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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
---------------- ----------------
COMMISSION FILE NUMBER 1-9647
JAN BELL MARKETING, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-2290953
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
14051 N.W. 14th Street
Sunrise, Florida 33323
--------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (954) 846-2703
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.0001 par value
Warrants to Purchase Common Shares
Rights to Purchase Common Shares
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge in definitive proxy or information statements,
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of April 1, 1997, the aggregate market value of the voting stock beneficially
held by non-affiliates of the registrant was $57,823,434. The aggregate
market value was computed with reference to the closing price on the American
Stock Exchange on such date. Affiliates are considered to be executive officers
and directors of the registrant and their affiliates for which beneficial
ownership is not disclaimed.
As of April 1, 1997, 25,894,610 shares of Common Stock ($.0001 par value) were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PART III: Portions of the definitive Proxy Statement for the 1997 Annual
Shareholders' meeting (to be filed).
LOCATION OF EXHIBIT INDEX: The index of exhibits is contained in Part IV herein
on page number ________________.
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JAN BELL MARKETING, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page No.
<S> <C> <C>
Item 1 Business .......................................
Item 2 Properties......................................
Item 3 Legal Proceedings...............................
Item 4 Submission of Matters to a Vote
of Security Holders ...................
PART II
Item 5 Market for the Registrant's Common
Stock and Related Stockholder
Matters ...............................
Item 6 Selected Financial Data ........................
Item 7 Management's Discussion and
Analysis of Financial Condition
and Results of Operations..............
Item 8 Financial Statements and
Supplementary Data ....................
Item 9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure...................
PART III
Item 10 Directors and Executive Officers
of the Registrant......................
Item 11 Executive Compensation..........................
Item 12 Security Ownership of Certain
Beneficial Owners and
Management ............................
Item 13 Certain Relationships and Related
Transactions...........................
PART IV
Item 14 Exhibits, Financial Statement
Schedules, and Reports on
Form 8-K...............................
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Jan Bell provides fine jewelry, watches and certain other select
non-jewelry consumer products to the value-conscious fashion consumer. The
Company markets its products principally through Sam's Club, ("Sam's") a
division of Wal-Mart, Inc., pursuant to an arrangement whereby the Company
operates an exclusive leased department at all of Sam's existing and future
domestic locations and Puerto Rican Sam's Clubs through February 1, 2001. In the
Company's fiscal year ended on February 1, 1997 ("Fiscal 1996"), sales to Sam's
customers accounted for approximately 94% of the Company's net sales.
Accordingly, the Company is dependent on Sam's to conduct its business, and the
loss of the leased department arrangement with Sam's would have a material
adverse effect on the business of the Company. The Company offers products
including fine jewelry, watches, fragrances, fine writing instruments,
sunglasses and certain collectibles and accessories. See "Warehouse Membership
Clubs".
The results of operations for Fiscal 1996, Fiscal 1995 and Fiscal 1994
reflect the Company's strategy to achieve expense savings at all levels. During
this time the Company also implemented merchandise strategies and selection
offerings that further allowed the Company to achieve higher gross margins in
its leased departments. In addition, emphasis on cash management and inventory
control systems allowed the Company to generate positive cash flows from
operations and reduce its reliance on working capital support from third party
lenders. Finally, the Company's ongoing drive to reduce and better balance its
inventory levels led the Company to improve its inventory turns and reduce its
average inventory requirements. Management believes there is a possibility of
additional opportunity for continued improvements in gross margins, operating
cash flows and expense savings in its traditional core business with Sam's Club.
However, these opportunities are not believed to be as significant as those
realized in Fiscal 1996 and Fiscal 1995.
On November 9, 1995, the Company opened its first "Jewelry Depot", a
6,071 square foot value-oriented jewelry and luxury gift store in Framingham,
Massachusetts. Subsequently, the Company also opened two "Jewelry Depot
Outlets", a 2,207 square foot facility in Vero Beach, Florida and an 891 square
foot store in Worcester, Massachusetts. The "Jewelry Depot" and "Jewelry Depot
Outlets" each were opened as prototypes for potential stand-alone jewelry
operations that the Company has evaluated as possible long term sources of
additional revenue. The Framingham and Worcester locations have not been
successful and in January 1997 the Company decided it would close these
operations. Additionally, during the third quarter of 1996, the Company acquired
from Andin International, Inc. its three Manhattan Diamond outlet locations in
the
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Potomac Mills, Gurnee Mills and Orlando Belz outlet malls. The Company currently
is unable to determine the impact of these stand-alone jewelry operations on its
future operating results or capital requirements.
The terms "Jan Bell" and the "Company" when used herein refer to Jan
Bell Marketing, Inc. and its consolidated subsidiaries, as required by the
context. The Company's principal offices are located at 14051 Northwest 14th
Street, Sunrise, Florida 33323 (telephone: (954) 846-2703).
PRODUCTS
The Company's principal products are gold jewelry set with diamonds
and/or other precious and semi-precious gemstones, gold chain, other forms of
gold and silver jewelry and watches. The Company's jewelry product line includes
chains, pendants, bracelets, watches, rings and earrings. Other consumer
products sold by the Company include perfumes and fragrances, sunglasses,
writing instruments, and collectible and giftware products.
During each of Fiscal 1996, Fiscal 1995 and Fiscal 1994 the Company
recorded approximately 76% of net sales in jewelry and watches and approximately
24% of net sales in other consumer products.
The Company's products are classically designed to offer broad consumer
appeal. Following the warehouse club philosophy of limiting the assortment in
each product category, a typical location will be merchandised at any one time
with approximately 300 jewelry items, 100 watches and 200 other consumer
products. This assortment is more focused than the average number of items
typically stocked by jewelry counters in department stores and other jewelry
retailers.
WAREHOUSE MEMBERSHIP CLUBS
The Company's principal customers during Fiscal 1996 were members of
Sam's Club. In Fiscal 1996, 1995, 1994, 1993 and 1992 approximately 94%, 91%,
85%, 85% and 81%, respectively, of the Company's net sales originated from the
warehouse membership clubs. The Company's sole warehouse membership club
relationship in Fiscal 1996 was with Sam's. Prior to May 1993, the Company had
an agreement to be the primary supplier of fine jewelry, watches and fragrances
to all present and future Sam's club locations until February 1997. In May 1993,
the arrangement was changed to provide that the Company would operate an
exclusive leased department at all Sam's existing and future domestic locations
through February 1, 1999. In March 1994, the arrangement was extended through
February 1, 2001.
Warehouse membership clubs offer a variety of product categories to
targeted consumers. By limiting the assortment in each product category and
operating on a no-frills basis, warehouse membership clubs generally provide
name brand products at prices significantly below conventional
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retailers and department, discount and catalog stores. Warehouse club members,
the majority of whom pay a nominal annual membership fee, include businesses,
credit unions, employee groups, schools, churches and other organizations, as
well as eligible individuals. In addition to jewelry, merchandise offered by
warehouse membership clubs typically includes groceries, health and beauty aids,
computers, cellular telephones, clothing, sporting goods, automotive
accessories, hardware, electronics and office equipment. Successful execution of
the warehouse membership club concept requires high sales volumes, rapid
inventory turnover, low merchandise returns and strict control of operating
costs.
Each Sam's location is staffed by Jan Bell employees with the inventory
owned by Jan Bell until sold to Sam's members. In exchange for the right to
operate the department and the use of the retail space, Jan Bell pays a tenancy
fee of 9% of net sales. While Sam's is responsible for paying utility costs,
maintenance and certain other expenses associated with operation of the
departments, the Company provides and maintains all fixtures and other equipment
necessary to operate the departments.
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SPECIAL CONSIDERATIONS
The Company's retail operation requires expertise in the areas of
merchandising, sourcing, selling, personnel, training, systems and accounting.
The Company must look to increases in the number of retail locations to occur,
thereby increasing the Company's customer base, for expansion. The retail
jewelry market is particularly subject to the level of consumer discretionary
income and the subsequent impact on the type and value of goods purchased. With
the consolidation of the retail industry, the Company believes that competition
both within the warehouse club industry and with other competing general and
specialty retailers and discounters will continue to increase. Further
consolidation of the warehouse club industry due to geographic constraints and
market consolidation might also adversely affect the Company's existing
relationship and the Company's business. The opening and success of the leased
locations and locations to be opened in later years, if any, will depend on
various factors, including general economic and business conditions affecting
consumer spending, the performance of the Company's retail operations, the
acceptance by consumers of the Company's retail programs and concepts, and the
ability of the Company to manage the leased operations and future expansion and
hire and train personnel. See "Future Operating Results, Uncertainties and
Risks" in Item 7. "Management's Discussion and Analysis of Financial
Consolidation and Results of Operations".
OTHER CUSTOMERS
The Company also sells to a limited number of department stores,
supermarkets, discount stores, drug stores, wholesalers and jewelry chains. In
Fiscal 1996, sales to these customers aggregated approximately 4% of net sales.
Due to the closing of the wholesale watch division in late 1994 and the focus on
the retail operations at Sam's, it is not anticipated that sales to wholesale
customers will continue in any significant manner other than the continued
balancing of inventory and selected sales of goods.
PURCHASING
DIAMONDS AND OTHER GEMSTONES
The Company purchases diamonds and other gemstones directly in
international markets located in Tel Aviv, New York, Antwerp, and elsewhere. The
Company buys cut and polished gemstones in various sizes. During 1990, the
Company acquired a purchasing and trading unit based in Israel. The Company
seeks to meet its diamond requirements with purchases on a systematic basis
throughout the year.
Hedging is not available with respect to possible fluctuations in the
price of gemstones. If such fluctuations should be unusually large or rapid and
result in prolonged higher or lower prices, there is no
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assurance that the necessary price adjustments could be made quickly enough to
prevent the Company from being adversely affected.
The world supply and price of diamonds is influenced considerably by
the Central Selling Organization ("CSO"), which is the marketing arm of DeBeers
Consolidated Mines, Ltd. ("DeBeers"), a South African company. Through CSO,
DeBeers, over the past several years, has supplied approximately 80% of the
world demand for rough diamonds, selling to gem cutters and polishers at
controlled prices periodically throughout the year.
The continued availability of diamonds to the Company is dependent, to
some degree, upon the political and economic situation in South Africa and
Russia, which has been unstable. Several other countries are also major
suppliers of diamonds, including Botswana and Zaire. In the event of an
interruption of diamond supplies, or a material or prolonged reduction in the
world supply of finished diamonds, the Company could be adversely affected.
GOLD PRODUCTS
Finished gold products and gold castings are purchased from a
relatively small number of manufacturers in Israel, Italy, New York and
California. The Company believes that there are numerous alternative sources for
gold chain and castings, and the failure of any of its current manufacturers
would not have a material adverse effect on the Company.
WATCHES
From May 1990 through Fiscal 1994, the Company actively marketed
watches. Featuring Seiko and Citizen watches as well as other select name
brands, private label and designer watches, the Company sold its watch inventory
through Sam's and at wholesale to a variety of retail outlets. In late 1994,
the Company decided to close the wholesale watch operations, so the watch
program in Fiscal 1995 became a part of the Company's retail operations other
than selected sales and continued balancing of inventory. The Company in Fiscal
1995 also discontinued the exclusive marketing and licensing of certain designer
watches.
The Company purchased approximately 57% and 49% of watches through
parallel marketed means during Fiscal 1996 and Fiscal 1995 respectively, as well
as approximately 43% and 51% of watches directly from other manufacturers during
Fiscal 1996 and Fiscal 1995 respectively. Parallel marketed goods are products
to which trademarks are legitimately applied but which were not necessarily
intended by their foreign manufacturers to be imported and sold in the United
States. See "Regulation."
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OTHER PRODUCTS
The Company purchases sunglasses, fine writing instruments, fragrances
and collectibles directly from manufacturers as well as from parallel marketed
means. See "Regulation."
AVAILABILITY
Although purchases of several critical raw materials, notably gold and
gemstones, are made from a limited number of sources, the Company believes that
there are numerous alternative sources for all raw materials used in the
manufacture of its finished jewelry, and that the failure of any principal
supplier would not have a material adverse effect on operations. Any changes in
foreign or domestic laws and policies affecting international trade may have a
material adverse effect on the availability or price of the diamonds, other
gemstones, precious metals and non-jewelry products purchased by the Company.
Because supplies of parallel marketed products are not always readily available,
it can be a difficult process to match the customer demand to market
availability. See "Regulation."
SEASONALITY
The Company's jewelry business is highly seasonal, with the fourth
calendar quarter (which includes the Christmas shopping season) historically
contributing significantly higher sales than any other quarter during the year.
Approximately 39% of the Company's Fiscal 1996 net sales were made during the
fourth quarter.
MANUFACTURING
The Company currently performs all quality control functions at its
headquarters in Sunrise, Florida and performs certain jewelry manufacturing in
Israel.
All gold and watch products are manufactured by third parties. During
Fiscal 1996, approximately 31% of gemstone products purchased were manufactured
by the Company in Israel. The remaining portion of gemstone products were
manufactured or purchased complete from third parties.
RETAIL OPERATIONS, MERCHANDISING AND MARKETING
GENERAL
Each retail department is supervised by a manager whose primary duties
include member sales and service, scheduling and training of associates, and
maintaining loss prevention and visual presentation standards. The departments
are generally staffed by the manager and a minimum of two staff associates
depending on sales volume. At least one Jan Bell employee staffs the department
during operating hours. The departments employ temporary associates during peak
selling seasons such
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as Christmas. Each department is generally open for business during the same
hours as the warehouse club in which it operates. Except for extended hours
during certain holiday seasons, Sam's is generally open Monday through Friday
from 10:00 a.m. to 8:30 p.m., 9:30 a.m. to 7:00 p.m. on Saturdays and 11:00 a.m.
to 6:00 p.m. on Sundays.
The counter manager reports to a senior manager. Senior/district
managers supervise on average six clubs and report to an area manager. The
Company has thirteen geographic area managers. The area managers have
responsibility over a territory that includes four to six senior/district
managers. The area managers report directly to the Senior Vice President of
Operations.
The fixtures and equipment located in the Company's departments
generally consist of six to ten showcases, four corner towers, a safe, a point
of sale (POS) terminal, storage cabinets for merchandise and supplies, display
elements, signage and miscellaneous equipment such as telephones, scales,
calculators and diamond testers. In certain larger volume clubs, the department
will have additional showcases and towers and POS terminals.
The Sam's Clubs are membership only, cash and carry operations. The
Company's departments were previously required to accept only the forms of
payment accepted by Sam's which presently includes cash, checks, Discover Card
and a Sam's credit card. However, during Fiscal 1996, the Company's departments
were permitted to accept Visa and Mastercard.
DEPARTMENT COUNT
The following table sets forth data regarding the number of departments
which the Company operated:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Departments:
Operated, beginning of period 437 428 418
Opened during period 9 11 22
Closed during period 6 2 12
Operated, end of period 440 437 428
--- --- ---
Net increase 3 9 10
=== === ===
</TABLE>
Generally, the Company's departments are between 260 and 275 square
feet of selling space usually located in higher traffic areas of the clubs near
or adjacent to the cart rails, front entrances or check out areas of the clubs.
PERSONNEL AND TRAINING
The Company considers its associates to be one of the most important
aspects of its ability to successfully carry out its business
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objectives. The Company intends to devote a substantial amount of resources to
support its associates with training programs, technology and facilities. The
Company has implemented a comprehensive training program covering its
relationship selling techniques, member service skills, product knowledge and
operational procedures. The Company compensates its associates at rates it
believes are competitive in the discount retail industry and seeks to motivate
its associates through a flexible incentive program. The flexible incentive
program is not based on the typical commission system (i.e., % of sales
revenue), but rewards the associate for exceeding target sales levels or meeting
other criteria which the Company establishes from time to time.
ADVERTISING AND PROMOTION
In accordance with Sam's philosophy, the Company does not promote its
products sold in the departments by newspaper or other periodical advertising or
the broadcast media. To support seasonal activities, the Company promotes its
products through direct mail catalogues to Sam's members. The Company utilizes
promotional materials such as signage, banners and takeaway brochures within the
clubs to promote its products.
DISTRIBUTION
The Company's retail locations receive the majority of their
merchandise directly from the Company's distribution warehouse located in
Sunrise, Florida. Merchandise is shipped from the distribution warehouse
utilizing various air and ground carriers. Presently, a small portion of
merchandise is delivered directly to the retail locations from suppliers. The
Company transfers merchandise between retail locations to balance inventory
levels and to fulfill customer requests. The Company's wholesale shipments are
processed through its distribution warehouse in Sunrise, Florida.
The Company operates a distribution facility in Mexico City, Mexico
which warehouses and distributes merchandise sold to Sam's Club in Mexico.
The Company does not believe that the dollar amount of unfilled orders
is significant to an understanding of the Company's business due to the
relatively short time between receipt of a customer order and shipment of the
product.
COMPETITION
The Company's competitors include foreign and domestic jewelry
retailers, national and regional jewelry chains, department stores, catalog
showrooms, discounters, direct mail suppliers, televised home shopping networks,
manufacturers, distributors and large wholesalers and importers, some of whom
have greater resources than the Company. The Company believes that competition
in its markets is based primarily on price, design, product quality and service.
With the consolidation of the
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retail industry that is occurring, the Company believes that competition both
within the warehouse club industry and with other competing general and
specialty retailers and discounters will continue to increase.
REGULATION
The Company utilizes the services of independent customs agents to
comply with U.S. customs laws in connection with its purchases of gold, diamond
and other jewelry merchandise from foreign sources.
Jan Bell bears certain risks in purchasing parallel marketed goods
which includes certain watches and other products such as fragrances and
collectibles. Parallel marketed goods are products to which trademarks are
legitimately applied but which were not necessarily intended by their foreign
manufacturers to be imported and sold in the United States. The laws and
regulations governing transactions involving such goods lack clarity in
significant respects. From time to time, trademark or copyright holders and
their licensees initiate private suits or administrative agency proceedings
seeking damages or injunctive relief based on alleged trademark or copyright
infringement by purchasers and sellers of parallel marketed goods. While Jan
Bell believes that its practices and procedures with respect to the purchase of
parallel marketed goods lessen the risk of significant litigation or liability,
Jan Bell is from time to time involved in such proceedings and there can be no
assurance that additional claims or suits will not be initiated against Jan Bell
or any of its affiliates, and there can be no assurances regarding the results
of any pending or future claims or suits. Further, legislation has been
introduced in Congress in recent years and is currently pending regarding
parallel marketed goods. Certain legislative or regulatory proposals, if
enacted, could materially limit Jan Bell's ability to sell parallel marketed
goods in the United States. There can be no assurances as to whether or when any
such proposals might be acted upon by Congress or that future judicial,
legislative or administrative agency action will restrict or eliminate these
sources of supply. Jan Bell has identified alternate sources of supply or
categories of similar products, although the cost of certain products may
increase or their availability may be lessened.
EMPLOYEES
As of April 15, 1997, the Company employed approximately 1,012 persons
on a full-time basis, including approximately 737 in regional and local sales
(primarily the Sam's retail locations), 148 in inventory and distribution and
127 in administrative and support functions. In addition, the Company also
employed approximately 1,535 persons on a part-time or temporary basis which
varies with the seasonal nature of its business. None of its employees are
governed by a collective bargaining agreement, and the Company believes that its
relations with employees are good.
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ITEM 2. PROPERTIES
PROPERTIES AND LEASES
The Company's corporate headquarters is owned by the Company and
located on 11.1 acres in a 123,000 square foot building in Sunrise, FL. The
Company owns an additional 3.7 acres adjacent to the headquarters facility, on
which a 60,000 square foot building, previously used as the headquarters
facility is located. The Company is in the process of selling the 60,000 square
foot building and recently consolidated all headquarters and distribution center
operations in the newer 123,000 square foot building.
The Company leases on a quarter to quarter basis one distribution and
one office facility with an aggregate of approximately 4,000 square feet in
Mexico City. The Company leases facilities in Israel of 11,000 square feet for
manufacturing and offices and 2,000 square feet for production and offices
pursuant to leases which expire in May 2001.
As of April 1, 1997, the Company had leased department operations at
440 Sam's club locations in 49 states throughout the United States and Puerto
Rico. The typical leased department consists of approximately 260 to 275 square
feet.
On November 9, 1995, the Company opened its first "Jewelry Depot", a
6,071 square foot value-oriented jewelry and luxury gift store in Framingham,
Massachusetts. Subsequently, the Company also opened two "Jewelry Depot Outlet"
locations, a 2,207 square foot facility in Vero Beach, Florida and an 891 square
foot store in Worcester, Massachusetts. The "Jewelry Depot" and "Jewelry Depot
Outlets" each were opened as prototypes for potential stand-alone jewelry
operations that the Company has evaluated as possible long term sources of
additional revenue. The Framingham and Worcester locations have not been
successful and in January 1997 the Company decided it would close these
operations. Additionally, during the third quarter of 1996, the Company acquired
from Andin International, Inc. its three Manhattan Diamond locations in the
Potomac Mills, Gurnee Mills and Orlando Belz outlet malls.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incident to the
conduct of its business. There are no pending legal proceedings reportable
pursuant to this Item 3.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in
the fourth quarter of the fiscal year ended February 1, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been listed on the American Stock
Exchange since the Company's initial public offering in August 1987. The
following table sets forth for the periods indicated, the range of sales prices
per share on the American Stock Exchange Composite Tape as furnished by the
National Quotation Bureau, Inc.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year Ended February 1, 1997
Thirteen Weeks Ended May 4, 1996...................$3.63 $2.63
Thirteen Weeks Ended August 3, 1996................ 3.38 2.00
Thirteen Weeks Ended November 2, 1996.............. 3.31 2.06
Thirteen Weeks Ended February 1, 1997.............. 2.81 2.00
Year Ended February 3, 1996
Thirteen Weeks Ended April 29, 1995................$4.25 $2.44
Thirteen Weeks Ended July 29, 1995................. 2.94 2.19
Thirteen Weeks Ended October 28, 1995.............. 4.00 2.38
Fourteen Weeks Ended February 3, 1996.............. 3.50 1.75
</TABLE>
The last reported sales price of the Common Stock on the American Stock
Exchange Composite Tape on April 1, 1997 was $2.25. On April 1, 1997, the
Company had 849 stockholders of record.
The Company has never paid a cash dividend on its Common Stock. The
Company currently anticipates that all of its earnings will be retained for use
in the operation and expansion of its business and does not intend to pay any
cash dividends on its Common Stock in the foreseeable future. Any future
determination as to cash dividends will depend upon the earnings, capital
requirements and financial condition of the Company at that time, applicable
legal restrictions and such other factors as the Board of Directors may deem
appropriate. Currently, the Company's working capital facility prohibits
dividend payments.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected data should be read in conjunction with the
Consolidated Financial Statements and Related Notes thereto appearing elsewhere
in this Form 10-K and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Fifty-two Fifty-three Fifty-two
weeks ended weeks ended weeks ended Years Ended
February 1, February 3, January 28, December 31,
----------- ----------- ----------- ------------
1997 1996 1995(3) 1993 1992
---- ---- ------- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales $243,079 $254,004 $305,685 $275,177 $333,521
Less: Effect of
Sam's agreement (1) --- --- --- 99,718 ---
-------- -------- -------- -------- --------
243,079 254,004 305,685 175,459 333,521
-------- -------- -------- -------- --------
Cost of Sales 183,636 199,579 255,725 243,349 274,586
Less: Effect of
Sam's agreement (1) --- --- --- 79,687 ---
-------- -------- -------- -------- --------
183,636 199,579 255,725 163,662 274,586
-------- -------- -------- -------- --------
Gross profit 59,443 54,425 49,960 11,797 58,935
Store and warehouse operating
and selling expenses 33,368 35,261 42,596 16,400 11,163
General and administrative
expenses 11,577 11,486 16,195 19,876 20,506
Other charges (2) 5,643 --- 47,773 10,217 ---
Depreciation and
amortization 8,236 8,674 9,511 10,177 5,443
Currency exchange (gain)/loss (26) 597 5,474 --- ---
-------- -------- -------- -------- --------
Operating income (loss) 645 (1,593) (71,589) (44,873) 21,823
Interest expense (999) (3,196) (3,534) (3,195) (916)
Interest and other income 1,269 1,477 419 635 550
-------- -------- -------- -------- --------
Income/(loss) before
income taxes 915 (3,312) (74,704) (47,433) 21,457
Income tax provision
(benefit) 154 130 353 (11,709) 6,682
-------- -------- -------- -------- --------
Net income/(loss) $ 761 $ (3,442) $(75,057) $(35,724) $ 14,775
======== ======== ======== ======== ========
Net income/(loss)
per common share $ 0.03 $ (.13) $ (2.92) $ (1.40) $ .59
======== ======== ======== ======== ========
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 96,828 $ 96,762 $ 88,742 $174,496 $198,043
Total assets 139,385 153,173 186,752 312,254 301,958
Notes payable, less amounts
classified as current --- 7,500 --- 33,496 33,047
Stockholders' equity 125,373 125,225 127,335 205,382 234,974
- -----------------------
</TABLE>
(1) As a result of the agreement with Sam's entered into in May 1993, the
Company recorded a sales reversal of $99.7 million for the amount of
inventory previously sold by Jan Bell to Sam's which was subject to
repurchase. In addition, cost of sales was reduced by $79.7 million
resulting in
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a $20.0 million one-time charge to pre-tax earnings.
(2) Other charges for the fifty-two weeks ended February 1, 1997, include
(a) $2 million in severance payments to the Company's Former President
and Chief Executive Officer; (b) $630,000 write-off of financing costs
in connection with the Company's repayment of senior notes;(c)
$1.5 million write-down of the corporate headquarters building which the
Company has placed on the market for sale; and (d) $1.5 million provision
for the closing of two Jewelry Depot locations. (See Note L to the
Consolidated Financial Statements.)
Other charges in the fifty-two weeks ended January 28, 1995, include (a)
$23.8 million write-off of Goodwill associated with the 1991 acquisition of
the minority interest in the Big Ben `90 joint venture; (b) $17.7 million to
provide for liquidation of inventory predominantly sold in the wholesale
watch division, which the Company decided to close, and certain other
inventory in order to raise cash for liquidity purposes as a result of the
then uncertain status of credit availability due to the Company's failure to
comply with certain covenants in its debt agreements, and $2.7 million for
obligations under licensing agreements for the use of trade names on watches
previously sold in the wholesale division; (c) $3.0 million for severance
payments to terminated employees and the settlement of certain employment
contracts in connection with the closing of the wholesale watch division and
the buy-out of the unvested portions of bonus stock awards; and (d) other
costs of $.6 million, consisting of financing costs incurred primarily in
connection with the original senior note agreement which was substantially
amended and a bank credit facility which was terminated and replaced, less a
recovery of previously accrued expenses resulting from the settlement of the
terminated lease department agreement with Pace Membership Warehouse, Inc.
(See Note L to the Consolidated Financial Statements.)
Included in Other Charges for 1993 was $6.0 million of charges related to
the Sam's agreement and retail transition and $4.2 million related to the
compensation costs in connection with the departure of the former Chairman
of the Board of Directors, consisting primarily of the acceleration of
vesting of previously granted stock bonus awards and amounts due under his
employment contract.
(3) In February 1994, the Company changed its fiscal year from December 31
to a retail 52/53 week fiscal year ending on the Saturday closest to the
end of each January.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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. In some
cases, forward looking statements use terminology such as "may", "will",
"expect", "plans", "believes", "anticipates", "estimates", "potential", or
"continue" or the negative thereof, and other variations thereon or comparable
terminology. The Company's actual results could differ materially from those
anticipated in any forward-looking statements as a result of certain
uncertainties and risk factors set forth below and elsewhere in this report.
The fifty-two weeks ended February 1, 1997, the fifty-three weeks
ended February 3, 1996 and the fifty-two weeks ended January 28, 1995 are
referred to herein as Fiscal 1996, Fiscal 1995 and Fiscal 1994.
The Company operates an exclusive leased department at all existing and
future domestic and Puerto Rican Sam's Wholesale Club ("Sam's") locations under
an agreement which expires February 1, 2001. As of February 1, 1997, the Company
operated a leased department in 440 Sam's locations. During Fiscal 1996,
approximately 94% of the Company's net sales were to Sam's customers.
Results of operations for Fiscal 1996, Fiscal 1995 and Fiscal 1994
reflect the Company's strategy to achieve expense savings at all levels. During
this time the Company also implemented merchandise strategies and selection
offerings that further allowed the Company to achieve higher gross margins in
its leased departments. In addition, emphasis on cash management and inventory
control systems allowed the Company to generate positive cash flows from
operations and reduce its reliance on working capital support from third party
lenders. Finally, the Company's ongoing drive to reduce and better balance its
inventory levels led the Company to improve its inventory turns and reduce its
average inventory requirements. Management believes there is the possibility of
additional opportunity for continued improvements in gross margins, operating
cash flows and expense savings in its traditional core business with Sam's Club.
However, these opportunities are not believed to be as significant as those
realized in Fiscal 1996 and Fiscal 1995.
On November 9, 1995, the Company opened its first "Jewelry Depot", a
6,071 square foot value-oriented jewelry and luxury gift store in Framingham,
Massachusetts. Subsequently, the Company also opened two "Jewelry Depot
Outlets", a 2,207 square foot facility in Vero Beach, Florida and an 891 square
foot store in Worcester, Massachusetts. The "Jewelry Depot" and "Jewelry Depot
Outlets" each were opened as prototypes for potential stand-alone jewelry
operations that the Company has evaluated as possible long term sources of
additional revenue. The Framingham and Worcester locations have not been
successful and in January 1997 the Company decided it would close these
operations. Additionally, during the third quarter of 1996, the Company
acquired from Andin International, Inc. its three Manhattan Diamond outlet
17
<PAGE> 18
locations in the Potomac Mills, Gurnee Mills and Orlando Belz outlet malls. The
Company currently is unable to determine the impact of these stand-alone jewelry
operations on its future operating results or capital requirements.
The retail jewelry business is seasonal in nature with a higher
proportion of sales and a significant portion of earnings generated during the
fourth quarter holiday selling season.
The following table sets forth for the periods indicated the percentage
of net sales for certain items in the Company's Statements of Operations:
<TABLE>
<CAPTION>
Income and Expense Items as a
Percentage of Net Sales
-----------------------------
Fifty-two Fifty-three Fifty-two
Weeks Ended Weeks Ended Weeks Ended
February 1, February 3, January 28,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 75.5 78.6 83.7
----- ----- -----
Gross profit 24.5 21.4 16.3
Store and warehouse operating
and selling expenses 13.7 13.9 13.9
General and administrative
expenses 4.8 4.5 5.3
Other charges 2.3 --- 15.6
Depreciation and amortization 3.4 3.4 3.1
Currency exchange loss --- .2 1.8
----- ----- -----
Operating income/(loss) .3 (.6) (23.4)
Interest expense .4 1.3 1.2
Interest and other income .5 .6 .1
----- ----- -----
Income/(loss) before income taxes .4 (1.3) (24.5)
Provision for income taxes .1 .1 .1
----- ----- -----
Net income/(loss) .3% (1.4)% (24.6)%
===== ===== =====
</TABLE>
- --------------------
SALES
In Fiscal 1996, net sales were $243.0 million, a decrease of $11.0
million or 4.3% from Fiscal 1995. Comparable retail sales for locations
operating in both periods were $225.1 million in Fiscal 1996, an increase of
$1.4 million or .6% from Fiscal 1995. The decline in Fiscal 1996 net sales is
primarily attributable to liquidation sales in Fiscal 1995 not made during
Fiscal 1996 as result of the closing
18
<PAGE> 19
of the Company's U.S. wholesale division. Net sales in the Company's Sam's and
independent retail locations for Fiscal 1996 were $230.0 million compared to
$227.9 million for Fiscal 1995.
In Fiscal 1995, net sales were $254.0 million, a decrease of $51.7
million or 16.9% from Fiscal 1994. The decline in sales in Fiscal 1995 reflects
primarily the closing of the U.S. wholesale division as well as the reduction in
business through the Company's Mexican operations due to the significant peso
devaluation during the fourth quarter of Fiscal 1994. Net sales in retail
locations for Fiscal 1995 were $227.9 million compared to $228.0 million for
Fiscal 1994. The impact of the extra week in Fiscal 1995 was approximately
$2.3 million.
There were no wholesale sales to Sam's in 1996 compared to $5.5 million
in Fiscal 1995 and $33.9 million in Fiscal 1994 as a result of the Company
closing its U.S. wholesale business. Wholesale sales to customers other than
Sam's were $13.1 million in Fiscal 1996 compared to $20.6 million in Fiscal 1995
and $43.8 million in 1994. The sales in Fiscal 1996 primarily were made by the
Company's subsidiaries in Israel and Mexico. Significant changes from the Fiscal
1996 sales amounts are not anticipated during Fiscal 1997. Approximately 44% of
the Fiscal 1995 wholesale sales were a result of liquidation sales in connection
with the disposal of inventory previously purchased for the closed U.S.
wholesale division.
Sales in the future may be adversely impacted by general economic
conditions, the level of spending in the wholesale club environment and changes
to the Company's existing relationship with Sam's. The retail jewelry market is
particularly subject to the level of consumer discretionary income and the
subsequent impact on the type and value of goods purchased. With the
consolidation of the retail industry, the Company believes that competition both
within the warehouse club industry and with other competing general and
specialty retailers and discounters will continue to increase.
19
<PAGE> 20
COST OF SALES AND GROSS PROFIT
Gross profit in Fiscal 1996 was 24.5% compared to 21.4% and 16.3% in
Fiscal 1995 and Fiscal 1994, respectively. The improvement in gross margin in
both Fiscal 1996 and Fiscal 1995 was primarily attributed to a change in
merchandising strategies at the retail locations to emphasize higher margin gem,
gold and watch products in place of other lower margin products and categories.
Further, wholesale sales, for which the Company realizes a significantly lower
gross profit percentage than for retail sales, decreased to 5% of net sales in
Fiscal 1996 from 10% in Fiscal 1995 and 26% in Fiscal 1994. In addition, the
Company achieved improvements as a percentage of sales in Fiscal 1995 in
inventory shrinkage and in freight and handling costs.
STORE AND WAREHOUSE OPERATING AND SELLING EXPENSES
Store and warehouse operating and selling expenses decreased by $1.9
million in Fiscal 1996 from Fiscal 1995 and decreased $7.3 million in Fiscal
1995 from Fiscal 1994. The decrease in Fiscal 1996 is primarily a result of
advertising expense reductions during the holiday selling season and because
Fiscal 1995, being a fifty three week period compared to the fifty two week
period of Fiscal 1996, contained an additional week of expense. The decrease in
Fiscal 1995 is primarily a reflection of expense reductions implemented by
management, including field and related operating and selling staff
reductions.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $11.6 million in Fiscal 1996
and $11.5 million in Fiscal 1995, and decreased by $4.8 million in Fiscal 1995
from Fiscal 1994. In Fiscal 1996, the decrease in expense as a result of the
extra week in Fiscal 1995 was offset by increases in professional fees,
primarily related to the Company's strategic business development project. The
decrease in Fiscal 1995 is primarily a reflection of expense reductions
implemented by management, including general and administrative staff reductions
and the elimination of expenses associated with the Company's domestic wholesale
and manufacturing divisions.
OTHER CHARGES
In Fiscal 1996 and Fiscal 1995, the Company recorded $5.6 million and
$47.8 million, respectively, in other charges discussed below. See Note L to the
Consolidated Financial Statements.
In May 1996 the Company's President and Chief Executive Officer
resigned and the Company made approximately $2 million in severance
payments.
Also during the second quarter, the Company recorded a write-off of
$630,000 of financing costs in connection with the prepayment of its senior
notes as further discussed in Note G to the consolidated financial
statements.
During the fourth quarter of Fiscal 1996, the Company recorded a $1.5
million write-down of the carrying value of its former corporate headquarters
building which is currently held for sale. The Company also recorded a $1.5
million provision for the closing of two Jewelry Depot locations which includes
a $1.0 million accrual for costs associated with terminating the leases and a
$500,000 write-down of fixed assets which will be disposed.
20
<PAGE> 21
As a result of the decision to close the wholesale watch division and
other related factors, the Company concluded that it had not retained any of the
valuable elements obtained in the 1991 acquisition of the minority interest of
the Big Ben '90 joint venture. Also, the Company projected, based on
management's best estimate of future operating results for its remaining watch
business, that none of the balance of Goodwill arising from the Big Ben '90
acquisition would be recovered. Accordingly, the remaining balance of Goodwill
of $23.8 million as of January 28, 1995, was written off in Fiscal 1994.
In the fourth quarter of 1994, the Company made the decision to sell
certain inventory at significantly less than normal prices, resulting in an
estimated net realizable value below the cost of such inventory. This decision
was made (a) to liquidate the merchandise that was predominantly sold in the
wholesale watch division which was being closed in order to focus management's
attention on the Company's retail operations, and (b) to liquidate certain other
inventory on an expedited basis in order to raise cash for liquidity purposes as
a result of the then uncertain status of credit availability due to the
Company's failure to comply with certain covenants in its debt agreements. As a
result, the Company recorded losses of $17.7 million to reflect such inventory
at its estimated net realizable value. Additionally, the Company provided $2.7
million for obligations under licensing agreements for the use of trade names on
watches previously sold in the wholesale division.
In connection with the closing of the wholesale watch division, changes
in executive management and the reduction in the number of personnel, the
Company made payments to and provided for severance for terminated employees and
the settlement of certain employment contracts, aggregating $3.0 million.
In Fiscal 1994 the Company did not comply with certain covenants in the
agreement related to its senior notes which was substantially amended and bank
credit facility which was terminated and replaced. The Company expensed $2.3
million in financing costs incurred primarily in connection with these original
agreements. Also, the Company settled the termination of the lease department
agreement with Pace Membership Warehouse, Inc., which resulted in a $1.7 million
recovery of previously accrued expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses were $8.2 million in Fiscal
1996, $8.7 million in Fiscal 1995 and $9.4 million in Fiscal 1994. The decreases
in Fiscal 1996 and Fiscal 1995 are primarily attributable to the write-off
of deferred financing costs in Fiscal 1996 and goodwill write-off in Fiscal
1994, both of which reduced amortization in later periods.
21
<PAGE> 22
CURRENCY EXCHANGE GAIN/LOSS
The Company supplies selected fine jewelry, watches and fragrances to
Sam's Club locations in Mexico, a warehouse club joint venture in Mexico between
Wal-Mart Stores and Cifra S.A. Accordingly, it is exposed to foreign currency
exchange rate fluctuations. The significant devaluation of the Mexican peso
during Fiscal 1994 and the continuing decline in Fiscal 1995 resulted in
currency exchange losses of $597,000 and $5.5 million in Fiscal 1995 and 1994,
respectively. Greater stability during 1996 resulted in a gain of $26,000 in
Fiscal 1996.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE
Interest and other income was $1.3 million in Fiscal 1996, $1.5 million
in Fiscal 1995 and $419,000 in Fiscal 1994. Interest expense was $1.0 million in
Fiscal 1996, $3.2 million in Fiscal 1995 and $3.5 million in Fiscal 1994. The
decrease in interest expense in Fiscal 1996 compared to Fiscal 1995 and Fiscal
1994 is primarily attributable to the prepayment of the senior notes in July
1996 and decreased borrowings under the Company's Working Capital Facility.
Average short-term borrowings were $192,500 in Fiscal 1996, $1.2 million in
Fiscal 1995 and $9.2 million in Fiscal 1994.
INCOME TAXES
The Company's effective income tax rate was 16.9% in Fiscal 1996, 3.9%
in Fiscal 1995 and 0.5% in Fiscal 1994. The Company has a Federal net operating
loss carryforward of approximately $52.2 million, and a state net operating loss
carryforward of approximately $62.1 million. The Federal net operating loss
carryforward expires beginning in 2008 through 2011 and the state net operating
loss carryforward expires beginning in 1998 through 2011. The Company also has
an alternative minimum tax credit carryforward of approximately $937,000 to
offset future Federal income taxes. Valuation allowances have been provided to
fully offset the net deferred tax asset to the amount that the Company believes,
after evaluating currently available evidence, will more likely than not be
realized. The changes in the effective rates primarily relate to the valuation
allowance on the net operating loss carryforwards in Fiscal 1996, Fiscal 1995
and Fiscal 1994.
When the Company purchased Exclusive Diamonds International, Limited ("EDI") in
August of 1990, EDI applied to and received from the Israeli government under
the Encouragement of Capital Investments Law of 1959 "approved enterprise"
status, which results in reduced tax rates given to foreign owned corporations
to stimulate the export of Israeli manufactured products. This benefit allows a
favorable tax rate ranging from zero to ten percent during the first ten years
in which the subsidiary recognizes a profit. The "approved enterprise" benefit
is available to the Company until the year 2000. Additionally, the Company has
not provided for Federal and state income taxes on earnings of foreign
subsidiaries which are considered indefinitely invested. (See Note H to the
Consolidated Financial Statements.)
22
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
As of February 1, 1997, cash and cash equivalents totaled $23.5 million
and the Company had no short-term borrowings outstanding under its working
capital facility.
On July 15, 1996 the Company amended its working capital facility with
GBFC, Inc./Foothill Capital Corporation increasing the amount available to $40
million from $30 million and extending the term to May 31, 1998. The amended
interest rate of any borrowings is generally prime plus one quarter of one
percent. Upon closing of this amendment, the Company prepaid the $17.5 million
remaining balance of the senior notes.
The Company's working capital requirements are directly related to the
amount of inventory required to support its retail operations. The Company began
Fiscal 1994 with retail inventory in excess of its needs, primarily due to the
inventory purchased under the Sam's Club agreement as previously discussed. Over
the course of that year, inventory was reduced providing the liquidity to fund
its repurchase obligations to Sam's and the Company's operating losses.
The agreement related to the amended working capital facility contains
covenants which require the Company to maintain financial ratios related to
earnings, working capital, inventory turnover, trade payables and tangible net
worth. It limits capital expenditures and the incurrence of additional debt and
prohibits 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.
During Fiscal 1996, operations provided $28.9 million in cash primarily
due to the effects of depreciation and amortization and the significant
reduction in inventory, partially offset by reductions in accounts payable and
accrued expenses. The inventory reduction in Fiscal 1996 is primarily a result
of management's efforts to decrease its reliance on working capital support from
third party lenders. Capital expenditures for Fiscal 1996 were $2.3 million,
primarily for new back office computer systems. Cash of $17.5 million was used
to prepay the remaining balance of the senior notes.
The Company's business is highly seasonal, with seasonal working
capital needs peaking in October and November, before the holiday shopping
season. The Company anticipates similar seasonal needs in Fiscal 1997.
The Company partially finances its peak seasonal inventory with
short-term borrowings. During Fiscal 1996, Fiscal 1995 and Fiscal 1994, the
Company's peak levels of inventory were $113.2 million, $132.3 million and
$172.4 million and peak outstanding short-term borrowings pursuant to lines of
credit were $4.1 million, $14.7 million and $39.8 million, respectively. Average
amounts of
23
<PAGE> 24
outstanding short-term borrowings for the respective years were $192,500, $1.2
million and $9.2 million.
During Fiscal 1995, a dispute arose between Sam's and the Company
related to certain wholesale sales and returns, primarily relating to claims by
Sam's for credits for certain merchandise returns. The Company considers this
matter to be in nature and magnitude outside the normal course of business. The
total difference between the amount of credits that Sam's has claimed and the
amount the Company believes is appropriate is approximately $6.7 million. The
Company and Sam's have held discussions and negotiations regarding this matter;
however, no resolution has been reached. While the Company believes that no
further amounts are owed to Sam's, the outcome remains uncertain. The financial
statements do not include a provision for any loss that may result from the
resolution of this matter.
The Company believes that its cash on hand, projected cash from
operations and availability under the Working Capital Facility will be
sufficient to meet its anticipated working capital and capital expenditure needs
for Fiscal 1997. There can be no assurance that the Company's future operating
results will be sufficient to sustain working capital and capital expenditure
needs.
EFFECTS OF INFLATION
Gold prices are affected by political, industrial and economic factors
and by changing perceptions of the value of gold relative to currencies.
Investors commonly purchase gold and other precious metals perceived to be
rising in value as a hedge against a perceived increase in inflation, thereby
bidding up the price of such metals. The Company's sales volume and net income
are potentially affected by the fluctuations in prices of gold, diamonds and
other precious or semi-precious gemstones as well as watches and other
accessories. The Company has used gold commodities futures contracts to hedge
its gold inventories, excluding the gold component of gem jewelry-related
merchandise. Because of the change in the Company's business and the manner in
which it procures and sells gold jewelry as further discussed in Note D to the
Consolidated Financial Statements, the Company believes that it is no longer
necessary to hedge its gold inventories. Therefore, during the fifty-two weeks
ended February 1, 1997, the Company discontinued its hedging activities relating
to gold inventories. Hedging is not available with respect to possible
fluctuations in the price of precious and semi-precious gemstones, watches or
other accessories.
The Company's selling, general and administrative expenses are directly
affected by inflation resulting in an increased cost of doing
24
<PAGE> 25
business. Although inflation has not had and the Company does not expect it to
have a material effect on operating results, there is no assurance that the
Company's business will not be affected by inflation in the future.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted the following Statements of Financial Accounting
Standards ("SFAS") in the year ending February 1, 1997, which did not have
a material effect on the Company's financial position or results of operations.
SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to Be Disposed Of" establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. Long-lived assets and
certain identifiable intangibles to be held and used by a company are required
to be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Measurement of an impairment loss for such long-lived assets and identifiable
intangibles should be based on the fair value of the asset. Long-lived assets
and certain identifiable intangibles to be disposed of are required to be
reported generally at the lower of the carrying amount or fair value less cost
to sell.
SFAS No. 123, "Accounting for Stock-Based Compensation" establishes
financial accounting and reporting standards for stock-based employee
compensation plans, including stock options, stock purchase plans, restricted
stock, and stock appreciation rights. SFAS No. 123 defines and encourages the
use of the fair value method of accounting for employee stock-based
compensation. Continuing use of the intrinsic value based method of accounting
prescribed in Accounting Principles Board Opinion No. 25 ("APB 25") for
measurement of employee stock-based compensation is allowed with pro forma
disclosures of net income and earnings per share as if the fair value method of
accounting had been applied. Transactions in which equity instruments are issued
in exchange for goods or services from non-employees must be accounted for based
on the fair value of the consideration received or of the equity instrument
issued, whichever is more reliably measurable. The Company has determined that
it will continue to use the method of accounting prescribed in APB 25 for
measurement of employee stock-based compensation, and has provided the required
pro forma disclosures in Notes to the Consolidated Financial Statements.
25
<PAGE> 26
FUTURE OPERATING RESULTS, UNCERTAINTIES AND RISKS
The future operating results of the Company may be affected by a number
of factors, including without limitation the following:
The Company is focusing on strategic business development and the
Company incurred expenses for the initial phase of the project of approximately
$800,000. A significant portion of those costs were expensed by the Company
during the fourth quarter of Fiscal 1996. The Company is currently unable to
determine to what extent the strategies will be implemented or the impact of
any potential growth opportunities on its future operating results or capital
requirements.
The Company markets its products through Sam's Club, a division of
Wal-Mart, Inc., pursuant to an arrangement whereby the Company operates an
exclusive leased department at all of Sam's existing and future domestic and
Puerto Rican locations through February 1, 2001. Accordingly, the Company is
dependent on Sam's to conduct its business, and the loss of the leased
department arrangement with Sam's would have a material adverse effect on
the business of the Company. During Fiscal 1997, the Company will continue
to focus on developing retail opportunities outside its traditional core
business within Sam's Club.
Whether by acquisition or by developing alternative retail concepts,
management believes that the Company should be in a diversified position if it
is to successfully renegotiate or absorb the expiration of its Sam's Club lease
in 2001. The pursuit of any such opportunity will require a significant
investment of capital and attention by management. Such business development is
subject to all risks inherent to establishing or acquiring an additional
business, including competition and consumer uncertainties.
On November 9, 1995, the Company opened its first "Jewelry Depot", a
6,071 square foot value-oriented jewelry and luxury gift store in Framingham,
Massachusetts. Subsequently, the Company also opened two "Jewelry Depot Outlet"
locations, a 2,207 square foot facility in Vero Beach, Florida and an 891 square
foot store in Worcester, Massachusetts. The "Jewelry Depot" and "Jewelry Depot
Outlet" each were opened as prototypes for potential stand-alone jewelry
operations that the Company has evaluated as possible long term sources of
additional revenue. The Framingham and Worcester locations have not been
successful and in January 1997 the Company decided it would close these
operations. Additionally, during the third quarter of 1996, the Company acquired
from Andin International, Inc. its three Manhattan Diamond locations in the
Potomac Mills, Gurnee Mills and Orlando Belz outlet malls. The Company currently
is unable to determine the impact of these three stand-alone jewelry operations
on its future operating results or capital requirements.
The Company's retail operation requires expertise in the areas of
merchandising, sourcing, selling, personnel, training, systems and accounting.
The Company must look to increases in the number of retail
26
<PAGE> 27
locations to occur, thereby increasing the Company's customer base, for
expansion. The retail jewelry market is particularly subject to the level of
consumer discretionary income and the subsequent impact on the type and value of
goods purchased. With the consolidation of the retail industry, the Company
believes that competition both within the warehouse club industry and with other
competing general and specialty retailers and discounters will continue to
increase. Further consolidation of the warehouse club industry due to geographic
constraints and market consolidation might also adversely affect the Company's
existing relationship with Sam's and the Company's business. The opening and
success of the leased locations and locations to be opened in later years, if
any, will depend on various factors, including general economic and business
conditions affecting consumer spending, the performance of the Company's retail
programs and concepts, and the ability of the Company to manage the leased
operations and future expansion and hire and train personnel.
The Company purchases diamonds and other gemstones directly in
international markets located in Tel Aviv, New York, Antwerp and elsewhere. The
Company seeks to meet its diamond requirements with purchases on a systemic
basis throughout the year. Hedging is not available with respect to possible
fluctuations in the price of gemstones. If such fluctuations should be unusually
large or rapid and result in prolonged higher or lower prices, there is no
assurance that the necessary price adjustments could be made quickly enough to
prevent the Company from being adversely affected. Further, the continued
availability of diamonds to the Company is dependent, to some degree, upon the
political and economic situation in South Africa and Russia, which have been
unstable. Several other countries also are major suppliers of diamonds,
including Botswana and Zaire. In the event of an interruption of diamond
supplies, or a material or prolonged reduction in the world supply of finished
diamonds, the Company could be adversely affected.
Although purchases of several critical raw materials, notably gold and
gemstones, are made from a limited number of sources, the Company believes that
there are numerous alternative sources for all raw materials used in the
manufacture of its finished jewelry, and the failure of any principal supplier
would not have a material adverse effect on operations. Any changes in foreign
or domestic laws and policies affecting international trade may have a material
adverse effect on the availability or price on the diamonds, other gemstones,
precious metals and non-jewelry products purchased by the Company. Because
supplies of parallel marketed products are not always readily available, it can
be a difficult process to match the customer demand to market availability.
The Company utilizes the services of independent suppliers and customs
agents to comply with U.S. customs laws in connection with its purchases of
gold, diamond and other jewelry merchandise from domestic and foreign sources.
The Company bears certain risks in purchasing parallel marketed goods which
includes certain watches and other products such as
27
<PAGE> 28
fragrances and collectibles. Parallel marketed goods are products to which
trademarks are legitimately applied but which were not necessarily intended by
their foreign manufacturers to be imported and sold in the United States. The
laws and regulations governing transactions involving such goods lack clarity in
significant respects. From time to time, trademark or copyright holders and
their licensees initiate private suits or administrative agency proceedings
seeking damages or injunctive relief based on alleged trademark or copyright
infringement by purchasers and sellers of parallel marketed goods. While the
Company believes that its practices and procedures with respect to the purchase
of parallel marketed goods lessen the risk of significant litigation or
liability, the Company is from time to time involved in such proceedings and
there can be no assurance that additional claims or suits will not be initiated
against the Company or any of its affiliates, and there can be no assurances
regarding the results of any pending or future claims or suits. Further,
legislation has been introduced in Congress in recent years and is currently
pending regarding parallel marketed goods. Certain legislative or regulatory
proposals, if enacted, could materially limit the Company's ability to sell
parallel marketed goods in the United States. There can be no assurances as to
whether or when any such proposals might be acted upon by Congress or that
future judicial, legislative or administrative agency action will restrict or
eliminate these sources of supply. The Company has identified alternate sources
of supply or categories of similar products, although the cost of certain
products may increase or their availability may be lessened.
The agreements related to the Company's amended Working Capital
Facility contain covenants which require the Company to maintain financial
ratios related to earnings, working capital, inventory turnover, trade payables
and tangible net worth. It also limits capital expenditures and the incurrence
of additional debt and prohibits the payment of dividends. There can be
assurance that the Company's future operating results will be sufficient to meet
the requirements of the foregoing covenants.
28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report......................................
Consolidated Balance Sheets as of February 1, 1997
and February 3, 1996.........................................
Consolidated Statements of Operations for
the Fifty-two Weeks Ended February 1, 1997,
the Fifty-three Weeks Ended February 3, 1996,
and the Fifty-two Weeks Ended January 28, 1995...............
Consolidated Statements of Stockholders' Equity for
the Fifty-two Weeks Ended February 1, 1997,
the Fifty-three Weeks Ended February 3, 1996 and
the Fifty-two Weeks Ended January 28, 1995
Consolidated Statements of Cash Flows for
the Fifty-two Weeks Ended February 1, 1997,
the Fifty-three Weeks Ended February 3, 1996 and
the Fifty-two Weeks Ended January 28, 1995...................
Notes to Consolidated Financial Statements........................
</TABLE>
29
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Jan Bell Marketing, Inc.
Sunrise, Florida
We have audited the accompanying consolidated balance sheets of Jan
Bell Marketing, Inc. and its subsidiaries (the "Company") as of February 1, 1997
and February 3, 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three fiscal years in the
period ended February 1, 1997. Our audits also included the financial statement
schedule listed at Item 14(a)(2). These consolidated financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of February
1, 1997 and February 3, 1996, and the results of its operations and its cash
flows for each of the three fiscal years in the period ended February 1, 1997,
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As discussed in Note D to the consolidated financial statements, during the
fifty-two weeks ended February 1, 1997 the Company changed its method of
accounting for its gold jewelry inventory from market value to cost determined
on the first-in-first-out basis.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 25, 1997
30
<PAGE> 31
JAN BELL MARKETING, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts shown in thousands except share and per share data)
<TABLE>
<CAPTION>
February 1, February 3,
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 23,525 $ 14,955
Accounts receivable (net of allowance
for doubtful accounts of $1,439
and $702, respectively) 6,162 5,855
Inventories 79,893 95,486
Other current assets 1,260 914
-------- --------
Total current assets 110,840 117,210
Property, net 21,481 25,943
Excess of cost over fair value of
net assets acquired 2,860 2,685
Other assets 4,204 7,335
-------- --------
$139,385 $153,173
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $8,222 $6,043
Accrued expenses 5,790 4,405
Current portion of long term debt --- 10,000
-------- --------
Total current liabilities 14,012 20,448
-------- --------
Long-term debt --- 7,500
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.0001 par value, 50,000,000
shares authorized, 25,894,428 and
25,833,541 shares issued, respectively 3 3
Additional paid-in capital 180,448 180,716
Accumulated deficit (53,338) (54,099)
Foreign currency translation adjustment (1,740) (1,395)
-------- --------
125,373 125,225
-------- --------
$139,385 $153,173
======== ========
</TABLE>
See notes to consolidated financial statements.
31
<PAGE> 32
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts shown in thousands except share and per share data)
<TABLE>
<CAPTION>
Fifty-two Fifty-three Fifty-two
Weeks Ended Weeks Ended Weeks Ended
February 1, February 3, January 28,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $ 243,079 $ 254,004 $ 305,685
Cost of sales 183,636 199,579 255,725
----------- ----------- -----------
Gross profit 59,443 54,425 49,960
Store and warehouse
operating and selling expenses 33,368 35,261 42,596
General and
administrative expenses 11,577 11,486 16,195
Other charges 5,643 --- 47,773
Depreciation and amortization
expense 8,236 8,674 9,511
Currency exchange (gain)/loss (26) 597 5,474
----------- ----------- -----------
Operating income/(loss) 645 (1,593) (71,589)
Interest expense (999) (3,196) (3,534)
Interest and other income 1,269 1,477 419
----------- ----------- -----------
Income/(loss) before income taxes 915 (3,312) (74,704)
Income tax provision 154 130 353
----------- ----------- -----------
Net income/(loss) $761 $(3,442) $(75,057)
=========== =========== ===========
Net income/(loss) per
common share $.03 $(.13) $(2.92)
=========== =========== ===========
Weighted average number
of common shares 26,017,364 25,774,018 25,688,592
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE> 33
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
Retained Foreign
Common Additional Earnings/ Currency Total
Shares Common Paid-in Accumulated Deferred Translation Stockholders'
Issued Stock Capital Deficit Compensation Adjustment Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 30, 1994 $25,852,238 $3 $180,371 $ 24,400 $(3,773) $ -0- $201,001
Purchase plan exercise 19,065 78 78
Issuance of common stock 63,688 990 990
Issuance of stock warrants 826 826
Settlement of stock awards (193,000) (3,369) 3,369
Amortization of deferred
compensation 404 404
Foreign currency
translation adjustment (907) (907)
Net loss (75,057) (75,057)
----------- --- -------- -------- ------- ------- --------
Balance at January 28, 1995 25,741,991 3 178,896 (50,657) -0- (907) 127,335
Purchase plan exercise 35,372 71 71
Issuance of common stock 63,688 350 350
Issuance of stock warrants 1,414 1,414
Foreign currency translation
adjustment (488) (488)
401(K) Plan contribution 6,367 20 20
Purchase and retirement of
common stock (13,877) (35) (35)
Net loss (3,442) -0- (3,442)
----------- --- -------- -------- ------- ------- --------
Balance at February 3, 1996 25,833,541 3 180,716 (54,099) -0- (1,395) 125,225
Purchase plan exercise 34,671 68 68
Issuance of common stock 21,334 363 363
Cancellation of
stock warrants (709) (709)
Foreign currency
translation adjustments (345) (345)
401(K) Plan contribution 4,882 10 10
Net income 761 761
----------- --- -------- -------- ------- ------- --------
Balance at February 1, 1997 25,894,428 $3 $180,448 $(53,338) $ -0- $(1,740) $125,373
=========== === ======== ======== ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
33
<PAGE> 34
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts shown in thousands)
<TABLE>
<CAPTION>
Fifty-two Fifty-three Fifty-two
Weeks Ended Weeks Ended Weeks Ended
February 1, February 3, January 28,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 242,632 $ 259,629 $ 310,756
Cash paid to suppliers and
employees (213,802) (251,154) (287,504)
Interest and other income
received 1,269 1,477 419
Interest paid (998) (3,196) (3,534)
Income taxes received (paid) (154) 506 14,348
--------- --------- ---------
Net cash provided by
operating activities 28,947 7,262 34,485
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (2,306) (1,937) (6,218)
Acquisition of Manhattan Diamonds stores (500) -- --
--------- --------- ---------
Net cash used in
investing activities (2,806) (1,937) (6,218)
--------- --------- ---------
Cash flows from financing
activities:
Debt repayment (17,500) (17,500) ---
Other 133 148 (20)
--------- --------- ---------
Net cash used in
financing activities (17,367) (17,352) (20)
--------- --------- ---------
Effect of exchange rate changes (204) (1,230) (2,338)
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 8,570 (13,257) 25,909
Cash and cash equivalents at
beginning of year 14,955 28,212 2,303
--------- --------- ---------
Cash and cash equivalents at
end of year $ 23,525 $ 14,955 $ 28,212
========= ========= =========
</TABLE>
34
<PAGE> 35
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts shown in thousands)
(continued)
<TABLE>
<CAPTION>
Fifty-two Fifty-three Fifty-two
Weeks Ended Weeks Ended Weeks Ended
February 1, February 3, January 28,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net income (loss) to
net cash provided by
operating activities:
Net income (loss) $ 761 $(3,442) $(75,057)
Adjustments to reconcile
net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 8,236 8,674 9,511
Impairment of long-lived assets 1,500 --- ---
Goodwill write-off --- --- 23,795
Currency exchange (gain)/loss (26) 597 5,474
(Increase) decrease in assets:
Accounts receivable (net) (446) 5,625 5,071
Inventories 15,519 10,132 77,846
Other assets (201) (1,705) 14,480
Increase (decrease) in liabilities:
Accounts payable 2,222 (6,868) (10,436)
Accrued expenses 1,382 (5,751) 1,967
Liability for inventory
repurchased --- --- (18,166)
------- ------- --------
Net cash provided by
operating activities $28,947 $ 7,262 $ 34,485
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 36
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FISCAL YEARS ENDED
FEBRUARY 1, 1997 FEBRUARY 3, 1996 and JANUARY 28, 1995
A. Nature of Business:
The Company is principally engaged in the sale of jewelry, watches and
other consumer products through leased departments in wholesale clubs and
formerly through its own wholesale operations. During the fifty-two weeks ended
February 1, 1997, the Company generated approximately 94% of its net sales from
Sam's customers. Accordingly, the Company is dependent on Sam's to conduct its
business and the loss of the leased department arrangement with Sam's would have
a material adverse effect on the business of the Company.
The Company's consolidated financial statements are prepared on a
52/53 week retail fiscal year basis. The fifty-two weeks ended February 1,
1997, the fifty-three weeks ended February 3, 1996 and the fifty-two weeks
ended January 28, 1995 are referred to herein as Fiscal 1996, Fiscal 1995 and
Fiscal 1994, respectively.
B. Relationship with Sam's Club:
In May 1993, the Company entered into an agreement (the "Agreement") to
operate an exclusive leased department at all existing and future Sam's Club
("Sam's") locations through February 1, 1999, later extended to February 1,
2001. Under the terms of the Agreement, the Company purchased Sam's existing
inventory which included goods Sam's had previously purchased from the Company
as well as from other vendors. As consideration for entering into the Agreement,
the Company paid to Sam's a one-time fee of $7.0 million, which is included in
Other Assets and is being amortized over the term of the Agreement. The
unamortized amount as of February 1, 1997 and February 3, 1996 was approximately
$3.7 million and $4.7 million, respectively. The Company pays Sam's a tenancy
fee of 9% of net sales.
As of February 1, 1997, the Company operated leased departments in 440
Sam's locations.
During Fiscal 1995, a dispute arose between Sam's and the Company
related to certain wholesale sales and returns, primarily relating to
claims by Sam's for credits for certain merchandise returns. The Company
considers this matter to be in nature and magnitude outside the normal course of
business. The total difference between the amount of credits that Sam's has
claimed and the amount the Company believes is appropriate is approximately $6.7
million. The Company and Sam's have held discussions and negotiations regarding
this matter; however, no resolution has been reached. While
36
<PAGE> 37
the Company believes that no further amounts are owed to Sam's, the outcome
remains uncertain. The financial statements do not include a provision for any
loss that may result from the resolution of this matter.
C. Summary of Significant Accounting Policies:
(1) Principles of Consolidation -- The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in the consolidation.
(2) Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(3) Sales of Consignment Merchandise -- Income is recognized on the
sale of inventory held on consignment at such time as the merchandise is sold.
(4) Sales Returns -- The Company generally gives its customers the
right to return merchandise purchased by them and records an accrual at the time
of sale for the amount of gross profit on estimated returns.
(5) Hedging Activities -- The Company has used gold commodities futures
contracts to hedge gold inventories. Commodity futures contracts are contracts
for delayed delivery of commodities in which the seller agrees to make and the
purchaser agrees to take delivery at a specified future date of a specified
commodity, at a specified price. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
commodity values and interest rates. Gains and losses on futures used to hedge
gold inventories valued at cost are deferred and included in the determination
of income upon disposition of such inventories. Gains and losses on futures
contracts used to hedge gold inventories valued at market were included in the
determination of income. Because of the change in the Company's business and
the manner in which it procures and sells gold jewelry as further discussed in
Note D, the Company believes that it is no longer necessary to hedge its gold
inventories. Therefore, during Fiscal 1996, the Company discontinued its hedging
activities relating to gold inventories.
37
<PAGE> 38
(6) Inventories -- Inventories are valued at the lower of cost
(first-in, first-out method) or market. The Company records reserves for lower
of cost or market, damaged goods, and obsolete and slow-moving inventory.
Costs incurred in acquiring, receiving, preparing and distributing
inventory to the point of being ready for sale are included in inventory. The
amount of these costs included in inventory as of February 1, 1997 and February
3, 1996 was $4.5 million and $5.7 million, respectively.
(7) Property -- Property is stated at cost and is depreciated using the
straight-line method over the following estimated useful lives of the respective
assets:
<TABLE>
<CAPTION>
Estimated
Asset Useful Life
----- -----------
<S> <C>
Building 30 years
Furniture and fixtures 5 years
Leasehold improvements 5 years
Automobiles and trucks 3 years
</TABLE>
(8) Income Taxes -- The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," ("SFAS No. 109"). Under SFAS 109, deferred income taxes reflect the net
tax effects of (a) temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the bases for income tax
purposes, and (b) operating loss and tax credit carryforwards.
(9) Net Income/(Loss) Per Common Share -- Net income/(loss) per common
share is based upon the weighted average number of shares of common stock
outstanding in each period, adjusted for the dilutive effects, if any, of
options granted under the Company's option plans and outstanding warrants to
purchase the Company's common stock.
(10) Cash and Cash Equivalents -- The Company considers all
highly-liquid investments purchased with original maturities of three months or
less to be cash equivalents.
(11) Cost in Excess of Fair Value of Assets Acquired ("Goodwill") --
The Company on an ongoing basis evaluates the recoverability of the carrying
amount of Goodwill based on projected operating income. Goodwill is being
amortized using the straight line method over 20 years. Goodwill for the three
recently acquired Manhattan Diamonds stores is being amortized using the
straight line method over
38
<PAGE> 39
the remaining terms of the leases for the locations which range from 14 months
to 39 months. Accumulated amortization related to Goodwill at February 1, 1997
and February 3, 1996 was approximately $1.4 million and $.7 million,
respectively.
(12) Deferred Financing Costs - The Company amortizes deferred
financing costs incurred in connection with its financing agreements over the
related period. Such deferred costs are included in other assets.
(13) Foreign Currency - Adjustments resulting from the translation of
the accounts of foreign subsidiaries from their functional currency to the
reporting currency are accumulated and reported in the foreign currency
translation adjustment component of stockholders' equity. Exchange rate gains
and losses on foreign currency transactions are reported as a currency exchange
gain or loss in the consolidated statement of operations, except for
intercompany transactions with subsidiaries that are of a long-term investment
nature, which are reported in the same manner as translation adjustments.
(14) Advertising costs are charged to expense as incurred. Advertising
expense was $1.0 million, $2.8 million, and $2.4 million in Fiscal 1996, 1995
and 1994, respectively.
(15) The Company adopted the following Statements of Financial
Accounting Standards ("SFAS") during Fiscal 1996, which did not have a
significant effect on financial position and results of operations.
SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to Be Disposed Of" establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. Long-lived assets and
certain identifiable intangibles to be held and used by a company are required
to be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Measurement of an impairment loss for such long-lived assets and identifiable
intangibles should be based on the fair value of the asset. Long-lived assets
and certain identifiable intangibles to be disposed of are required to be
reported generally at the lower of the carrying amount or fair value less cost
to sell.
SFAS No. 123, "Accounting for Stock-Based Compensation" establishes
financial accounting and reporting standards for stock-based employee
compensation plans, including stock options, stock purchase plans, restricted
stock, and stock appreciation rights. SFAS No. 123 defines and encourages the
use of the fair value method of accounting for employee stock-based
compensation. Continuing use of the intrinsic value based method of accounting
prescribed in Accounting Principles
39
<PAGE> 40
Board Opinion No. 25 ("APB 25") for measurement of employee stock-based
compensation is allowed with pro forma disclosures of net income and earnings
per share as if the fair value method of accounting had been applied.
Transactions in which equity instruments are issued in exchange for goods or
services from non-employees must be accounted for based on the fair value of the
consideration received or of the equity instrument issued, whichever is more
reliably measurable. The Company has continued to use the method of accounting
prescribed in APB 25 for measurement of employee stock-based compensation and
has provided the required disclosures in Note N.
(16) Reclassifications - Certain reclassifications have been made to
the prior consolidated financial statements to conform to the current
presentation.
D. Accounting Change
The Company has determined that the cost method, determined on a
first-in, first-out (FIFO) basis is a more appropriate method for accounting for
its inventory of gold jewelry merchandise. The Company currently buys
predominantly gold jewelry finished goods which are sold on a retail basis,
whereas previously the Company primarily purchased raw materials, including gold
bullion, to be used in the manufacturing of gold jewelry which was sold
predominantly on a wholesale basis. Because of the change in the Company's
business and the manner in which gold jewelry merchandise is procured and sold,
the Company believes that accounting for such inventory on the FIFO cost method
results in a better matching of costs with revenues. The Company now uses the
FIFO cost method for all of its inventories and believes that FIFO cost is the
method primarily used by similar companies in the retail industry to account
for inventories. Therefore, the Company has changed the method of accounting for
its gold jewelry inventory to the FIFO cost method from market value. The
cumulative effect of the change on retained earnings as of February 3, 1996 was
not significant due to the effects of gold commodities futures contracts used by
the Company to hedge gold inventories, including gold jewelry-related
merchandise. Also, the effect of the change on consolidated net income for the
fifty-two weeks ended February 1, 1997 was not significant.
E. Inventories:
Inventories are summarized as follows:
40
<PAGE> 41
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
---- ----
(amounts shown in thousands)
Company Held on Company Held on
Owned Consignment Owned Consignment
----- ----------- ----- -----------
<S> <C> <C> <C> <C>
Precious and semi-precious gem jewelry-
related merchandise (and
associated gold):
Raw materials $ 6,257 $ --- $ 6,488 $ ---
Finished goods 39,054 1,378 42,083 1,395
Gold jewelry-related merchandise:
Finished goods 12,639 705 15,791 206
Watches 10,414 --- 13,131 ---
Other consumer products 11,529 --- 17,993 ---
------- ------ ------- ------
$79,893 $2,083 $95,486 $1,601
======= ====== ======= ======
</TABLE>
F. Property:
The components of property are as follows:
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
---- ----
(amounts shown in thousands)
<S> <C> <C>
Land $ 4,171 $ 4,171
Buildings 9,819 10,792
Furniture and fixtures 34,827 32,443
Leasehold improvements 721 1,205
Automobiles and trucks 497 528
-------- --------
50,035 49,139
Less accumulated depreciation (28,554) (23,196)
-------- --------
$ 21,481 $ 25,943
======== ========
</TABLE>
The Company's former corporate headquarters building is held for sale.
The carrying value has been reduced to the estimated fair value, less cost of
disposal, of $3,000,000 as of February 1, 1997.
Depreciation expense for Fiscal 1996, Fiscal 1995 and Fiscal
1994 was approximately $5.3 million, $5.7 million and $5.5 million respectively.
G. Financing Arrangements
In October 1992, the Company finalized a $35 million unsecured private
placement of senior notes with an interest rate of 6.99%. Interest was payable
semi-annually, and principal payments of $6.5 million were due annually
commencing April 1996, with a final principal payment of $9.0 million due in
October 1999. The related agreement required the Company to maintain various
financial ratios and covenants. During Fiscal 1994, the Company failed to comply
with covenants specified in the agreement related to earnings and tangible net
worth as of January 28, 1995. As discussed below, the agreement was
substantially amended and the Company charged to expense the financing costs
incurred in
41
<PAGE> 42
connection with the original agreement.
On May 31, 1995, the Company entered into an amended and restated
senior note agreement that provided, among other things, for the Company to
immediately prepay $8.5 million in principal amount of the notes. The notes as
amended, (the "amended notes") were scheduled to mature on February 1, 1998,
were secured and bore interest for the period (a) from closing to January 31,
1997, at an annual rate of 12.5% and (b) from February 1, 1997 to maturity, at
an annual rate of 16%. In compliance with the amended agreement, an additional
payment of $9 million was made February 1, 1996. Another principal payment in
the amount of $10 million was payable on February 1, 1997 with a final payment
of $7.5 million due February 1, 1998. The Company paid the noteholders a fee of
$500,000 in connection with this agreement. During the second quarter of Fiscal
1996 the Company prepaid the $17.5 million balance due on the senior notes in
conjunction with the signing of an amended Working Capital Facility as discussed
below.
On May 31, 1995 the Company replaced its previous revolving bank credit
facility with a Working Capital Facility with GBFC, Inc. (an affiliate of Gordon
Brothers, Inc.) and Foothill Capital Corporation which provides for a $30
million secured revolving bank credit facility. On July 15, 1996 the Company
amended its Working Capital Facility increasing the amount available to $40
million. Availability under the amended Working Capital Facility is determined
based upon a percentage formula applied to inventory and accounts receivable.
The Working Capital Facility terminates on May 31, 1998 and bears interest at an
annual rate of The First National Bank of Boston's base rate plus .25% which was
decreased from the original agreement of base plus 1.50%. The Company is
required to pay a fee of $450,000 annually to the lenders, which will be reduced
to $400,000 in May 1997, and an administration fee of $11,000 monthly.
Further, the Company granted to the noteholders warrants (the
"noteholder warrants") to purchase 1,732,520 shares of the Company's common
stock at an initial purchase price per share of $2.25. The noteholder warrants
were scheduled to vest as follows: 20% on May 31, 1995, 20% on February 2, 1996,
30% on February 2, 1997, and 30% on July 31, 1997. As a result of the prepayment
of the senior notes discussed above, warrants to purchase 1,212,764 shares were
cancelled. The vested noteholder warrants expire May 31, 2005. In connection
with the Working Capital Facility, the Company granted warrants to purchase up
to 234,000 shares of the Company's common stock with exercise prices ranging
from $3.25 to $4.00 per share. All of these warrants were recorded at their fair
value at the date issued and included in deferred financing costs. When the
actual number of warrants to become vested was determined upon the prepayment of
the senior notes, the carrying amount of the cancelled warrants was reversed.
The agreements related to the amended Working Capital Facility contain
covenants which require the Company to maintain financial ratios related to
earnings, working capital, inventory turnover, trade payables and tangible net
worth. It also limits capital expenditures and the incurrence of additional debt
and prohibits payment of dividends. Substantially all of the Company's assets
are subject to a blanket lien in accordance with the agreement related to the
amended working capital facility.
42
<PAGE> 43
Information concerning the Company's short-term borrowings follows:
<TABLE>
<CAPTION>
Fifty-two Fifty-three Fifty-two
Weeks Ended Weeks Ended Weeks Ended
February 1, February 3, January 28,
1997 1996 1995
---- ---- ----
(dollars shown in thousands)
<S> <C> <C> <C>
Maximum borrowings outstanding
during the period..................... $4,100 $14,717 $39,750
Average outstanding balance
during the period 193 1,162 9,239
Weighted average interest rate
for the period 8.5% 10.25% 8.61%
H. Income Taxes:
</TABLE>
The significant items comprising the Company's net deferred taxes as of
February 1, 1997 and February 3, 1996 are as follows:
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
---- ----
(amounts shown in thousands)
<S> <C> <C>
Deferred Tax Liabilities:
Difference between book and
tax basis of property $ 1,315 $ 1,454
Other --- 575
------- -------
$ 1,315 $ 2,029
------- -------
Deferred Tax Assets:
Sales returns and doubtful accounts
allowances not currently deductible 1,033 887
Inventory reserves not currently deductible 2,095 1,918
Federal net operating loss and tax
credit carryforward 18,763 19,026
State net operating loss carryforward 2,868 4,291
Other 363 ---
------- -------
25,122 26,122
------- -------
Valuation allowance 23,807 24,093
------- -------
Net Deferred Tax Asset/Liability $ --- $ ---
======= =======
</TABLE>
The components of income/(loss) before income taxes are as follows:
43
<PAGE> 44
<TABLE>
<CAPTION>
Fifty-two Fifty-three Fifty-two
Weeks Ended Weeks Ended Weeks Ended
February 1, February 3, January 28,
1997 1996 1995
---- ---- ----
(amounts shown in thousands)
<S> <C> <C> <C>
Domestic $ 2,601 $ (702) (70,650)
Foreign (1,686) (2,610) (4,054)
------- ------- --------
$ 915 $(3,312) $(74,704)
======= ======= ========
</TABLE>
The components of the provision for income taxes consist of the following:
<TABLE>
<CAPTION>
Fifty-two Fifty-three Fifty-two
Weeks Ended Weeks Ended Weeks Ended
February 1, February 3, January 28,
1997 1996 1995
---- ---- ----
(amounts shown in thousands)
<S> <C> <C> <C>
Current:
Federal $ 97 $ ---
State 6 ---
Foreign 51 130 353
---- --- ---
154 130 353
---- --- ---
</TABLE>
The provision (benefit) for income taxes varies from the amount
computed by applying the statutory rate for reasons summarized below:
<TABLE>
<CAPTION>
Fifty-two Fifty-three Fifty-two
Weeks Ended Weeks Ended Weeks Ended
February 1, February 3, January 28,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
Benefit of graduated rates (1.0) (1.0)
State taxes (net of
federal benefit) 1.2 1.1
Tax effect of
foreign subsidiaries --- (31.1) (.5)
Valuation allowance (31.3) (9.1) (35.0)
Other deductible expenses 13.0 1.2 ---
----- ----- -----
16.9% (3.9%) (.5)
===== ===== =====
</TABLE>
The Company has a Federal net operating loss carryforward of
approximately $52.2 million and a state net operating loss carryforward of
approximately $62.1 million. The Federal net operating loss carry forward
expires beginning in 2008 through 2011 and the state net
44
<PAGE> 45
operating loss carry forward expires beginning in 1998 through 2011. The Company
also has an alternative minimum tax credit carryforward of approximately
$937,000 to offset future regular federal income taxes. The valuation allowance
has been recorded to fully offset the net deferred tax asset to the amount that
the Company believes, after evaluating the currently available evidence, will
more likely than not be realized.
45
<PAGE> 46
At the time the Company purchased Exclusive Diamonds International,
Limited ("EDI") in August of 1990, EDI applied to and received from the Israeli
government under the Capital Investments Law of 1959 "approved enterprise"
status, which results in reduced tax rates given to foreign owned corporations
to stimulate the export of Israeli manufactured products. The benefit to the
Company amounted to approximately $1.2 million or $0.05 per share in Fiscal
1994. The effect in Fiscal 1996 and Fiscal 1995 was not material. The "approved
enterprise" tax benefit is available to EDI until the year 2000.
The Company has not provided Federal and state income taxes on
approximately $3.1 million of undistributed earnings of foreign subsidiaries
which it considers invested in such subsidiaries indefinitely. The amount of
unrecognized deferred tax liability on the unremitted earnings of the foreign
subsidiaries at February 1, 1997 approximates $1.2 million exclusive of any
benefit from utilization of foreign tax credits. At February 1, 1997, the
Company has approximately $2.1 million of unrecognized foreign tax credits
which, depending on circumstances, may be available to reduce federal income
taxes on the unremitted earnings of the foreign subsidiaries in the event such
earnings are repatriated.
I. Commitments and Contingencies:
(1) As discussed in Note G, there are outstanding warrants to purchase
519,756 shares of common stock at $2.25 per share which expire May 31, 2005.
Additionally, the Company has warrants outstanding to purchase 700,000 shares of
common stock at $24.70 per share which expire December 16, 1998.
(2) The Company has non-cancelable leases for retail space in six
locations through October 2002. The Company also has operating leases for
copiers, postage machines, and computer equipment. Minimum lease commitments
subsequent to February 1, 1997 are as follows:
<TABLE>
<S> <C>
1997..........$ 898,127
1998..........$ 770,609
1999..........$ 540,247
2000..........$ 345,030
2001..........$ 241,322
Thereafter....$ 204,897
----------
$3,000,232
==========
</TABLE>
46
<PAGE> 47
J. Legal Proceedings:
The Company is from time to time involved in litigation incidental to
the conduct of its business. While it is not possible to predict with certainty
the outcome of such matters, management believes that any litigation currently
pending to which the Company is a party will not have a material adverse effect
on the Company's financial position.
K. Geographic Information
The Company operates in three principal geographic areas, the United
States, Israel and Mexico. Net sales to unaffiliated customers by U.S.-based
operations are made primarily into the United States. Net sales to unaffiliated
customers by Israel-based operations are made primarily into Europe. Net sales
to unaffiliated customers by Mexico-based operations are made primarily into
Mexico. Transfers have been eliminated from consolidated net sales. Financial
information, summarized by geographic area, is as follows (in thousands):
<TABLE>
<CAPTION>
Fifty-two weeks ended
February 1, 1997
United States Israel Mexico Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Sales
Unaffiliated Customers 232,902 7,344 2,833 -- 243,079
Transfers to other geographic areas -- 16,055 -- (16,055) --
-------- -------- ------ -------- --------
Total Net Sales 232,902 23,399 2,833 (16,055) 243,079
======== ======== ====== ======== ========
Income/(loss) before taxes 2,692 (2,465) 517 171 915
======== ======== ====== ======== ========
Identifiable assets 130,353 12,138 6,101 (9,207) 139,385
======== ======== ====== ======== ========
Fifty-three weeks ended
February 3, 1996
Net Sales
Unaffiliated Customers 242,483 8,652 2,869 -- 254,004
Transfers to other geographic areas -- 19,806 1,596 (21,402) --
-------- -------- ------ -------- --------
Total Net Sales 242,483 28,458 4,465 (21,402) 254,004
========= ======== ====== ======== ========
Income/(loss) before taxes (702) (1,721) 1,404 (2,293) (3,312)
========= ======== ====== ======== ========
Identifiable assets 149,021 14,483 4,350 (14,681) 153,173
========= ======== ====== ======== ========
Fifty-two weeks ended
January 28, 1995
Net Sales
Unaffiliated Customers 284,605 7,135 13,945 -- 305,685
Transfers to other geographic areas -- 28,533 -- (28,533) --
-------- -------- ------ -------- --------
Total Net Sales 284,605 35,668 13,945 (28,533) 305,685
======== ======== ====== ======== ========
Income/(loss) before taxes (70,650) 4,979 (3,282) (5,751) (74,704)
======== ======== ====== ======== ========
Identifiable assets 178,177 13,477 9,851 (14,753) 186,752
======== ======== ====== ======== ========
</TABLE>
47
<PAGE> 48
L. Other Charges
In Fiscal 1996, the Company recorded $5.6 million in other charges as
discussed below.
In May 1996 the Company's President and Chief Executive Officer
resigned and the Company made approximately $2 million in severance payments.
Also during the second quarter, the Company recorded a write-off of
$630,000 of financing costs in connection with the prepayment of its senior
notes as further discussed in Note G.
During the fourth quarter, the Company recorded a $1.5 million
write-down of the carrying value of its former corporate headquarters building
which is currently held for sale. The Company also recorded a $1.5 million
provision for the closing of two of its Jewelry Depot locations which includes a
$1.0 million accrual for costs associated with terminating the leases and a
$500,000 write-down of fixed assets which will be disposed.
The following is the composition of Other Charges in Fiscal 1994(in
thousands):
<TABLE>
<S> <C>
Goodwill write-off (1) $23,795
Losses on inventory liquidations (2) 20,428
Severance and executive compensation
settlements (3) 2,985
Other (4) 565
-------
Total $47,773
=======
</TABLE>
(1) In May 1990, the Company entered into an agreement with Big Ben
Corporation to form a joint venture, Big Ben '90, in which the Company held a
50.1% interest. In September 1991, the Company acquired the minority interest in
the joint venture in a transaction accounted for as a purchase, resulting in a
cost in excess of net assets acquired (goodwill) of $26.9 million. The Company
viewed the joint venture formation and acquisition as a means of assuring
adequate supplies of watches for sale at discount prices to its existing
significant customers, Sam's and Pace, and for new marketing opportunities.
Management perceived that the valuable elements of Big Ben '90 were: (a)
contacts for access to parallel markets in order to purchase substantial
quantities of watches for sale at lower price points; (b) personnel with
expertise to manage a wholesale watch division; (c) an existing wholesale watch
business; and (d) opportunities for expansion of the wholesale watch business to
new customers and through development of private label and designer brand names
for watches at lower price points.
48
<PAGE> 49
In 1991 and 1992, the Company experienced increases in its watch
business, with watches accounting for 34% and 38% respectively, of net sales. A
significant portion of these sales increases occurred in promotional events at
lower price points. In subsequent years, sales of watches decreased to 26% of
net sales in 1993 and 22% in Fiscal 1994, and further decreases were expected.
These decreases, as well as the related decline in profitability from sales of
watches were caused by a number of factors, including: (a) increased competition
as watches at lower price points became increasingly available, resulting in
higher levels of returns and lower gross margin; (b) marketing promotions of
lower price point watches became ineffective; (c) private label and designer
brand name watch programs with lower price points were unsuccessful; (d) efforts
to expand the wholesale watch business were not successful; and (e) the
inventory of watches became overstocked and the amount of watches in need of
repair increased, resulting in increased costs. In addition, as discussed in
Note B, in 1993 the Company became primarily a retailer, and now operates leased
jewelry departments in all Sam's locations. During 1994, Sam's notified the
Company that it wanted the Company to eliminate lower end watches from the
departments, and to instead offer primarily recognized brands at higher price
points.
These circumstances caused an evaluation of the wholesale watch
business in the latter half of 1994, and in the fourth quarter the Company made
the decision to close its wholesale watch division and liquidate the related
inventory as soon as practicable, resulting in significant inventory reserves as
discussed below. All key personnel from Big Ben '90 left the Company by year
end. The Company now sells primarily recognized brand watches at higher price
points in the leased departments at Sam's. Also, while the Company will continue
to purchase watches in parallel markets, the sources and styles of the
merchandise purchased are different from those in Big Ben '90.
As a result of the events described above, as well as the decisions,
actions and plans of management, the Company concluded that it had not retained
any of the valuable elements of the Big Ben '90 acquisition. Also, the Company
projected, based on management's best estimate of future operating results for
its watch business, that none of the remaining balance of Goodwill arising from
the Big Ben '90 acquisition was recoverable. Accordingly, the remaining balance
of such Goodwill of $23.8 million was written off as of January 28, 1995.
(2) In the fourth quarter of 1994, the Company made the decision to
sell certain inventory at significantly less than normal prices, resulting in an
estimated net realizable value below the cost of such inventory. This decision
was made (a) to liquidate the merchandise that was predominantly sold in the
wholesale watch division which was being closed in order to focus management's
attention on the Company's retail operations, and (b) to liquidate certain other
inventory on an expedited
49
<PAGE> 50
basis in order to raise cash for liquidity purposes as a result of the then
uncertain status of credit availability due to the Company's failure to comply
with certain covenants in its debt agreements as discussed in Note G.
As a result, the Company recorded losses of $17.7 million to reflect
such inventory at its net realizable value. Additionally, the Company provided
$2.7 million for obligations under licensing agreements for the use of trade
names on watches previously sold in the wholesale division.
(3) In connection with the closing of the wholesale watch division,
changes in executive management and the reduction in the number of personnel,
the Company made payments to and provided for severance for terminated employees
and the settlement of certain employment contracts, aggregating $2.7 million.
In addition, cash payments of $0.8 million were made to buy-out the unvested
portions of bonus stock awards, resulting in a $0.3 million charge to expense,
and the related remaining amount of deferred compensation was eliminated by
charging additional paid-in-capital.
(4) As discussed in Note G, in Fiscal 1994 the Company did not comply
with certain covenants in the agreements related to the senior notes payable,
as well as its then existing bank credit facility, and financing costs of
$2.3 million incurred primarily in connection with these original agreements
were charged to expense. Additionally, the Company settled the termination of
the lease department agreement with Pace Membership Warehouse, Inc., which
resulted in a $1.7 million recovery of previously accrued expenses.
50
<PAGE> 51
M. Acquisition of Manhattan Diamond Stores:
On September 30, 1996 the Company acquired from Andin International,
Inc. its three Manhattan Diamond outlet stores located in the Gurnee Mills,
Potomac Mills and Orlando Belz outlet malls. The purchase price for the stores
was $500,000, of which $70,000 was for all store fixtures and $430,000 was
allocated to goodwill. Both of these amounts are being amortized over the
remaining terms of the respective store leases which range from 14 months to 39
months. Pro forma effects of the results of operations resulting from the
acquisition of these stores is not materially different from the Company's
historical results.
N. Stock Benefit Plans:
As of February 1, 1997 the Company had 2,211,367 shares of common stock
available for grant to its key employees and directors under its 1987 and 1991
Stock Option Plans. Under these plans, the option price must be equal to the
market price of the stock on the date of the grant, or in the case of an
individual who owns 10% or more of common stock, the minimum price must be 110%
of the market price.
Options granted to date generally become exercisable from six months to
three years after the date of grant, provided that the individual is
continuously employed by the Company, or in the case of directors, remains on
the board of directors. All options generally expire no more than ten years
after the date of grant.
EMPLOYEE STOCK PURCHASE PLAN
In June 1987, the Board of Directors approved an Employee Stock
Purchase Plan, which permits eligible employees to purchase common stock from
the Company at 85% of its fair market value through regular payroll deductions.
A total of 562,500 shares are reserved for issuance under the Employee
Stock Purchase Plan of which 34,748, 35,372 and 19,065 shares were issued during
the years ended February 1, 1997, February 3, 1996 and January 28, 1995,
respectively.
RETIREMENT SAVINGS PLAN
In December 1992, the Board of Directors approved a Retirement Savings
Plan, which permits eligible employees to make contributions to the Plan on a
pretax salary reduction basis in accordance with the provisions of Section
401(k) of the Internal Revenue Code. The Company makes a matching stock or cash
contribution of 25% of the employee's pretax contribution, up to 4% of the
employees compensation, in any calendar year.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation
cost has been recognized for such plans. Had compensation cost for the Company's
stock-based compensation plans
51
<PAGE> 52
been determined using the fair value method described in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," at the
grant dates for awards granted in Fiscal 1996 and Fiscal 1995 under these plans,
the Company's net earnings and earnings per share would have been reduced to the
proforma amounts presented below:
<TABLE>
<CAPTION>
Fiscal Fiscal
1996 1995
---- ----
<S> <C> <C>
Net income/(loss) (in thousands)
As reported $ 761 $(3,442)
Proforma $(147) $(4,253)
Income/(loss) per share
As reported $ .03 $ (.13)
Proforma $(.01) $ (.17)
</TABLE>
The fair value of each option grant was estimated as of the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1996 and 1995; expected volatility of 65%
for both years, risk-free interest rate of 6.53% for both years, expected lives
of approximately five years for both years; and a dividend yield of zero for
both years. The weighted average fair values of options granted during Fiscal
1996 and Fiscal 1995 were $1.36 and $1.55 respectively.
The following is a summary of the activity in the option plans during
Fiscal 1996, Fiscal 1995 and Fiscal 1994:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1996 1995 1994
---- ---- ----
Weighted Avge. Weighted Avge. Weighted Avge.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 4,641,126 $6.02 4,085,146 $7.56 1,882,785 $10.95
Granted 175,000 2.24 1,628,300 2.55 2,302,210 4.89
Canceled (479,750) 4.31 (1,072,320) 6.64 (99,849) 9.85
Exercised (21,334) 2.51 0 0 0 0
--------- ---- --------- ---- --------- ----
Outstanding at end of year 4,315,042 $6.07 4,641,126 $6.02 4,085,146 $ 7.56
========= ===== ========= ===== ========= ======
</TABLE>
A summary of the status of the option plans as of February 1, 1997 is
presented below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Avge. Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Life Exercise Number Exercise
Prices Outstanding (in years) Price Exercisable Price
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.09-3.09 1,364,034 8.6 $ 2.49 535,116 $ 2.55
3.10-4.64 627,000 8.0 3.96 445,667 3.94
4.65-6.95 947,435 7.3 5.04 424,056 5.08
6.96-10.43 651,139 5.9 8.99 642,522 8.99
10.44-15.64 675,434 5.1 12.99 675,434 12.99
15.65-19.63 50,000 6.2 18.43 50,000 18.43
- ------------ --------- --- ------ --------- ------
$ 2.06-19.63 4,315,042 7.2 $ 6.07 2,772,795 $ 7.48
============ ========= === ====== ========= ======
</TABLE>
52
<PAGE> 53
O. Fair Value of Financial Instruments:
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company, using available market
information and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that would be realized in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
(1) Cash and Cash Equivalents, Accounts Receivable, Accounts Payable
and Accrued Expenses. The carrying amounts of these items are a reasonable
estimate of their fair values.
(2) Long Term Debt - The present value of the future principal and
interest payments on the senior notes issued in October 1992 is used to estimate
fair value for this debt which is not quoted on an exchange. The notes had a net
book value at February 3, 1996 of $17.5 million and an estimated fair value at
February 3, 1996 of approximately $18.4 million.
(3) Gold Futures Contracts -- The fair value of gold futures contracts
is the amount at which they could be settled, based on market prices on
commodity exchanges. At February 3, 1996, open gold futures contracts are
included in the consolidated financial statements at their fair value which
approximated $221,000 which represented an asset.
53
<PAGE> 54
P. Selected Quarterly Financial Data (unaudited):
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
(In thousands, except per share data)
May 4, August 3, November 2, February 1,
1996 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $47,449 $55,152 $44,706 $95,772
Gross Profit 9,710 12,092 9,860 27,781
Net income (loss) (5,071) (1,177) (2,910) 9,919
Net income (loss) per
Common Share (0.20) (0.05) (0.11) 0.38
</TABLE>
<TABLE>
<CAPTION>
Thirteen Weeks Fourteen Weeks
Ended Ended
-------------------------------------- --------------
April 29, July 29, October 28, February 3,
1995 1995 1995 1996
---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net Sales $50,018 $55,452 $46,209 $102,325
Gross Profit 7,384 11,048 10,349 25,644
Net income (loss) (5,775) (1,886) (2,933) 7,152
Net income (loss) per
Common Share (.22) (.07) (.11) .28
</TABLE>
- -----------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Form 8-K filed within 24 months prior to the date of
the most recent financial statements reporting a change of accountants or
reporting disagreements on any matter of accounting principle or financial
statement disclosure.
PART III
ITEMS 10 THROUGH 13.
Within 120 days after the close of the fiscal year, the Company intends
to file with the Securities and Exchange Commission a definitive proxy statement
pursuant to Regulation 14A which will involve the election of directors. The
answers to Items 10 through 13 are incorporated by reference pursuant to General
Instruction G(3); provided, however, the
54
<PAGE> 55
Compensation Committee Report, the Performance Graphs, and all other items of
such report that are not required to be incorporated, are not incorporated by
reference into this Form 10-K or any other filing with the Securities and
Exchange Commission by the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The following is a list of the financial statements
of Jan Bell Marketing, Inc. included in Item 8 of Part II.
Independent Auditors' Report.
Consolidated Balance Sheets - February 1, 1997 and February 3, 1996.
Consolidated Statements of Operations - Fifty-two Weeks Ended February 1, 1997,
Fifty-three Weeks Ended February 3, 1996 and Fifty-two Weeks Ended January 28,
1995.
Consolidated Statements of Stockholders' Equity - Fifty-two Weeks Ended February
1, 1997, Fifty-three Weeks Ended February 3, 1996 and Fifty-two Weeks Ended
January 28, 1995.
Consolidated Statements of Cash Flows - Fifty-two Weeks Ended February 1, 1997,
Fifty-three Weeks Ended February 3, 1996 and Fifty-two Weeks Ended January 28,
1995.
(a)(2) Financial Statement Schedules. The following is the financial statement
schedule filed as part of this Form 10-K: Schedule II. All other schedules are
omitted because they are not applicable, or not required, or because the
required information is included in the financial statements or notes thereto.
(a)(3) The following list of schedules and exhibits are included or
incorporated by reference as indicated in this Form 10-K:
55
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
Number Description
------ -----------
<S> <C>
3.1 - Certificate of Incorporation. Incorporated by reference from
Company's Form S-1 (No. 33-15347) declared effective in August
1987.
3.2 - Bylaws. Incorporated by reference from Company's Form 10-K
filed May 15, 1995.
4.1 - Specimen Certificate. Incorporated by reference from
Company's Form 10-K filed in March 1991.
4.2 - Jan Bell Marketing, Inc. 1987 Stock Option Plan. Incorporated
by reference from Company's Form 10-K filed in March 1991.
4.3 - Jan Bell Marketing, Inc. Employee Stock Purchase Plan.
Incorporated by reference from Company's Form 10-K filed in
March 1991.
4.4 - Jan Bell Marketing, Inc. 1991 Stock Bonus Plan. Incorporated
by reference from Company's Definitive Proxy Statement filed
in April 1991.
4.5 - Jan Bell Marketing, Inc. 1991 Stock Option Plan. Incorporated
by reference from Company's Definitive Proxy Statement filed
in April 1993.
4.6 - Rights Agreement dated November 21, 1996 incorporated by
reference from Form 8-K filed November 21, 1996.
10.1 - Employment Agreement dated August 1, 1994 between Richard
Bowers and the Company. Incorporated by reference from
Company's Form 10-K filed May 15, 1995.
10.2 - Form of Indemnification Agreement. Incorporated by reference
from Company's Form S-1 (No. 33-26947) declared effective in
February 1989.
10.3 - Agreement with Sam's dated July 19, 1993. Incorporated by
reference from Company's 8-K filed in July 1993.
10.4 - Addendum to Sam's Agreement dated July 19, 1993. Incorporated
by reference from Company's 10-K filed in April 1994.
</TABLE>
56
<PAGE> 57
<TABLE>
<S> <C>
10.5 - Loan and Security Agreement between GBFC, Inc. and JBM Retail
Company, Inc. dated May 31,1995. Incorporated by reference
from Company's Form 10-K/A filed in May 1995.
10.6 - Third Amendment to Loan and Security Agreement incorporated by
reference from Form 10-Q filed September 17, 1996.
10.7 - Warrant Agreement dated May 31, 1995 between the Company and
Various Lenders. Incorporated by reference from Company's Form
10-K/A filed in May 1995.
10.8 - Warrant Agreement dated May 31, 1995 between the Company,
GBFC, Inc. and Foothill Capital Corporation. Incorporated by
reference from Company's Form 10-K/A filed in May 1995.
21.1 - Subsidiaries of Registrant:
Wholly-owned subsidiaries of the Company include JBM Venture
Co., Inc., JBM Retail Company, Inc., Delaware corporations,
Regal Diamonds Ltd., an Israeli company, Exclusive Diamonds
International, Ltd., an Israeli company, Jan Bell de Mexico,
S.A. de C.V., and Elico Mexicana, a Mexican corporation, and
Jan Bell Marketing/Puerto Rico, Inc., a Puerto Rican
corporation.
23.1 - Consent of Deloitte & Touche LLP
27.1 - Financial Data Schedule (for S.E.C. use only).
(b) Reports on Form 8-K. The Company filed reports on Form 8-K
during the fourth quarter ending February 1, 1997 as follows:
None
</TABLE>
57
<PAGE> 58
SCHEDULE II
JAN BELL MARKETING, INC.
VALUATION AND QUALIFICATION ACCOUNTS
(Amounts shown in thousands)
<TABLE>
<CAPTION>
Charged to
Beginning Costs and Ending
Description Balance Expenses Deductions Balance
- ----------- ------- -------- ---------- -------
<S> <C> <C> <C> <C>
January 28, 1995
Allowance for Doubtful
Accounts $ 725 $ 83 $ 363 $ 445
Allowance for Sales
Returns 2,880 10,699 8,394 5,185
Inventory Allowances 2,000 21,236 2,000 21,236
February 3, 1996
Allowance for Doubtful
Accounts 445 4,252 3,995 702
Allowance for Sales
Returns 5,185 643 5,828 0
Inventory Allowances 21,236 6,171 21,100 6,307
February 1, 1997
Allowance for Doubtful
Accounts 702 925 188 1,439
Inventory Allowances 6,307 3,898 5,063 5,142
</TABLE>
58
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf of the undersigned, thereunto duly authorized.
JAN BELL MARKETING, INC.
Date: May 2, 1997 By: /s/ Isaac Arguetty
-------------------------------
Isaac Arguetty,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE
- --------- -------- ----
/s/ Isaac Arguetty Chairman of the Board, May 2, 1997
- ---------------------- Chief Executive Officer
Isaac Arguetty
/s/ David Boudreau Chief Financial Officer May 2, 1997
- ---------------------- and Senior Vice President of
David Boudreau Finance & Treasurer
/s/ Haim Bashan Director May 2, 1997
- ----------------------
Haim Bashan
/s/ Gregg Bedol Director May 2, 1997
- ----------------------
Gregg Bedol
/s/ Tom Epstein Director May 2, 1997
- ----------------------
Tom Epstein
/s/ Sidney Feltenstein Director May 2, 1997
- ----------------------
Sidney Feltenstein
/s/ Peter Offermann Director May 2, 1997
- ----------------------
Peter Offermann
/s/ Robert Robison Director May 2, 1997
- ----------------------
Robert Robison
59
<PAGE> 60
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
Number Description NUMBERED PAGE
- ------ ----------- -------------
<S> <C> <C>
SEE PAGE __ FOR A COMPLETE LIST OF
EXHIBITS FILED, INCLUDING EXHIBITS
INCORPORATED BY REFERENCE FROM
PREVIOUSLY FILED DOCUMENTS.
21.1 Subsidiaries of Registrant:
Wholly-owned subsidiaries of the Company
include JBM Venture Co., Inc., JBM
Retail Company, Inc., Delaware
corporations, Exclusive Diamonds
International, Ltd., an Israeli company,
Jan Bell de Mexico, S.A. de C.V., and
Elico Mexicana, a Mexican corporation,
and Jan Bell Marketing/Puerto Rico,
Inc., a Puerto Rican corporation.
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule (for S.E.C. use only).
</TABLE>
60
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-20026, 33-20031, 33-42410, 33-42419, 33-44025 and 33-45778 of Jan Bell
Marketing, Inc. on Forms S-8 of our report dated March 25, 1997, appearing in
this Annual Report on Form 10-K of Jan Bell Marketing, Inc. for the fifty-two
weeks ended February 1, 1997.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
May 1, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME, THE CONSOLIDATED BALANCE SHEETS, THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND THE NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> FEB-01-1997
<CASH> 23,443
<SECURITIES> 82
<RECEIVABLES> 7,576
<ALLOWANCES> 1,439
<INVENTORY> 79,893
<CURRENT-ASSETS> 110,840
<PP&E> 50,035
<DEPRECIATION> 28,554
<TOTAL-ASSETS> 139,385
<CURRENT-LIABILITIES> 14,012
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 125,370
<TOTAL-LIABILITY-AND-EQUITY> 139,385
<SALES> 243,079
<TOTAL-REVENUES> 243,079
<CGS> 183,636
<TOTAL-COSTS> 183,636
<OTHER-EXPENSES> 58,798<F1>
<LOSS-PROVISION> 925
<INTEREST-EXPENSE> 999
<INCOME-PRETAX> 915
<INCOME-TAX> 154
<INCOME-CONTINUING> 761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 761
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
<FN>
<F1>Other expenses consists of all operating costs and excludes interest,
non-operating income and income taxes.
</FN>
</TABLE>
