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 July 31, 1999
Commission File Number 1-9647
JAN BELL MARKETING, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 59-2290953
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(State of Incorporation) (IRS Employer Identification No.)
14051 N.W. 14TH STREET, SUNRISE, FLORIDA 33323
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(Address of principal executive offices) (Zip Code)
(954) 846-2718
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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.
24,585,291 COMMON SHARES ($.0001 PAR VALUE)
AS OF SEPTEMBER 10, 1999
FORM 10-Q
QUARTERLY REPORT
THIRTEEN WEEKS ENDED JULY 31, 1999
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
PAGE NO.
Item 1. Consolidated Financial Statements
A. Consolidated Balance Sheets.................................3
B. Consolidated Statements of Operations.......................4-5
C. Consolidated Statements of Cash Flows.......................6-7
D. Notes to Consolidated Financial Statements..................8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................12-15
Item 3. Quantitative and Qualitative Disclosures About Market Risks..16
PART II: OTHER INFORMATION
Items 1, 2, 3, and 5 have been omitted because they are not
applicable with respect to the current reporting period.
Item 6. Exhibits and Reports
on Form 8-K...................................................17
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)
JULY 31, JANUARY 30,
1999 1999
---------- ----------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents .............................. $ 4,178 $ 3,530
Accounts receivable, net of allowance for doubtful
accounts of $2,725 and $3,344, respectively ......... 19,139 25,385
Inventories ............................................ 73,001 67,975
Deferred income taxes .................................. 2,769 2,769
Other current assets ................................... 2,001 1,596
-------- --------
Total current assets ................................ 101,088 101,255
Property, net .......................................... 22,900 25,281
Goodwill ............................................... 29,064 25,857
Other assets ........................................... 2,245 4,084
-------- --------
Total non-current assets 54,209 55,222
Net assets of discontinued operations .................. 77,188 77,388
Deferred loss on discontinued operations ............... 3,170 --
-------- --------
Total assets ........................................ $235,655 $233,865
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ......................................... $ 23,646 $ 25,746
Accrued expenses ......................................... 9,155 10,499
Due to former Mayor's stockholders ....................... 4,361 6,145
--------- ---------
Total current liabilities ............................. 37,162 42,390
Long term debt ........................................... 40,000 26,409
Other long term liabilities .............................. 1,157 1,380
--------- ---------
Total long term liabilities ........................... 41,157 27,789
Stockholders' Equity:
Common stock, $.0001 par value, 50,000,000 shares
authorized,
28,407,591 and 28,358,475 shares issued and outstanding 3 3
Additional paid-in capital ............................... 191,687 191,538
Accumulated deficit ...................................... (28,299) (26,077)
Accumulated other comprehensive income ................... -- (1,778)
Less: 1,949,600 shares of treasury stock, at cost ........ (6,055) --
--------- ---------
Total stockholders' equity ............................ 157,336 163,686
--------- ---------
Total liabilities and stockholders' equity ............ $ 235,655 $ 233,865
========= =========
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
JULY 31, AUGUST 1,
1999 1998
------------- ------------
(UNAUDITED)
Net sales $ 31,989 $ --
Cost of sales 20,385 --
------------- ------------
Gross profit 11,604 --
Store operating and selling 9,350 --
expenses
General and administrative expenses 3,979 --
Depreciation and amortization 2,147 --
------------- ------------
15,476 --
------------- ------------
Operating loss (3,872) --
Interest and other income 47 --
Interest expense (489) --
------------- ------------
Loss before income taxes (4,314) --
Income tax provision -- --
------------- ------------
Net loss from continuing operations (4,314) --
Income from discontinued operations,
net of income tax expense of $178
and $85, in 1999 and 1998,
respectively 4,937 461
------------- ------------
Net income $ 623 $ 461
============= ============
Weighted average shares
outstanding
(Basic and Diluted) 27,097,892 26,762,042
Basic and Diluted earnings (loss) per share:
Continuing operations $ (0.16) $ 0.00
Discontinued operations $ 0.18 $ 0.02
------------- ------------
Net income $ 0.02 $ 0.02
============= ============
See notes to consolidated financial statements.
4
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts shown in thousands except share and per share data)
TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED
JULY 31, 1999 AUGUST 1, 1998
------------- --------------
(UNAUDITED)
Net sales $ 61,909 $ --
Cost of sales 39,618 --
------------- ------------
Gross profit 22,291 --
Store operating and selling expenses 18,175 --
General and administrative expenses 9,017 --
Depreciation and amortization 4,387 --
------------- ------------
31,579 --
Operating loss (9,288) --
Interest and other income 37 --
Interest expense (1,049) --
------------- ------------
Loss before income taxes (10,300) --
Income tax provision -- --
------------- ------------
Net loss from continuing operations (10,300) --
Income from discontinued operations,
net of income tax expense of $315 and
$142, in 1999 and 1998, respectively 8,078 (111)
------------- ------------
Net loss $ (2,222) $ (111)
============= ============
Weighted average shares outstanding
(basic and diluted) 27,726,439 28,278,560
Basic and Diluted earnings (loss) per share:
Continuing operations $ (0.37) $ 0.00
Discontinued operations $ 0.29 $ 0.00
------------- ------------
Net loss $ (0.08) $ 0.00
============= ============
See notes to consolidated financial statements.
5
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts shown in thousands except share and per share data)
TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED
JULY 31, 1999 AUGUST 1, 1998
------------- --------------
(UNAUDITED)
Cash flows from operating activities:
Cash received from customers $ 68,155 $ --
Cash paid to suppliers and employees (75,685) --
Interest and other income paid (1,012) --
--------- ---------
Net cash used in continuing operations (8,542) --
Net cash provided by discontinued operations 6,886 11,594
--------- ---------
Net cash used in operating activities (1,656) 11,594
Cash flows from investing activities:
Capital expenditures (3,143) --
Proceeds from sale of fixed assets 2,083 --
Investment in Mayor's, net of cash acquired
in 1998 (2,654) (54,395)
--------- ---------
Net cash used in investing activities (3,714) (54,395)
Cash flows from financing activities:
Proceeds from sale of employee stock plans 149 --
Purchase of treasury stock (6,055) --
Cash paid to former Mayor's shareholder (1,785) --
Borrowings under line of credit 224,885 --
Line of credit repayments (211,176) --
--------- ---------
Net cash provided by financing activities 6,018 --
Net increase in cash and cash equivalents 648 (42,801)
Cash and cash equivalents at beginning of period 3,530 48,432
--------- ---------
Cash and cash equivalents at end of period $ 4,178 $ 5,631
========= =========
(continued)
6
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Amounts shown in thousands except share and per share data)
TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED
JULY 31, AUGUST 1,
1999 1998
------------ ------------
(UNAUDITED)
Cash flows used in operating activities:
Net loss $ (2,222) $ --
Deduct income from discontinued operations (8,078) --
-------- --------
Loss from continuing operations (10,300) --
Adjustments to reconcile net loss from continuing
operations to net cash used in continuing
operating activities:
Depreciation and amortization 4,387 --
Provision for doubtful accounts 812 --
(Increase) Decrease in assets:
Accounts receivable (net) 5,434 --
Inventories (5,026) --
Other (405) --
Increase (Decrease) in liabilities:
Accounts payable (2,100) --
Accrued expenses (1,344) --
-------- --------
Net cash used in continuing operations $ (8,542) $ --
Net cash provided by discontinuing operations 6,886 11,594
-------- --------
Net cash provided by (used in) operating activities $ (1,656) $ 11,594
======== ========
(concluded)
See notes to consolidated financial statements.
7
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The Company's financial statements as of July 31, 1999 and for the thirteen
and twenty-six week periods ended July 31, 1999 and August 1, 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 and twenty-six week
periods ended July 31, 1999 and August 1, 1998 are not necessarily indicative of
annual results because of the seasonality of the Company's business. Prior year
results of operations and cash flows have been reclassified to reflect the
results of the Sam's division as discontinued operations (See "Expiration of
Sam's Agreement and Discontinued Operations" below for further discussion).
Since Mayor's Jewelers, Inc. ("Mayor's") was acquired subsequent to the second
quarter of the prior fiscal year, the related operating results for the thirteen
and twenty-six weeks ended August 1, 1998 are not included in the Company's
statement of operations and statement of cash flows for such periods.
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 30, 1999 filed with the Securities and Exchange Commission.
B. EXPIRATION OF SAM'S AGREEMENT AND DISCONTINUED OPERATIONS
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 to conduct its business and without replacement business, the loss of the
arrangement with Sam's will have a material adverse effect on the future
business of the Company subsequent to February 1, 2001. The Mayor's acquisition
(see Note C) 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 develop the luxury jeweler platform
through the opening of new stores and strategic acquisitions during the
remainder of 1999 and beyond.
As a result of this announcement, the Company has developed and adopted a
plan for the disposal of the Sam's business. This plan includes the July 1999
sale of the Company's Mexico subsidiary, Jan Bell de Mexico S.A. de C.V, which
supplied selected fine jewelry, watches and fragrances to Sam's locations in
Mexico, as well as the planned future sale or liquidation of the Company's
Israel subsidiary, Exclusive Diamonds International, Limited, which manufactures
diamond jewelry primarily for retail sale in the Sam's Club jewelry counters.
Consequently, the Company will now account for its Sam's Club operations, future
field and back office expenses associated with the transition out of the clubs,
its loss from the sale of the Mexico subsidiary and its estimated loss on the
sale or liquidation of its Israel subsidiary as discontinued operations in its
financial statements.
Net sales and income from discontinued operations are as follows:
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
JULY 31, 1999 AUGUST 1, 1998
-------------- --------------
(amounts shown in thousands)
Net sales $ 61,584 $ 60,352
Cost of sales (38,266) (38,945)
Operating expenses (18,240) (21,586)
Interest income (net) 37 725
-------------- -------------
Income from operations 5,115 546
Income tax provision (178) (85)
-------------- -------------
Income from discontinued operations $ 4,937 $ 461
============== =============
8
TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED
JULY 31, 1999 AUGUST 1, 1998
-------------- --------------
(amounts shown in thousands)
Net sales $ 119,379 $ 112,846
Cost of sales (73,756) (72,564)
Operating expenses (37,283) (41,752)
Interest income (net) 53 1,501
-------------- -------------
Income from operations 8,393 31
Income tax provision (315) (142)
-------------- -------------
Income (loss) from discontinued
operations $ 8,078 $ (111)
============== =============
Net assets of discontinued operations have been recorded at their estimated
net realizable value and are as follows:
JULY 31, JANUARY 30,
1999 1999
-------------- -------------
(amounts shown in thousands)
Inventories $ 71,715 $ 76,604
Other current assets 6,772 8,891
Property, plant and equipment, net 1,329 1,732
Other non-current assets 3,444 4,016
Trade payables (2,472) (8,961)
Other current liabilities (3,600) (4,894)
-------------- -------------
Net assets of discontinued operations $ 77,188 $ 77,388
============== =============
The income from discontinued operations was $4.9 million and $8.1 million
for the thirteen and twenty-six weeks ended July 31, 1999, respectively. A
significant portion of this income is a result of a reduction in expenses caused
by the reallocation of continuing corporate overhead and certain back office
expenses from the Sam's division to the Mayor's division. As a result, the loss
from continuing operations was $4.3 and $10.3 million for the thirteen and
twenty-six weeks ended July 31, 1999, respectively. The balance sheet caption
deferred loss on discontinued operations of $3.2 million represents the loss
incurred on the sale of the Mexico subsidiary. This amount has been deferred as
management expects that the Company will realize a net profit from the remaining
operations and wind down of the Sam's division.
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 July 31, 1999 includes goodwill of
approximately $29.0 million, which is net of $1.8 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 July 31, 1999 and January 30, 1999 as Due to
Former Mayor's Shareholders.
9
D. INVENTORIES
Inventories are summarized as follows:
JULY 31, 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 $ -- $ -- $ 2,745 $ --
Finished goods 41,356 10,476 35,098 15,635
Gold jewelry-related
merchandise:
Finished goods 5,544 507 6,663 62
Watches 23,909 706 19,920 1,308
Other consumer products 2,192 177 3,549 160
-------- --------- -------- -----------
$ 73,001 $ 11,866 $ 67,975 $ 17,165
======== ========= ========= ===========
E. 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. However, due to the nonrenewal of the Sam's agreement, it is more likely
than not that Jan Bell's state net operating loss carryforward will not be fully
utilized. The Company also has an alternative minimum tax credit carryforward of
approximately $1.4 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 TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 31, 1999 AUGUST 1, 1998 JULY 31, 1999 AUGUST 1, 1998
------------- -------------- ------------- --------------
Net income (loss) $ 623 $ 461 $ (2,222) $ (111)
Adjustment to reconcile net
income (loss) to
comprehensive income (loss):
Foreign currency translation
adjustment (1,629) -- (1,778) --
------------ ------------ ------------ -------------
Comprehensive income (loss) $ (1,006) $ 461 $ (4,000) $ (111)
============ ============ ============ =============
G. LEGAL PROCEEDINGS
In addition to the Mayor's acquisition litigation discussed in Note C, the
Company is also involved in litigation arising from the normal course of
business. In addition to other commercial litigation, the Company has two
lawsuits with a former vendor and a third lawsuit with the same former vendor
which relates to an alleged employment relationship. A federal court action was
tried in
10
January 1999, and the federal court issued a judgment in favor of the Company,
including an award of attorney's fees and costs. The former vendor has appealed
the judgment. A state court action was tried in August 1999, and the state court
issued a judgment in favor of the vendor, including an award of attorney's fees
and costs. The Company intends to appeal this state court ruling. The Company
believes the facts and the law support its positions and these matters should
not materially affect the financial position of the Company; however, there can
be no assurance as to the final result of these legal matters. It should also be
noted that the Company will incur significant ongoing legal fees.
H. SUPPLEMENTAL INFORMATION OF NONCASH ACTIVITIES
The Statement of Cash Flows for the twenty-six weeks ended July 31, 1999
does not include the following noncash transactions:
Capital lease obligations incurred. $ 481,000
Deferred gain on discontinued operations $ 3,170,000
The Statement of Cash Flows for the twenty-six weeks ended August 1, 1998
does not include noncash financing and investing transactions associated with
the issuance of common stock and debt for the acquisition of Mayor's. The
components of the transactions are as follows:
Fair value of assets acquired (including goodwill) $ 129,718
Liabilities assumed 28,628
----------
Net assets acquired 101,090
Cash acquired 990
Issuance of common stock 7,705
Borrowing under working capital facility 38,000
----------
Cash used to acquire Mayor's $ 54,395
==========
11
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 and other reports filed with the Securities and
Exchange Commission.
The Company currently operates 22 Mayor's and Maier & Berkele luxury
jewelry stores in Florida and Georgia. It also has 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. 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 to conduct its
business, and without replacement business, the loss of the arrangement with
Sam's will have a material adverse effect on the business of the Company
subsequent to February 1, 2001. The Mayor's acquisition has reduced this
dependency 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 develop the luxury jewelry platform through the opening of new stores and
strategic acquisitions during the remainder of 1999 and beyond. During the
thirteen and twenty-six weeks ended July 31, 1999, approximately 63% of the
Company's net sales were to Sam's customers.
As a result of this announcement, the Company has developed and adopted a
plan for the disposal of the Sam's business. This plan includes the July 1999
sale of the Company's Mexico subsidiary, Jan Bell de Mexico S.A. de C.V., which
supplied selected fine jewelry, watches and fragrances to Sam's locations in
Mexico, as well as the future sale or liquidation of the Company's Israel
subsidiary, Exclusive Diamonds International, Limited, which manufactures
diamonds primarily for retail sale in the Sam's Club jewelry counters.
Therefore, the Company will now account for its Sam's Club operating results,
future field and back office expenses associated with the transition out of the
clubs, its loss from the sale of the Mexico subsidiary and its estimated loss on
the sale or liquidation of its Israel subsidiary as discontinued operations in
its financial statements
Consequently, the results of continuing operations for the thirteen and
twenty-six weeks ended July 31, 1999 include only the results of Mayor's. Since
the Mayor's acquisition on July 28, 1998, the Company began to review ongoing
strategies to increase revenues and achieve expense savings in the Mayor's
business and currently a significant portion of the Company's resources are
being spent on the development of the luxury jeweler platform through the
opening of new stores and strategic acquisitions during the remainder of 1999
and beyond. Currently, the Company's operating infrastructure is designed to
service a larger base of operations than the current Mayor's business. However,
the Company expects to "grow into" the infrastructure which it believes is
appropriately sized, given the expansion intentions for Mayor's and associated
direct response businesses. In view of the investment being made into a Company
infrastructure, continuing operations reflect costs which are higher than what
- -normally would be incurred for an operation of Mayor's present size. In
addition, certain corporate overhead expenses previously charged to the Sam's
division have been reallocated to the continuing Mayor's division. Mayor's
continuing operations recognized net losses of $(4.3) million and $(10.3)
million for the thirteen and twenty-six weeks ended July 31, 1999. It is the
Company's intent to reduce the losses through the expansion of the Mayor's chain
as well as identifying further efficiencies in the Company's infrastructure. The
Company has started to implement a focused merchandising, marketing and real
estate strategy that will serve to solidify Mayor's position as a premier luxury
guild jeweler.
SALES
The Company's net sales from the Mayor's continuing operations for the
thirteen and twenty-six weeks ended July 31, 1999 were $32.0 million and $61.9
million, respectively, with comparative net sales for the thirteen and
twenty-six weeks ended July 31, 1999 increasing 5.3% and 2.3%, respectively,
from the same periods during the prior year.
The Company is seeking to expand its Mayor's chain into a national luxury
jeweler, which will increase the Company's net sales. However, 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 and with other competing general
and specialty retailers and discounters will continue to increase. However,
based upon economic projections the economy is expected to be favorable to the
luxury goods retail industry during the upcoming holiday season. The superior
watch brands business comprise a significant portion of the Mayor's business,
which is a result
12
of the Company's ability to market effectively high-end watches. During the past
quarter, as the Company continually improved its assortment and quantity of
watch brands in stock, a subsequent sales increase occurred. In addition, the
Company plans to improve the merchandise assortment in its non-watch categories
and to continue to clear out aged goods. This will result in stronger in stock
positions which should then lead to increased sales in existing stores and set a
precedent for new stores.
Gross profit was 36.3% for the thirteen weeks ended July 31, 1999 and 36.0%
for the twenty-six weeks ended July 31, 1999. The Company believes there is
significant opportunity to increase gross profit over the next couple of years.
Areas for gross margin improvement include the purchasing of inventories at a
lower cost, increasing the assortment of goods towards higher margin jewelry
items, higher initial markups, reductions in shipping and handling costs,
improving the Company's discipline with respect to purchase related discounts,
and a reduction in required reserves for slow moving inventories as the Company
continues to reduce its slow moving inventory in stock. In addition, as the
Company completes its Mayor's integration, the Company expects to improve the
allocation and management of inventory and as a result, other expenses such as
inventory shrinkage and slow moving reserves are expected to decrease.
Store operating and selling expenses were $9.4 million and $18.2 million
for the thirteen and twenty-six weeks ended July 31, 1999, respectively. The
Company does not believe there is significant opportunity to reduce these
expenses. The Company believes it has a very well executed front end in its
Mayor's stores which includes highly professional, trained associates. Also, the
Company believes that the elegance of the Mayor's stores helps set the business
apart from other jewelers and adds to the experience of shopping in a Mayor's
store. As such, the Company does not believe a reduction in these expenses would
be beneficial. However, as the expected sales increases occur in the Mayor's
stores, the store operating and selling expenses as a percentage of sales will
decrease. Also, as the number of stores in a particular geographic region
increase, expenses such as advertising will decrease as a percentage of sales.
General and administrative expenses were $4.0 million and $9.0 million for
the thirteen and twenty-six weeks ended July 31, 1999, respectively. The Company
believes there is significant opportunity for savings in this area. The current
infrastructure is designed to service a larger base of operations. The
percentage of general and administrative expenses to net sales should
continually decrease as the Company expands its business. In addition to estate
services, the Company is currently evaluating catalog and Internet retail
opportunities for their long term potential for earnings contribution to the
Company. As sales from these programs increase, the percentage of these costs to
revenues should decrease.
Depreciation and amortization expenses were $2.1 million for the thirteen
weeks ended July 31, 1999 and $4.4 million for the twenty-six weeks ended July
31, 1999. Included in these amounts are the depreciation of Mayor's store
assets, depreciation for substantially all corporate headquarter and
distribution center fixed assets, amortization of goodwill resulting from the
Mayor's acquisition and amortization of financing costs related to the Company's
working capital facility with Citicorp, USA.
Interest expense related to the Company's working capital facility was $.5
million for the thirteen weeks ended July 31, 1999 and $1.0 million for the
twenty-six weeks ended July 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1999, cash and cash equivalents totaled $4.2 million and the
Company had $40.0 million outstanding under its working capital facility. The
borrowings under this facility were primarily 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 July 31, 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 twenty-six weeks ended July 31, 1999, net cash used in
operating activities was $1.7 million consisting of $8.6 million in cash used in
continuing operations and $6.9 million in cash provided by discontinued
operations. The Company's business is
13
highly seasonal. Consequently, seasonal working capital needs peak in October
and November, before the holiday shopping season. The Company anticipates
increased borrowings during the remainder of 1999 as the Company currently plans
to open four new Mayor's locations during the fourth quarter. This increase in
cash flow requirements will be met with cash generated from operations and a
planned reduction in the Sam's division inventories held in the Company's
distribution center in preparation of the expiration of the Sam's agreement on
February 1, 2001. Inventories in the Sam's Club counters during the remainder of
1999 are not expected to be significantly reduced.
Net cash used in investing activities was $3.7 million during the
twenty-six weeks ended July 31, 1999, primarily related to an increase in costs
associated with the Mayor's investment. The Company has opened one new Mayor's
store in Miami and replaced the Perimeter Maier & Berkele store with a new 5,100
square foot Mayor's store. Further, the Company has recently completed
remodeling and expanding its Aventura location and plans to relocate one other
store during 1999 to a better location within the same mall. 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 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 has and will continue to repurchase the shares
in the open market or in privately negotiated transactions, from time to time,
in compliance with the Securities and 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 twenty-six weeks ended July 31, 1999, the
Company purchased 1,949,600 shares at a cost of $6,055,000 and are currently
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.
DISCONTINUED OPERATIONS
The results of operations for the thirteen and twenty-six weeks ended July
31, 1999 related to the Sam's Division discontinued operations reflect the
Company's strategy to achieve earnings improvement in Sam's. 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, during this
period, the Company has continually 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 Company expects to continue to have positive cash flows and positive income
from Sam's during the remaining term of the Agreement. The Company believes that
the discontinued Sam's operations during the remaining term of the Agreement
will ultimately result in a net gain. This estimated gain considers the Sam's
division operations through February 1, 2001, the loss on the sale of Mexico
which was sold in July 1999, the estimated loss on the Israel subsidiary which
is expected to be sold or liquidated during the next twelve months, and an
estimate for field and back office expenses expected during the transition out
of Sam's. Income from discontinued operations have remained and are expected to
continue to be consistent with prior years during the remainder of 1999, with
the magnitude of revenues during the fourth quarter holiday season. The Company
can make no assurances regarding the results of the wind down of its Sam's
division business including matters related to the results of operations,
personnel and inventories.
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.
14
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 July 31, 1999, the Company estimates that the business is
approximately 90% 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. Subsequent to this, the Company plans to perform simulated
testing, which will be completed by the end of November 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 $2.2 million through July 31, 1999. It is expected that the
remaining Year 2000 expenditures will approximate $.2 million. Included in this
$2.4 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.
15
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. The Company does not believe that the risk related to interest rate
changes is materially different than it was at the date of that 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 subsequent to February 1, 2001.
The Company is pursuing new growth opportunities primarily in the luxury
jeweler platform. However, management continuously considers other growth
opportunities including acquisitions of businesses 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 Mall Maier & Berkele store in Atlanta with a new 5,100 square foot
Mayor's store. The Company currently plans to open four 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 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 three 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
16
malls or other economic downturns affecting customer mall traffic could have an
adverse effect on the Company's net sales and profitability.
In addition to the Mayor's acquisition litigation discussed in Note C, the
Company is also involved in litigation arising from the normal course of
business. In addition to other commercial litigation, the Company has two
lawsuits with a former vendor and a third lawsuit with the same former vendor
which relates to an alleged employment relationship. A federal court action was
tried in January 1999, and the federal court issued a judgment in favor of the
Company, including an award of attorney's fees and costs. The former vendor has
appealed the judgment. A state court action was tried in August 1999 and the
state court issued a judgment in favor of the vendor, including an award of
attorney's fees and costs. The Company intends to appeal this state court
ruling. The Company believes the facts and the law support its positions and
these matters should not materially affect the financial position of the
Company; however, there can be no assurance as to the final result of these
legal matters. It should also be noted that the Company will incur significant
ongoing legal fees.
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.
ITEM 4.
The Annual Meeting of Shareholders was held July 9, 1999. The shareholders
of the Company elected as directors Gregg Bedol, Samuel A. Getz and Robert
Robison to serve terms expiring in 2002, and Haim Bashan to serve a term
expiring in 2000. The election of directors by the shareholders was by the
following votes:
Director For Withheld
------------------ --------------- --------------
Haim Bashan 22,602,723 418,923
Gregg Bedol 22,599,383 422,263
Samuel A. Getz 22,606,733 414,913
Robert Robison 22,591,733 429,913
In addition to Messrs. Bashan, Bedol, Getz and Robison, the following are
directors whose term of office continued after the Annual Meeting: Isaac
Arguetty, Thomas Epstein, Margaret Gilliam, William Grayson and Peter Offermann.
The shareholders ratified Deloitte and Touche LLP as independent
accountants of the Company for the fiscal year ending January 29, 2000 by a vote
of 22,970,452 shares in favor, 36,588 shares against and 14,606 shares
abstaining.
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.
17
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: September 13, 1999
18
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule