required to support its retail operations. The inventory
increase as of August 1, 1998 of $71 million is the result of the inventory
acquired in connection with the acquisition of Mayor's. In addition, inventory
levels are expected to increase as a result of the Company's agreement with
Value America, Inc., an Internet based distribution retailer that offers a wide
selection of consumer products for sale at its Internet site
WWW.VALUEAMERICA.COM. For the remainder of Fiscal 1998, based on discussions
with Sam's, the Company expects a very limited increase in the number of leased
departments it operates. However, Sam's has agreed to provide the Company with
additional counter space during the Holiday selling season which will
necessitate an increase in inventory levels. The Company believes that these
increases in the Company's inventory levels will result in higher sales and
gross margin dollars.
Related to the integration of Mayor's, the Company is evaluating its
potential capital expenditure requirements for the remainder of Fiscal 1998 that
involve primarily investments in computer equipment, Mayor's store locations
(new stores or remodeling), additional Sam's Club fine jewelry departments or
refurbishings, and the expansion of the Company's executive offices in Sunrise,
Florida. Excluding the results of this evaluation, the Company's capital
expenditures are projected not to exceed $3 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 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 1998. There can, however, be no assurance that the Company's future
operating results will be sufficient to sustain any debt service and working
capital needs.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards ("SFAS") No.
131, "Disclosures 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 such companies report selected information about
segments in interim financial reports issued to shareholders. SFAS No. 131,
which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise,"
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retains the requirements to report information about major customers and
requires that a public company report financial and descriptive information
about its reportable operating segments. Operating segments are components of an
enterprise about 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. 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. 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 issued for periods
beginning after December 15, 1997. This statement is not required to be applied
to interim financial statements in the initial year of its application. The
Company has not yet determined the effects, if any, that SFAS No. 131 will have
on the disclosures in its consolidated financial statements.
YEAR 2000 MATTERS
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or other equipment or systems that have or rely on
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system or equipment failure or
miscalculations at the Company itself or with its vendors causing disruptions of
operations, including, among other things, a temporary inability to process
transactions and invoices, or engage in similar normal business activities.
The Company has identified and assessed its systems that could be affected
by the Year 2000 issue and has developed an implementation plan to resolve the
issue. The principal phases of the Year 2000 Project include:
ASSESSMENT & INVENTORY
In this phase, a project template classifying all software, hardware, and
critical vendors with a status of compliant or non-compliant was prepared and
provided to the project leaders for their respective departments. The leaders
used this template as a worksheet to track and update any status changes as they
occurred. This phase has been completed for all critical business units and will
be continuously monitored for any status updates and new items that were not
included in the initial assessment.
PROJECT IMPLEMENTATION
The implementation phase includes hardware and software conversions,
upgrades and replacements. Additionally, systems relying on external data
interchanges are being assessed to ensure compliance. Most of the non-compliant
systems are scheduled to be replaced or converted by the end of 1998. One
notable exception to this is a proposed point of sale (POS) system, which should
be completed during 1999. As systems are upgraded, simulation tests will be
executed to validate that the systems will work in year 2000 and beyond.
SIMULATION TEST PLAN
Tests will be performed on all business critical systems to identify and
resolve any problems related to the Year 2000 rollover. A separate environment
will be set up to duplicate the Company's production process.
VENDOR MAINTENANCE PLAN
All vendors critical to business continuity are being contacted to request
their current status on the Year 2000 compliance issue. Vendor progress will be
monitored on an ongoing basis.
AUDIT
A final internal audit and verification of Year 2000 readiness along with
any applicable contingency plan is being defined to ensure that all necessary
modifications are done and adequately tested and all program dependencies and
interfaces are considered.
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The Company estimates the potential direct and indirect costs required to
address Year 2000 to be approximately $2 million. The Company presently believes
that the Year 2000 issue will not pose significant operational problems for the
Company's computer systems software and related computer technologies. The
Company also believes that the Year 2000 issue will not have a significant
impact on its financial position or results of operations, although there can be
no assurance. Additionally, there can be no assurance that the systems of other
companies of which the Company relies will be Year 2000 compliant, which could
result in a material adverse effect on the Company. Finally the Company is
evaluating possible contingency plans that may be necessary to implement in the
event portions of the current Year 2000 plans are not executed successfully or
unexpected events occur.
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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 markets its products through Sam's pursuant to an arrangement
whereby the Company operates an exclusive leased department at all of Sam's
existing and future domestic locations and four Puerto Rico locations through
February 1, 2001. 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
are evaluating 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 are currently reviewing strategies that could lead to a modified
relationship prior to the expiration date. The Company has been dependent on
Sam's to conduct 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 Mayor's acquisition is expected to reduce this dependence on Sam's.
The Company is actively pursuing new growth opportunities outside of its
existing business within Sam's and Mayor's and future business with Value
America. Management is also considering other growth opportunities and may
consider acquisitions of businesses similar or complementary to that of the
Company, but there can be no assurance that such opportunities will not require
a significant investment of funds and management attention by the Company. Any
such growth opportunities will be subject to all of the risks inherent in the
establishment of a new product or service offering, including competition, lack
of sufficient customer demand, unavailability of experienced management,
unforeseen complications, delays and cost increases. The Company may incur costs
in connection with pursuing new growth opportunities that it cannot recover, and
the Company may be required to expense certain of these costs, which may
negatively impact the Company's reported operating performance for the periods
during which such costs are incurred.
The Company's retail operation requires expertise in the areas of
merchandising, sourcing, selling, personnel, training, systems and accounting.
The Company will continue to look to expand the number of retail locations,
thereby increasing the Company's customer base. The Company will also continue
to review other available sources of revenue. 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, Mayor's locations and locations to be opened or acquired
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 operations and future expansion and hire and train personnel.
The Company also operates three Manhattan Diamond locations in the Gurnee
Mills, The Orlando Belz Outlet Mall and a Vero Beach Outlet Mall. The Company is
presently reviewing its strategy for the Manhattan Diamond concept. Management
believes that the three locations currently do not generate an acceptable return
on capital employed. The Company will look to either open additional locations
in order to achieve economies of scale with respect to required cost structures
or seek an acceptable sale of these locations.
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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.
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 on 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 also has relationships with certain significant vendors that
the Company purchases a significant amount of inventory that would be
unavailable from other sources, (e.g., Rolex Watches). A loss of such a
relationship could have a material impact on the revenues of the Company. There
can be no assurance that these significant vendor relationships will continue on
an ongoing basis or be available at future locations.
The Company generally utilizes the services of independent customs agents
to comply with U.S. customs laws in connection with its purchases of gold,
diamond and other jewelry merchandise from foreign sources. The Company bears
certain risks in purchasing parallel marketed goods which includes certain
watches and other products. 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 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. Further, legislation is introduced in
Congress from time to time 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.
In connection with the Mayor's acquisition, certain former minority
shareholders of Mayor's have filed a lawsuit in state court in Miami, Florida
against Mayor's and Jan Bell claiming that the acquisition and merger violated
their shareholders' rights and that the acquisition of the Mayor's stock was
unlawful. Jan Bell believes the lawsuit to be without merit and intends to
vigorously defend the action.
The Company also is involved in litigation arising from the normal course
of business. Management believes these matters should not materially affect the
financial position of the Company, however there can be no assurance as to the
results of these legal matters.
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The working capital facility agreement contains covenants, which require
the Company to maintain financial ratios including leverage ratio, fixed charge
ratio, tangible net worth, and also limits capital expenditures, incurrence of
additional debt, and prohibits 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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PART II: OTHER INFORMATION
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held July 2, 1998. The shareholders
of the Company elected as directors Thomas Epstein, Margaret Gilliam, and
William Grayson to serve terms expiring in 2001. The election of directors by
the Shareholders was by the following votes:
DIRECTOR FOR WITHHELD
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Thomas Epstein 22,655,472 84,956
Margaret Gilliam 22,653,334 87,094
William Grayson 22,658,223 82,205
In addition to Messrs. Epstein and Grayson and Ms. Gilliam, the following
are directors whose term of office continued after the Annual Meeting: Isaac
Arguetty, Peter Offermann, Haim Bashan, Gregg Bedol, and Robert G. Robison.
Effective as of July 28, 1998, Messrs. Getz and Hechler became directors of the
Company for terms expiring at the next annual shareholders meeting.
The shareholders ratified Deloitte and Touche LLP as independent accountants
of the Company for the fiscal year ending January 30, 1999 by a vote of
22,634,577 in favor, 85,109 shares against and 20,742 shares abstaining.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) The following list of schedules and exhibits are incorporated by
reference as indicated in this Form 10-Q:
(10) Employment Agreement dated as of July 28, 1998 between the Company and
Samuel A. Getz
(11) Stock Option Agreement and Letter of Grant dated as of July 28, 1998
between the Company and Samuel A. Getz
(12) Loan and Security Agreement among Citicorp USA, Inc. and the other
parties hereto identified as lenders below, as Lenders, Citicorp USA,
Inc., as Agent for the Lenders, and Jan Bell Marketing, Inc., JBM Retail
Company, Inc., and Mayor's Jewelers, Inc., as Borrowers dated as of July
28, 1998
(27) Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
The Company filed a report on August 10, 1998 relating to the closing
of the Stock Purchase Agreement among Mayor's Jewelers, Inc., the Stockholders
of Mayor's Jewelers, Inc. and Jan Bell Marketing, Inc on July 28, 1998.
The Company filed an amended report on September 15, 1998, which
includes historical financial statements and proforma financial information
related to the acquisition of Mayor's Jewelers, Inc.
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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.
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(Registrant)
By: /s/ David P. Boudreau
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Chief Financial Officer and Senior Vice
President of Finance & Treasurer
Date: SEPTEMBER 15, 1998
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