<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Thirteen Weeks Ended October 30, 1999
Commission File Number 1-9647
JAN BELL MARKETING, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-2290953
------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
14051 N.W. 14TH STREET, SUNRISE, FLORIDA 33323
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(954) 846-2718
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
22,501,215 SHARES ($.0001 PAR VALUE)
AS OF DECEMBER 8, 1999
<PAGE> 2
FORM 10-Q
QUARTERLY REPORT
THIRTEEN WEEKS ENDED OCTOBER 30, 1999
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements
A. Consolidated Balance Sheets.................................... 3
B. Consolidated Statements of Operations.......................... 4-5
C. Consolidated Statements of Cash Flows.......................... 6-7
D. Notes to Consolidated Financial Statements..................... 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 12-16
Item 3. Quantitative and Qualitative Disclosures About Market Risks.. 17
PART II: OTHER INFORMATION
Items 1, 2, 3, 4, and 5 have been omitted because they are
not applicable with respect to the current
reporting period.
Item 6. Exhibits and Reports
on Form 8-K ................................................. 18
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
JAN BELL MARKETING, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts shown in thousands except share and per share data)
<TABLE>
<CAPTION>
OCTOBER 30, JANUARY 30,
1999 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 239 $ 3,530
Accounts receivable, net of allowance for doubtful
accounts of $788 and $3,344, respectively 19,760 25,385
Inventories 85,912 67,975
Deferred income taxes 2,769 2,769
Other current assets 2,013 1,596
--------- ---------
Total current assets 110,693 101,255
Property, net 26,421 25,281
Goodwill 28,546 25,857
Other assets 2,270 4,084
--------- ---------
Total non-current assets 57,237 55,222
Net assets of discontinued operations 76,117 77,388
Deferred loss on discontinued operations 3,225 --
--------- ---------
Total assets $ 247,272 $ 233,865
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 30,078 $ 25,746
Accrued expenses 12,152 10,499
Due to former Mayor's stockholders 4,361 6,145
Short term portion of long term debt 6,930 --
--------- ---------
Total current liabilities 53,521 42,390
Long term debt 50,000 26,409
Other long term liabilities 894 1,380
--------- ---------
Total long term liabilities 50,894 27,789
Stockholders' Equity:
Common stock, $.0001 par value, 50,000,000 shares authorized,
28,415,124 and 28,358,475 shares issued and outstanding 3 3
Additional paid-in capital 191,706 191,538
Accumulated deficit (33,679) (26,077)
Accumulated other comprehensive loss -- (1,778)
Less: 4,890,100 shares of treasury stock, at cost (15,173) --
--------- ---------
Total stockholders' equity 142,857 163,686
--------- ---------
Total liabilities and stockholders' equity $ 247,272 $ 233,865
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts shown in thousands except share and per share data)
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
OCTOBER 30, 1999 OCTOBER 31, 1998
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Net sales $ 32,192 $ 26,695
Cost of sales 20,624 16,370
------------ ------------
Gross profit 11,568 10,325
Store operating and selling expenses 10,315 8,194
General and administrative expenses 4,209 5,005
Depreciation and amortization 1,673 1,740
------------ ------------
16,197 14,939
------------ ------------
Operating loss (4,629) (4,614)
Interest and other income 11 15
Interest expense (763) (882)
------------ ------------
Net loss from continuing operations (5,381) (5,481)
Income from discontinued operations, net
of income tax expense of $153 in 1998 -- 1,767
------------ ------------
Net loss $ (5,381) $ (3,714)
============ ============
Weighted average shares outstanding
(basic and diluted) 24,609,086 28,302,124
Basic and Diluted earnings (loss) per share:
Continuing operations $ (0.22) $ (0.19)
Discontinued operations $ -- $ 0.06
------------ ------------
Net loss $ (0.22) $ (0.13)
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts shown in thousands except share and per share data)
<TABLE>
<CAPTION>
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
OCTOBER 30, 1999 OCTOBER 31, 1998
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Net sales $ 94,100 $ 26,695
Cost of sales 60,242 16,370
------------ ------------
Gross profit 33,858 10,325
Store operating and selling expenses 28,489 8,194
General and administrative expenses 13,226 5,005
Depreciation and amortization 6,060 1,740
------------ ------------
47,775 14,939
Operating loss (13,917) (4,614)
Interest and other income 48 15
Interest expense (1,811) (882)
------------ ------------
Net loss from continuing operations (15,680) (5,481)
Income from discontinued operations,
net of income tax expense of $315 and
$295, in 1999 and 1998, respectively 8,078 1,655
------------ ------------
Net loss $ (7,602) $ (3,826)
============ ============
Weighted average shares outstanding
(basic and diluted) 26,687,321 27,094,551
Basic and Diluted earnings (loss) per share:
Continuing operations $ (0.58) $ (0.20)
Discontinued operations $ 0.30 $ 0.06
------------ ------------
Net loss $ (0.28) $ (0.14)
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts shown in thousands except share and per share data)
<TABLE>
<CAPTION>
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
OCTOBER 30, 1999 OCTOBER 31, 1998
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 99,726 $ 28,581
Cash paid to suppliers and employees (114,333) (33,019)
Interest and other income paid (1,764) (882)
--------- ---------
Net cash used in continuing operations (16,371) (5,320)
Net cash provided by discontinued operations 7,901 7,556
--------- ---------
Net cash provided by (used in) operating activities (8,470) 2,236
Cash flows from investing activities:
Capital expenditures (8,699) (2,480)
Proceeds from sale of fixed assets 3,360 --
Investment in Mayor's, net of cash acquired in 1998 (2,654) (54,395)
--------- ---------
Net cash used in investing activities (7,993) (56,875)
Cash flows from financing activities:
Proceeds from sale of employee stock plans 168 --
Purchase of treasury stock (15,173) --
Cash paid to former Mayor's shareholder (1,784) --
Repayment of capital lease (485) --
Underwriting fees (75) --
Borrowings under line of credit 330,090 83,962
Line of credit repayments (299,569) (69,516)
--------- ---------
Net cash provided by financing activities 13,172 14,446
Net decrease in cash and cash equivalents (3,291) (40,193)
Cash and cash equivalents at beginning of period 3,530 48,432
========= =========
Cash and cash equivalents at end of period $ 239 $ 8,239
========= =========
(continued)
</TABLE>
6
<PAGE> 7
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Amounts shown in thousands except share and per share data)
<TABLE>
<CAPTION>
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
OCTOBER 30, 1999 OCTOBER 31, 1998
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss $ (7,602) $ (763)
Deduct income from discontinued operations (8,078) (8,724)
-------- --------
Loss from continuing operations (15,680) (9,487)
Adjustments to reconcile net loss from continuing operations to net
cash used in continuing operating activities:
Depreciation and amortization 6,060 1,722
Provision for doubtful accounts 1,036 --
(Increase) decrease in assets:
Accounts receivable (net) 4,589 1,713
Inventories (17,937) (4,482)
Other (424) (550)
Increase in liabilities:
Accounts payable 4,332 5,666
Accrued expenses 1,653 98
-------- --------
Net cash used in continuing operations $(16,371) $ (5,320)
Net cash provided by discontinuing operations 7,901 7,556
-------- --------
Net cash provided by (used in) operating activities $ (8,470) $ 2,236
======== ========
(concluded)
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The Company's financial statements as of October 30, 1999 and for
the thirteen and thirty-nine week periods ended October 30, 1999 and October 31,
1998 have not been audited by certified public accountants, but in the opinion
of management of the Company reflect all adjustments (which include only normal
recurring accruals) necessary to present fairly the financial position, results
of operations and cash flows for those periods. Results of the thirteen and
thirty-nine week periods ended October 30, 1999 and October 31, 1998 are not
necessarily indicative of annual results because of the seasonality of the
Company's business. Prior year results of operations and cash flows have been
reclassified to reflect the results of the Sam's division as discontinued
operations (See "Expiration of Sam's Agreement and Discontinued Operations"
below for further discussion). The operating results for Mayor's Jewelers, Inc.
("Mayor's") for the thirteen and thirty-nine weeks ended October 31, 1998
include the results for the period subsequent to August 1, 1998, which is the
acquisition date for accounting purposes.
The accompanying consolidated financial statements should be read
in conjunction with the Company's annual consolidated financial statements and
the notes thereto appearing in the Company's annual report on Form 10-K for the
year ended January 30, 1999 filed with the Securities and Exchange Commission.
B. EXPIRATION OF SAM'S AGREEMENT AND DISCONTINUED OPERATIONS
In May 1993, the Company entered into an agreement (the
"Agreement") to operate an exclusive licensed concession at all existing and
future Sam's Club ("Sam's") locations through February 1, 1999, later extended
to February 1, 2001. On April 6, 1999, the Company was informed that the
Agreement will not be renewed beyond its February 1, 2001 term. The Company has
been dependent on Sam's to conduct its business and without replacement
business, the loss of the arrangement with Sam's will have a material adverse
effect on the future business of the Company subsequent to February 1, 2001. The
Mayor's acquisition (see Note C) has reduced this dependence on Sam's. In
addition, the Company's operating and capital resources that are and will become
available during the transition are expected to be used to develop the luxury
jeweler platform through the opening of new stores during the remainder of 1999
and beyond as well as potential future strategic acquisitions.
As a result of this nonrenewal, in July 1999 the Company has developed
and adopted a plan for the disposal of the Sam's business. This plan includes
the July 1999 sale of the Company's Mexico subsidiary, Jan Bell de Mexico S.A.
de C.V, which supplied selected fine jewelry, watches and fragrances to Sam's
locations in Mexico, as well as the planned future sale or liquidation of the
Company's Israel subsidiary, Exclusive Diamonds International, Limited, which
manufactures diamond jewelry primarily for retail sale in the Sam's Club
jewelry counters. Consequently, starting in the second quarter, the Company
began to account for its Sam's Club operations, future field and back office
expenses associated with the transition out of the clubs, its loss from the
sale of the Mexico subsidiary and its estimated loss on the sale or liquidation
of its Israel subsidiary as discontinued operations in its financial
statements.
The balance sheet caption deferred loss on discontinued operations of
$3.2 million represents the loss incurred on the sale of the Mexico subsidiary,
and the deferred loss from discontinued operations for the thirteen weeks ended
October 30, 1999 which includes a $2.0 million write-off of goodwill associated
with the purchase of Exclusive Diamonds International, Limited. This amount has
been deferred as management expects that the Company will realize a net profit
from the remaining operations and wind down of the Sam's division. The deferred
loss from discontinued operations was $55,000 for the thirteen weeks ended
October 30, 1999 resulting in a deferred loss to date as of October 30, 1999 of
$3.2 million. The income from discontinued operations was $8.1 million for the
thirty-nine weeks ended October 30, 1999. A significant portion of the
calculation of the deferred loss and income from discontinued operations is a
result of a reduction in expenses caused by the reallocation of continuing
corporate overhead and certain back office expenses from the Sam's division to
the Mayor's division. As a result, the loss from continuing operations was $5.4
and $15.7 million for the thirteen and thirty-nine weeks ended October 30, 1999,
respectively.
8
<PAGE> 9
Operating results from discontinued operations is as follows:
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
OCTOBER 30, 1999 OCTOBER 31, 1998
---------------- ----------------
(amounts shown in thousands)
<S> <C> <C>
Net sales $ 49,931 $ 52,315
Cost of sales (31,473) (32,946)
Operating expenses (16,436) (17,412)
Impairment of long-lived asset (1,995) 0
Interest income, net 8 (37)
----------- -----------
Income from operations 35 1,920
Income tax provision (90) (153)
----------- -----------
Income (loss) from discontinued operations $ (55) $ 1,767
=========== ===========
</TABLE>
Consistent with the accounting for discontinued operations, the
$55,000 loss during the thirteen weeks ended October 30, 1999 is reflected as a
change in the balance sheet account deferred loss from discontinued operations.
<TABLE>
<CAPTION>
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
OCTOBER 30, 1999 OCTOBER 31, 1998
---------------- ----------------
(amounts shown in thousands)
<S> <C> <C>
Net sales $ 169,310 $ 165,161
Cost of sales (105,229) (105,510)
Operating expenses (53,719) (59,164)
Impairment of long-lived asset (1,995) 0
Interest and other income, net 61 1,463
----------- -----------
Income from operations 8,428 1,950
Income tax provision (405) (295)
----------- -----------
Income from discontinued operations $ 8,023 $ 1,655
=========== ===========
</TABLE>
Included in the $8,023,000 income from discontinued operations is
income of $8,078,000 related to the twenty-six weeks ended October 30, 1999
which is reflected in the Company's statement of operations and a loss of
$55,000 which is reflected in the Company's October 30, 1999 balance sheet as a
change in the deferred loss from discontinued operations.
Net assets of discontinued operations, have been recorded at
their estimated net realizable value and are as follows:
<TABLE>
<CAPTION>
OCTOBER 30, JANUARY 30,
1999 1999
----------- -----------
(amounts shown in thousands)
<S> <C> <C>
Inventories $ 90,998 $ 76,604
Other current assets 6,594 8,891
Property, plant and equipment, net 1,128 1,732
Other non-current assets 1,170 4,016
Trade payables (22,282) (8,961)
Other current liabilities (1,491) (4,894)
----------- -----------
Net assets of discontinued operations $ 76,117 $ 77,388
=========== ===========
</TABLE>
9
<PAGE> 10
C. MAYOR'S ACQUISITION
In July 1998, Jan Bell acquired Mayor's Jewelers, Inc. Total
consideration consisted of approximately $18 million cash, 2 million shares of
Jan Bell Marketing, Inc. common stock, and the assumption of Mayor's outstanding
debt which was refinanced through a new $80 million working capital facility
with a syndicate of banks led by Citicorp, U.S.A., Inc. Following the closing,
Jan Bell had approximately $40 million outstanding under its new facility. The
accompanying Consolidated Balance Sheet as of October 30, 1999 includes goodwill
of approximately $28.5 million, which is net of $2.4 million in accumulated
amortization, resulting from the Mayor's acquisition.
In connection with the Mayor's acquisition, certain former
minority shareholders of Mayor's have filed a lawsuit in state court in Miami,
Florida against Mayor's and Jan Bell and two directors of Mayor's claiming that
the acquisition and merger violated their shareholders' rights and that the
acquisition of the Mayor's stock was unlawful. Jan Bell believes the lawsuit to
be without merit and intends to vigorously defend the action. The consideration
for the stock of the former minority shareholders is reflected in the
Consolidated Balance Sheets as of October 30, 1999 and January 30, 1999 as Due
to Former Mayor's Shareholders.
D. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
October 30, 1999 January 30, 1999
---------------------------- ----------------------------
(amounts shown in thousands)
Company Held On Company Held On
Owned Consignment Owned Consignment
--------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Precious and semi-precious gem jewelry-
related merchandise (and associated gold):
Raw materials $ 5,190 $ -- $ 2,745 $ --
Finished goods 41,584 11,003 35,098 15,635
Gold jewelry-related merchandise:
Finished goods 6,403 57 6,663 62
Watches 29,037 5,686 19,920 1,308
Other consumer products 3,698 89 3,549 160
--------- ---------- --------- ---------
$ 85,912 $ 16,835 $ 67,975 $ 17,165
========= ========== ========= =========
</TABLE>
E. INCOME TAXES
The Company has a deferred tax asset of approximately $12.8
million which has been offset by a $10.0 million valuation allowance. The
valuation allowance has been provided to reduce the net deferred tax asset to
the amount that the Company believes, after evaluating currently available
evidence, will more likely than not be realized. This evaluation considers the
non renewal of the Sam's Agreement as well as the Company's determination to
defer recognizing a deferred tax benefit until the Company has more experience
with the Mayor's operation and is able to better estimate future earnings trends
and other information. The Company has a Federal net operating loss carryforward
of approximately $28.0 million, and a state net operating loss carryforward of
approximately $90.1 million. Separately stated, Jan Bell has a Federal net
operating loss carryforward of approximately $22.4 million and a state net
operating loss carryforward of approximately $78.0 million. Mayor's has a
Federal net operating loss carryforward of approximately $5.6 million and a
state net operating loss carryforward of approximately $12.1 million. Due to
Internal Revenue Code Section 382 limitations, the amount of Mayor's net
operating loss carryforward which the Company can utilize each year is
approximately $1.5 million. The Federal net operating loss carryforward expires
beginning in 2008 through 2011 and the state net operating loss carryforward
expires beginning in 1999 through 2013. However, due to the nonrenewal of the
Sam's agreement, it is not more likely than not that Jan Bell's state net
operating loss carryforward will be fully utilized. The Company also has an
alternative minimum tax credit carryforward of approximately $1.4 million to
offset future Federal income taxes.
10
<PAGE> 11
F. COMPREHENSIVE INCOME (LOSS)
Effective February 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." Comprehensive income includes all changes in
equity during a period except those resulting from investment by owners and
distributions to owners. Comprehensive loss was as follows:
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
OCTOBER 30, 1999 OCTOBER 31, 1998 OCTOBER 30, 1999 OCTOBER 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net loss $ (5,381) $ (3,714) $ (7,602) $ (3,826)
Adjustment to reconcile net loss to
comprehensive loss:
Foreign currency translation adjustment -- -- (130) --
---------- ---------- --------- ---------
Comprehensive loss $ (5,381) $ (3,714) $ (7,732) $ (3,826)
========== ========== ========= =========
</TABLE>
G. LEGAL PROCEEDINGS
In addition to the Mayor's acquisition litigation discussed in
Note C, the Company is also involved in litigation arising from the normal
course of business. In addition to other commercial litigation, the Company has
two lawsuits with a former vendor and a third lawsuit with the same former
vendor which relates to an alleged employment relationship. A Federal court
action was tried in January 1999, and the Federal court issued a judgment in
favor of the Company, including an award of attorney's fees and costs. The
former vendor has appealed the judgment. A state court action was tried in
August 1999, and the state court issued a verdict in favor of the vendor,
including an award of attorney's fees and costs. The Company intends to appeal
this state court ruling. The Company believes the facts and the law support its
positions and these matters should not materially affect the financial position
of the Company; however, there can be no assurance as to the final result of
these legal matters. It should also be noted that the Company will incur
significant ongoing legal fees.
H. SUPPLEMENTAL INFORMATION OF NONCASH ACTIVITIES
The Statement of Cash Flows for the thirty-nine weeks ended
October 30, 1999 does not include the following noncash transactions:
Capital lease obligations incurred $ 481,000
The Statement of Cash Flows for the thirty-nine weeks ended
October 31, 1998 does not include noncash financing and investing transactions
associated with the issuance of common stock and debt for the acquisition of
Mayor's. The components of the transactions are as follows:
Fair value of assets acquired (including goodwill) $ 129,718
Liabilities assumed 28,628
----------
Net assets acquired 101,090
Cash acquired 990
Issuance of common stock 7,705
Borrowing under working capital facility 38,000
----------
Cash used to acquire Mayor's $ 54,395
==========
11
<PAGE> 12
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The discussion and analysis below contains trend analysis and
other forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21SE of the Securities Exchange Act of 1934.
The Company's actual results could differ materially from those anticipated in
any forward-looking statements as a result of certain factors set forth below
and elsewhere in this Report and in the Company's annual report on Form 10-K for
the year ended January 30, 1999 and other reports filed with the Securities and
Exchange Commission.
The Company currently operates 24 Mayor's and Maier & Berkele luxury
jewelry stores in Florida and Georgia. It also has an exclusive licensed
concession department at all existing and future domestic and Puerto Rico Sam's
locations under an agreement which expires February 1, 2001. On April 6, 1999,
the Company was informed that this agreement would not be renewed beyond its
February 1, 2001 term. The Company has been dependent on Sam's to conduct its
business, and without replacement business, the loss of the arrangement with
Sam's will have a material adverse effect on the business of the Company
subsequent to February 1, 2001. The July 1998 acquisition of Mayor's Jewelers
has reduced this dependency on Sam's. In addition, the Company's operating and
capital resources that are and will become available during the transition are
expected to be used to develop the luxury jewelry platform through the opening
of two new stores during the remainder of 1999 and the opening of approximately
ten new stores and strategic acquisitions during the Year 2000 and beyond.
During the thirteen and thirty-nine weeks ended October 30, 1999, approximately
61% and 64%, respectively, of the Company's net sales were to Sam's customers,
which are included in the captions Income from Discontinued Operations and
Deferred Loss on Discontinued Operations in the Consolidated Statements of
Operations and Consolidated Balance Sheets, respectively.
As a result of this announcement, the Company has developed and
adopted a plan for the disposal of the Sam's business. This plan includes the
July 1999 sale of the Company's Mexico subsidiary, Jan Bell de Mexico S.A. de
C.V., which supplied selected fine jewelry, watches and fragrances to Sam's
locations in Mexico, as well as the future sale or liquidation of the Company's
Israel subsidiary, Exclusive Diamonds International, Limited, which manufactures
diamonds primarily for retail sale in the Sam's Club jewelry counters.
Therefore, starting in the second quarter of 1999, the Company began to account
for its Sam's Club operating results, future field and back office expenses
associated with the transition out of the clubs, its loss from the sale of the
Mexico subsidiary and its estimated loss on the sale or liquidation of its
Israel subsidiary as discontinued operations in its financial statements.
Consequently, the results of continuing operations for the thirteen and
thirty-nine weeks ended October 30, 1999 include only the results of Mayor's.
Since the Mayor's acquisition on July 28, 1998, the Company began to review
ongoing strategies to increase revenues and achieve expense savings in the
Mayor's business and currently a significant portion of the Company's resources
are being spent on the development of the luxury jeweler platform through the
opening of new stores and strategic acquisitions. The Company's operating
infrastructure is designed to service a larger base of operations than the
current Mayor's business. However, the Company expects to "grow into" the
infrastructure which it believes is appropriately sized, given the expansion
intentions for Mayor's and associated direct response businesses. In view of the
investment being made into the Company infrastructure, continuing operations
reflect costs which are higher than what normally would be incurred for an
operation of Mayor's present size. In addition, certain corporate overhead
expenses previously charged to the Sam's division have been reallocated to the
continuing Mayor's division. Mayor's continuing operations recognized net losses
of $(5.4) million and $(15.7) million for the thirteen and thirty-nine weeks
ended October 30, 1999. The Company intends to reduce the losses through the
expansion of the Mayor's chain as well as identifying further efficiencies in
the Company's infrastructure. The Company has implemented a focused
merchandising, marketing and real estate strategy that will serve to solidify
Mayor's position as a premier luxury guild jeweler.
SALES
The Company's net sales from the Mayor's continuing operations
for the thirteen and thirty-nine weeks ended October 30, 1999 were $32.2 million
and $94.1 million, respectively, compared to $26.7 million for the thirteen and
thirty-nine weeks ended October 30, 1998. The increase in revenues for the
thirteen weeks ended October 30, 1999 is mainly attributable to increases in all
product categories, with the largest increases in the watch category.
Comparative net sales for the thirteen and thirty-nine weeks ended October 30,
1999 increased 26.5% and 9.6%, respectively, from the same periods during the
prior year.
The Company is seeking to expand its Mayor's chain into a
national luxury jeweler, which will increase the Company's net sales. However,
the retail jewelry market is particularly subject to the level of consumer
12
<PAGE> 13
discretionary income and the subsequent impact on the type and value of goods
purchased. With the consolidation of the retail industry, the Company believes
that competition both within the luxury goods retail industry and with other
competing general and specialty retailers and discounters will continue to
increase. However, based upon economic projections the economy is expected to be
favorable to the luxury goods retail industry during the upcoming holiday
season. The superior watch brands business comprise a significant portion of the
Mayor's business, which is a result of the Company's ability to market
effectively high-end watches. During the past two quarters, as the Company
continually improved its assortment and quantity of watch brands in stock, a
subsequent sales increase occurred. In addition, the Company plans to improve
the merchandise assortment in its non-watch categories and to continue to clear
out aged goods. This will result in stronger in stock positions which should
then lead to increased sales in existing stores and set a precedent for new
stores.
Gross profit was 35.9% for the thirteen weeks ended October 30,
1999 and 36.0% for the thirty-nine weeks ended October 30, 1999. Gross profit
was 38.7% for the thirteen and thirty-nine weeks ended October 31, 1998. The
decrease in gross profit as a percentage of net sales for the thirteen weeks
ended October 30, 1999 is a result of the Company's liquidation of its slow
moving inventory at significantly reduced prices and an increase in watch sales
which generally have a lower gross profit than other product categories. The
Company believes there is opportunity to increase gross profit over the next
couple of years. Areas for gross margin improvement include the purchasing of
inventories at a lower cost, increasing the assortment of goods towards higher
margin jewelry items, higher initial markups, reductions in shipping and
handling costs, improving the Company's discipline with respect to purchase
related discounts, and a reduction in required reserves for slow moving
inventories as the Company continues to reduce its slow moving inventory in
stock. In addition, as the Company has substantially completed its Mayor's
integration, the Company expects to improve the allocation and management of
inventory and as a result, other expenses such as inventory shrinkage and slow
moving reserves are expected to decrease.
Store operating and selling expenses were $10.3 million and $28.5
million for the thirteen and thirty-nine weeks ended October 30, 1999 compared
to $8.2 million for the thirteen and thirty-nine weeks ended October 31, 1998.
The increase in store operating and selling expenses for the thirteen weeks
ended October 30, 1999 is mainly attributable to increased store commissions,
chargecard and check processing fees and percentage rent which are directly
related to the increased sales. Security expenses have also increased due to the
Company's efforts to better secure the Mayor's stores. The Company does not
believe there is significant opportunity to reduce these expenses. The Company
believes it has a very well executed front end in its Mayor's stores which
includes highly professional, trained associates. Also, the Company believes
that the elegance of the Mayor's stores helps set the business apart from other
jewelers and adds to the experience of shopping in a Mayor's store. As such, the
Company does not believe a reduction in these expenses would be beneficial.
However, as the expected sales increases occur in the Mayor's stores, the
overall store operating and selling expenses as a percentage of sales will
decrease. Also, as the number of stores in a particular geographic region
increase, expenses such as advertising will decrease as a percentage of sales.
General and administrative expenses were $4.2 million and $13.2
million for the thirteen and thirty-nine weeks ended October 30, 1999, compared
to $5.0 million for the thirteen and thirty-nine weeks ended October 31, 1998.
The decrease in general and administrative expenses for the thirteen weeks ended
October 30, 1999 is primarily due to the consolidation of the Jan Bell and
Mayor's back office functions and locations. The Company believes there is
significant opportunity for savings in this area. The current infrastructure is
designed to service a larger base of operations. The percentage of general and
administrative expenses to net sales should continually decrease as the Company
expands its business. In addition to estate services, the Company is currently
evaluating and testing catalog and Internet retail opportunities for their long
term potential for earnings contribution to the Company. As sales from these
programs increase, the percentage of these costs to revenues should decrease.
Depreciation and amortization expenses were $1.7 million and $6.1
million for the thirteen and thirty-nine weeks ended October 30, 1999, compared
to $1.7 million for the thirteen and thirty-nine weeks ended October 31, 1998.
Depreciation and amortization expenses were consistent with the prior year for
the thirteen weeks ended October 30, 1999. This is a result of an increase in
amortization due to a higher Mayor's goodwill balance during the current year
and an increase in depreciation as a result of new and remodeled stores which
are net with a decrease primarily due to the write-off of the fixed assets at
the previous Mayor's headquarters. Included in these amounts are the
depreciation of Mayor's store assets, depreciation for substantially all
corporate headquarter and distribution center fixed assets, amortization of
goodwill resulting from the Mayor's acquisition and amortization of financing
costs related to the Company's working capital facility with Citicorp, USA.
Interest expense related to the Company's working capital
facility was $.8 million for the thirteen weeks ended October 30, 1999 and $1.8
million for the thirty-nine weeks ended October 30, 1999.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
As of October 30, 1999, cash and cash equivalents totaled $.2 million
and the Company had $56.9 million outstanding under its working capital
facility. The borrowings under this facility were primarily a result of the July
1998 acquisition of Mayor's. Total consideration consisted of approximately $18
million cash, 2 million shares of Jan Bell common stock and the refinancing of
Mayor's outstanding debt through an $80 million working capital facility with a
syndicate of banks led by Citicorp, U.S.A., Inc. Availability under this
facility is determined based upon a percentage formula applied to inventory and
accounts receivable. Based upon this formula, the maximum of $80 million was
available to the Company at October 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 the thirty-nine weeks ended October 30, 1999, net cash used in
operating activities was $8.5 million consisting of $16.4 million in cash used
in continuing operations and $7.9 million in cash provided by discontinued
operations. The Company's business is highly seasonal. Consequently, seasonal
working capital needs peak in October and November, before the holiday shopping
season. These working capital needs and the Company's new Mayor's locations
opened or opening during the fourth quarter resulted in the Company's increased
borrowings during the third quarter. This increase in cash flow requirements
will be met with cash generated from operations and a planned reduction in the
Sam's division inventories held in the Company's distribution center in
preparation of the expiration of the Sam's agreement on February 1, 2001.
Inventories in the Sam's Club counters during the remainder of 1999 are not
expected to be significantly reduced.
Net cash used in investing activities was $8.0 million during the
thirty-nine weeks ended October 30, 1999, primarily related to an increase in
costs associated with the Mayor's investment and the Company's new and remodeled
stores. The Company has opened three new Mayor's stores, one each in Miami and
Tampa, Florida and one in Buford, a suburb of Atlanta, Georgia. Also, the
Company has replaced the Perimeter Mall Maier & Berkele store in Atlanta with a
new 5,100 square foot Mayor's store. Under its Mayor's growth strategy, the
Company plans to open approximately ten new stores per year in future fiscal
periods. Management estimates that the Company's cash requirements will be
approximately $4.2 million for each new store, with approximately $1.2 million
(after consideration of lease concessions from landlords) related to leasehold
improvements, fixtures, point of sale terminals and other equipment in the
stores, and approximately $3 million related to the inventories. The Company
also estimates it will make back office capital expenditures of approximately
$4.0 million during 1999, primarily for a new Mayor's credit and collections
computer system, Year 2000 system additions and modifications as well as other
management information system enhancements.
On April 16, 1999 the Company's Board of Directors authorized the
expenditure of up to $15 million to repurchase the Company's common stock over a
period of one year. On October 29, 1999, the authorized amount was increased by
an additional $5 million. The Company has and will continue to repurchase the
shares in the open market or in privately negotiated transactions, from time to
time, in compliance with the Securities and Exchange Commission's Rule 10b-18,
subject to market conditions, applicable legal requirements and other factors.
The number of shares of common stock actually acquired by the Company will
depend on subsequent developments and corporate needs, and the repurchase
program may be interrupted or discontinued at any time. The acquired shares will
be held in treasury or canceled. During the thirty-nine weeks ended October 30,
1999, the Company purchased 4,890,100 shares at a cost of $15,173,000. The
shares are currently held in treasury.
The Company believes that its cash on hand, projected cash from
operations (which are expected to increase as a result of an expected decrease
in Sam's inventory levels) and availability under the current working capital
facility will be sufficient to meet its anticipated working capital and capital
expenditure needs for the remainder of Fiscal 1999; however, there can be no
assurance that the Company's future operating results will be sufficient to
sustain any debt service and working capital needs.
DISCONTINUED OPERATIONS
The results of operations for the thirteen and thirty-nine weeks
ended October 30, 1999 related to the Sam's Division discontinued operations
reflect the Company's continued strategy to maximize earnings in Sam's Club as
much as possible until the contract ends, while also attempting to reduce
inventory to a minimal level at that time. During the last three quarters, the
Company continued to execute merchandise strategies in Sam's that emphasized
higher margin diamond, semi-precious gem, gold and watch products in place of
other lower margin non-jewelry products and categories. 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
and might recognize some declines as a result of the contract nonrenewal. The
14
<PAGE> 15
Company expects to continue to have positive cash flows and positive income from
Sam's during the remaining term of the Agreement. The Company believes that the
discontinued Sam's operations during the remaining term of the Agreement will
ultimately result in a net gain. This estimated gain considers the Sam's
division operations through February 1, 2001, the loss on the sale of Mexican
operations which were sold in July 1999, the estimated loss on the Israel
operations which are expected to be sold or liquidated during the next fiscal
year, and an estimate for field and back office expenses expected during the
transition out of Sam's. Income from discontinued operations have remained and
are expected to continue to be consistent with prior years during the remainder
of 1999, with the magnitude of revenues during the fourth quarter holiday
season. The Company can, however, make no assurances regarding the results of
the wind down of its Sam's division business, including matters related to the
results of operations, personnel and inventories.
YEAR 2000 MATTERS
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs or other equipment or systems that have or rely
on time sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system or equipment failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions and invoices, distribute
merchandise to its retail locations 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 have required 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. Testing is in progress and
is substantially completed. All technological and operating applications and
systems have been upgraded and/or replaced with Year 2000 compliant versions. As
of October 30, 1999, the Company estimates that the business is approximately
98% 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.
As of October 30, 1999, the Company's entire systems hardware
infrastructure was Year 2000 compliant. Additionally, all hardware and operating
systems have been successfully tested using required simulated date conditions.
This includes all network equipment such as servers, routers, hubs, switches,
PC's and printers; all communication equipment such as phone switches; all
mid-range systems, polling systems, point-of-sale systems, in-store systems and
credit card systems; and all building security, alarm and maintenance systems.
Also, all mission critical application systems are Year 2000 compliant.
Simulation testing for these application systems was completed in early December
1999.
The Company has made contact with its critical vendors during the
course of its Year 2000 compliance plan. The Company's payroll processing
service provider has indicated that its major systems will operate with correct
date logic for Year 2000. The Company's service providers, including those
administering employee benefits, have also indicated that they are or will be
Year 2000 compliant, as have most of the Company's major merchandise vendors.
The Company's cumulative expenditures related to the Year 2000
issue approximated $2.2 million through October 30, 1999. It is expected that
the remaining Year 2000 expenditures will approximate $.2 million. Included in
this $2.4 million is approximately $.9 million of new computer hardware and
software which will significantly upgrade the Company's financial systems. The
Company expects to fund these costs through its cash provided by operations as
well as borrowings under its working capital facility, if needed. Certain of
these costs are being expensed as incurred.
The Company has developed basic contingency plans to restore the
material functions of each of its systems or activities in case of a Year 2000
failure, which consists primarily of the manual operation of the business. The
Company plans to continually refine these plans and make them more comprehensive
as additional information becomes available from testing or third party
suppliers.
15
<PAGE> 16
There can be no assurances that the Company will be able to
complete all the modifications in the required time frame, that unanticipated
events may occur, or that all issues will have been identified before problems
occur. The Company's Year 2000 efforts are ongoing and the overall plan
including the contingency plans will continue to evolve as new information
becomes available. While the Company anticipates no major interruption of
business, that will be dependent in part upon the ability of third parties to be
compliant. Although the Company is addressing all Year 2000 issues to lessen
potential problems, the Company is unable to eliminate them or to estimate the
final effect Year 2000 risks will have on operational results. If the Company is
unable to open or operate its retail locations, sales could decline until the
problems are corrected.
16
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risks
The disclosure in the Annual Report on Form 10-K filed April 28,
1999 is incorporated by reference herein. The Company does not believe that the
risk related to interest rate changes is materially different than it was at the
date of the referenced report.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This report and other written reports and releases and oral
statements made from time to time by the Company contain forward-looking
statements which can be identified by their use of words like "plans,"
"expects," "believes," "will," "anticipates," "intends," "projects,"
"estimates," "could," "would," "may," "planned," "goal," and other words of
similar meaning. All statements that address expectations, possibilities or
projections about the future, including without limitation statements about the
Company's strategy for growth, expansion plans, sources or adequacy of capital,
the Sam's Club transition, expenditures, financial results and Year 2000 matters
are forward-looking statements.
One must carefully consider such statements and understand that
many factors could cause actual results to differ from the forward-looking
statements, such as inaccurate assumptions and other risks and uncertainties,
some known and some unknown. No forward-looking statement is guaranteed and
actual results may vary materially. Such statements are made as of date
provided, and the Company assumes no obligation to update any forward-looking
statements to reflect future developments or circumstances.
One should carefully evaluate such statements by referring to the
factors described in the Company's filings with the SEC, especially on Form's
10-K, 10-Q and 8-K. Particular review is to be made of Items 1, 2, 3 and 7 of
the Form 10-K and Item 2 of the Form's 10-Q where the Company discusses in more
detail various important risks and uncertainties that could cause actual results
to differ from expected or historical results. The Company notes these factors
for investors as permitted by the Private Securities Litigation Act of 1995.
Since it is not possible to predict or identify all such factors, the identified
items are not a complete statement of all risks or uncertainties. In addition to
the factors previously discussed or referenced in this report, the following are
some of the other 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 five Puerto Rico locations through
February 1, 2001. On April 6, 1999, the Company was informed by Sam's that its
concession agreement would not be renewed beyond its expiration date. The
Company has been dependent on Sam's Club to conduct its business and, without
replacement business, the loss of the arrangement with Sam's Club will have a
material adverse effect on the business of the Company subsequent to February 1,
2001.
The Company is pursuing new growth opportunities primarily in the
luxury jeweler platform. However, management continuously considers other growth
opportunities including acquisitions of businesses complementary to that of the
Company, which could require a significant investment of funds and management
attention. Any such growth opportunities will be subject to all of the risks
inherent in the establishment of a new product or service offering, including
competition, lack of sufficient customer demand, unavailability of experienced
management, unforeseen complications, delays and cost increases and integration
difficulties. The Company may incur costs in connection with pursuing new growth
opportunities that it cannot recover, and the Company may be required to expense
certain of these costs, which may negatively impact the Company's reported
operating performance for the periods during which such costs are incurred.
During 1999 the Company has opened three new Mayor's stores and
replaced the Perimeter Mall Maier & Berkele store in Atlanta with a new 5,100
square foot Mayor's store. The Company currently plans to open 2 additional
Mayor's stores during the remainder of 1999. The Company considers its Mayor's
expansion program to be an integral part of its future plans to replace the
Sam's business. However, there can be no assurance that the Company will be able
to find favorable store locations, negotiate favorable leases, hire and train
new store and account managers, and integrate the new stores in a manner that
will allow the Company to meet its expansion program. Conditions outside the
Company's control, such as adverse weather conditions affecting construction
schedules, unavailability of materials, labor disputes and similar issues also
could impact anticipated store openings. The failure to expand by opening new
stores as planned could have a material adverse effect on the Company's future
sales growth, profitability and operating results.
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
17
<PAGE> 18
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.
In addition to the Mayor's acquisition litigation discussed in
Note C, the Company is also involved in litigation arising from the normal
course of business. In addition to other commercial litigation, the Company has
two lawsuits with a former vendor and a third lawsuit with the same former
vendor which relates to an alleged employment relationship. A federal court
action was tried in January 1999, and the federal court issued a judgment in
favor of the Company, including an award of attorney's fees and costs. The
former vendor has appealed the judgment. A state court action was tried in
August 1999 and the state court issued a verdict in favor of the vendor,
including an award of attorney's fees and costs. The Company intends to appeal
this state court ruling. The Company believes the facts and the law support its
positions and these matters should not materially affect the financial position
of the Company; however, there can be no assurance as to the final result of
these legal matters. It should also be noted that the Company will incur
significant ongoing legal fees.
The working capital facility agreement contains covenants, which
require the Company to maintain financial ratios including a leverage ratio,
fixed charge ratio, tangible net worth, and also limits capital expenditures,
incurrence of additional debt, and prohibits the payment of dividends. There can
be no assurance that the Company's future operating results will be sufficient
to meet the requirements of the applicable covenants.
PART II: OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following list of schedules and exhibits are incorporated by
reference and indicated in this Form 10-Q:
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K: None.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JAN BELL MARKETING, INC.
---------------------------------------
(Registrant)
By: /s/ DAVID P. BOUDREAU
------------------------------------
Chief Financial Officer and
Senior Vice President of
Finance & Treasurer
Date: December 10, 1999
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND THE CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> OCT-30-1999
<CASH> 239
<SECURITIES> 0
<RECEIVABLES> 20,548
<ALLOWANCES> 788
<INVENTORY> 85,912
<CURRENT-ASSETS> 110,693
<PP&E> 38,584
<DEPRECIATION> 12,163
<TOTAL-ASSETS> 247,272
<CURRENT-LIABILITIES> 53,521
<BONDS> 0
3
0
<COMMON> 0
<OTHER-SE> 142,854
<TOTAL-LIABILITY-AND-EQUITY> 247,272
<SALES> 94,100
<TOTAL-REVENUES> 94,100
<CGS> 60,242
<TOTAL-COSTS> 60,242
<OTHER-EXPENSES> 47,775<F1>
<LOSS-PROVISION> 766
<INTEREST-EXPENSE> 1,811
<INCOME-PRETAX> (15,680)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,680)
<DISCONTINUED> 8,078
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<NET-INCOME> (7,602)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
<FN>
<F1>OTHER EXPENSES CONSISTS OF ALL OPERATING COSTS AND EXCLUDES INTEREST,
NON-OPERATING INCOME AND INCOME TAXES.
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