1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Thirteen Weeks Ended October 31, 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
- ------------------------ ---------------------------------
(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.
28,314,823 COMMON SHARES ($.0001 PAR VALUE)
AS OF DECEMBER 15, 1998
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FORM 10-Q
QUARTERLY REPORT
THIRTEEN WEEKS ENDED OCTOBER 31, 1998
TABLE OF CONTENTS
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, 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..................... 17
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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)
October 31, January 31,
1998 1998
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,239 $ 48,432
Accounts receivable, net of allowance for doubtful
accounts of $1,403 and $1,786, respectively 24,603 6,271
Inventories 181,923 69,193
Deferred income taxes 2,765 2,625
Other current assets 3,038 1,376
-------- --------
Total current assets 220,568 127,897
Property, net 24,829 18,143
Excess of cost over fair value of net assets acquired 24,696 2,475
Other assets 6,249 3,197
-------- --------
Total assets $276,342 $151,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 56,501 $ 9,784
Accrued expenses 12,532 6,349
Due to Mayor's Jewelers, Inc. shareholders 6,205 --
Short term portion of long term debt 2,464 --
Deferred income taxes 4,757 --
-------- --------
Total current liabilities 82,459 16,133
Long term debt 50,135 --
Other long term liabilities 1,259 --
-------- --------
Total long term liabilities 51,394 --
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value,
50,000,000 shares authorized,
28,312,757 and 25,981,970 shares
issued and outstanding, respectively 3 3
Additional paid-in capital 191,385 180,649
Accumulated deficit (47,121) (43,295)
Foreign currency translation adjustment (1,778) (1,778)
-------- --------
Total stockholders' equity 142,489 135,579
-------- --------
Total liabilities and stockholders' equity $276,342 $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
October 31, 1998 November 1, 1997
---------------- ----------------
(Unaudited)
Net sales $ 79,011 $ 45,219
Cost of sales and occupancy costs 56,159 35,127
----------- -----------
Gross profit 22,852 10,092
Store and warehouse
operating and selling expenses 16,381 7,612
General and administrative expenses 6,428 3,658
Depreciation and amortization 2,255 1,504
Currency exchange (gain) loss 470 (21)
----------- -----------
Operating loss (2,682) (2,661)
Interest and other income 3 437
Interest expense 882 --
----------- -----------
Loss before income taxes (3,561) (2,224)
Income tax provision 153 83
----------- -----------
Net loss $ (3,714) $ (2,307)
=========== ===========
Net loss per common share $ (0.13) $ (0.09)
Weighted average shares outstanding 28,302,124 25,916,240
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 Weeks Thirty-nine Weeks
Ended Ended
October 31, 1998 November 1, 1997
---------------- ----------------
(Unaudited)
Net sales $ 191,857 $ 145,505
Cost of sales and occupancy costs 142,881 113,126
----------- -----------
Gross profit 48,976 32,379
Store and warehouse
operating and selling expenses 34,411 23,261
General and administrative expenses 12,801 10,114
Depreciation and amortization 4,935 5,349
Currency exchange (gain) loss 982 (19)
----------- -----------
Operating loss (4,153) (6,326)
Interest and other income 1,508 1,261
Interest expense 886 --
----------- -----------
Loss before income taxes (3,531) (5,065)
Income tax provision 295 191
----------- -----------
Net loss $ (3,826) $ (5,256)
=========== ===========
Net loss per common share $ (0.14) $ (0.20)
Weighted average shares outstanding 27,094,551 25,903,944
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
October 31, 1998 November 1, 1997
----------------- -----------------
(Unaudited)
Cash flows from (used in) operating activities:
Cash received from customers $ 194,482 $ 146,679
Cash paid to suppliers and employees (200,348) (145,709)
Interest and other income received 736 1,260
Income taxes (paid) refunded (357) (49)
--------- ---------
Net cash provided by (used in) operating activities (5,487) 2,181
--------- ---------
Cash flows (used in) investing activities:
Investment in Mayor's, net of cash acquired (54,450) --
Capital expenditures (2,589) (1,389)
--------- ---------
Net cash used in investing activities (57,039) (1,389)
--------- ---------
Cash flows from (used in) financing activities:
Borrowings under line of credit 83,962 --
Line of credit repayments (69,516) --
Proceeds from sale of employee stock plans 3,031 84
Increase in due to Mayor's shareholders 6,205 --
Payment of commitment fees (1,052) (400)
Other -- (25)
--------- ---------
Net cash provided by (used in) financing activities 22,630 (341)
--------- ---------
Effect of exchange rate on cash (297) 39
--------- ---------
Net increase (decrease) in cash and cash equivalents (40,193) 490
Cash and cash equivalents at beginning of period 48,432 23,525
--------- ---------
Cash and cash equivalents at end of period $ 8,239 $ 24,015
========= =========
Reconciliation of net loss to net cash provided by (used in)
operating activities:
Net loss $ (3,826) $ (5,256)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 4,935 5,349
Currency exchange loss (gain) 1,048 (19)
Provision for doubtful accounts 275 --
(Increase) Decrease in assets (net of effect of acquisition in
1998):
Accounts receivable (net) 2,350 1,174
Inventories (41,407) (21,655)
Other (117) (341)
Increase (Decrease) in liabilities (net of effect of acquisition
in 1998):
Accounts payable 31,284 22,453
Accrued expenses (29) 476
--------- ---------
Net cash provided by (used in) operating activities $ (5,487) $ 2,181
========= =========
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 October 31, 1998 and November 1, 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 thirty-nine week
periods ended October 31, 1998 and November 1, 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 and 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 October 31, 1998 includes goodwill
of approximately $22.2 million, net of $.4 million in accumulated amortization,
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. The operating results of Mayor's are included in the
consolidated statements of operations and the consolidated statement of cash
flows 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 and two directors 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 consideration for the stock of
the former minority shareholders is reflected in the October 31, 1998 balance
sheet as due to Mayor's Jewelers, Inc. shareholders.
C. RELATIONSHIP WITH SAM'S CLUB
The Company operates full service jewelry departments at all existing and
future domestic and four Puerto Rico Sam's Club ("Sam's") locations under an
agreement which expires February 1, 2001. During the thirteen and thirty-nine
weeks ended October 31, 1998, approximately 60% and 80% 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.
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JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
D. INVENTORIES:
Inventories are summarized as follows:
October 31, January 31,
1998 1998
----------------------- ------------------------
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 $ 11,307 $ -- $ 5,439 $ --
Finished goods 84,340 21,061 33,513 1,756
Gold jewelry-related merchandise 27,974 352 13,148 243
Watches 37,379 1,243 7,372 --
Other consumer products 20,923 184 9,721 19
-------- ------- ------- -------
$181,923 $22,840 $69,193 $ 2,018
======== ======= ======= =======
E. INCOME TAXES
The Company has a deferred tax asset of approximately $15.2 million, which
has been offset by 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.
F. 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 Thirty-nine Thirty-nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
October 31, 1998 November 1, 1997 October 31, 1998 November 1, 1997
---------------- ---------------- ---------------- ----------------
Net loss $(3,714) $(2,307) $(3,826) $(5,256)
Adjustment to reconcile net
Loss to comprehensive loss:
Foreign currency translation adjustment -- 61 -- (38)
------- ------- ------- -------
Comprehensive loss $(3,714) $(2,246) $(3,826) $(5,294)
======== ======= ======= =======
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JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
G. SUPPLEMENTAL INFORMATION OF NONCASH ACTIVITIES
The Statement of Cash Flows for the thirty-nine weeks ended October 31, 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) $129,773
Liabilities assumed 28,628
--------
Net assets acquired 101,145
Cash acquired
990
Issuance of common stock 7,705
Borrowing under working capital facility 38,000
-------
Cash used to acquire Mayor's $54,450
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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 contains 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 and Exchange Commission on
August 10, 1998 and amended on September 15, 1998. Operating results of Mayor's
are included in the consolidated operations of Jan Bell for periods subsequent
to August 1, 1998, which is the acquisition date for accounting purposes.
The Company operates two divisions: I.) 24 Mayor's and Maier & Berkele
luxury jewelry stores ("Mayor's") and II.) full service jewelry departments at
all existing and future domestic and four Puerto Rico Sam's Wholesale Club
locations ("Sam's") under an agreement which expires February 1, 2001. During
the thirteen and thirty-nine weeks ended October 31, 1998, approximately 60% and
80% of the Company's net sales were from Sam's customers. The Company also
operated three Manhattan Diamond locations in the Gurnee Mills, The Orlando Belz
Outlet Mall and a Vero Beach Outlet Mall. The Company sold these three locations
during November 1998.
The results of operations for the thirteen and thirty-nine weeks ended
October 31, 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
departments as a result of obtaining temporary additional retail square footage
for promotional and pallet programs, improved merchandise assortments, higher
merchandise quality offerings and improved distribution of merchandise which has
allowed the Company to realize higher gross margin dollars. Management believes
there is opportunity for continued improvements in sales, gross margins and
operating cash flows in both its Mayor's and Sam's Club divisions.
The following details the sales results for the divisions and periods
indicated:
Thirteen Thirteen Thirty-nine Thirty-nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
Oct. 31, 1998 Nov. 1, 1997 Oct. 31, 1998 Nov. 1, 1997
------------- ------------ ------------- ------------
Net sales
Sam's Club locations $48,088 $42,583 $154,875 $135,878
Mayor's Jewelers 26,695 N/A 26,695 N/A
Other 4,228 2,636 10,287 9,627
Total $79,011 $45,219 $191,857 $145,505
Percentage change
Sam's Club locations 12.9% .7% 14.0% (1.6%)
Mayor's Jewelers N/A N/A N/A N/A
Other 60.4% 9.2% 6.9% 4.9%
Total 74.7% 1.1% 31.9% (1.2%)
Comparative retail sales
Sam's Club locations $47,809 $42,396 $153,422 $135,227
Mayor's Jewelers 24,688 25,366 N/A N/A
Percentage change
Sam's Club locations 12.8% (1.0%) 13.5% (3.1%)
Mayor's Jewelers (2.7%) N/A N/A N/A
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The increase in revenues in the Sam's locations for the thirteen and
thirty-nine weeks ended October 31, 1998 is mainly attributable to the obtaining
of temporary additional retail square footage for promotional and pallet
programs, improved merchandise strategies, improved placement of goods within
the Sam's locations, and additional advertising and marketing in Sam's
advertising and marketing programs. These sales increases were in all product
categories except fragrances, with the largest increases being in the diamond
jewelry and watch product categories.
Sales in the future could be adversely impacted by general economic
conditions, the level of spending by customers, the inability to obtain the
additional retail square footage for promotional and pallet programs in Sam's,
and changes to the Company's existing relationship with Sam's Club. 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 luxury goods retail industry, the warehouse club industry and
with other competing general and specialty retailers and discounters will
continue to increase.
Gross profit was $22.9 million or 28.9% of net sales for the thirteen weeks
ended October 31, 1998 compared to $10.1 million or 22.3% of net sales for the
thirteen weeks ended November 1, 1997. Gross profit was $49.0 million or 25.5%
of net sales for the thirty-nine weeks ended October 31, 1998 compared to $32.4
million or 22.3% of net sales for the thirty-nine weeks ended November 1, 1997.
Gross profit for Mayor's was $10.1 million or 37.9% of net sales for the
thirteen weeks ended October 31, 1998. Gross profit for the Sam's division
(which includes the Company's Israel, Mexico and Manhattan Diamond operations
throughout the remaining discussion of Management's Discussion and Analysis) was
$12.7 million or 24.3% of the net sales for the thirteen weeks ended October 31,
1998 compared to $10.1 million or 22.3% of net sales for the thirteen weeks
ended November 1, 1997 and $38.9 million or 23.5% of the net sales for the
thirty-nine weeks ended October 31, 1998 compared to $32.4 or 22.3% of the net
sales for the thirty-nine weeks ended November 1, 1997. The increase in the
Company's gross profit as a percentage of net sales is a result of higher
margins in the recently acquired Mayor's division, in addition to margin
improvements in the Sam's Club gold product categories, reduction in the Sam's
Club shrinkage as a percentage of sales and reduced markdowns as a percentage of
Sam's Club sales related to the sale of discontinued and slow moving
merchandise.
Store and warehouse operating and selling expenses were $16.4 million and
$34.4 million for the thirteen and thirty-nine weeks ended October 31, 1998
compared to $7.6 million and $23.3 million for the thirteen and thirty-nine
weeks ended November 1, 1997. Store and warehouse operating and selling expenses
for Mayor's were $7.4 million for the thirteen weeks ended October 31, 1998.
Store and warehouse operating and selling expenses for the Sam's division were
$9.0 million and $27.0 million for the thirteen and thirty-nine weeks ended
October 31, 1998 compared to $7.6 million and $23.3 million for the thirteen and
thirty-nine weeks ended November 1, 1997. The increase in these expenses for the
thirteen and thirty-nine weeks ended October 31, 1998 compared to the thirteen
and thirty-nine weeks ended November 1, 1997 is primarily attributable to the
Mayor's division expenditures which are excluded from the November 1, 1997
operating results, increased store payroll and incentives in Sam's Club and
increased advertising and marketing in Sam's Club advertising and marketing
programs. The Company believes the investment in these costs in the Sam's Clubs
contributed to the increase in Sam's Club 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 $6.4 million and $12.8 million for
the thirteen and thirty-nine weeks ended October 31, 1998 compared to $3.7
million and $10.1 million for the thirteen and thirty-nine weeks ended November
1, 1997. General and administrative expenses for Mayor's were $2.8 million for
the thirteen weeks ended October 31, 1998. General and administrative expenses
for the Sam's division were $3.6 million and $10.0 million for the thirteen and
thirty-nine weeks ended October 31, 1998 compared to $3.7 million and $10.1
million for the thirteen and thirty-nine weeks ended November 1, 1997. General
and administrative expenses have increased as a result of the Mayor's
acquisition and increased professional fees related to the Company's legal
matters. This increase is net of a decrease in expenses for the thirteen and
thirty-nine weeks ended October 31, 1998 attributable to professional fees
related to the Sam's division strategic business development and severance
payments both of which were expensed during the thirty-nine weeks ended November
1, 1997 which did not occur in 1998. Management believes savings will be
realized once the integration of Mayor's is complete.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and amortization expense was $2.3 million and $4.9 million for
the thirteen and thirty-nine weeks ended October 31, 1998 compared to $1.5
million and $5.3 million for the thirteen and thirty-nine weeks ended November
1, 1997. Depreciation and amortization expense for Mayor's was $.7 million for
the thirteen weeks ended October 31, 1998. Depreciation and amortization
expense for the Sam's division was $1.6 million and $4.3 million for the
thirteen and thirty-nine weeks ended October 31, 1998 compared to $1.5 million
and $5.3 million for the thirteen and thirty-nine weeks ended November 1, 1997.
The increase is primarily a result of the depreciation of Mayor's fixed assets,
and amortization of goodwill resulting from the Mayor's acquisition offset by
decreased depreciation expense primarily attributable to the fixed assets of the
Sam's retail business that became fully depreciated during May 1998.
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. The Company
has determined that the business and financial risk in Mexico outweighs the long
term growth benefits and 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
the last quarter of Fiscal 1997 and during the first three quarters of Fiscal
1998. During the thirteen and thirty-nine weeks ended October 31, 1998, there
was a foreign currency exchange loss of $.5 million and $1.0 million,
respectively. During the thirteen and thirty-nine weeks ended November 1, 1997,
there was an insignificant currency exchange gain.
Interest and other income was less than $100,000 and $1.5 million for the
thirteen and thirty-nine weeks ended October 31, 1998 compared to $.4 million
and $1.3 million for the thirteen and thirty-nine weeks ended November 1, 1997.
The decrease for the thirteen weeks ended October 31, 1998 was primarily
attributable to the significantly reduced cash balance available to invest
subsequent to the purchase of Mayor's. The increase for the thirty-nine weeks
ended October 31, 1998 is a result of higher average cash balances available for
investment during the period prior to the Mayor's acquisition.
Interest expense was $.9 million for the thirteen and thirty-nine weeks
ended October 31, 1998 compared to no interest expense for the thirteen and
thirty-nine weeks ended November 1, 1997. The increase in interest expense is
attributable to the procurement of debt due to the acquisition of Mayor's.
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 thirty-nine weeks ended October 31, 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 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. The Company has the right to
request an increase up to $110 million contingent upon lender approval. 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. At October 31, 1998, Jan Bell had approximately $52
million outstanding under its new facility.
The Company's working capital requirements are directly related to the
amount of inventory required to support its retail operations. When compared to
January 31, 1998, the inventory increase as of October 31, 1998 of $113 million
is the result of the approximately $72 million of inventory acquired in
connection with the acquisition of Mayor's as well as the build up of inventory
in anticipation of the holiday selling season. For the remainder of Fiscal 1998,
based on discussions with Sam's Club, the Company expects a limited increase in
the number of leased departments it operates. However, Sam's Club has agreed to
provide the Company with additional counter and retail floor space during this
holiday selling season which will necessitate an increase in inventory levels.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company believes that these increases in the Company's inventory levels will
result in higher sales and gross margin dollars while maintaining inventory
turns.
The Company is evaluating its capital expenditure requirements for the
remainder of Fiscal 1998 which includes possible new and remodeled Mayor's store
locations, investments in computer equipment, additional Sam's Club fine jewelry
departments or refurbishings, and the expansion of the Company's executive
offices in Sunrise, Florida. Pending the foregoing evaluation, the Company's
capital expenditures are projected not to exceed $3 million. The Company expects
to open approximately three to five new Mayor's locations next year with the
estimated required investment to open a Mayor's location of approximately $1.2
million in capital expenditures (after consideration of lease concessions from
landlords) and $4 million in inventories. Further, the Company expects to close
four of the least profitable Mayor's stores by the first quarter of Fiscal 1999.
The redistribution and liquidation of these stores inventories and fixed assets
are not expected to have a material impact on the financial condition of the
Company.
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 as well as Fiscal 1999. 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," 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.
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" was issued which established standards for the accounting
and reporting of derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal years beginning after June 15, 1999.
The Company is currently evaluating the requirements and related disclosures
of SFAS No. 131 and 133.
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 normal business activities and
processes.
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14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has identified and assessed its systems that could be affected
by the Year 2000 issue and has developed an implementation plan to update all
business systems to be Year 2000 compliant. The principal phases of the Year
2000 implementation plan 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 the
template is being continuously updated to reflect new and /or integrated
systems.
PROJECT IMPLEMENTATION
Compliance efforts have been in process since the fourth quarter of Fiscal
1997 and have consisted of a thorough review and assessment of all technological
and operating applications and systems that require "Year 2000 Compliance",
meaning that neither performance nor functionality will be affected by dates
prior to, during and after Year 2000. Most technological and operating
applications and systems have already been upgraded and/or replaced with Year
2000 compliant versions. As of October 31, 1998, the business is approximately
80% compliant, as the Company updated its financial systems, POS polling systems
and office PC applications during the quarter. The process continues to upgrade
and/or replace others to achieve compliance. As a result, the Company believes
all applications and systems will be Year 2000 compliant by the end of summer
1999.
SIMULATION TEST PLAN
As significant portions of the Company's systems become compliant, the
Company will implement simulation test plans to help ensure that rigorous
testing is performed on all critical systems in a controlled environment that
replicates current production systems. The Company anticipates being able to
provide test information by the end of the second quarter of Fiscal 1999.
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 is being
monitored on an ongoing basis. Plans are in place to perform a review of
specific vendors' Year 2000 status in the third quarter of 1999.
AUDIT
A final internal audit and verification of Year 2000 readiness is being
developed to ensure that all necessary modifications are complete and adequately
tested and all program dependencies and interfaces are considered.
Additionally, contingency planning is being developed to manage potential
failures resulting from power outages, communication and software failures, and
non-compliant suppliers. In addition to the cost of internal resources, which
the Company has not segregated or otherwise estimated, the Company estimates the
potential direct and indirect costs required to address Year 2000 to be
approximately $2 million, which includes costs allocated to software, hardware
and related direct and indirect costs of implementation. 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,
although there can be no assurance that such problems will not occur.
Additionally, there can be no assurance that the systems of other companies,
upon which the Company is dependent, will be Year 2000 compliant, and if not,
there will not be a material adverse effect on the Company. Finally, the Company
is evaluating possible contingency plans in the event portions of the current
Year 2000 plans are not executed successfully or unexpected events occur.
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15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 its primarily mall based Mayor's
and Maier and Berkele stores as well as through Sam's pursuant to an arrangement
whereby the Company operates an exclusive leased department at all of Sam's
existing and future domestic 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
working on a new agreement that would provide for a restructured relationship in
advance of the expiration date. While there is no fixed timetable, management
believes a successful future working agreement with Sam's Club is achievable
prior to expiration of the current arrangement. The Company has been dependent
on Sam's Club to conduct its business and, without replacement business, the
loss of the arrangement with Sam's Club would have a material adverse effect on
the business of the Company.
The Company is pursuing new growth opportunities outside of its existing
business with Sam's and Mayor's and future arrangements with other retail
ventures. Management considers other growth opportunities including acquisitions
of businesses similar or complementary to that of the Company, which could
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 and integration
difficulties. 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 operations require 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 luxury goods
marketplace and 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 Club and the Company's business. The opening and success
of 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 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.
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16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company also has relationships with certain significant vendors from
whom 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. 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. 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 and 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 and two directors 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. In addition to other commercial litigation, the Company has two
contractual lawsuits with a former vendor and a third lawsuit with the same
former vendor which relates to an alleged employment relationship. The two
contractual related lawsuits are expected to proceed to trial in the near term.
The Company believes the facts and the law support its positions and that 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 and
the Company will incur legal fees regarding these items.
During the year ended January 31, 1998, the Florida Department of Revenue
commenced a sales tax audit on Mayor's Jewelers, Inc. for the tax periods July
1, 1990 through July 31, 1995. The original assessment was approximately $1.7
million of additional sales tax, interest and penalties. Mayor's has paid
$242,000 of this original assessment and believes it has recorded an adequate
accrual related to this assessment which the Company is vigorously contesting.
During the year ended February 1, 1997 the Internal Revenue Service commenced an
audit on Mayor's Jewelers, Inc. for the year ended January 31, 1996 which is
still in process. At the time of the Mayor's acquisition, an escrow account was
established from the amounts paid to Mayor's shareholders to fund all or
portions of such potential losses. However, the outcome of these audits, the
sufficiency of this escrow and the impact on future operations, if any, is
currently uncertain.
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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17
PART II: OTHER INFORMATION
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
27.1 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.
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: /s/ DAVID P. BOUDREAU
---------------------------------------
Chief Financial Officer and Senior Vice
President of Finance & Treasurer
Date: December 15, 1998
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