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 JANUARY 30, 1999 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) 846-2718
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, $.0001 PAR VALUE
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. [ X ]
As of April 16, 1999, the aggregate market value of the voting stock
beneficially held by non-affiliates of the registrant was $76,890,443. The
aggregate market value was computed with reference to the closing price on the
American Stock Exchange on such date. Affiliates are considered to be executive
officers and directors of the registrant and their affiliates for which
beneficial ownership is not disclaimed.
As of April 16, 1999, 28,369,974 shares of Common Stock ($.0001 par value) were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PART III: Portions of the definitive Proxy Statement for the 1999 Annual
Shareholders' meeting (to be filed).
LOCATION OF EXHIBIT INDEX: The index of exhibits is contained in Part IV herein
on page number 49.
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JAN BELL MARKETING, INC.
TABLE OF CONTENTS
PART I PAGE NO.
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Item 1 Business 4
Item 2 Properties 14
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 15
PART II
Item 5 Market for the Registrant's Common Stock and Related
Stockholder Matters 16
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 8 Financial Statements and Supplementary Data 28
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 48
PART III
Item 10 Directors and Executive Officers of the Registrant 49
Item 11 Executive Compensation 49
Item 12 Security Ownership of Certain Beneficial Owners and
Management 49
Item 13 Certain Relationships and Related Transactions 49
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 49
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PART I
ITEM 1. BUSINESS
GENERAL
The information in this section pertains to the business of Jan Bell
Marketing, Inc. and subsidiaries ("Jan Bell" or the "Company") including its
wholly-owned subsidiary Mayor's Jewelers, Inc. ("Mayor's") which was acquired on
July 28, 1998. Please refer to Item 7 regarding "Forward-Looking Statements and
Cautionary Factors That May Affect Future Results."
MAYOR'S JEWELERS
Mayor's is a leading upscale retailer of fine quality guild jewelry,
watches and giftware. Mayor's was founded in 1910 and currently operates 17
stores in Florida under the "Mayor's" name and four stores in the Atlanta,
Georgia metropolitan area under the "Mayor's" and "Maier & Berkele" name (both
referred to as "Mayor's"). Mayor's has a long-established reputation in its
principal market areas as a premier guild jeweler offering fine quality
merchandise in an elegant environment conducive to the purchase of luxury items.
As a guild jeweler, the Company does not sell "costume" or gold filled jewelry;
rather, all of its jewelry products are constructed of 14 or 18 karat gold,
platinum, or sterling silver, with or without precious gemstones, with
significant emphasis on quality and craftsmanship. The average price per item of
all merchandise sold in Fiscal 1998 was approximately $1,100, an amount the
Company believes is substantially higher than that of any other publicly-traded
domestic jewelry retailer.
Mayor's distinguishes itself from most of its competitors by offering a
larger selection of distinctive and higher quality merchandise at many different
price points, and by placing substantial emphasis on professionalism and
training in its sales force. Mayor's experienced buyers procure distinctive
merchandise directly from manufacturers, diamond cutters and other suppliers
throughout the world, enabling Mayor's to sell fine quality merchandise often
not available from other jewelers in its markets. Management believes it has one
of the best trained staffs of sales professionals in the industry as a result of
Mayor's emphasis on classroom training, in-store training and participation in
industry-recognized educational programs, particularly those offered by the
Gemological Institute of America (GIA).
In connection with the acquisition of Mayor's by Jan Bell, total
consideration consisted of approximately $18 million cash, 2 million shares of
Jan Bell common stock and the refinancing of Mayor's outstanding debt through an
$80 million working capital facility with a syndicate of banks led by Citicorp,
U.S.A., Inc.
SAM'S CLUB
Jan Bell retails fine jewelry, watches and certain other select
non-jewelry consumer products primarily to warehouse club members through Sam's
Club, ("Sam's"), a division of Wal-Mart, Inc., pursuant to an arrangement
whereby the Company operates a concession at all of Sam's existing and future
domestic and Puerto Rico locations through February 1, 2001. The Company offers
products at Sam's including fine jewelry, watches, fragrances, fine writing
instruments, sunglasses and certain collectibles and accessories. See "Warehouse
Membership Clubs." During April 1999, the Company was informed by Sam's that the
concession agreement would not be renewed beyond its expiration date. During the
Company's fiscal year ended on January 30, 1999 ("Fiscal 1998"), sales to Sam's
customers accounted for approximately 73% of the Company's net sales. This
percentage is expected to decrease to approximately 60% when a full year of
Mayor's sales are reflected in Jan Bell's operating results. Although the
Company's acquisition of Mayor's will mitigate the loss of the Sam's business,
the concession non-renewal will have a material adverse effect on the business
of the Company. To compensate for the loss of the Sam's business, the Company
will focus its attention and resources on expanding Mayor's into a national
retailer. In addition, the Company will consider other acquisitions. In the
interim, the Company will seek to develop a transition plan on how best to exit
from the Sam's Club business. During this time, the impact on the Company's
revenue and profitability is uncertain primarily attributable to operational
matters, inventory management and associate turnover and retention. Management
recognizes the need for and is focused on developing an efficient exit strategy
as well as plans for future
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growth. Please refer to Item 7 regarding "Forward-Looking Statements and
Cautionary Factors That May Affect Future Results."
GROWTH OPPORTUNITIES
The Company will seek to expand its business beyond the arrangement
with Sam's. The acquisition of Mayor's was a significant initial step towards
that goal. Through the reduction of working capital requirements, continual
profitability and the infusion of capital expected from the Sam's termination by
way of inventory reductions, the Company believes that it has the financial
strength to embark on other retail growth strategies.
Management intends to capitalize on the Mayor's business strategy to
pursue growth opportunities in selected new geographic markets where the local
demographics and the nature of competition would support new high-volume luxury
guild jewelry stores. In Fiscal 1999 and subsequent years, the Company intends
to add new stores (five to ten per year are targeted) either through new store
openings or, as the opportunity arises, through acquisitions. The Company
estimates that the investment required to open a new Mayor's store is
approximately $1.2 million for fixtures and leasehold improvements (after
landlord concessions) and approximately $3 million for inventory. The Company
has identified potential new markets which appear attractive, but there can be
no assurance that the Company will be able to find appropriate sites or in fact
develop or acquire new stores in these or other markets.
Currently, the Company is the predominant supplier of fine jewelry and
watches to Internet retailers Value America (Nasdaq: VUSA), ShopNow.com and
IMALL (Nasdaq: IMAL). The Company also has a Mayor's website (www.mayors.com),
which provides information about Mayor's and offers for sale a limited selection
of jewelry, watches and gift items. The Company expects to introduce its Mayor's
estate Internet site during the second quarter of Fiscal 1999. The Company will
review other Internet opportunities on an on-going basis.
Management is considering other growth opportunities and potential
acquisitions of businesses similar or complementary to that of the Company, but
there can be no assurance that such opportunities will arise or will be
profitable to the Company. The pursuit of any such growth opportunities will
require a significant investment of funds and management attention. Any such
growth opportunities will be subject to all of the risks inherent in the
establishment of a new product or service, including competition, lack of
sufficient customer demand, unavailability of experienced management, unforeseen
complications, delays and cost increases. The Company may incur costs in
connection with pursuing new growth opportunities that it cannot recover, and
the Company may be required to expense certain of these costs, which may
negatively impact the Company's reported operating performance for the periods
during which such costs are incurred. Please refer to Item 7 regarding
"Forward-Looking Statements and Cautionary Factors That May Affect Future
Results."
The Company's principal offices are located at 14051 Northwest 14th
Street, Sunrise, Florida 33323 (telephone: (954) 846-2718).
SPECIAL RETAIL RISK CONSIDERATIONS
The Company's retail operations require 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 luxury goods marketplace, the warehouse club industry and with
other competing general and specialty retailers and discounters will continue to
increase. The opening and success of current 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
locations and future expansion and hire and train personnel. Please refer to
Item 7 regarding "Forward-Looking Statements and Cautionary Factors That May
Affect Future Results."
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PRODUCTS
MAYOR'S
Mayor's offers a large selection of distinctive and high quality
merchandise at many different price points. This merchandise includes designer
jewelry, diamond jewelry, rings, wedding bands, earrings, bracelets, necklaces,
pearls, charms, and high fashion watches often not available from other jewelers
in its markets. All of Mayor's jewelry products are constructed of 14 or 18
karat gold, platinum, or sterling silver with significant emphasis on quality
and craftsmanship. Mayor's carries a large selection of brand name watches,
including Rolex, Baume & Mercier, Patek Philippe, Cartier, Omega, Gucci,
Bvlgari, Bedat, Charriol, Tag Heuer and Raymond Weil, designer jewelry including
Quadrillion, David Yurman, Pasquale Bruni and Carrera Y Carrera, and a variety
of high quality giftware, including Lalique, Baccarat, Mont Blanc, Moser and
Herend.
Management believes that Mayor's is one of the largest authorized
jewelers for selected products in North America. Management believes that the
wide selection of merchandise positions the Mayor's stores as a "destination of
choice" for purchasers of fine quality jewelry and watches.
During the last six months of Fiscal 1998 net sales by product were as
follows: watches - 39%; bridal diamonds - 24%; diamond fashion - 13%; other -
24%. The Rolex brand, which is included in watch sales, accounted for 26% of
total Mayor's sales.
SAM'S AND WAREHOUSE MEMBERSHIP CLUBS
The Sam's division principal products are gold jewelry set with
diamonds and/or other precious and semi-precious gemstones, gold chains, other
forms of gold and silver jewelry and watches. This product line includes chains,
pendants, bracelets, watches, rings and earrings. Other consumer products
include perfumes and fragrances, sunglasses, writing instruments, and
collectible and giftware products.
During Fiscal 1998, approximately 82% of net sales were in jewelry and
watches and approximately 18% of net sales were in other consumer products. In
each of Fiscal 1997 and Fiscal 1996, respectively, approximately 80% and 76% of
net sales were in jewelry and watches and approximately 20% and 24% of net sales
were in other consumer products.
The Sam's division products are classically designed to offer broad
consumer appeal. Following the warehouse club philosophy of limiting the
assortment in each product category, the merchandise offered at a typical
location includes 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.
The Company's principal customers for these products during Fiscal
1998, 1997 and 1996 were members of Sam's. In Fiscal 1998, 1997 and 1996,
approximately 73%, 93% and 94% respectively, of the Company's net sales
originated from 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 locations until February 1997. In May 1993, the arrangement was
changed to provide that the Company would operate an exclusive licensed
concession at all Sam's existing and future domestic locations through February
1, 1999. In March 1994, the arrangement was extended through February 1, 2001.
During April 1999, the Company was informed by Sam's that the concession
arrangement would not be renewed beyond its expiration date. It is anticipated
that Jan Bell will continue to operate pursuant to the terms of the existing
agreement until the expiration scheduled for 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 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
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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.
Jan Bell employees staff the jewelry department at each Sam's location
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.
PURCHASING
MAYOR'S
The Mayor's staff of experienced buyers procures distinctive
merchandise directly from manufacturers, diamond cutters, and other supplier's
worldwide enabling Mayor's to sell fine quality merchandise often not available
from others jewelers in its markets. Buyers generally specialize in purchasing
merchandise in categories such as diamonds, watches, gold jewelry, and giftware.
Buyers frequently visit both Mayor's and competitors' stores to compare value,
selection, and service, as well as to observe client reaction to merchandise
selection and determine future needs.
The Company's worldwide buying power allows Mayor's to pass its savings
on to its clients through competitively priced merchandise at Mayor's stores.
While Mayor's does not emphasize discounting, it does actively compete with
other jewelry retailers on the basis of price, particularly with regard to brand
name items such as watches, with respect to which comparison shopping is common.
DIAMOND AND GEMSTONES
During Fiscal 1998, revenues from sales of diamond jewelry and diamond
jewelry with gemstones represented approximately 39% of Mayor's net sales.
Whenever possible, Mayor's purchases unset diamonds and other precious gemstones
directly from cutters in international markets, such as Antwerp, Bangkok and Tel
Aviv, gold jewelry from Italy and pearls from Japan. These diamonds and other
gemstones are frequently furnished to independent goldsmiths for setting,
polishing and finishing pursuant to Company instructions, as well as to Mayor's
facilities in order to deliver a finished product at the best possible value.
WATCHES
Mayor's purchases watches from a number of leading manufactures and
suppliers. During Fiscal 1998, merchandise supplied by Rolex, the Company's
largest supplier, accounted for approximately 26% of Mayor's net sales. Although
management believes the Company enjoys excellent relationships with all of its
major suppliers of watches, there is no assurance that its operations would not
be adversely affected if it were no longer able to purchase watches from such
suppliers. Please refer to Item 7 regarding "Forward-Looking Statements and
Cautionary Factors That May Affect Future Results."
In Fiscal 1998, Mayor's purchased jewelry and giftware for sale in
Mayor's stores from over 500 suppliers. Many of these suppliers have long
standing relationships with Mayor's. Another source of jewelry is Mayor's estate
division, which purchased approximately $2.2 million in jewelry from estates,
individuals and bank and trust departments during the six months subsequent to
the acquisition. Management believes that the estate division often provides
Mayor's with the ability to obtain jewelry and raw material inventory at
significant savings, thereby increasing gross profit margins.
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SAM'S
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.
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 a substantial amount 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.
Please refer to Item 7 regarding "Forward-Looking Statements and Cautionary
Factors That May Affect Future Results."
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
The Company purchased approximately 49% and 63% of watches through
parallel marketed means during Fiscal 1998 and Fiscal 1997, respectively, as
well as approximately 51% and 37% of watches directly from other manufacturers
during Fiscal 1998 and Fiscal 1997 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."
OTHER PRODUCTS
The Company purchases sunglasses, fine writing instruments, fragrances
and collectibles directly from manufacturers and vendors, as well as through
parallel marketed means. See "REGULATION."
AVAILABILITY OF PRODUCTS FOR MAYOR'S AND SAM'S
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" and Item 7 regarding "Forward-Looking Statements
and Cautionary Factors That May Affect Future Results."
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CHANGING PRICES AND AVAILABILITY
Changes in foreign or domestic laws and policies affecting
international trade may also have an adverse effect on the availability or price
of the diamonds, gemstones and precious metals required by the Company. Other
risks to the Company's supplies of merchandise include fluctuation in the price
of precious gems and metals. Because substantially all of the Company's purchase
transactions are denominated in U.S. dollars, the Company does not engage in any
hedging activities in foreign currencies. See "Currency Exchange Gain/Loss" in
Management's Discussion and Analysis of Financial Conditions and Results of
Operations regarding the Company's forward sales contracts of the Mexican peso.
The Company does not speculate in gems or precious metals or engage in any
hedging activity with respect to possible fluctuations in the prices of these
items, since historically the Company has been able to make compensatory
adjustments in its retail prices as material fluctuations in the price of
supplies have occurred. If such fluctuations should be unusually large, rapid or
prolonged, there is no assurance that the necessary adjustments could be made
quickly enough to prevent the Company from being adversely affected. Please
refer to Item 7 regarding "Forward-Looking Statements and Cautionary Factors
That May Affect Future Results."
SEASONALITY
The Company's jewelry business is highly seasonal, with the fourth
quarter (which includes the Christmas shopping season) historically contributing
significantly higher sales than any other quarter during the year. Approximately
47% of the Company's Fiscal 1998 net sales were made during the fourth quarter.
This percentage is expected to approximate 40% when a full year of Mayor's sales
are included in Jan Bell's operating results.
MANUFACTURING
MAYOR'S
In addition to Mayor's purchases of finished jewelry and the
subcontracting of certain fabrication activities to others, Mayor's also has a
jewelry design studio and manufacturing and repair facility located in its
executive offices. In keeping with Mayor's identity as a full service guild
jeweler, this studio and workshop offers custom designed jewelry in response to
customers' special requests and manufactures jewelry for retail sale when it is
economical to do so. Mayor's also provides jewelry and watch refurbishment and
repair services, which are performed in stores or at the Mayor's centralized
repair facility. In addition to repair work, jewelers will perform other work,
including ring sizing on new purchases and repairs covered under warranty.
SAM'S
The Company performs certain jewelry manufacturing in Israel. During
Fiscal 1998, approximately 29% of diamond and gemstone products purchased were
manufactured by the Company in Israel. The remaining gemstone products were
manufactured or purchased from third parties. All gold and watch products are
manufactured by third parties.
RETAIL OPERATIONS, MERCHANDISING AND MARKETING
MAYOR'S
GENERAL
The Company distinguishes itself from most of its competitors by
offering a larger selection of distinctive and higher quality merchandise at
many different price points. Mayor's keeps substantially its entire inventory on
display in its stores rather than at its distribution facility. Although each
store stocks a representative array of jewelry, watches, giftware and other
accessories, certain inventory is tailored to meet local tastes and historical
merchandise sales patterns of the individual store. If a client desires an item
which is not available in a particular store, it can be transferred from another
store, generally in less than twenty-four hours. To assist in this process, each
sales professional is instructed to
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contact the Company's customer service department, which in turn uses Mayor's
imaging system which includes substantially all of the inventory to determine if
another store carries the requested merchandise.
The Company believes that the elegant ambiance of its stores and
attractive merchandise displays play an important role in providing an
atmosphere for encouraging sales. The Company pays careful attention to detail
in the design and layout of each of its stores, particularly lighting, colors,
choice of materials and placement of display cases. The Company also places
substantial emphasis on its window displays as a means of attracting walk-in
traffic and reinforcing its distinctive image. The Company's display department
designs and creates window and store merchandise case displays for all stores.
Window displays are frequently changed to provide variety and to reflect
seasonal events such as Christmas, Valentine's Day and Mother's Day.
A manager, two assistant managers, six additional sales professionals,
and an office manager staff a typical Mayor's Store with approximately $5
million in annual sales. Each store manager reports to one of four regional
directors. The four regional directors report to the Vice President of Mayor's
Store Operations. Many Mayor's stores also have a watchmaker or jeweler on the
premises to make repairs. Management believes that the availability of these
craftsmen reinforces the Company's image as a full-service guild jeweler and
encourages customers to patronize its stores.
PERSONNEL AND TRAINING
Mayor's places substantial emphasis on the professionalism of its sales
force to maintain its position as a leading upscale jeweler. Mayor's strives to
hire only highly motivated, friendly and customer-oriented individuals. All new
sales professionals attend a 10 day course where they are trained in technical
areas of the jewelry business, specific service techniques and Mayor's
commitment to client service. In general, Mayor's trains its sales personnel to
establish a personal rapport with each client, to identify client preferences
with respect to both product and price range, and to successfully conclude a
sale. Management believes that attentive personal service and knowledgeable
sales professionals are key components of Mayor's success.
As part of Mayor's commitment to training, the Company established
"Mayor's University", a formalized system of in-house training with a primary
focus on client service that involves extensive classroom training, the use of
detailed operational manuals, in-store mentorship programs and product knowledge
testing. All attendees must perform satisfactorily on written tests and quizzes
that are administered during the training program in order to retain their
employment with the Company. To help ensure successful skill transference from
the classroom training environment to the sales floor, a training manager works
with each new sales professional on a one-to-one basis in the store. Each new
sales professional is partnered with a mentor in the store, who trains the new
associate on basic operational procedures. In addition, the Company conducts
in-house training seminars on a periodic basis and administers training modules
with audits to (i) enhance the quality and professionalism of all sales
professionals, (ii) measure the level of knowledge of each sales professional
and (iii) identify needs for additional training. The Company also provides
store managers with more extensive management and client service training that
emphasizes "on-the-job" coaching and training instruction techniques.
Mayor's also stresses external training for its sales professionals.
The Company encourages all associates (and requires all store managers) to
complete a series of courses offered by the Gemological Institute of America
(GIA), an independent industry-recognized diamond grading laboratory and
gemological school, and pays for the tuition costs of those who complete each
course.
ADVERTISING AND PROMOTION
Mayor's marketing philosophy is to build on its well-established
reputation in each of its market areas as a premier guild jeweler offering fine
quality merchandise in an elegant, sophisticated environment conducive to the
purchase of luxury items. Mayor's stresses its role as a fashion leader that
does not promote discounting, but instead prices all of its merchandise with the
goal of delivering consistent value to its clients. Mayor's marketing efforts,
which consist of advertising, direct mailings, promotional events, attractive
store design and elegant display, are shaped in large part by demographic and
consumer trends affecting both the jewelry industry generally and Mayor's
specifically.
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Mayor's advertisements stress its image as a full service guild
jeweler, its tradition of integrity, value and reliability, its longevity in the
jewelry business and its emphasis on superior client service. In addition,
advertisements frequently associate Mayor's with internationally recognized
brand names such as Rolex, Patek Philippe, Cartier and Mikimoto. Advertising and
promotions for all stores are developed by Company personnel at its headquarters
in conjunction with outside advertising agencies. During the six months after
acquisition, Mayor's purchased $5.6 million (6.8% of net sales) of advertising,
which is net of the portion which was reimbursed by its suppliers.
CREDIT OPERATIONS
Sales under Mayor's proprietary credit cards accounted for
approximately 31% of the Company's net sales during the six months ended January
30, 1999. Mayor's credit programs are intended to complement its overall
merchandising and sales strategy by encouraging larger and more frequent sales
to a loyal customer base.
Mayor's extends credit solely to its Mayor's customers under its own
revolving charge plan with up to two-year payment terms. Finance charges, which
are subject to rate ceilings imposed by state law, are currently assessed on
customers' balances at a rate of 1.5% per month. Customers that exceed higher
credit standards may also be offered a 90-day, interest free payment plan. All
clients may also take advantage of Mayor's layaway plan, which allows them to
set items aside and pay for the items over a limited period of time with no
interest charges.
Mayor's credit department, located at the Company's Sunrise corporate
office, makes all credit decisions. Neither sales personnel or store managers
are authorized to grant credit. Mayor's has developed a detailed
creditworthiness analysis on which it bases its credit decisions. A customer
will generally receive a credit approval or denial in less than 15 minutes.
Mayor's custom-designed, computerized accounts receivable systems provide credit
office personnel with on-line decision making information, including new
accounts processing, credit authorizations and customer inquiries.
As of January 30, 1999 Mayor's had approximately 58,000 credit card
holders. Mayor's utilizes its credit card customer base in its targeting
marketing programs.
Mayor's has a collections department, which follows up on delinquent
accounts. Collectors are trained on collection programs, which have been
developed in house by the credit organization. Early stage delinquencies are
handled with an approach to customer goodwill. If accounts progress in
delinquency, more assertive action is taken. Ultimately, if a delinquent account
cannot be collected in house, outside legal action is undertaken. During the six
month period ended January 30, 1999, Mayor's bad debt expense as a percentage of
credit sales was approximately 3.5%.
SAM'S
GENERAL
Each retail department is supervised by a counter 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 counter 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 as Christmas. Each department is
generally open for business during the same hours as the Sam's location in which
it operates. Except for extended hours during certain holiday seasons, Sam's
locations are generally open Monday through Friday from 10:00 a.m. to 8:30 p.m.,
8:00 a.m. to 8:30 p.m. on Saturdays and 10:00 a.m. to 7:00 p.m. on Sundays.
The counter manager reports to either an operating manager or a
regional director. Each region generally has two operating managers that report
to a regional director of the respective area. The Company currently has 11
regional directors. The regional directors report directly to the Vice President
of Sam's Operations.
11
<PAGE>
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 locations are membership only, cash and carry operations. The
Company's departments accept cash, checks, Discover, Visa, Mastercard and a
Sam's credit card.
DEPARTMENT COUNT
The following table sets forth data regarding the number of departments
at Sam's locations which the Company operated:
FISCAL FISCAL FISCAL
1998 1997 1996
---- ---- ----
Departments:
Operated, beginning of period 447 440 437
Sam's Clubs opened during period 8 8 9
Sam's Clubs closed during period 0 1 6
--- --- ---
Operated, end of period 455 447 440
--- --- ---
Net increase 8 7 3
=== === ===
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 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 at Sam's by newspaper or other periodical
advertising or the broadcast media. To support seasonal activities, the Company
promotes its products through direct mail catalogs to Sam's members. The Company
utilizes promotional materials such as signage, banners and takeaway brochures
within Sam's locations to promote its products.
DISTRIBUTION
The Company's Mayor's and Sam'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 operates a manufacturing facility in Tel Aviv, Israel which
manufactures diamonds and other gem jewelry. Also this facility warehouses and
distributes merchandise. A significant portion of sales from this facility
12
<PAGE>
are intercompany sales to the Company's distribution center in Sunrise, Florida
with the remainder of the sales to retailers in Israel and other countries.
The Company operates a distribution facility in Mexico City, Mexico
which warehouses and distributes merchandise sold to Sam's in Mexico.
COMPETITION
The retailing industry is highly competitive. 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
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 generally utilizes the services of independent customs
agents to comply with U.S. customs laws in connection with its purchases of
gold, diamond and other jewelry merchandise from foreign sources.
Jan Bell bears certain risks in purchasing parallel marketed goods
which includes certain watches and other products. Parallel-marketed goods are
products to which trademarks are legitimately applied but which were not
necessarily intended by their foreign manufacturers to be imported and sold in
the United States. The laws and regulations governing transactions involving
such goods lack clarity in significant respects. From time to time, trademark or
copyright holders and their licensees initiate private suits or administrative
agency proceedings seeking damages or injunctive relief based on alleged
trademark or copyright infringement by purchasers and sellers of
parallel-marketed goods. While Jan Bell believes that its practices and
procedures with respect to the purchase of 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 is introduced in Congress from time to time 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. Please refer to Item 7 regarding
"Forward-Looking Statements and Cautionary Factors That May Affect Future
Results."
The Company's operations are affected by numerous federal and state
laws that impose disclosure and other requirements upon the origination,
servicing and enforcement of credit accounts and limitations on the maximum
amount of finance charges that may be charged by a credit provider. In addition
to the Company's private label credit cards, credit to the Company's customers
is provided primarily through bank cards such as Visa/registered trademark/,
Mastercard/registered trademark/ and Discover/registered trademark/, without
recourse to the Company based upon a customer's failure to pay. Any change in
the regulation of credit which would materially limit the availability of credit
to the Company's traditional customer base could adversely affect the Company's
results of operations or financial condition. Please refer to Item 7 regarding
"Forward-Looking Statements and Cautionary Factors That May Affect Future
Results."
EMPLOYEES
As of April 1, 1999, the Company employed approximately 1,612 persons
on a full-time basis, including approximately 1,107 in regional and local sales,
203 in inventory and distribution and 302 in administrative and support
functions. In addition, the Company also employed approximately 1,892 persons on
a part-time or temporary basis
13
<PAGE>
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.
ITEM 2. PROPERTIES
The Company's corporate headquarters is owned by the Company and
located on 11.1 acres in a 131,000 square foot building in Sunrise, Florida. In
March 1999, the Company sold the previous corporate headquarters, a 64,000
square foot building on 3.7 acres, located adjacent to the current headquarters.
As of April 1, 1999, Mayor's had a total of 27 leased stores, of which
21 were operating and 6 are in the process of being constructed or are in the
design phase. Mayor's leases its stores, with rent generally the greater of a
percentage of the store's sales volume (subject to certain adjustments) or a
fixed minimum base rent. The Mayor's lease terms generally range from two to 15
years. Due to Mayor's high volume of sales, Mayor's has historically paid rent
for most stores based on sales. Lease rental payments are also subject to annual
increases for tax and maintenance. At three of the stores, the leases have
expired; Mayor's is renegotiating leases for these locations and expects the
terms of such new leases to be on substantially the same terms as the prior
lease as adjusted for appropriate rent increases and space increases. The
following table summarizes all store leases:
TOTAL
OPERATING STORES SQUARE FEET EXPIRATION LOCATION
- ---------------- ----------- ---------- --------
Altamonte Springs 3138 (1) Altamonte Springs, FL
Aventura Mall 3447 Dec-2008 N. Miami Bch, FL
Boca Town Center 5878 Jan-2007 Boca Raton, FL
Boynton Beach Mall 3065 Jan-2007 Boynton Beach, Fl
Brandon 4110 Jun-2005 Brandon, FL
Broward Mall 2236 Dec-2004 Plantation, FL
Coral Gables 2500 Mar-2000 Coral Gables, FL
Dadeland Mall 5700 Jan-2007 Miami, FL
The Falls 1480 (1) Miami, FL
Florida Mall 3233 Jan-2007 Orlando, FL
Galleria Mall 3682 (1) Ft. Lauderdale, FL
Gardens Mall 2907 Jan-2004 Palm Beach Gardens, FL
International Mall 3226 Jan-2006 Miami, FL
Orlando Fashion Square 4095 Jun-2005 Orlando, FL
Seminole 3461 Apr-2009 Sanford, FL
Treasure Coast 2506 Jan-2001 Jensen Beach, FL
Westland Mall 4200 Jan-2000 Hialeah, FL
Buckhead Store 10000 Apr-2009 Atlanta, GA
Lenox Square Mall 4587 Dec-2003 Atlanta, GA
North Point Mall 2135 Dec-2002 Alpharetta, GA
Perimeter Mall 5157 Jan-2009 Atlanta, GA
14
<PAGE>
<TABLE>
<CAPTION>
FUTURE STORES EXPECTED OPENING
- ------------- ----------------
<S> <C> <C> <C> <C>
Citrus Park Town Center 3890 (1) Tampa, FL Nov-1999
Lincoln Road 4250 Apr-2009 Miami Beach, FL Sep-1999
Mall of Georgia 3486 (1) Mill Creek, GA Oct-1999
The Palladium at City Place 6000 Oct-2010 West Palm Beach, FL Oct-2000
Shops at Sunset 2051 Jan-2009 S Miami, FL May-1999
Southgate Plaza 4200 (1) Sarasota, FL Nov-1999
<FN>
(1) Final terms are currently being negotiated.
</FN>
</TABLE>
As of April 1, 1999, the Company had licensed concession operations at
458 Sam's locations in 49 states throughout the United States and Puerto Rico.
The typical licensed concession consists of approximately 260 to 275 square
feet.
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.
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. Although certain litigation with third parties and
present and former employees of the Company is routine and incidental, such
litigation can result in large monetary awards for compensatory or punitive
damages; however, the Company believes that no litigation which is currently
pending involving the Company will have a material adverse effect on the
Company's financial condition.
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 January 30, 1999.
15
<PAGE>
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.
HIGH LOW
---- ---
Year Ended January 30, 1999
Thirteen Weeks Ended May 2, 1998 $5.94 $2.69
Thirteen Weeks Ended August 1, 1998 7.94 4.63
Thirteen Weeks Ended October 31, 1998 7.25 4.00
Thirteen Weeks Ended January 30, 1999 7.50 4.50
Year Ended January 31, 1998
Thirteen Weeks Ended May 3, 1997 $2.38 $1.94
Thirteen Weeks Ended August 2, 1997 2.63 2.13
Thirteen Weeks Ended November 1, 1997 3.25 2.31
Thirteen Weeks Ended January 31, 1998 3.06 2.31
The last reported sales price of the Common Stock on the American Stock
Exchange Composite Tape on April 16, 1999 was $2.81. On April 16, 1999, the
Company had 727 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.
RECENT SALES OF UNREGISTERED SECURITIES
Effective July 28, 1998, the Company consummated the acquisition
of Mayor's Jewelers, Inc. Total consideration consisted of approximately $18
million in cash, 2 million shares of Jan Bell Marketing, Inc. common stock and
the refinancing of Mayor's outstanding debt. The Company issued the common stock
in reliance on the exemption in Section 4(2) of the Securities Act.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial 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-
FIFTY-TWO FIFTY-TWO FIFTY-TWO THREE FIFTY-TWO
WEEKS WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED ENDED
JAN. 30, JAN. 31, FEB. 1, FEB. 3, JAN. 28,
1999 1998 1997 1996 1995
--------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales $361,048 $247,890 $243,079 $254,004 $305,685
Cost of Sales 260,121 188,004 183,636 199,579 255,725
-------- -------- -------- -------- --------
Gross profit 100,927 59,886 59,443 54,425 49,960
Store and warehouse operating and
selling expenses 58,481 33,082 33,368 35,261 42,596
General and administrative
expenses 19,052 13,521 11,577 11,486 16,195
Other charges (1) -- -- 5,643 -- 47,773
Depreciation and amortization
expense 7,102 6,928 8,236 8,674 9,511
Currency exchange (gain) loss 1,121 333 (26) 597 5,474
-------- -------- -------- -------- --------
Operating income (loss) 15,171 6,022 645 (1,593) (71,589)
Interest expense (1,748) -- (999) (3,196) (3,534)
Interest and other income 1,538 1,756 1,269 1,477 419
-------- -------- -------- -------- --------
Income (loss) before income taxes 14,961 7,778 915 (3,312) (74,704)
Income tax provision (benefit) (2,257) (2,265) 154 130 353
-------- -------- -------- -------- --------
Net income (loss) $ 17,218 $ 10,043 $ 761 $ (3,442) $(75,057)
======== ======== ======== ======== ========
Net income (loss) per common share
Basic $0.63 $0.39 $0.03 $(0.13) $(2.92)
======== ======== ======== ======== ========
Diluted $0.60 $0.39 $0.03 $(0.13) $(2.92)
======== ======== ======== ======== ========
BALANCE SHEET DATA (AT PERIOD END):
Working capital $130,505 $111,764 $ 96,828 $ 96,762 $ 88,742
Total assets 247,720 151,712 139,385 153,173 186,752
Credit facility, less amounts
classified as current 26,409 -- -- 7,500 --
Stockholders' equity 163,686 135,579 125,373 125,225 127,335
<FN>
(1) 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 placed on the market for sale; and (d) $1.5 million provision
for the closing of two Jewelry Depot locations.
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
17
<PAGE>
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 uninvested 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.
</FN>
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The years ended January 30, 1999, January 31, 1998 and February 1, 1997
are referred to herein as Fiscal 1998, Fiscal 1997 and Fiscal 1996,
respectively. The operating results of Mayor's are included in the consolidated
operations of Jan Bell for periods subsequent to August 1, 1998, which is the
acquisition date for accounting purposes. As the Mayor's business is highly
seasonal with fourth quarter (which includes the Christmas shopping season)
historically contributing significantly higher sales and operating results than
any other quarter, it should be noted that the six months of operating results
included are not representative of the operating results for an annual period.
Therefore, operating results will be impacted in Fiscal 1999 when the less
profitable first six months of the year, which are not included in the operating
results for Fiscal 1998, are included.
The Company operates two divisions. The first is Mayor's and Maier &
Berkele luxury jewelry stores. The second is an exclusive licensed concession
department at all existing and future domestic and Puerto Rico Sam's locations
under an agreement which expires February 1, 2001. As of January 30, 1999, the
Company operated a licensed concession department in 455 Sam's locations. On
April 6, 1999, the Company was informed that this agreement would not be renewed
beyond its February 1, 2001 term. The Company has been dependent on Sam's Club
to conduct its business, and without replacement business, the loss of the
arrangement with Sam's Club will have a material adverse effect on the business
of the Company. The Mayor's acquisition has reduced this dependency on Sam's.
During Fiscal 1998, approximately 73% of the Company's net sales were to Sam's
customers. Moreover, this percentage is expected to decrease in Fiscal 1999 when
a full year of Mayor's sales are included in the Company's operating results. In
addition, the Company's operating and capital resources that are and will become
available during the transition are expected to be used to pursue growth of the
Mayor's chain as well as considered for use in other acquisitions.
The results of operations for Fiscal 1998, Fiscal 1997 and Fiscal 1996
reflect the Company's consistent strategy to achieve continual earnings
improvement in the retail marketplace. During this time the Company implemented
merchandise strategies in Sam's that emphasized higher margin diamond,
semi-precious gem, gold and watch products in place of other lower margin
non-jewelry products and categories. Further, the Company has achieved revenue
growth in its Sam's departments as a result of obtaining temporary additional
square footage for promotional and pallet programs, improved merchandise
assortments, higher quality merchandise offerings and improved distribution of
merchandise which have allowed the Company to realize higher gross margin
dollars. Management does not expect any significant additional improvements in
sales, gross margins, operating cash flows and expense savings in its
traditional business with Sam's.
The results of operations for Fiscal 1998 also include the results of
Mayor's for the period subsequent to the acquisition date of July 28, 1998.
During this period, the Company began to review ongoing strategies to increase
revenues and achieve expense savings in the Mayor's business. These include
efforts to reduce and better balance inventory levels, reduce the amount of
discontinued inventory in stock and replace with current merchandise, and
increase inventory turns. Also, the Company believes gross margins can be
increased through reducing purchasing costs of inventory and a reduction of
discounts given at the point of sale on nondiscontinued inventory. Management
also believes there is opportunity for reductions in Mayor's operating expenses
once the Mayor's integration is completed Fiscal 1999.
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.
19
<PAGE>
The following table sets forth for the periods indicated the percentage
of net sales for certain items in the Company's Statements of Income:
INCOME AND EXPENSE ITEMS AS A
PERCENTAGE OF NET SALES
-----------------------------
YEAR YEAR YEAR
ENDED ENDED ENDED
JAN. 30, JAN. 31, FEB. 1,
1999 1998 1997
-------- -------- -------
Net sales 100.0% 100.0% 100.0%
Cost of sales 72.0 75.8 75.5
----- ----- -----
Gross profit 28.0 24.2 24.5
Store and warehouse operating and selling expenses 16.2 13.4 13.7
General and administrative expenses 5.3 5.5 4.8
Other charges -- -- 2.3
Depreciation and amortization 2.0 2.8 3.4
Currency exchange loss .3 .1 --
----- ----- -----
Operating income 4.2 2.4 .3
Interest expense (.5) (--) (.4)
Interest and other income .4 .7 .5
----- ----- -----
Income before income taxes 4.1 3.1 .4
Provision (benefit) for income taxes (.7) (.9) .1
----- ----- -----
Net income 4.8% 4.0% .3%
===== ===== =====
SALES
YEAR ENDED YEAR ENDED YEAR ENDED
JAN. 30, 1999 JAN. 31, 1998 FEB. 1, 1997
------------- ------------- ------------
Net sales
Sam's Club locations $263,705 $233,555 $230,041
Mayor's Jewelers 82,221 N/A N/A
Other 15,122 14,335 13,038
-------- -------- --------
Total $361,048 $247,890 $243,079
======== ======== ========
Percentage change
Sam's Club locations 12.9% 1.5% .9%
Mayor's Jewelers N/A N/A N/A
Other 5.5% 10.0% (50.1%)
Total 45.6% 2.0% (4.3%)
Comparative retail sales
Sam's Club locations $260,117 $230,937
Mayor's Jewelers N/A N/A
Percentage change
Sam's Club locations 12.6% 0.4%
Mayor's Jewelers N/A N/A
The increase in revenues and comparative retail sales in the
Sam's locations for Fiscal 1998 is mainly attributable to merchandise strategies
the Company has implemented to emphasize higher margin products. Further, the
Company has achieved revenue growth in its Sam's departments as a result of
obtaining temporary additional retail square footage for promotional and pallet
programs, improved merchandise assortments, higher merchandise
20
<PAGE>
quality offerings and improved distribution of merchandise which has allowed the
Company to realize higher gross margin dollars. These sales increases were in
all product categories except fragrances, with the largest increases being in
the diamond jewelry, semi-precious gem, and watch product categories.
The increase in 1997 net sales was driven by an improvement in fourth
quarter sales of $102.4 million compared to $95.8 million during the comparable
period of Fiscal 1996. This increase of $6.6 million during the Christmas
selling season was primarily attributable to better merchandising strategies,
improved placement of goods within the Sam's locations, and additional
advertising and marketing in Sam's advertising and marketing vehicles. The sales
increases primarily were in the Company's diamond and gold jewelry product
categories.
Wholesale sales during Fiscal 1998, 1997 and 1996 were $15.0 million,
$14.4 million and $13.1 million, respectively. These sales were primarily made
by the Company's subsidiaries in Israel and Mexico.
Sales in the future will be adversely impacted when the Sam's Agreement
expires on February 1, 2001. In addition, sales may also be impacted by general
economic conditions, the level of spending by customers and the inability to
obtain the additional retail square footage for promotional and pallet programs
in Sam's during the period the Agreement remains in effect. The retail jewelry
market is particularly subject to the level of consumer discretionary income and
the subsequent impact on the type and value of goods purchased. With the
consolidation of the retail industry, the Company believes that competition both
within the luxury goods retail industry, the warehouse club industry, and with
other competing general and specialty retailers and discounters will continue to
increase. The Company will continue to focus on developing retail opportunities
outside its business with Sam's. This will include consideration of expanding
the Mayor's chain into a national luxury retailer, as well as the acquisition of
other retailers.
COST OF SALES AND GROSS PROFIT
Gross profit in Fiscal 1998 was 28.0% compared to 24.2% and 24.5% in
Fiscal 1997 and Fiscal 1996, respectively. Gross profit for Mayor's was 37.0%
during the six-month period subsequent to acquisition. Gross profit in Fiscal
1998 was 25.3% for the Sam's division (which includes the Company's Israel,
Mexico, and Manhattan Diamonds operations throughout the remaining discussion).
The increase in Fiscal 1998 is primarily a result of higher margins in the
recently acquired Mayor's division. In addition, the Company recognized slight
margin improvements in the Sam's Club division. The decline in gross margin in
Fiscal 1997 was primarily attributed to inventory reserves the Company has
provided related to discontinued and slow moving merchandise, partially offset
by an increase in gross margin recognized on sales in certain product
categories, and improvements as a percentage of sales in inventory shrinkage and
product handling costs.
STORE AND WAREHOUSE OPERATING AND SELLING EXPENSES
Store and warehouse operating and selling expenses increased by $25.4
million in Fiscal 1998 from Fiscal 1997 and decreased $0.3 million in Fiscal
1997 from Fiscal 1996. Store and warehouse operating and selling expenses for
Mayor's were $20.1 million for the third and fourth quarters of Fiscal 1998.
Store and warehouse operating and selling expenses for the Sam's division were
$38.4 million for Fiscal 1998. The increase in these expenses for Fiscal 1998 is
primarily attributable to the Mayor's division expenditures which are excluded
from Fiscal 1997 operating results, increased store payroll and incentives in
Sam's, and increased advertising and marketing in Sam's advertising and
marketing programs. The Company believes the investment in these costs in Sam's
contributed to the increase in Sam's sales previously discussed. Also
contributing to the increase in expenses are costs that vary proportionately
with sales, such as check authorization charges and charge card processing fees.
The decrease in Fiscal 1997 is primarily attributed to a decrease in bad debt
expense and reduced advertising and marketing costs during holiday seasons,
offset by increased store payroll as a result of additional stores and annual
pay increases.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $5.5 million in Fiscal
1998 from Fiscal 1997, and increased by $1.9 million in Fiscal 1997 from Fiscal
1996. General and administration expenses for Mayor's were $5.3 million for the
third and fourth quarter of Fiscal 1998. General and administrative expenses for
the Sam's division were $13.8
21
<PAGE>
million for Fiscal 1998. The increase in Fiscal 1998 was primarily a result of
the Mayor's general and administrative expenses, Mayor's integration costs and
increased professional fees related to the Company's legal matters. This
increase is net of a decrease in expenses for Fiscal 1998 attributable to
professional fees related to the Sam's division strategic business development
and severance payments, both of which were expensed during Fiscal 1997, which
did not occur in 1998. Management believes savings will be realized once the
integration of Mayor's is complete. In Fiscal 1997, the increase is primarily
attributed to increases in litigation costs, severance pay related to terminated
employees and management bonuses which are based upon the profitability of the
Company.
OTHER CHARGES
Other charges in Fiscal 1996 consisted of approximately $2.0 million in
severance payments to the Company's former President and Chief Executive
Officer, the write-off of $630,000 of financing costs in connection with the
prepayment of certain then existing debt, $1.5 million write-down of the
carrying value of the Company's former corporate headquarters building which
became held for sale, and a $1.5 million provision for the closing of two of the
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. These two locations were closed during November 1997 and January 1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses were $7.1 million in Fiscal
1998, $6.9 million in Fiscal 1997 and $8.2 million in Fiscal 1996. Depreciation
and amortization expense for Mayor's was $2.0 million for the third and fourth
quarters of Fiscal 1998. Depreciation and amortization expense for the Sam's
division was $5.1 million for Fiscal 1998. The increase is primarily a result of
the depreciation of Mayor's fixed assets, amortization of goodwill resulting
from the Mayor's acquisition and amortization of Citicorp financing costs. This
increase was mitigated by decreased depreciation expense primarily attributable
to the fixed assets of the Sam's retail business that became fully depreciated
during May 1997. The decrease in Fiscal 1997 is primarily attributable to the
significant fixed asset expenditures made to satisfy the requirements of the
retail business during 1992 becoming fully depreciated during May 1997. In
addition, the corporate headquarters building was depreciated during Fiscal 1996
but not in Fiscal 1997 and Fiscal 1998 since during Fiscal 1997 the building was
unoccupied and held for sale during both these years.
CURRENCY EXCHANGE GAIN/LOSS
The Company has operations in Mexico (the Company supplies selected
fine jewelry, watches and fragrances to Sam's locations in Mexico, a warehouse
club joint venture in Mexico between Wal-Mart Stores and Cifra S.A.) and Israel.
In Israel the functional currency exchange rate between the Israeli Shekel and
U.S. dollar is government regulated and not currently subject to significant
currency exchange rate fluctuations. In Mexico, the U.S. dollar is the
functional currency since the economy is considered highly inflationary. The
economic and political instability of the business environment in Mexico
requires the Company to constantly review its operating strategy. If it is
determined that the risk in Mexico outweighs the long term growth benefits, the
Company will seek to maximize its return through a divestiture of this entity.
Changes in the exchange rates for the Mexican peso relative to the U.S. dollar
resulted in direct charges or credits to the Consolidated Statements of Income
during a portion of Fiscal 1997 and all of Fiscal 1998. During Fiscal 1998,
there was a foreign currency exchange loss of $1.1 million and $.3 million
during Fiscal 1997. During 1996, Mexico had greater stability which resulted in
a gain of $26,000.
The Company manages the Mexican peso currency exchange rate exposure to
minimize the effect of exchange rate gains and losses on its cash flows through
the use of forward sales contracts, generally for periods not exceeding three
months. During Fiscal 1998, a maximum of $2.5 million in Mexico peso forward
sale contracts were outstanding at any one time. As of January 30, 1999, there
were $2.5 million of contracts outstanding. Forward sales contracts are
accounted for on a mark to market basis.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE
Interest and other income was $1.5 million in Fiscal 1998, $1.8 million
in Fiscal 1997 and $ 1.3 million in Fiscal 1996. The decrease for Fiscal 1998
was primarily attributable to the significantly reduced cash balance available
22
<PAGE>
to invest subsequent to the purchase of Mayor's, net of an increase as a result
of higher average cash balances available for investment during the period prior
to the Mayor's acquisition. The increase in interest income in Fiscal 1997 is a
result of higher average cash balances generated from operations available for
investment during Fiscal 1997. Interest expense was $1.7 million for Fiscal
1998. There was no interest expense in Fiscal 1997, attributable to the absence
of debt throughout Fiscal 1997. Interest expense was $1.0 million in Fiscal 1996
related to a credit facility that expired in 1998. The increase in interest
expense in Fiscal 1998 is attributable to the procurement of debt due to the
acquisition of Mayor's. There were no short-term borrowings in Fiscal 1997.
INCOME TAXES
The Company's effective income tax rate was (15.1)% in Fiscal 1998,
(29.1)% in Fiscal 1997 and 16.8% in Fiscal 1996. As a result of net income
realized in Fiscal 1998, Fiscal 1997, and Fiscal 1996, the Company recorded in
Fiscal 1998 and Fiscal 1997 an income tax benefit of $2.8 million and $2.6
million, respectively, which primarily represents the net operating loss
carryforwards which management believes are more likely than not to be utilized.
The Company does not anticipate recording a material income tax benefit in
Fiscal 1999. Further, it expects that a portion of its income in Fiscal 2000
will be provided for at statutory rates. The Company has a remaining deferred
tax asset of approximately $12.8 million which is reduced by a $10 million
valuation allowance. Valuation allowances have been provided to 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 Company has a Federal net operating loss carryforward of
approximately $28 million, and a state net operating loss carryforward of
approximately $90.1 million. Separately stated, Jan Bell has a Federal net
operating loss carryforward of approximately $22.4 million and a state net
operating loss carryforward of approximately $78.0 million. Mayor's has a
Federal net operating loss carryforward of approximately $5.6 million and a
state net operating loss of approximately $12.1 million. Due to Section 382
limitations, the amount of Mayor's NOL which the Company can utilize each year
is approximately $1.5 million. The Federal net operating loss carryforward
expires beginning in 2008 through 2011 and the state net operating loss
carryforward expires beginning in 1999 through 2013. The Company also has an
alternative minimum tax credit carryforward of approximately $1.4 million to
offset future Federal income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of January 30, 1999, cash and cash equivalents totaled $5.4 million
and the Company had $26.3 million outstanding under its working capital
facility. The borrowings under this facility were a result of the July 1998
acquisition of Mayor's. Total consideration consisted of approximately $18
million cash, 2 million shares of Jan Bell common stock and the refinancing of
Mayor's outstanding debt through an $80 million working capital facility with a
syndicate of banks led by Citicorp, U.S.A., Inc. Availability under this
facility is determined based upon a percentage formula applied to inventory and
accounts receivable. Based upon this formula, the maximum of $80 million was
available to the Company at January 30, 1999. The Company has the right to
request an increase up to $110 million contingent upon lender approval. The
credit facility bears interest at floating rates, currently based upon LIBOR
plus 1.5% or the bank's adjusted base rate plus .25%, at the Company's option.
These interest rates can be increased if the Company's average leverage ratio
does not meet certain levels. In addition, the Company pays a commitment fee of
.25% of the unused line balance as well as 2.5% of the aggregate outstanding
letter of credit liability. The agreement contains covenants which require the
Company to maintain financial ratios including leverage ratio, fixed charge
ratio, and tangible net worth, and also limits capital expenditures, incurrence
of additional debt, and prohibits payment of dividends.
During Fiscal 1998, cash flows from operating activities provided $28.6
million in cash. The Company's business is highly seasonal. Consequently,
seasonal working capital needs peak in October and November, before the holiday
shopping season. During Fiscal 1998 these seasonal needs were supplied by the
Company's internally generated working capital and borrowings under the Citicorp
credit facility. During Fiscal 1998, the Company's peak level of inventory was
$190.5 million requiring a maximum outstanding borrowing on the line of credit
of $63.6 million. The Company anticipates less borrowings during Fiscal 1999 as
the Company will attempt to reduce the Sam's Division inventories in
contemplation of the expiration of the Sam's agreement on February 1, 2001.
23
<PAGE>
Net cash used in investing activities was $65.4 million in Fiscal 1998
primarily related to the $59 million in cash used to purchase Mayor's. In
addition, approximately $6.3 million was invested in capital expenditures.
Fiscal 1998 capital expenditures include back office computer software and
hardware as well as costs associated with new and remodeled Mayor's locations.
The Company currently plans to open at least 5 Mayor's stores during 1999. Under
its Mayor's growth strategy, the Company plans to open 5-10 new stores per year.
Management estimates that the Company's cash requirements will be approximately
$4.2 million for each new store, with approximately $1.2 million (after
consideration of lease concessions from landlords) related to leasehold
improvements, fixtures, point of sale terminals and other equipment in the
stores, and approximately $3 million related to the inventories. The Company
closed three Mayor's stores in January 1999. The inventory from these stores
then redistributed to other open stores or will be redistributed to new stores
opening in 1999. The Company also estimates it will make back office capital
expenditures of approximately $4.0 million during 1999 primarily for new systems
in the payroll/human resources area, for a new Mayor's credit and collections
computer system, Year 2000 system additions and modifications as well as other
management information system enhancements.
On April 16, 1999 the Company's Board of Directors authorized the
expenditure of up to $15 million to repurchase the Company's common stock over a
period of one year. The Company may repurchase the shares in the open market or
in privately negotiated transactions, from time to time, in compliance with the
Securities Exchange Commission's Rule 10b-18, subject to market conditions,
applicable legal requirements and other factors. The number of shares of common
stock actually acquired by the Company will depend on subsequent developments
and corporate needs, and the repurchase program may be interrupted or
discontinued at any time. The acquired shares will be held in treasury or
canceled.
The Company believes that its cash on hand, projected cash from
operations (which are expected to increase as a result of an expected decrease
in Sam's inventory levels) and availability under the current working capital
facility will be sufficient to meet its anticipated working capital and capital
expenditure needs for Fiscal 1999; however, there can be no assurance that the
Company's future operating results will be sufficient to sustain any debt
service and working capital needs.
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. Because of the manner in which the Company procures and sells gold
products, the Company believes that it is not necessary to hedge its 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 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
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires reporting every derivative
instrument at its fair value on the balance sheet. This statement also requires
recognizing any change in the derivatives' fair value in earnings for the
current period unless specific hedge accounting criteria are met.
24
<PAGE>
SFAS No. 133 is effective for fiscal quarters of fiscal years that
begin after June 15, 1999. The Company has not determined the impact that this
statement will have on its financial position or the results of its operations
upon adoption.
YEAR 2000 MATTERS
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or other equipment or systems that have or rely on
time sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system or equipment failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions and invoices, distribute
merchandise to its retail location or engage in similar business activities.
Management has recognized the need to minimize the risk that its
operations and relationship with vendors and other pertinent parties will not be
adversely effected by software processing errors arising from calculations using
the year 2000 or beyond. A significant number of the Company's computer
applications and systems require modification in order to render these systems
Year 2000 compliant. Failure by the Company to resolve internal Year 2000 issues
could result in an inability to process its daily business for a period of time.
However, the Company presently believes that scenario is not likely given the
progress made in its Year 2000 Compliance Plan.
The Company has used a combination of internal and external sources to
analyze and make the needed corrections to its information systems, personal
computers, hardware and network applications. These systems included areas such
as credit, point of sale, payroll, merchandise buying and distribution and
financial and management reporting. Non-compliant programs and systems are being
replaced and/or modified. Testing has begun and will be substantially complete
by the fourth quarter of 1999. Most technological and operating applications and
systems have already been upgraded and/or replaced with Year 2000 compliant
versions. As of January 31, 1999, the Company estimates that the business is
approximately 80% compliant. The Company has communicated and will continue to
communicate with its suppliers and others with which it does business to monitor
and evaluate the Year 2000 conversion process.
Non-information systems such as office, distribution and store
security, environmental issues and phone networks are also being evaluated for
Year 2000 compliance. Non-compliant systems have been, or will be corrected or
upgraded by September 1999.
The Company has made contact with its critical vendors during the
course of its Year 2000 compliance plan. The Company's payroll processing
service provider has indicated that its major systems will operate with correct
date logic for Year 2000. The Company's service providers, including those
administering employee benefits, have also indicated that they are or will be
Year 2000 compliant, as have most of the Company's major merchandise vendors.
The Company's expenditures related to the Year 2000 issue approximated
$440,000 through January 31, 1999. It is expected that expenditures in Fiscal
1999 will approximate $2.3 million. Included in this $2.3 million is
approximately $1.3 million of new computer hardware and software which will
significantly upgrade the Company's financial systems. The Company expects to
fund these costs through its cash provided by operations, as well as borrowings
under its working capital facility, if needed. Certain of these costs are being
expensed as incurred.
The Company has developed basic contingency plans to restore the
material functions of each of its systems or activities in case of a Year 2000
failure. The Company plans to continually refine these plans and make them more
comprehensive as additional information becomes available from testing or third
party suppliers.
There can be no assurances that the Company will be able to complete
all the modifications in the required time frame, that unanticipated events may
occur, or that all issues will have been identified before problems occur.
25
<PAGE>
The Company's Year 2000 efforts are ongoing and the overall plan
including the contingency plans, will continue to evolve as new information
becomes available. While the Company anticipates no major interruption of
business, that will be dependent in part upon the ability of third parties to be
compliant. Although the Company is addressing all Year 2000 issues to lessen
potential problems, the Company is unable to eliminate them or to estimate the
final effect Year 2000 risks will have on operational results.
INTEREST RATE AND FOREIGN EXCHANGE MARKET RISKS
INTEREST RATE RISK
The Company's credit facility accrues interest at floating rates,
currently based upon LIBOR plus 1.5% or the bank's adjusted base rate plus .25%,
at the Company's option. The Company manages its borrowings under this credit
facility each day in order to minimize interest expense. The impact on the
Company's earnings per share of a one-percentage point interest rate change on
the outstanding balance as of January 30, 1999 would increase or decrease
earnings per share by $.01 per share.
The Company extends credit to its Mayor's customers under its own
revolving charge plan with up to two-year payment terms. Finance charges are
generally currently assessed on customers' balances at a rate of 1.5% per month.
Since the interest rate is fixed at the time of sale, market interest rate
changes would not impact the Company's finance charge income.
FOREIGN EXCHANGE RISK
The Company has operations in Israel and Mexico. In Israel, the
functional currency exchange rate between the Israeli Shekel and U.S. dollar is
government regulated and not currently subject to significant currency exchange
rate fluctuations. The Company manages the Mexican peso currency exchange rate
exposure through the use of forward sales contracts, generally for periods not
exceeding three months. During Fiscal 1998, a maximum of $2.5 million in Mexico
peso forward sales contracts were outstanding at any one time. As of January 30,
1999, there were $2.5 million contracts outstanding which were marked to market
at that date. The Company also has foreign currency exchange translation
exposure resulting from the translation of foreign currency-denominated earnings
into U.S. dollars in the Company's consolidated financial statements. Management
estimates that, as of January 30, 1999, a ten percent change in the Peso foreign
exchange rate would not have a material impact on the Company's annual earnings.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This report and other written reports and releases and oral statements
made from time to time by the Company contain forward-looking statements which
can be identified by their use of words like "plans," "expects," "believes,"
"will," "anticipates," "intends," "projects," "estimates," "could," "would,"
"may," "planned," "goal," and other words of similar meaning. All statements
that address expectations, possibilities or projections about the future,
including without limitation statements about the Company's strategy for growth,
expansion plans, sources or adequacy of capital, the Sam's Club transition,
expenditures, financial results and Year 2000 matters are forward-looking
statements.
One must carefully consider such statements and understand that many
factors could cause actual results to differ from the forward-looking
statements, such as inaccurate assumptions and other risks and uncertainties,
some known and some unknown. No forward-looking statement is guaranteed and
actual results may vary materially. Such statements are made as of date
provided, and the Company assumes no obligation to update any forward-looking
statements to reflect future developments or circumstances.
One should carefully evaluate such statements by referring to the
factors described in the Company's filings with the SEC, especially on Form's
10-K, 10-Q and 8-K. Particular review is to be made of Items 1, 2, 3 and 7 of
the Form 10-K and Item 2 of the Form's 10-Q where the Company discusses in more
detail various important risks and uncertainties that could cause actual results
to differ from expected or historical results. The Company
26
<PAGE>
notes these factors for investors as permitted by the Private Securities
Litigation Act of 1995. Since it is not possible to predict or identify all such
factors, the identified items are not a complete statement of all risks or
uncertainties. In addition to the factors discussed in this report, the
following are some of the important factors that could cause results to vary.
The Company markets its products through its primarily mall based
Mayor's and Maier and Berkele stores as well as through Sam's pursuant to an
arrangement whereby the Company operates an exclusive licensed concession at all
of Sam's existing and future domestic and four Puerto Rico locations through
February 1, 2001. On April 6, 1999, the Company was informed by Sam's that its
concession agreement would not be renewed beyond its expiration date. The
Company has been dependent on Sam's Club to conduct its business and, without
replacement business, the loss of the arrangement with Sam's Club will have a
material adverse effect on the business of the Company.
The Company is pursuing new growth opportunities outside of its
existing business with Sam's and Mayor's and future arrangements with other
retail ventures. Management continuously considers other growth opportunities
including acquisitions of businesses similar or complementary to that of the
Company, which could require a significant investment of funds and management
attention by the Company. Any such growth opportunities will be subject to all
of the risks inherent in the establishment of a new product or service offering,
including competition, lack of sufficient customer demand, unavailability of
experienced management, unforeseen complications, delays and cost increases and
integration difficulties. The Company may incur costs in connection with
pursuing new growth opportunities that it cannot recover, and the Company may be
required to expense certain of these costs, which may negatively impact the
Company's reported operating performance for the periods during which such costs
are incurred.
The Company plans to open five Mayor's stores in 1999. The Company
considers its Mayor's expansion program to be an integral part of its future
plans to replace the Sam's business. However, there can be no assurance that the
Company will be able to find favorable store locations, negotiate favorable
leases, hire and train new store and account managers, and integrate the new
stores in a manner that will allow the Company to meet its expansion program.
Conditions outside the Company's control, such as adverse weather conditions
affecting construction schedules, unavailability of materials, labor disputes
and similar issues also could impact anticipated store openings. The failure to
expand by opening new stores as planned could have a material adverse effect on
the Company's future sales growth, profitability and operating results.
All but two of the Mayor's stores are located in major regional malls.
The success of the Company's operations depends to a certain extent on the
ability of mall anchor tenants and other attractions to generate customer
traffic in the vicinity of the Mayor's stores. The loss of mall anchor tenants
in the regional malls where the Mayor's stores are located, the opening of
competing regional malls or other economic downturns affecting customer mall
traffic could have an adverse effect on the Company's net sales and
profitability.
The working capital facility agreement contains covenants, which
require the Company to maintain financial ratios including a leverage ratio,
fixed charge ratio, tangible net worth, and also limits capital expenditures,
incurrence of additional debt, and prohibits the payment of dividends. There can
be no assurance that the Company's future operating results will be sufficient
to meet the requirements of the foregoing covenants.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
PAGE
----
Independent Auditors' Report 29
Consolidated Balance Sheets as of January 30, 1999
and January 31, 1998. 30
Consolidated Statements of Income for
the Year Ended January 30, 1999,
the Year Ended January 31, 1998, and
the Year Ended February 1, 1997 31
Consolidated Statements of Stockholders' Equity for
the Year Ended January 30, 1999,
the Year Ended January 31, 1998, and
the Year Ended February 1, 1997 32
Consolidated Statements of Cash Flows for
the Year Ended January 30, 1999,
the Year Ended January 31, 1998, and
the Year Ended February 1, 1997 33
Notes to Consolidated Financial Statements 35
28
<PAGE>
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 January 30, 1999
and January 31, 1998 and the related Consolidated Statements of Income,
Stockholders' Equity, and Cash Flows for each of the three fiscal years in the
period ended January 30, 1999. 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 January
30, 1999 and January 31, 1998, and the results of its operations and its cash
flows for each of the three fiscal years in the period ended January 30, 1999,
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.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
April 6, 1999
29
<PAGE>
<TABLE>
<CAPTION>
JAN BELL MARKETING, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS SHOWN IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,434 $ 48,432
Accounts receivable (net of allowance for doubtful
accounts of $3,504 and $1,786, respectively) 31,628 6,271
Inventories 144,579 69,193
Deferred income taxes 2,769 2,625
Other current assets 2,340 1,376
-------- --------
Total current assets 186,750 127,897
Property, net 27,013 18,143
Excess of cost over fair value of net assets acquired 25,551 2,475
Other assets 8,406 3,197
-------- --------
Total assets $247,720 $151,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 34,732 $ 9,784
Accrued expenses 15,368 6,349
Due to former Mayor's shareholders 6,145 -
-------- --------
Total current liabilities 56,245 16,133
-------- --------
Long term debt 26,409 -
Other long term liabilities 1,380 -
-------- --------
Total long term liabilities 27,789 -
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.0001 par value,
50,000,000 shares authorized,
28,358,475 and 25,981,970 shares
issued and outstanding, respectively 3 3
Additional paid-in capital 191,538 180,649
Accumulated deficit (26,077) (43,295)
Accumulated other comprehensive
income (1,778) (1,778)
-------- --------
Total stockholders' equity 163,686 135,579
-------- --------
Total liabilities and
stockholders' equity $247,720 $151,712
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE>
<TABLE>
<CAPTION>
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS SHOWN IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $361,048 $247,890 $243,079
Cost of sales and occupancy costs 260,121 188,004 183,636
-------- -------- --------
Gross profit 100,927 59,886 59,443
-------- -------- --------
Store and warehouse
operating and selling expenses 58,481 33,082 33,368
General and administrative expenses 19,052 13,521 11,577
Other charges -- -- 5,643
Depreciation and amortization 7,102 6,928 8,236
Currency exchange (gain) loss 1,121 333 (26)
-------- -------- --------
85,756 53,864 58,798
-------- -------- --------
Operating income 15,171 6,022 645
Interest and other income 1,538 1,756 1,269
Interest expense (1,748) 0 (999)
-------- -------- --------
Income before income taxes 14,961 7,778 915
Income tax provision (benefit) (2,257) (2,265) 154
-------- -------- --------
Net income $ 17,218 $ 10,043 $ 761
======== ======== ========
Net income per common share:
Basic $0.63 $0.39 $.03
Diluted $0.60 $0.39 $.03
Weighted average shares outstanding:
Basic 27,401,952 25,919,427 25,859,255
Diluted 28,804,352 26,006,635 26,017,364
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
<PAGE>
<TABLE>
<CAPTION>
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
ACCUMULATED
COMMON ADDITIONAL OTHER
SHARES COMMON PAID-IN ACCUMULATED COMPREHENSIVE COMPREHENSIVE
ISSUED STOCK CAPITAL DEFICIT INCOME INCOME TOTAL
---------- ------ ---------- ----------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 3, 1996 25,833,541 $3 $180,716 $(54,099) $(1,395) $125,225
Comprehensive Income:
Net income 761 $ 761 761
Foreign currency translation
adjustment (345) (345) (345)
-------
$ 416
=======
Purchase plan exercise 34,671 68 68
Issuance of common stock 21,334 363 363
Cancellation of stock warrants (709) (709)
401(k) Plan contribution 4,882 10 10
---------- -- -------- -------- ------- --------
Balance at February 1, 1997 25,894,428 3 180,448 (53,338) (1,740) 125,373
Comprehensive Income:
Net income 10,043 $10,043 10,043
Foreign currency translation
adjustment (38) (38) (38)
-------
$10,005
=======
Purchase plan exercise 30,209 60 60
Issuance of common stock 57,333 141 141
---------- -- -------- -------- ------- --------
Balance at January 31, 1998 25,981,970 3 180,649 (43,295) (1,778) 135,579
Comprehensive Income:
Net income 17,218 $17,218 17,218
Purchase plan exercise 30,921 106 106
Issuance of common stock 816,034 3,078 3,078
Issuance of common stock-Mayor's
Acquisition 1,529,550 7,705 7,705
---------- -- -------- -------- ------- ------- --------
Balance at January 30, 1999 28,358,475 $3 $191,538 $(26,077) $17,218 $(1,778) $163,686
========== == ======== ======== ======= ======= ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
<PAGE>
<TABLE>
<CAPTION>
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS SHOWN IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 356,726 $ 247,662 $ 242,632
Cash paid to suppliers and
employees (327,386) (222,760) (213,802)
Interest and other income
received 1,532 1,657 1,269
Interest paid (1,748) -- (998)
Income taxes paid (501) (142) (154)
--------- --------- ---------
Net cash provided by operating activities 28,623 26,417 28,947
--------- --------- ---------
Cash flows from investing activities:
Investment in Mayor's, net of cash acquired (59,111) -- --
Capital expenditures (6,275) (1,708) (2,306)
Acquisition of Manhattan Diamonds stores -- -- (500)
--------- --------- ---------
Net cash used in investing activities (65,386) (1,708) (2,806)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under line of credit 267,083 -- --
Line of credit repayments (278,887) -- (17,500)
Proceeds from sale of employee stock plans 3,184 -- --
Increase in due to Mayor's shareholders 3,766 -- --
Payment of commitment fee (1,052) -- --
Other -- 135 133
--------- --------- ---------
Net cash provided by (used in)
financing activities (5,906) 135 (17,367)
--------- --------- ---------
Effect of exchange rate changes (329) 63 (204)
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents (42,998) 24,907 8,570
Cash and cash equivalents at
beginning of year 48,432 23,525 14,955
--------- --------- ---------
Cash and cash equivalents at
end of year $ 5,434 $ 48,432 $ 23,525
========= ========= =========
</TABLE>
(CONTINUED)
33
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Reconciliation of net income to
net cash provided by operating
activities:
Net income $ 17,218 $ 10,043 $ 761
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation and amortization 7,102 6,928 8,236
Impairment of long-lived assets -- -- 1,500
Deferred income tax benefit (2,875) (2,625) --
Currency exchange (gain)/loss 1,067 237 (26)
Provision for doubtful accounts 756 -- --
(Increase) decrease in assets (net of effect
acquisition in 1998):
Accounts receivable (net) (5,079) (227) (446)
Inventories (2,818) 10,607 15,519
Other assets 813 (670) (201)
Increase (decrease) in liabilities (net of
effect acquisition in 1998):
Accounts payable 9,454 1,564 2,222
Accrued expenses 2,985 560 1,382
--------- --------- ---------
Net cash provided by
operating activities $ 28,623 $ 26,417 $ 28,947
========= ========= =========
</TABLE>
(CONCLUDED)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
34
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FISCAL YEARS ENDED
JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
A. NATURE OF BUSINESS:
The Company is principally engaged in the sale of jewelry, watches and
other consumer products through two separate divisions. The first division
operates Mayor's Jewelers and Maier and Berkele luxury jewelry stores. This
division operated 24 locations in South and Central Florida and metropolitan
Atlanta, Georgia. The second division currently operates 453 full service
jewelry departments at all existing domestic and five Puerto Rico Sam's
Wholesale Club locations ("Sam's").
The Company's consolidated financial statements are prepared on a 52/53
week retail fiscal year basis. The fifty-two weeks ended January 30, 1999,
January 31, 1998 and February 1, 1997 are referred to herein as Fiscal 1998,
Fiscal 1997 and Fiscal 1996, respectively.
B. EXPIRATION OF SAM'S AGREEMENT:
In May 1993, the Company entered into an agreement (the "Agreement") to
operate an exclusive licensed concession at all existing and future Sam's
locations through February 1, 1999, later extended to February 1, 2001. On April
6, 1999, the Company was informed that the Agreement will not be renewed beyond
its February 1, 2001 term. The Company has been dependent on Sam's Club to
conduct its business and without replacement business, the loss of the
arrangement with Sam's Club will have a material adverse effect on the future
business of the Company. The Mayor's acquisition has reduced this dependence on
Sam's. In addition, the Company's operating and capital resources that are and
will become available during the transition are expected to be used to
aggressively pursue growth of the Mayor's chain as well as considered for use in
acquiring other companies. 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 in the Consolidated Balance Sheets, and is being amortized over the term
of the Agreement. The unamortized amount as of January 30, 1999 and January 30,
1998 was approximately $1.9 million and $2.8 million, respectively. The Company
pays Sam's a concession fee of 9% of net sales.
C. MAYOR'S ACQUISITION:
In July 1998, Jan Bell acquired Mayor's Jewelers, Inc. ("Mayor's").
Total consideration consisted of approximately $18 million cash, 2 million
shares of Jan Bell Marketing, Inc. common stock, and the assumption of Mayor's
outstanding debt which was refinanced through a new $80 million working capital
facility with a syndicate of banks led by Citicorp, U.S.A., Inc. Following the
closing, Jan Bell had approximately $40 million outstanding under its new
facility. The accompanying Consolidated Balance Sheet as of January 30, 1999
includes goodwill of approximately $23.4 million, net of $.7 million in
accumulated amortization, resulting from the Mayor's acquisition. The operating
results of Mayor's are included in the Consolidated Statement of Income and the
Consolidated Statement of Cash Flows for the year ended January 30, 1999,
effective as of August 1, 1998, which is the acquisition date for accounting
purposes.
In connection with the Mayor's acquisition, certain former minority
shareholders of Mayor's have filed a lawsuit in state court in Miami, Florida
against Mayor's and Jan Bell and two directors of Mayor's claiming that the
acquisition and merger violated their shareholders' rights and that the
acquisition of the Mayor's stock was unlawful. Jan Bell believes the lawsuit to
be without merit and intends to vigorously defend the action. The consideration
for the stock of the former minority shareholders is reflected in the
Consolidated Balance Sheet as of January 30, 1999 and classified as Due to
Former Mayor's Shareholders.
The following table presents unaudited pro forma consolidated operating
results as if the Company's acquisition of Mayor's had been consummated as of
February 2, 1997. The unaudited pro forma results include adjustments to
historical amounts including additional amortization of the excess of costs over
the fair value of net assets acquired, increased interest on borrowings to
finance the acquisition, and the reduced investment income or
35
<PAGE>
available funds used to finance the acquisition. The pro forma consolidated
operating results do not purport to present actual operating results had the
acquisition been made at the beginning of Fiscal 1997, or the results which may
occur in the future.
1998 1997
---- ----
Net sales $422,682 $390,081
======== ========
Net income $13,391 $ 8,289
======= =======
Net income per share:
Basic $.47 $.30
==== ====
Diluted $.45 $.30
==== ====
D. 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.
Significant estimates used by management in the consolidated financial
statements include the allowance for uncollectible accounts receivable,
allowance for inventory valuation, litigation and sales tax liability reserves.
(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) ACCOUNTS RECEIVABLE - - Accounts receivable arise primarily from
customers' use of the Mayor's credit cards. Several installment sales plans are
offered which vary as to repayment terms and finance charges assessed. Finance
charges, when applicable, accrue at rates ranging from 10% to 18% per annum.
Finance charge income for the period since acquisition was $1.1 million for the
six months ended January 30, 1999 and is recorded as a reduction of store and
warehouse operating and selling expenses in the accompanying Consolidated
Statement of Income for the year ended January 30, 1999.
Certain sales plans of Mayor's provide for revolving lines of credit
under which the payment terms may exceed one year. In accordance with industry
practice, these receivables are included in current assets in the accompanying
January 30, 1999 Consolidated Balance Sheet. The portion of these receivables as
of January 30, 1999 that is not scheduled to be collected during the year ending
January 29, 2000 is approximately $3.1 million or 13% of total accounts
receivable.
(6) INVENTORIES -- The Sam's division inventories are valued at the
lower of cost (first-in, first-out method) or market. The Company's Mayor's
division inventories are valued at last-in, first-out ("LIFO") cost which is not
in excess of market. Under the first-in, first-out ("FIFO") cost method of
accounting, the Mayor's LIFO inventories would have been $75,000 higher than
that what is reported at January 30, 1999. 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 January 30, 1999 and January
31, 1998 was approximately $5.3 million and $3.5 million, respectively.
36
<PAGE>
(7) PROPERTY -- Property is stated at cost net of accumulated
deprecation and is depreciated using the straight-line method over the following
estimated useful lives of the respective assets:
ESTIMATED
ASSET USEFUL LIFE
----- -----------
Building 30 years
Furniture and fixtures 5 years
Automobiles and trucks 3 years
Computer hardware and software 3 years
Leasehold improvements are amortized over the shorter of the term of
the respective lease, including renewal options, or the useful life of the
asset.
(8) INCOME TAXES -- The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes." 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) CASH AND CASH EQUIVALENTS -- The Company considers all
highly-liquid investments purchased with original maturities of three months or
less to be cash equivalents.
(10) 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 resulting from
the Mayor's acquisition is being amortized using the straight line method over
15 years. Goodwill resulting from the Company's acquisition of Exclusive
Diamonds, Inc. in 1990 is being amortized using the straight line method over 20
years. Accumulated amortization related to the Company's Goodwill at January 30,
1999 and January 31, 1998 was approximately $2.8 million and $1.7 million,
respectively.
(11) LONG-LIVED ASSETS -- Long-lived assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Measurement of an impairment loss for such long-lived assets would be based on
the fair value of the asset. Long-lived assets to be disposed of are reported
generally at the lower of the carrying amount or fair value less cost to sell.
(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 -- The Company has operations in Mexico (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.) and Israel. In Israel, the functional currency exchange
rate between the Israeli Shekel and U.S. dollar is government regulated and not
currently subject to significant currency exchange rate fluctuations. In Mexico,
the U.S. dollar is the functional currency since the economy is considered
highly inflationary. Changes in the exchange rates for the Mexican Peso relative
to the U.S. dollar resulted in direct charges or credits to the statement of
income during a portion of Fiscal 1997 and all of Fiscal 1998.
The Company manages the Mexican peso currency exchange rate exposure to
minimize the effect of exchange rate gains and losses on its cash flows through
the use of forward sales contracts, generally for periods not exceeding three
months. Forward sales contracts are accounted for on a mark to market basis.
Exchange rate gains and losses on foreign currency transactions are reported as
a currency exchange gain or loss in the Consolidated Statements of Earnings,
except for intercompany transactions with subsidiaries that are of a long-term
investment nature, which are reported in the same manner as translation
adjustments. At January 30, 1999 and January 31, 1998, the Company had
approximately $2.5 million of forward exchange contracts outstanding with dates
of maturity of March 1999 and March 1998 respectively.
37
<PAGE>
(14) ADVERTISING COSTS -- Advertising costs are charged to expense as
incurred or, for direct response advertising, capitalized and amortized in
proportion to related revenues. The Company and its vendors participate in
cooperative advertising programs in which the vendors reimburse the Company for
a portion of certain advertising costs. Advertising expense, net of vendor
cooperative advertising allowances, amounted to $7 million, $.5 million, and
$1.0 million in Fiscal 1998, 1997, and 1996, respectively.
(15) PRE-OPENING EXPENSES -- Pre-opening expenses related to the
opening of new and relocated stores are expensed as incurred.
(16) NEWLY ADOPTED ACCOUNTING STANDARDS - During 1998, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for reporting and the
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. This
Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement does not require a specific format for that
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS No. 130 was adopted as of January 1, 1998, and, as required by
SFAS No. 130, the Company has reclassified its 1997 and 1996 consolidated
financial statements. Accumulated other comprehensive income as presented in the
accompanying consolidated statements for 1998 represents net income and for 1997
and 1996, net income and foreign currency translation adjustments.
During 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 supersedes SFAS
No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE, replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performances as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about the
products and services, geographic areas and major customers. The adoption of
SFAS No. 131 did not affect the results of operations or financial position but
did affect the disclosure of segment information.
(17) NEWLY ISSUED ACCOUNTING STANDARDS -- In June 1998, Financial
Accounting Standards Board issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. Among other provisions, SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It also requires that an entity recognize all
derivatives as either assets or liabilities in the statement of condition and
measure those instruments at fair value. SFAS No. 133 is effective for all
quarters of all fiscal years beginning after June 15, 1999. Management has not
determined what effect, if any, adoption of SFAS 133 will have on the
consolidated financial statements.
(18) EARNINGS PER SHARE - Basic earnings per share is calculated based
upon the weighted average number of shares outstanding during each period.
Diluted earnings per share assumes under the treasury stock method that dilutive
stock options and warrants are exercised.
38
<PAGE>
E. INVENTORIES:
Inventories are summarized as follows:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
---- ----
COMPANY HELD ON COMPANY HELD ON
OWNED CONSIGNMENT OWNED CONSIGNMENT
----- ----------- ----- -----------
(AMOUNTS SHOWN IN THOUSANDS)
<S> <C> <C> <C> <C>
Precious and semi-precious gem jewelry-
related merchandise (and
associated gold):
Raw materials $ 6,953 $ -- $ 5,439 $ --
Finished goods 73,392 15,824 33,513 1,756
Gold jewelry-related merchandise:
Finished goods 20,076 231 13,148 243
Watches 30,417 1,308 7,372 --
Other consumer products 13,741 160 9,721 19
-------- ------- ------- ------
$144,579 $17,523 $69,193 $2,018
======== ======= ======= ======
</TABLE>
F. PROPERTY:
The components of property are as follows:
JANUARY 30, JANUARY 31,
1999 1998
---- ----
(AMOUNTS SHOWN IN
THOUSANDS)
Land $ 4,171 $ 4,171
Buildings and improvements 10,592 10,086
Furniture and fixtures 34,553 19,614
Leasehold improvements 14,142 534
Automobiles and trucks 712 320
------- -------
64,170 34,725
Less accumulated depreciation (37,157) (16,582)
------- -------
$27,013 $18,143
======= =======
Subsequent to year end, the Company's former corporate headquarters
building was sold. Based upon the selling price of $3.3 million, a gain of
approximately $215,000 was recognized in March 1999.
Depreciation expense for Fiscal 1998, Fiscal 1997 and Fiscal 1996 was
approximately $4.9 million, $5.0 million and $5.3 million respectively.
G. LONG-TERM DEBT:
On July 28,1998, the Company entered into a loan and security agreement
with a syndicate of banks led by Citicorp, U.S.A., Inc. for an $80 million
credit facility. Availability under this facility is determined based upon a
percentage formula applied to inventory and accounts receivable. Based upon this
formula, the maximum of $80 million was available to the Company at January 30,
1999. The Company has the right to request an increase up to $110 million
contingent upon lender approval. Of this total, an aggregate maximum of $10
million can be used for the issuance of one or more Letters of Credit. The
proceeds from this credit facility were used primarily to refinance Mayor's
outstanding debt.
The credit facility is collateralized by substantially all of the
Company's assets. Under the terms of the agreement the Company is required to
maintain financial ratios including leverage ratio, fixed charge ratio, and
39
<PAGE>
tangible net worth. The agreement also limits capital expenditures, incurrence
of additional debt, and prohibits the payment of dividends.
The credit facility bears interest at floating rates, currently a
portion is based upon LIBOR plus 1.5% and the remaining portion at the bank's
adjusted base rate plus .25%, at the Company's option. The interest rate at
January 30, 1999 based upon LIBOR and the banks adjusted base rate was 6.44% and
8%, respectively. These interest rates can be increased if the Company's average
leverage ratio does not meet certain levels. In addition, the Company pays a
commitment fee of .25% of the unused line balance as well as 2.5% of the
aggregate outstanding letter of credit liability. At January 30, 1999, the
Company had approximately $26 million outstanding under this facility and had
$.3 million in letters of credit outstanding.
Information concerning the Company's short-term borrowings follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JAN. 30, JAN. 31, FEB. 1,
1999 1998 1997
---- ---- ----
(DOLLARS SHOWN IN THOUSANDS)
Maximum borrowings outstanding
during the period $13,746 -- $ 4,100
Average outstanding balance
during the period 1,351 -- 193
Weighted average interest rate
for the period 7.7% -- 8.5%
H. INCOME TAXES:
The significant items comprising the Company's net deferred taxes as of
January 30, 1999 and January 31, 1998 are as follows:
JAN. 30, JAN. 31,
1999 1998
---- ----
(AMOUNTS SHOWN IN THOUSANDS)
Deferred Tax Liabilities:
Difference between book and
tax basis of property $ -- $ 1,071
Purchase accounting differences in
basis of inventories acquired 8,312 --
------- -------
8,312 1,071
Deferred Tax Assets:
Difference between book and
tax basis of property 156 --
Sales returns and doubtful accounts
allowances not currently deductible 2,209 719
Inventory reserves not currently deductible 1,747 1,441
Federal net operating loss and tax
credit carryforward 10,657 14,335
Acquired tax assets 2,147 --
State net operating loss carryforward 4,165 3,684
Other -- 959
------- -------
21,081 21,138
------- -------
Net deferred tax asset before valuation
allowance 12,769 20,067
Valuation allowance 10,000 17,442
------- -------
Net Deferred Tax Asset 2,769 $ 2,625
======= =======
40
<PAGE>
The components of income (loss) before income taxes are as follows:
YEAR YEAR YEAR
ENDED ENDED ENDED
JAN. 30 JAN. 31, FEB. 1,
1999 1998 1997
---- ---- ----
(AMOUNTS SHOWN IN THOUSANDS)
Domestic 16,731 $6,117 $ 2,692
Foreign (1,770) 1,661 (1,777)
------- ------- -------
$14,961 $7,778 $ 915
======= ====== =======
The components of the provision (benefit) for income taxes consist of
the following:
YEAR YEAR YEAR
ENDED ENDED ENDED
JAN. 30, JAN. 31, FEB. 1,
1999 1998 1997
---- ---- ----
(AMOUNTS SHOWN IN THOUSANDS)
Current:
Federal $ 427 $ 210 $ 97
State (3) 21 6
Foreign 194 129 51
------- ------- ----
Total Current 618 360 154
------- ------- ----
Deferred:
Federal (2,875) (2,625) --
State -- -- --
Foreign -- -- --
Total Deferred (2,875) (2,625) --
------- ------- ----
Total provision (benefit) for
income taxes $(2,257) $(2,265) $154
======= ======= ====
The provision (benefit) for income taxes varies from the amount
computed by applying the statutory rate for reasons summarized below:
YEAR YEAR YEAR
ENDED ENDED ENDED
JAN. 30, JAN. 31, FEB. 1,
1999 1998 1997
---- ---- ----
Statutory rate 35.0% 35.0% 35.0%
Benefit of graduated rates -- (1.0) (1.0)
State taxes (net of
federal benefit) -- (6.0) 1.2
Tax effect of
foreign subsidiaries 5.4 5.0 --
Reduction in valuation allowance (63.6) (67.5) (31.3)
Alternative minimum tax 2.8 2.7 10.6
Nondeductible expenses 0.8 -- --
Other 4.5 2.7 2.3
----- ----- -----
(15.1%) (29.1%) 16.8%
===== ===== =====
41
<PAGE>
The Company has a Federal net operating loss carryforward of
approximately $28 million and a state net operating loss carryforward of
approximately $90.1 million. Separately stated, Jan Bell has a Federal net
operating loss carryforward of approximately $22.4 million and a state net
operating loss carryforward of approximately $78.0 million. Mayor's has a
Federal net operating loss carryforward of approximately $5.6 million and a
state net operating loss of approximately $12.1 million. Due to Section 382
limitations, the amount of Mayor's NOL which the Company can utilize each year
is approximately $1.5 million. The Federal net operating loss carryforward
expires beginning in 2008 through 2011 and the state net operating loss
carryforward expires beginning in 1999 through 2013. The Company also has an
alternative minimum tax credit carryforward of approximately $1.4 million to
offset future Federal income taxes. The valuation allowance has been recorded to
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. The change in the valuation allowance of approximately $7.4 million is
the result of a reduction of approximately $9.5 million due to the utilization
of NOL carryforwards and an increase of $2.1 million applicable to net tax
assets recorded on the acquisition of Mayor's.
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 effect in Fiscal
1998, Fiscal 1997 and Fiscal 1996 was not material. The "approved enterprise"
tax benefit is available to EDI until the year 2000.
The Company is the sole shareholder of Jan Bell de Mexico, S.A. de C.V.
("Jan Bell de Mexico") and Elico Mexicana S.A. de C.V. ("Elico"). Elico employs
individuals and leases them to Jan Bell de Mexico. Elico is taxed at a rate of
34% on net income and Jan Bell de Mexico is taxed at an inflation adjusted rate
of approximately 26% of its net worth. Accordingly, during Fiscal 1998 the
Company recorded a tax provision of approximately $133,000 for its Mexico
operations.
The Company has not provided Federal and state income taxes on
approximately $10.1 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 January 31, 1999 approximates $3.8 million exclusive of any
benefit from utilization of foreign tax credits. At January 31, 1999, the
Company has approximately $2.4 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:
In connection with prior financing arrangements, there are outstanding
warrants to purchase 519,756 shares of common stock at $2.25 per share which
expire May 31, 2005 and warrants to purchase 234,000 shares of common stock at
$3.25 to $4.00 per share which expire May 1, 2005. Additionally, the Company had
outstanding warrants to purchase 700,000 shares of common stock at $24.70 per
share which expired December 16, 1998.
42
<PAGE>
Operating Leases- The Company had a land and building lease with a
trust which expired on January 30, 1999, which has been extended on a month to
month basis through May 1999. Certain beneficiaries of the trust were
shareholders of Mayor's prior to the acquisition and are also current
shareholders of Jan Bell. Rent expense related to this lease was $190,000 for
the six month period subsequent to acquisition. The Company leases all of its
Mayor's division retail stores under operating leases. The rentals are based
primarily on a percentage of sales with required minimum annual rentals. In
addition, most leases are subject to annual adjustment for increases in real
estate taxes and maintenance costs. The Company also has non-cancelable
operating leases for copiers, postage machines, and computer equipment. At
January 30, 1999, the Company was obligated for the following minimum annual
rentals under operating leases:
1999 $ 2,696,000
2000 2,747,000
2001 2,492,000
2002 2,507,000
2003 2,322,000
Thereafter 9,129,000
-----------
$21,893,000
Rent expense for the Mayor's stores was approximately $3.7 million
including $1.5 million of contingent rent during the six months ended January
30, 1999.
During the year ended January 31, 1998, the Florida Department of
Revenue commenced a sales tax audit on Mayor's Jewelers, Inc. for the tax
periods July 1, 1990 through July 31, 1995. The original assessment was
approximately $1.7 million of additional sales tax, interest and penalties.
Mayor's has paid $242,000 of this original assessment and believes it has
recorded an adequate accrual related to this assessment which the Company is
vigorously contesting. During the year ended February 1, 1997 the Internal
Revenue Service commenced an audit on Mayor's Jewelers, Inc. for the year ended
January 31, 1996 which is still in process. At the time of the Mayor's
acquisition, an escrow account was established from the amounts paid to Mayor's
shareholders to fund all or portions of such potential losses. However, the
outcome of these audits, the sufficiency of this escrow and the impact on future
operations, if any, is currently uncertain.
J. LEGAL PROCEEDINGS:
In addition to the Mayor's acquisition discussed in Note C, the Company
is also involved in litigation arising from the normal course of business. In
addition to other commercial litigation, the Company has two lawsuits with a
former vendor and a third lawsuit with the same former vendor which relates to
an alleged employment relationship. One state court action is expected to go to
jury trial sometime during or after August 1999. A federal court action was
tried in January 1999, and the federal court issued a final judgment in favor of
the Company, including an award of attorney's fees and costs. The Company
believes the facts and the law support its positions and that these matters
should not materially affect the financial position of the Company; however,
there can be no assurance as to the result of these legal matters and the
Company will incur ongoing legal fees.
K. OTHER CHARGES:
Other charges in Fiscal 1996 consisted of approximately $2 million in
severance payments to the Company's former President and Chief Executive
Officer, the write-off of $630,000 of financing costs in connection with the
prepayment of certain then outstanding debt, $1.5 million write-down of the
carrying value of the Company's former corporate headquarters building which
became held for sale, and a $1.5 million provision for the closing of two store
locations which included a $1.0 million accrual for costs associated with
terminating the leases and a $500,000 write-down of fixed assets. These two
locations were closed during November 1997 and January 1998.
43
<PAGE>
L. EMPLOYEE BENEFIT PLANS:
STOCK OPTION PLANS
As of January 30, 1999 the Company had 858,437 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 30,921, 30,209, and 34,671 shares were issued
during the years ended January 30, 1999, January 31, 1998 and February 1, 1997,
respectively.
PROFIT SHARING PLANS
In December 1992, the Board of Directors approved the Jan Bell
Marketing, Inc. 401(K) Profit Sharing Plan & Trust, 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 cash contribution of 25% of the employee's pretax
contribution, up to 4% of the employees compensation, in any calendar year.
Mayor's also has a profit sharing plan which covers all of its employees.
Contributions to the Mayor's plan were made at the discretion of the Company. On
November 1, 1998, employee contributions to the Mayor's plan ceased and
participants were given the option to join the Jan Bell plan.
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 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
1998, Fiscal 1997 and Fiscal 1996 under these plans, the Company's net earnings
and earnings per share would have been reduced to the proforma amounts presented
below:
FISCAL FISCAL FISCAL
1998 1997 1996
---- ---- ----
Net income/(loss) (in thousands)
As reported $17,218 $10,043 $ 761
Proforma $ 9,899 $ 7,762 $ (147)
Income/(loss) per share
As reported $.63 $.39 $ .03
Proforma basic $.36 $.30 $(.01)
Proforma diluted $.34 $.30 $(.01)
44
<PAGE>
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 Fiscal 1998, Fiscal 1997 and Fiscal 1996:
expected volatility of 67%, 53% and 65%, respectively, risk-free interest rate
of 5.23%, 5.70% and 6.53%, respectively, expected lives of approximately five
years for all three years, and a dividend yield of zero for all three years. The
weighted average fair values of options granted during Fiscal 1998, Fiscal 1997
and Fiscal 1996 were $3.90, $1.34, and $1.36 respectively.
The following is a summary of the activity in the option plans during
Fiscal 1998, Fiscal 1997 and Fiscal 1996:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----- --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 6,951,624 $4.41 4,315,042 $ 6.07 4,641,126 $ 6.02
Granted 1,101,009 5.61 3,334,500 2.58 175,000 2.24
Canceled (318,478) 9.65 (640,585) 6.26 (479,750) 4.31
Exercised (816,031) 3.77 (57,333) 2.46 (21,334) 2.51
--------- ----- --------- ------ --------- ------
Outstanding at end of year 6,918,124 $4.43 6,951,624 $ 4.41 4,315,042 $ 6.07
========= ===== ========= ====== ========= ======
</TABLE>
A summary of the status of the option plans as of January 30, 1999 is
presented below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED AVG
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
------ ----------- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 2.06 - $2.08 95,000 7.7 $ 2.06 80,000 $ 2.06
$ 2.09 - $3.09 3,721,303 8.3 $ 2.57 1,381,957 $ 2.47
$ 3.10 - $4.64 908,509 7.3 $ 4.14 632,968 $ 3.99
$ 4.65 - $6.95 1,315,020 7.9 $ 5.64 637,520 $ 5.46
$ 6.96 - $10.43 427,026 3.5 $ 9.00 427,026 $ 9.00
$10.44 - $14.10 451,266 3.1 $ 12.98 451,266 $ 12.98
- --------------- --------- --- -------- --------- --------
$ 2.06 - $14.10 6,918,124 7.4 $ 4.43 3,610,737 $ 5.34
=============== ========= === ======== ========= ========
</TABLE>
M. SEGMENT INFORMATION:
The Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information," effective for the fiscal year ended January
30, 1999. SFAS No. 131 superseded SFAS No. 14, "Financial Reporting for Segments
of a Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach defines the internal organization
used by management in its operating decision making. SFAS No. 131 did not affect
results of operations or financial position but did affect the disclosure of
segment information.
The Company retails fine jewelry and related products within two
operating divisions; Sam's Club which caters primarily to warehouse club members
and Mayor's, which the Company considers a luxury jeweler. These operating
segments follow the management organization structure of the Company. The
accounting policies of the segments are the same as those described in the
significant accounting policies (See Note D).
45
<PAGE>
The Company evaluates the performance of its segments based on
revenues, gross profit and segment contributions. Intercompany revenues and
expenses are eliminated from consolidated results. The following is a summary of
significant accounts and balances by segment, reconciling to the Company's
totals.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
------------------- ---------------- ----------------
<S> <C> <C> <C>
NET SALES
- ---------
Sam's Club $278,828 $247,890 $243,079
Mayor's 82,470 -- --
-------- -------- --------
361,298 247,890 243,079
Elimination (250) -- --
-------- -------- --------
$361,048 $247,890 $243,079
======== ======== ========
GROSS PROFIT
- ------------
Sam's Club $ 70,481 $ 59,886 $ 59,443
Mayor's 30,486 --
-------- -------- --------
100,967 59,886 59,443
Elimination (40) -- --
-------- -------- --------
$100,927 $ 59,886 $ 59,443
======== ======== ========
SEGMENT CONTRIBUTION
- --------------------
Sam's Club $ 11,416 $ 6,022 $ 645
Mayor's 3,795 -- --
-------- -------- --------
Reportable segments 15,211 6,022 645
Elimination (40) -- --
-------- -------- --------
15,171 6,022 645
-------- -------- --------
Interest income 1,531 1,684 1,156
Other income 7 72 113
Interest expense (1,748) -- (999)
-------- -------- --------
Income before income taxes $ 14,961 $ 7,778 $ 915
======== ======== ========
INVENTORIES
- -----------
Sam's Club $ 76,548 $ 69,193
Mayor's 68,031 --
-------- --------
$144,579 $ 69,193
======== ========
LONG LIVED ASSETS
- -----------------
Sam's Club $ 50,403 $ 23,815
Mayor's 10,567 --
-------- --------
$ 60,970 $ 23,815
======== =======
DEPRECIATION AND AMORTIZATION
- -----------------------------
Sam's Club $ 5,790 $ 6,928 $ 8,236
Mayor's 1,312 -- --
-------- -------- --------
Total $ 7,102 $ 6,928 $ 8,236
======== ======== ========
</TABLE>
46
<PAGE>
N. 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.
The following methods and assumptions were used to estimate fair value:
-The carrying amount of cash and cash equivalents, accounts
receivable, accounts payable, and accrued expenses approximate fair value
because of their short term nature.
-The Company reflects its Peso forward sales contracts on a
mark to market basis.
-The fair value of the Company's long term debt approximates
carrying value based on the quoted market prices for the same or similar issues.
O. SUPPLEMENTAL INFORMATION OF NONCASH ACTIVITIES:
The Statement of Cash Flows for the year ended January 30, 1999 does
not include noncash financing and investing transactions associated with the
issuance of common stock and debt for the acquisition of Mayor's. The components
of the transaction are as follows:
Fair value of assets acquired (including goodwill) $134,434
Liabilities assumed 28,628
--------
Net assets acquired 105,806
Cash acquired 990
Issuance of common stock 7,705
Borrowing under working capital facility 38,000
--------
Cash used to acquire Mayor's $ 59,111
P. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
--------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MAY 2, AUG. 1, OCT. 31, JAN. 30,
1998 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $52,493 $60,352 $79,011 $169,191
Gross Profit 12,160 13,963 22,852 51,952
Net income (loss) (572) 461 (3,714) 21,044
Basic earnings (loss) per
Common Share (0.02) 0.02 (0.13) 0.74
Diluted earnings (loss) per
Common Share (0.02) 0.02 (0.13) 0.68
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
--------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MAY 3, AUG. 2, NOV. 1, JAN. 31,
1997 1997 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $46,977 $53,309 $45,219 $102,385
Gross Profit 10,343 11,944 10,092 27,507
Net income (loss) (2,307) (643) (2,307) 15,300
Basic earnings (loss) per
Common Share (0.09) (0.02) (0.09) 0.59
Diluted earnings (loss) per
Common Share (0.09) (0.02) (0.09) 0.58
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
48
<PAGE>
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 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 consolidated
financial statements of Jan Bell Marketing, Inc. included in Item 8 of Part II.
INDEPENDENT AUDITORS' REPORT.
CONSOLIDATED BALANCE SHEETS - January 30, 1999 and January 31, 1998.
CONSOLIDATED STATEMENTS OF INCOME - Years Ended January 30, 1999 and January 31,
1998 and February 1, 1997.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Years Ended January 30, 1999
and January 31, 1998 and February 1, 1997.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Years Ended January 30, 1999 and January
31, 1998 and February 1, 1997.
(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:
49
<PAGE>
<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 Option Plan. Incorporated by reference from Company's Definitive Proxy
Statement filed in April 1993.
4.5 - Rights Agreement dated November 21, 1996 incorporated by reference from Form 8-K filed November 21, 1996.
10.1 - Form of Indemnification Agreement. Incorporated by reference from Company's Form S-1 (No. 33-26947) declared
effective in February 1989.
10.2 - Agreement with Sam's dated July 19, 1993. Incorporated by reference from Company's 8-K filed in July 1993.
10.3 - Addendum to Sam's Agreement dated July 19, 1993. Incorporated by reference from Company's 10-K filed in April 1994.
10.4 - 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.
10.5 - 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.
10.6 - Employment Agreement dated June 2, 1997 between Isaac Arguetty and the Company Incorporated by reference from the
Company's Form 10-Q filed September 17, 1997.
10.7 - Employment Agreement dated October 20, 1997 between David Boudreau and the Company. Incorporated by reference from
Company's Form 10-K filed March 1, 1998.
10.8 - Employment Agreement dated October 20, 1997 between William Grayson and the Company. Incorporated by reference from
Company's Form 10-K filed March 1, 1998.
10.9 - Employment Agreement dated October 20, 1997 between Marc Weinstein and the Company. Incorporated by reference from
Company's Form 10-K filed March 1, 1998.
10.10- Employment Agreement dated as of July 28, 1998 between Samuel A. Getz and the Company Incorporated by reference from
Company's Form 10-Q filed September 15, 1998.
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.11- Stock Option Agreement dated as of July 28, 1998 between Samuel A. Getz and the Company Incorporated by reference from
Company's Form 10-Q filed September 15, 1998.
10.12- Loan and Security Agreement among Citicorp USA, Inc. and JBM Retail Company, Inc., Mayor's Jewelers, Inc. and the
Company Incorporated by reference from Company's Form 10-Q filed September 15, 1998.
21.1 - Subsidiaries of Registrant
23.1 - Consent of Deloitte & Touche LLP
27.1 - Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during
the fourth quarter ended January 30, 1999.
51
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
JAN BELL MARKETING, INC. VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS SHOWN IN THOUSANDS)
CHARGED TO
BEGINNING MAYOR'S COST AND ENDING
DESCRIPTION BALANCE ACQUISITION EXPENSES DEDUCTIONS BALANCE
- ----------- ------- ----------- -------- ---------- -------
<S> <C> <C> <C> <C>
Fiscal year ended February 1, 1997
Allowance for Doubtful
Accounts $ 702 -- $ 925 $ 188 $1,439
Inventory Allowances 6,307 -- 3,898 5,063 5,142
Fiscal year ended January 31, 1998
Allowance for Doubtful
Accounts 1,439 -- 413 66 1,786
Inventory Allowances 5,142 -- 8,175 9,585 3,732
Fiscal year ended January 30, 1999
Allowance for Doubtful
Accounts 1,786 $3,237 1,031 2,550 3,504
Inventory Allowances 3,732 4,814 6,037 7,720 6,863
</TABLE>
52
<PAGE>
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: April 28, 1999
/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 and April 28, 1999
Isaac Arguetty Chief Executive Officer
/s/ DAVID BOUDREAU Chief Financial Officer April 28, 1999
David Boudreau and Senior Vice President of
Finance & Treasurer
/s/ HAIM BASHAN Director April 28, 1999
Haim Bashan
/s/ GREGG BEDOL Director April 28, 1999
Gregg Bedol
/s/ TOM EPSTEIN Director April 28, 1999
Tom Epstein
/s/ SAMUEL GETZ Director April 28, 1999
Samuel Getz
/s/ MARGARET GILLIAM Director April 28, 1999
Margaret Gilliam
/s/ WILLIAM GRAYSON Director April 28, 1999
William Grayson
/s/ PETER OFFERMANN Director April 28, 1999
Peter Offermann
/s/ ROBERT ROBISON Director April 28, 1999
Robert Robison
53
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
SEE PAGE 50 FOR A COMPLETE LIST OF EXHIBITS
FILED, INCLUDING EXHIBITS INCORPORATED BY
REFERENCE FROM PREVIOUSLY FILED DOCUMENTS.
21.1 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule (for SEC use only).
EXHIBIT 21.1
Wholly-owned subsidiaries of the Company include Ultimate Fine Jewelry and
Watches, Inc and JBM Retail Company, Inc., Delaware corporations; Regal Diamonds
International Ltd. and Exclusive Diamonds International, Ltd., Israeli
companies, Jan Bell de Mexico, S.A. de C.V. and Elico Mexican, Mexican
corporations; Jan Bell Marketing/Puerto Rico, Inc., a Puerto Rican corporation;
and Mayor's Jewelers, Inc., a Florida corporation.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in registration statement
Nos. 33-20026, 33-20031, 33-42410, 33-42419 and 333-68157 of Jan Bell Marketing,
Inc. on Forms S-8 of our report dated April 6, 1999, appearing in this Annual
Report on Form 10-K of Jan Bell Marketing, Inc. for the year ended January 30,
1999.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Miami, FL
April 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME AND THE CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 5,434
<SECURITIES> 0
<RECEIVABLES> 35,132
<ALLOWANCES> 3,504
<INVENTORY> 144,579
<CURRENT-ASSETS> 186,750
<PP&E> 64,170
<DEPRECIATION> 37,157
<TOTAL-ASSETS> 247,720
<CURRENT-LIABILITIES> 56,245
<BONDS> 26,409
0
0
<COMMON> 3
<OTHER-SE> 163,683
<TOTAL-LIABILITY-AND-EQUITY> 163,686
<SALES> 361,048
<TOTAL-REVENUES> 361,048
<CGS> 260,121
<TOTAL-COSTS> 260,121
<OTHER-EXPENSES> 85,756<F1>
<LOSS-PROVISION> 1,031
<INTEREST-EXPENSE> 1,748
<INCOME-PRETAX> 14,961
<INCOME-TAX> (2,257)
<INCOME-CONTINUING> 17,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,218
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.60
<FN>
<F1>Other expenses consists of all operating costs and excludes interest,
non-operating income and income taxes.
</FN>
</TABLE>
