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 May 1, 1999
Commission File Number 1-9647
JAN BELL MARKETING, INC.
------------------------
(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) 846-2718
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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.
27,197,008 COMMON SHARES ($.0001 PAR VALUE)
AS OF JUNE 11, 1999
FORM 10-Q
QUARTERLY REPORT
THIRTEEN WEEKS ENDED MAY 1, 1999
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.............................................. 5
D. Notes to Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risks........................... 13
PART II: OTHER INFORMATION
Items 1, 2, 3, 4, and 5 have been omitted because they are not
applicable with respect to the current reporting period.
Item 6. Exhibits and Reports
on Form 8-K .......................................................................... 15
2
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)
MAY 1, JANUARY 30,
1999 1999
---- ----
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 10,281 $ 5,434
Accounts receivable, net of allowance for doubtful
accounts of $3,241 and $3,504, respectively 25,892 31,628
Inventories 160,212 144,579
Deferred income taxes 2,769 2,769
Other current assets 2,034 2,340
-------- --------
Total current assets 201,188 186,750
Property, net 24,715 27,013
Excess of cost over fair value of net assets acquired 26,970 25,551
Other assets 6,422 8,406
-------- --------
Total assets $259,295 $247,720
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 46,744 $ 34,732
Accrued expenses 11,764 15,368
Due to former Mayor's shareholders 4,360 6,145
-------- --------
Total current liabilities 62,868 56,245
Long term debt 35,061 26,409
Other long term liabilities 1,042 1,380
-------- --------
Total long term liabilities 36,103 27,789
Stockholders' Equity:
Common stock, $.0001 par value,
50,000,000 shares authorized,
28,131,474 and 28,358,475 shares
issued and outstanding 3 3
Additional paid-in capital 191,566 191,538
Accumulated deficit (28,922) (26,077)
Accumulated other comprehensive income (1,629) (1,778)
Less: 238,500 shares of treasury stock, at cost (694) -
-------- --------
Total stockholders' equity 160,324 163,686
-------- --------
Total liabilities and
stockholders' equity $259,295 $247,720
======== ========
See notes to consolidated financial statements.
3
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts shown in thousands except share and per share data)
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
MAY 1, 1999 MAY 2, 1998
------------ -----------
(Unaudited)
Net sales $ 87,660 $ 52,493
Cost of sales and occupancy costs 65,396 40,333
------------ ------------
Gross profit 22,264 12,160
Store and warehouse
operating and selling expenses 16,070 8,584
General and administrative expenses 5,282 3,128
Depreciation and amortization 2,764 1,372
Currency exchange loss 302 367
------------ ------------
24,418 13,451
------------ ------------
Operating loss (2,154) (1,291)
Interest and other income 8 776
Interest expense 561 --
------------ ------------
Loss before income taxes (2,707) (515)
Income tax provision 138 57
------------ ------------
Net loss $ (2,845) $ (572)
============ ============
Net loss per common share $ (0.10) $ (0.02)
(basic and diluted)
Weighted average shares
outstanding (basic and diluted) 28,354,986 26,219,488
See notes to consolidated financial statements.
4
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts shown in thousands)
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
MAY 1, 1999 MAY 2, 1998
------------------ ----------------
(Unaudited)
Cash flows from operating activities:
Cash received from customers $ 93,503 $ 54,200
Cash paid to suppliers and employees (93,747) (50,286)
Interest and other income received (paid) (867) 776
Income taxes paid (221) (248)
-------- --------
Net cash (used in) provided by operating activities (1,332) 4,442
Cash flows from investing activities:
Capital expenditures (1,826) (314)
Proceeds from sale of fixed assets 2,083 --
-------- --------
Net cash provided by (used in) investing activities 257 (314)
Cash flows from financing activities:
Proceeds from sale of employee stock plans 28 1,974
Purchase of treasury stock (694) --
Cash paid for deferred financing costs (38) --
Cash paid to former Mayor's shareholder (1,785) --
Borrowings under line of credit 116,093 --
Line of credit repayments (107,674) --
-------- --------
Net cash provided by financing activities 5,930 1,974
Effect of exchange rate changes (8) (49)
-------- --------
Net increase in cash and cash equivalents 4,847 6,053
Cash and cash equivalents at beginning of period 5,434 48,432
----- ------
Cash and cash equivalents at end of period $ 10,281 $ 54,485
======== ========
Reconciliation of net loss to net cash (used in)
provided by operating activities:
Net loss $ (2,845) $ (572)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 2,764 1,372
Currency exchange loss 30 290
Provision for doubtful accounts (201) --
(Increase) Decrease in assets:
Accounts receivable (net) 6,044 1,707
Inventories (15,633) (13,776)
Other 101 386
Increase (Decrease) in liabilities:
Accounts payable 12,012 15,530
Accrued expenses (3,604) (495)
-------- --------
Net cash (used in) provided by operating activities $(1,332) $ 4,442
======== ========
Supplemental disclosure of cash flows information:
Capital lease obligations incurred $ 481 $ --
======== ========
See notes to consolidated financial statements.
5
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The Company's financial statements as of May 1, 1999 and for the thirteen
week periods ended May 1, 1999 and May 2, 1998 have not been audited by
certified public accountants, but in the opinion of management of the Company
reflect all adjustments (which include only normal recurring accruals) necessary
to present fairly the financial position, results of operations and cash flows
for those periods. Results of the thirteen week periods ended May 1, 1999 and
May 2, 1998 are not necessarily indicative of annual results because of the
seasonality of the Company's business. In addition, the May 1, 1999 results
include the operations of Mayor's Jewelers, Inc. ("Mayor's") which was acquired
on July 28, 1998. The May 2, 1998 results exclude Mayor's operations.
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, 1999 filed with the Securities Exchange Commission.
B. EXPIRATION OF SAM'S AGREEMENT:
In May 1993, the Company entered into an agreement (the "Agreement") to
operate an exclusive licensed concession at all existing and future Sam's Club
("Sam's") locations through February 1, 1999, later extended to February 1,
2001. On April 6, 1999, the Company was informed that the Agreement will not be
renewed beyond its February 1, 2001 term. 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 will have a material adverse effect on the
future business of the Company. The Mayor's acquisition has reduced this
dependence on Sam's. In addition, the Company's operating and capital resources
that are and will become available during the transition are expected to be used
to pursue growth of the Mayor's chain as well as considered for use in future
acquisitions.
C. MAYOR'S ACQUISITION:
In July 1998, Jan Bell acquired Mayor's Jewelers, Inc. Total consideration
consisted of approximately $18 million cash, 2 million shares of Jan Bell
Marketing, Inc. common stock, and the assumption of Mayor's outstanding debt
which was refinanced 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 May 1, 1999 includes goodwill of
approximately $24.9 million, net of $1.2 million in accumulated amortization,
resulting from the Mayor's acquisition.
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 of Mayor's 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
Consolidated Balance Sheets as of May 1, 1999 and January 30, 1999 as Due to
Former Mayor's Shareholders.
D. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. Among other provisions, SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It also requires that an entity recognize all
derivatives as either assets or liabilities in the statement of condition and
measure those instruments at fair value. SFAS No. 133 is effective for all
quarters of all fiscal years beginning after June 15, 2000. Management has not
determined what effect, if any, adoption of SFAS 133 will have on the
consolidated financial statements.
6
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
E. INVENTORIES
Inventories are summarized as follows:
MAY 1, 1999 JANUARY 30, 1999
----------- ----------------
(amounts shown in thousands)
COMPANY HELD ON COMPANY HELD ON
OWNED CONSIGNMENT OWNED CONSIGNMENT
---------- ----------- ------------ ------------
Precious and semi-precious gem jewelry-
related merchandise (and
associated gold):
Raw materials $ 6,450 $ --- $ 6,953 $ ---
Finished goods 81,809 14,901 73,392 15,824
Gold jewelry-related merchandise:
Finished goods 18,384 240 20,076 231
Watches 36,035 495 30,417 1,308
Other consumer products 17,534 151 13,741 160
--------- ---------- -------- ----------
$ 160,212 $ 15,787 $144,579 $ 17,523
========= ========== ======== ==========
F. INCOME TAXES
The Company has a deferred tax asset of approximately $12.8 million which
has been offset by a $10.0 million valuation allowance. The valuation allowance
has been provided to reduce the net deferred tax asset to the amount that the
Company believes, after evaluating currently available evidence, will more
likely than not be realized. This evaluation considers the non renewal of the
Sam's Agreement as well as the Company's determination to defer recognizing a
deferred tax benefit until the Company has more experience with the Mayor's
operation and is able to better estimate future earnings trends and other
information. The Company has a Federal net operating loss carryforward of
approximately $28.0 million, and a state net operating loss carryforward of
approximately $90.1 million. Separately stated, Jan Bell has a federal net
operating loss carryforward of approximately $22.4 million and a state net
operating loss carryforward of approximately $78.0 million. Mayor's has a
federal net operating loss carryforward of approximately $5.6 million and a
state net operating loss carryforward of approximately $12.1 million. Due to
Section 382 limitations, the amount of Mayor's net operating loss carryforward
which the Company can utilize each year is approximately $1.5 million. The
Federal net operating loss carryforward expires beginning in 2008 through 2011
and the state net operating loss carryforward expires beginning in 1999 through
2013. The Company also has an alternative minimum tax credit carryforward of
approximately $1.4 million to offset future Federal income taxes.
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 loss was as follows:
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
MAY 1, 1999 MAY 2, 1998
----------- -----------
Net loss $(2,845) $ (572)
Adjustment to reconcile net loss
to comprehensive loss:
Foreign currency translation adjustment (149) --
------- -------
Comprehensive loss $(2,994) $ (572)
======= =======
7
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 and in the Company's annual report on Form 10-K for the
year ended January 30, 1999 filed with the Securities Exchange Commission.
The Company operates two divisions. The first is Mayor's and Maier &
Berkele luxury jewelry stores. The second is an exclusive licensed concession
department at all existing and future domestic and Puerto Rico Sam's locations
under an agreement which expires February 1, 2001. As of May 1, 1999, the
Company operated a licensed concession department in 458 Sam's locations. On
April 6, 1999, the Company was informed that this agreement would not be renewed
beyond its February 1, 2001 term. 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 will have a material adverse effect on the business
of the Company. The Mayor's acquisition has reduced this dependency on Sam's.
During the thirteen weeks ended May 1, 1999, approximately 66% of the Company's
net sales were to Sam's customers. In addition, the Company's operating and
capital resources that are and will become available during the transition are
expected to be used to pursue growth of the Mayor's chain as well as considered
for use in future acquisitions.
The results of operations for the thirteen weeks ended May 1, 1999 reflect
the Company's consistent strategy to achieve continual earnings improvement in
the retail marketplace. During this time the Company continued to execute
merchandise strategies in Sam's that emphasized 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
square footage for promotional and pallet programs, improved merchandise
assortments, higher quality merchandise offerings and improved distribution of
merchandise which have allowed the Company to realize higher gross margin
dollars. Management does not expect any significant additional improvements in
sales, gross margins, operating cash flows and expense savings in its
traditional business with Sam's.
The results of operations for the thirteen weeks ended May 1, 1999 include
the results of Mayor's. Since the acquisition on July 28, 1998, the Company
began to review ongoing strategies to increase revenues and achieve expense
savings in the Mayor's business. These include efforts to reduce and better
balance inventory levels, reduce the amount of discontinued inventory in stock
and replace with current merchandise, and increase inventory turns. Also, the
Company believes gross margins may be increased through offering a balanced
merchandise presentation that emphasizes a greater assortment of higher margin
diamond, semi-precious gem, pearl and gold jewelry products and categories.
Further, the Company will seek to achieve gross margin improvement through a
reduction of discounts given at the point of sale on nondiscontinued inventory.
Management also believes there is opportunity for reductions in Mayor's
operating expenses once the Mayor's integration is completed during Fiscal 1999.
8
SALES
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
MAY 1, 1999 MAY 2, 1998
----------- -----------
Net sales
Sam's Club locations $57,538 $52,493
Mayor's Jewelers 30,122 N/A
------- -------
Total $87,660 $52,493
======= =======
Percentage change
Sam's Club locations 9.6% 11.7%
Mayor's Jewelers N/A N/A
Total 67.0% 11.7%
Comparative retail sales
Sam's Club locations $54,531 $49,281
Mayor's Jewelers $25,966 N/A
Percentage change
Sam's Club locations 10.7% 11.8%
Mayor's Jewelers (0.1%) N/A
The increase in revenues and comparative retail sales in the Sam's
locations for the thirteen weeks ended May 1, 1999 is mainly attributable to
merchandise strategies the Company has executed to emphasize higher margin
products. 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.
Sales in the future will be adversely impacted when the Sam's Agreement
expires on February 1, 2001. In addition, sales may also be impacted by general
economic conditions, the level of spending by customers and the inability to
obtain the additional retail square footage for promotional and pallet programs
in Sam's during the period the Agreement remains in effect. 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. The Company will continue to focus on developing retail opportunities
outside its business with Sam's. This will include consideration of expanding
the Mayor's chain into a national luxury retailer, as well as the acquisition of
other retailers.
Gross profit was 25.4% for the thirteen weeks ended May 1, 1999 compared to
23.2% for the thirteen weeks ended May 2, 1998. Gross profit for Mayor's was
26.1% for the thirteen weeks ended May 1, 1999. Gross profit for the thirteen
weeks ended May 1, 1999 was 25.1% for the Sam's division (which includes the
Company's Israel and Mexico operations during both thirteen week periods as well
as the Manhattan Diamonds operations during the thirteen weeks ended May 2,
1998). The increase for the thirteen weeks ended May 1, 1999 is primarily a
result of higher margins in the recently acquired Mayor's division. In addition,
the Company recognized margin improvements in the Sam's Club division.
Store and warehouse operating and selling expenses increased by $7.5
million for the thirteen weeks ended May 1, 1999 compared to the thirteen weeks
ended May 2, 1998. Store and warehouse operating and selling expenses for
Mayor's were $7.1 million for the thirteen weeks ended May 1, 1999. Store and
warehouse operating and selling expenses for the Sam's division were $8.9
million for the thirteen weeks ended May 1, 1999. The increase in these expenses
for the thirteen weeks ended May 1, 1999 is primarily attributable to the
Mayor's division expenditures which are excluded from the thirteen weeks ended
May 2, 1998 operating results, and increased store payroll and incentives in
Sam's. The Company believes the investment in these costs in Sam's contributed
to the increase in Sam's sales discussed previously. Also contributing to the
increase in Sam's division expenses are costs that vary proportionately with
sales, such as check authorization charges and charge card processing fees.
General and administrative expenses increased $2.1 million for the thirteen
weeks ended May 1, 1999 compared to the thirteen weeks ended May 2, 1998.
General and administration expenses for Mayor's were $1.9 million for the
thirteen weeks ended May 1, 1999. General and administrative expenses for the
Sam's division were $3.4 million for the thirteen weeks ended May 1, 1999. The
9
increase for the thirteen weeks ended May 1, 1999 was primarily a result of the
Mayor's general and administrative expense. Also, the Company incurred expenses
related to the development of programs geared to market directly to its
customers. In addition to estate and insurance replacement services, the Company
is currently evaluating catalog and internet retail opportunities for their long
term potential for earnings contribution for the Company. Management believes
savings opportunities are available once the integration of Mayor's is complete.
Depreciation and amortization expenses were $2.8 million for the thirteen
weeks ended May 1, 1999 compared to $1.4 million for the thirteen weeks ended
May 2, 1998. The increase is primarily a result of the depreciation of Mayor's
fixed assets, amortization of goodwill resulting from the Mayor's acquisition
and amortization of financing costs related to its working capital facility with
Citicorp, USA.
Interest and other income was $8,000 for the thirteen weeks ended May 1,
1999 compared to $.8 million for the thirteen weeks ended May 2, 1998. The
decrease for the thirteen weeks ended May 1, 1999 was attributable to the
significantly reduced cash balance available to invest subsequent to the
purchase of Mayor's. Interest expense related to the Company's working capital
facility was $.6 million for the thirteen weeks ended May 1, 1999. There was no
interest expense for the thirteen weeks ended May 2, 1998.
CURRENCY EXCHANGE GAIN/LOSS
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. Throughout 1998, in Mexico the U.S. dollar was the
functional currency since the economy was considered highly inflationary. As of
January 1, 1999, Mexico's economy is no longer considered to be highly
inflationary. The economic and political instability of the business environment
in Mexico requires the Company to constantly review its operating strategy. As a
result of the termination of the Sam's agreement in February 2001 and the
Company's determination that the risk in Mexico outweighs the long term growth
benefits, the Company plans to seek to maximize its return through a divestiture
of this entity during Fiscal 1999. During the thirteen weeks ended May 1, 1999,
there was a foreign currency exchange loss of $.3 million compared to $.4
million for the thirteen weeks ended May 2, 1998.
The Company manages the Mexican peso currency exchange rate exposure to
minimize the effect of exchange rate gains and losses on its cash flows through
the use of forward sales contracts, generally for periods not exceeding three
months. During the first quarter of 1999, a maximum of $2.5 million in Mexico
peso forward sale contracts were outstanding at any one time. As of May 1, 1999,
there were $2.5 million of contracts outstanding. Forward sales contracts are
accounted for on a mark to market basis.
SEGMENT INFORMATION
The Company retails fine jewelry and related products within two operating
divisions; Sam's Club which caters primarily to warehouse club members and
Mayor's, which the Company considers a luxury guild jeweler. The Company has
identified these segments based on how management evaluates the respective
business. The following is a summary of significant accounts and balances by
segment for the thirteen weeks ended May 1, 1999 and May 2, 1998, respectively,
that reconciles to the consolidated financial statements for the comparable
period.
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
MAY 1, 1999 MAY 2, 1998
----------- -----------
NET SALES
Sam's Club $ 57,795 $ 52,493
Mayor's 30,122 --
-------- --------
87,917 52,493
Elimination (257) --
-------- --------
$ 87,660 $ 52,493
======== ========
SEGMENT CONTRIBUTION
Sam's Club $ 460 $ (1,291)
Mayor's (2,620) --
-------- --------
Reportable segments (2,160) (1,291)
Elimination 6 --
-------- --------
(2,154) (1,291)
-------- --------
Interest & other income 8 776
Interest expense (561) --
-------- --------
(Loss) before taxes $ (2,707) $ (515)
======== ========
10
The retail jewelry business is seasonal in nature with a higher proportion
of sales and significant portion of earnings generated during the fourth quarter
holiday selling season. As a result, operating results for the thirteen weeks
ended May 1, 1999 are not necessarily indicative of operations for the entire
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
As of May 1, 1999, cash and cash equivalents totaled $10.3 million and the
Company had $34.7 million outstanding under its working capital facility. The
borrowings under this facility were a result of the July 1998 acquisition of
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 an $80 million working capital facility with a
syndicate of banks led by Citicorp, U.S.A., Inc. Availability under this
facility is determined based upon a percentage formula applied to inventory and
accounts receivable. Based upon this formula, the maximum of $80 million was
available to the Company at May 1, 1999. The Company has the right to request an
increase up to $110 million contingent upon lender approval. The credit facility
bears interest at floating rates, currently based upon LIBOR plus 1.5% or the
bank's adjusted base rate plus .25%, at the Company's option. These interest
rates can be increased if the Company's average leverage ratio does not meet
certain levels. In addition, the Company pays a commitment fee of .25% of the
unused line balance as well as 2.5% of the aggregate outstanding letter of
credit liability. 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.
During the thirteen weeks ended May 1, 1999, net cash used in operating
activities was $1.3 million. The Company's business is highly seasonal.
Consequently, seasonal working capital needs peak in October and November,
before the holiday shopping season. The Company anticipates less borrowings
during Fiscal 1999 as the Company will attempt to reduce the Sam's Division
inventories in contemplation of the expiration of the Sam's agreement on
February 1, 2001.
Net cash provided by investing activities was $.3 million during the
thirteen weeks ended May 1, 1999 primarily related to the proceeds received from
the sale of the Company's old executive office building net of fixed assets
additions. There was no significant gain or loss on the sale of this office
building. The Company has opened two new Mayor's stores and plans to open three
more Mayor's stores during 1999. Further, the Company is currently remodeling
one location and plans to move one other store during 1999. Under its Mayor's
growth strategy, the Company plans to open five to ten new stores per year.
Management estimates that the Company's cash requirements will be approximately
$4.2 million for each new store, with approximately $1.2 million (after
consideration of lease concessions from landlords) related to leasehold
improvements, fixtures, point of sale terminals and other equipment in the
stores, and approximately $3 million related to the inventories. The Company
also estimates it will make back office capital expenditures of approximately
$4.0 million during 1999 primarily for new systems in the payroll/human
resources area, for a new Mayor's credit and collections computer system, Year
2000 system additions and modifications as well as other management information
system enhancements.
On April 16, 1999 the Company's Board of Directors authorized the
expenditure of up to $15 million to repurchase the Company's common stock over a
period of one year. The Company may repurchase the shares in the open market or
in privately negotiated transactions, from time to time, in compliance with the
Securities Exchange Commission's Rule 10b-18, subject to market conditions,
applicable legal requirements and other factors. The number of shares of common
stock actually acquired by the Company will depend on subsequent developments
and corporate needs, and the repurchase program may be interrupted or
discontinued at any time. The acquired shares will be held in treasury or
canceled. During the thirteen weeks ended May 1, 1999 the Company purchased
238,500 shares at a cost of $694,000 which are held in treasury.
The Company believes that its cash on hand, projected cash from operations
(which are expected to increase as a result of an expected decrease in Sam's
inventory levels) and availability under the current working capital facility
will be sufficient to meet its anticipated working capital and capital
expenditure needs for the remainder of Fiscal 1999; however, there can be no
assurance that the Company's future operating results will be sufficient to
sustain any debt service and working capital needs.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires reporting every derivative
instrument at its fair value on the balance sheet. This statement also requires
recognizing any change in the derivatives' fair value in earnings for the
current period unless specific hedge accounting criteria are met.
SFAS No. 133 is effective for fiscal quarters of fiscal years that begin
after June 15, 2000. The Company has not determined the impact that this
statement will have on its financial position or the results of its operations
upon adoption.
11
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 causing disruptions of operations, including, among other
things, a temporary inability to process transactions and invoices, distribute
merchandise to its retail location or engage in similar business activities.
Management has recognized the need to minimize the risk that its operations
and relationship with vendors and other pertinent parties will not be adversely
effected by software processing errors arising from calculations using the year
2000 or beyond. A significant number of the Company's computer applications and
systems require modification in order to render these systems Year 2000
compliant. Failure by the Company to resolve internal Year 2000 issues could
result in an inability to process its daily business for a period of time.
However, the Company presently believes that scenario is not likely given the
progress made in its Year 2000 Compliance Plan.
The Company has used a combination of internal and external sources to
analyze and make the needed corrections to its information systems, personal
computers, hardware and network applications. These systems included areas such
as credit, point of sale, payroll, merchandise buying and distribution and
financial and management reporting. Non-compliant programs and systems are being
replaced and/or modified. Testing has begun and will be substantially completed
by the fourth quarter of 1999. Most technological and operating applications and
systems have already been upgraded and/or replaced with Year 2000 compliant
versions. As of May 1, 1999, the Company estimates that the business is
approximately 85% compliant. The Company has communicated and will continue to
communicate with its suppliers and others with which it does business to monitor
and evaluate the Year 2000 conversion process.
Non-information systems such as office, distribution and store security,
environmental issues and phone networks are also being evaluated for Year 2000
compliance. Non-compliant systems have been, or will be corrected or upgraded by
September 1999.
The Company has made contact with its critical vendors during the course of
its Year 2000 compliance plan. The Company's payroll processing service provider
has indicated that its major systems will operate with correct date logic for
Year 2000. The Company's service providers, including those administering
employee benefits, have also indicated that they are or will be Year 2000
compliant, as have most of the Company's major merchandise vendors.
The Company's cumulative expenditures related to the Year 2000 issue
approximated $.9 million through May 1, 1999. It is expected that the remaining
Year 2000 expenditures will approximate $1.4 million. Included in this $2.3
million is approximately $.9 million of new computer hardware and software which
will significantly upgrade the Company's financial systems. The Company expects
to fund these costs through its cash provided by operations, as well as
borrowings under its working capital facility, if needed. Certain of these costs
are being expensed as incurred.
The Company has developed basic contingency plans to restore the material
functions of each of its systems or activities in case of a Year 2000 failure.
The Company plans to continually refine these plans and make them more
comprehensive as additional information becomes available from testing or third
party suppliers.
There can be no assurances that the Company will be able to complete all
the modifications in the required time frame, that unanticipated events may
occur, or that all issues will have been identified before problems occur. The
Company's Year 2000 efforts are ongoing and the overall plan including the
contingency plans, will continue to evolve as new information becomes available.
While the Company anticipates no major interruption of business, that will be
dependent in part upon the ability of third parties to be compliant. Although
the Company is addressing all Year 2000 issues to lessen potential problems, the
Company is unable to eliminate them or to estimate the final effect Year 2000
risks will have on operational results.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
INTEREST RATE RISKS
See the disclosure in our 1998 Annual Report on Form 10-K, filed April 28,
1999. We do not believe that the risk we face related to interest rate changes
has changed materially different than at the date of such Report.
FOREIGN EXCHANGE RATE RISK
See the disclosure in our Annual Report on Form 10-K, filed April 28, 1999.
We do not believe that the risk we face related to foreign currencies has
changed materially different than at the date of such Report.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This report and other written reports and releases and oral statements made
from time to time by the Company contain forward-looking statements which can be
identified by their use of words like "plans," "expects," "believes," "will,"
"anticipates," "intends," "projects," "estimates," "could," "would," "may,"
"planned," "goal," and other words of similar meaning. All statements that
address expectations, possibilities or projections about the future, including
without limitation statements about the Company's strategy for growth, expansion
plans, sources or adequacy of capital, the Sam's Club transition, expenditures,
financial results and Year 2000 matters are forward-looking statements.
One must carefully consider such statements and understand that many
factors could cause actual results to differ from the forward-looking
statements, such as inaccurate assumptions and other risks and uncertainties,
some known and some unknown. No forward-looking statement is guaranteed and
actual results may vary materially. Such statements are made as of date
provided, and the Company assumes no obligation to update any forward-looking
statements to reflect future developments or circumstances.
One should carefully evaluate such statements by referring to the factors
described in the Company's filings with the SEC, especially on Form's 10-K, 10-Q
and 8-K. Particular review is to be made of Items 1, 2, 3 and 7 of the Form 10-K
and Item 2 of the Form's 10-Q where the Company discusses in more detail various
important risks and uncertainties that could cause actual results to differ from
expected or historical results. The Company notes these factors for investors as
permitted by the Private Securities Litigation Act of 1995. Since it is not
possible to predict or identify all such factors, the identified items are not a
complete statement of all risks or uncertainties. In addition to the factors
discussed in this report, the following are some of the important factors that
could cause results to vary.
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 licensed concession at all of Sam's
existing and future domestic and four Puerto Rico locations through February 1,
2001. On April 6, 1999, the Company was informed by Sam's that its concession
agreement would not be renewed beyond its expiration date. 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 will 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 continuously 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.
During 1999 the Company has opened one new Mayor's store and replaced the
Perimeter Maier & Berkele store with a new 5,100 square foot Mayor's store. The
Company plans to open three additional Mayor's stores during the remainder of
1999. The Company considers its Mayor's expansion program to be an integral part
of its future plans to replace the Sam's business. However, there can be no
assurance that the Company will be able to find favorable store locations,
negotiate favorable leases, hire and train new store and account managers, and
integrate the new stores in a manner that will allow the Company to meet its
expansion program. Conditions outside the Company's control, such as adverse
weather conditions affecting construction schedules, unavailability of
materials, labor
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disputes and similar issues also could impact anticipated store openings. The
failure to expand by opening new stores as planned could have a material adverse
effect on the Company's future sales growth, profitability and operating
results.
All but two of the Mayor's stores are located in major regional malls. The
success of the Company's operations depends to a certain extent on the ability
of mall anchor tenants and other attractions to generate customer traffic in the
vicinity of the Mayor's stores. The loss of mall anchor tenants in the regional
malls where the Mayor's stores are located, the opening of competing regional
malls or other economic downturns affecting customer mall traffic could have an
adverse effect on the Company's net sales and profitability.
The working capital facility agreement contains covenants, which require
the Company to maintain financial ratios including a 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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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following list of schedules and exhibits are incorporated by
reference and indicated in this Form 10-Q:
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K: None.
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PART II: OTHER INFORMATION
NONE
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: June 15, 1999
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