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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 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.)
13801 N.W. 14th Street
Sunrise, Florida 33323
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 846-2705
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.0001 par value
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 / /
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 /
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As of March 25, 1994, the aggregate market value of the voting stock
beneficially held by non-affiliates of the registrant was $150,462,704. The
aggregate market value was computed with reference to the closing price on the
American Stock Exchange on such date. Affiliates are considered to be
executive officers and directors of the registrant and their affiliates.
As of March 25, 1994, 25,852,238 shares of Common Stock ($.0001 par value) were
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
PART III: Portions of the definitive Proxy Statement for the 1994 Annual
Shareholders' meeting (to be filed).
LOCATION OF EXHIBIT INDEX: The index of exhibits is contained in Part IV
herein on page number 51.
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JAN BELL MARKETING, INC.
TABLE OF CONTENTS
PART I Page No.
Item 1 Business...................................... 5
Item 2 Properties.................................... 16
Item 3 Legal Proceedings............................. 16
Item 4 Submission of Matters to a Vote
of Security Holders................ 16
PART II
Item 5 Market for the Registrant's Common
Stock and Related Stockholder
Matters........................... 18
Item 6 Selected Financial Data....................... 19
Item 7 Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 21
Item 8 Financial Statements and
Supplementary Data................ 30
Item 9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.............. 50
PART III
Item 10 Directors and Executive Officers
of the Registrant................. 50
Item 11 Executive Compensation........................ 50
Item 12 Security Ownership of Certain
Beneficial Owners and
Management........................ 50
Item 13 Certain Relationships and Related
Transactions...................... 50
PART IV
Item 14 Exhibits, Financial Statement
Schedules, and Reports on
Form 8-K.......................... 50
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PART I
ITEM 1. BUSINESS
GENERAL
Jan Bell provides fine jewelry, watches and certain other select
non-jewelry consumer products to the value-conscious consumer. The Company
markets principally through the warehouse club industry, which in 1993
accounted for approximately 85% of the Company's net sales.
During 1993, Jan Bell moved substantially from being primarily a
wholesale vendor to becoming a fully-integrated retailer in the warehouse club
industry as well as a wholesale distributor. In May 1993, the Company entered
into an arrangement to operate an exclusive leased department at all existing
Sam's Wholesale Clubs and future locations through February 1, 1999. The
products to be sold include all fine jewelry, watches, fragrances, fine writing
instruments, sunglasses and certain collectibles and accessories.
Additionally, in late 1993 the Pace Membership Club operations were purchased
by Sam's and 87 of the 117 former Pace locations are now being operated as
Sam's Clubs. The other locations were closed. See "Warehouse Clubs."
The terms "JBM", "Jan Bell" and the "Company" when used herein refer
to Jan Bell Marketing, Inc. and its consolidated subsidiaries, as required by
the context. The Company's principal offices are located at 13801 Northwest
14th Street, Sunrise, Florida 33323 (telephone: (305) 846-8000).
PRODUCTS
The following table sets forth the approximate percentage of net sales
for the Company's principal products for the periods specified:
Years Ended December 31,
---------------------------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Gold jewelry with diamonds
and/or other
gemstones 39% 29% 25% 37% 48%
Gold jewelry 25 28 26 32 31
Watches 26 38 34 29 16
Other consumer products 10 5 15 2 5
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The Company's principal products are gold jewelry set with diamonds
and/or other precious and semi-precious gemstones, gold chain, other forms of
gold and silver jewelry and watches. The Company's jewelry product line
includes chains, pendants, bracelets, watches, rings and earrings. Other
consumer products sold by the Company include perfumes and fragrances,
sunglasses, writing instruments, leather and giftware products.
The Company's products are typically classic in design to offer broad
consumer appeal. The Company follows the warehouse club philosophy of limiting
the assortment in each product category. A typical location at a warehouse
club is anticipated to be merchandised at any one time with approximately 310
jewelry items, approximately 150 watches and approximately 200 other consumer
products, which is substantially less than the average number of items
typically stocked by jewelry counters in department stores and other jewelry
retailers. Items for wholesale customer programs are selected from the
Company's current product line, which the Company periodically edits and
updates with new styles. The Company works with its wholesale customers to
balance their on-site inventory levels and generally accepts returned
merchandise in this regard.
WAREHOUSE CLUBS
The Company's principal customers during 1993 were members of the
warehouse club industry. In 1989, 1990, 1991, 1992, and 1993 approximately
79%, 64%, 71%, 81% and 85%, respectively, of the Company's net sales originated
from the warehouse clubs. The Company's principal warehouse club relationships
in 1993 were Sam's and Pace, which in 1993 accounted for 62% and 23%,
respectively, of the Company's net sales.
Warehouse clubs are mass merchandisers offering a variety of product
categories to targeted consumers. By limiting the assortment in each product
category and operating on a no-frills basis, warehouse 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 jewelry, merchandise offered by
warehouse clubs typically includes groceries, health and beauty aids, clothing,
sporting goods, automotive accessories, hardware, electronics and office
equipment. Successful execution of the warehouse club concept requires high
sales volumes, rapid inventory turnover, low merchandise returns and strict
control of operating costs.
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Prior to May 1993, the Company had an agreement to be the primary
supplier of fine jewelry, watches and fragrances to all present and future
Sam's club locations until February 1997. In May 1993, the arrangement was
changed to provide that the Company will operate an exclusive leased department
at all Sam's existing and future locations through February 1, 1999. Each
location is staffed by Jan Bell employees with the inventory owned by Jan Bell
until sold to Sam's members. The products to be sold include all fine
jewelry, watches, fragrances, fine writing instruments, sunglasses and certain
collectibles and accessories. In exchange for the right to operate the
department and the use of the retail space, Jan Bell pays a tenancy fee of
9.25% 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.
Prior to December 1993, the Company had an agreement with Pace to
operate departments staffed with Jan Bell employees at all present and future
Pace warehouses and merchandise fine jewelry, watches, fragrances, fine writing
instruments and sunglasses on an exclusive basis until January 1997. In late
1993, Sam's purchased the Pace operations and 87 of the 117 locations are now
being operated by Sam's. The other locations were closed by Sam's.
In 1992, the Company signed an agreement to be the primary supplier of
fine jewelry, watches and fragrances with Club Aurrera, a warehouse club joint
venture in Mexico between Wal-Mart Stores and Cifra S.A. The initial agreement
runs through February 1, 1997. The Company also supplies sunglasses, fine
writing instruments and collectibles to Club Aurrera.
The retail department operation represents a significant change in the
Company's operations which, among other things, requires retail expertise in
the areas of personnel, training, systems and accounting. The loss of the
Company's leased department arrangement with Sam's or a material reduction of
sales at Sam's could have a material adverse effect on the business of the
Company. There can be no assurance that increases in the number of retail
locations, thereby increasing the Company's customer base, will occur or that
all of the Company's products will be marketed in all of such new locations or
that further consolidation of the warehouse club industry due to geographic
constraints and market consolidation will not adversely affect the Company's
existing relationships. The opening and success of the leased locations and
locations to be opened in later years, if any, will depend on various factors,
including general economic and business conditions affecting consumer spending,
the performance of the Company's wholesale and retail operations, the
acceptance by consumers of the Company's retail programs and concepts, and the
ability of the Company to manage the leased operations and future expansion and
hire and train personnel.
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GENERAL MERCHANDISERS AND SPECIALTY RETAILERS
The Company believes that its strategy, first developed and
successfully executed with the warehouse club industry, can be applied to
certain general merchandise and specialty retailers who serve value-conscious
consumers through locations designed to generate high traffic and sales volume.
The Company at all times continues to evaluate its ongoing relationships with
general merchandise and specialty retailers. Such evaluation criteria include
sales results, level of overhead in maintaining accounts, financial strength of
a customer, a customer's growth plans, a customer's market share and
competition with other customers. There can be no assurance that any of these
programs will be successful.
OTHER CUSTOMERS
The Company also sells to a limited number of discount stores, drug
stores, wholesalers and jewelry chains both directly and pursuant to
consignment arrangements.
PURCHASING
DIAMONDS AND 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
meets its diamond requirements with purchases on a systematic basis throughout
the year.
Hedging is not available with respect to possible fluctuations in the
price of gemstones. If such fluctuations should be unusually large or rapid
and result in prolonged higher or lower prices, there is no assurance that the
necessary price adjustments could be made quickly enough to prevent the Company
from being adversely affected.
The world supply and price of diamonds is influenced considerably by
the Central Selling Organization ("CSO"), which is the marketing arm of DeBeers
Consolidated Mines, Ltd. ("DeBeers"), a South African company. Through CSO,
DeBeers, over the past several years, has supplied approximately 80% of the
world demand for rough diamonds, selling to gem cutters and polishers at
controlled prices periodically throughout the year.
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The continued availability of diamonds to the Company is dependent, to
some degree, upon the political and economic situation in South Africa and
Russia, which have been unstable. Several other countries are also major
suppliers of diamonds, including Botswana and Zaire. In the event of an
interruption of diamond supplies, or a material or prolonged reduction in the
world supply of finished diamonds, the Company could be adversely affected.
GOLD PRODUCTS
Finished gold products and gold castings are purchased from a
relatively small number of manufacturers in Israel, Italy, New York and
California. The Company believes that there are numerous alternative sources
for gold chain and castings, and the failure of the above manufacturers would
not have a material adverse effect on the Company.
The Company directly supplies most of its gold subcontractors with gold
bullion which the subcontractors fabricate into chain and castings according
to specifications provided by the Company. The gold bullion is generally
purchased through Prudential-Bache Securities Inc. at market prices prevailing
at the time of purchase on the London and New York Commodities Exchanges.
Following purchase, the gold is either held in the Company's name in London or
New York, or shipped to the Company's offices in Sunrise, Florida. Upon
placing an order with a subcontractor, the Company generally ships the required
amount of gold to the subcontractor to be made into final product. Upon
receipt and inspection, the Company will pay the subcontractor a manufacturing
charge based on labor and value added as well as all applicable duties.
Subcontractors are selected and evaluated continuously based primarily on
craftsmanship, cost, financial strength and reliability.
The Company pays for its gold purchases at the time of purchase,
allowing it to avoid carrying charges generally imposed by gold fabricators and
the cost of leasing gold from third parties.
WATCHES
In May 1990, the Company formed a joint venture with Big Ben
Corporation, a privately held distributor and marketer of watches and other
accessories. Under the joint venture, Jan Bell provided and arranged for
inventory financing and managed the venture's integration into the Jan Bell
fine jewelry programs. In September 1991, Jan Bell purchased the minority
joint venture interest from Big Ben Corporation, resulting in the entire watch
program being integrated into Jan Bell. The program, initially implemented in
the wholesale clubs, has been expanded to include substantially all of the
Company's other customers. The program features Seiko and Citizen watches as
well as other select name brands, private label and designer watches. The
Company has license or distribution
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agreements for Pierre Cardin, Givenchy, Mathey Tissot and Ted Lapidus watches.
During 1993, the Company purchased approximately 40.4% of watches directly from
certain manufacturers as well as approximately 59.6% of watches through
parallel marketed means. Parallel marketed goods are products to which
trademarks are legitmately 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 as well as from parallel marketed
means. See "Regulation."
AVAILABILITY
Although purchases of several critical raw materials, notably gold and
gemstones, are made from a limited number of sources, the Company believes
that there are numerous alternative sources for all raw materials used in the
manufacture of its finished jewelry, and that the failure of any principal
supplier would not have a material adverse effect on operations. Any changes
in foreign or domestic laws and policies affecting international trade may have
a material adverse effect on the availability or price of the diamonds, other
gemstones, precious metals and non-jewelry products purchased by the Company.
Because supplies of parallel marketed products are not always readily
available, it can be a difficult process to match the customer demand to market
availability. See "Regulation."
SEASONALITY
The Company's jewelry business is highly seasonal, with the fourth
calendar quarter (which includes the Christmas shopping season) historically
contributing significantly higher sales than any other quarter during the year.
Approximately 50% of the Company's 1993 annual sales were made during the
fourth quarter.
MANUFACTURING
The Company performs certain jewelry manufacturing and all quality
control functions at its headquarters in Sunrise, Florida and performs jewelry
manufacturing in Israel. Almost all gold and watch products are manufactured by
third parties. During 1993, approximately 26% and 11% of gemstone products
received were manufactured by the Company in Israel and Florida, respectively.
The remaining portion of gemstone products were manufactured or purchased
complete from third parties.
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The Company utilizes independent subcontractors and craftsmen to
manufacture a significant portion of its jewelry products according to design
specifications approved by the Company, thereby shifting certain risks and
capital costs of manufacturing to third parties. Such risks and capital costs
of manufacturing shifted to third parties include costs of labor, cash for
capital expenditures and equipment, cost of design, environmental issues,
insurance and labor issues. Diamonds and gemstones purchased by the Company
are furnished to independent goldsmiths for setting, polishing and finishing
pursuant to Company instructions and procedures.
Gold acquired for manufacture is at least .999 fine and is then
combined with other metals to produce 14 karat gold. Varying quantities of
metals such as silver, copper, nickel and zinc are combined with gold to
produce 14 karat gold of different colors. Manufacturing processes performed
for the Company by independent contractors include refining (mixing alloys with
pure gold and silver), casting, fabricating, assembling, stone setting,
polishing and machining.
Research and development expenses have been and remain insignificant.
RETAIL OPERATIONS, MERCHANDISING AND MARKETING
GENERAL
Each retail department is supervised by a manager whose primary duties
include member sales and service, scheduling and training of associates, and
maintaining loss prevention and visual presentation standards. The departments
are generally staffed by the manager, a full-time associate and two to four
part-time associates depending on sales volume. The departments employ
temporary associates during peak selling seasons such as Christmas. Each
department is open for business during the same hours as the warehouse club in
which it operates. Except for extended hours during certain holiday seasons,
Sam's is generally open Monday through Friday from 10:00 a.m. to 8:30 p.m.,
9:30 a.m. to 7:00 p.m. on Saturdays and 12:00 noon to 6:00 p.m. on Sundays.
The department manager reports to a district manager. A district
manager supervises between nine to eleven clubs and reports to a regional
director. The Company presently has five regional directors who report to the
Vice President of Field Operations.
The fixtures and equipment located in the Company's departments
generally consist of eight to ten showcases, four corner towers, a safe, a 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
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will have additional fixtures consisting of one or more of the following: two
showcases, two towers or a center island display fixture.
The Sam's Clubs are membership only, cash and carry operations. The
Company's departments are required to accept only the forms of payment accepted
by Sam's which presently includes cash, checks and Discover Card.
The Company's departments operating in Pace accepted MasterCard and
Visa until Sam's acquired these clubs. Sam's does not accept MasterCard or
Visa and the Company was required to cease accepting these cards. The Company
believes that this will have an adverse effect on sales in the former Pace
Clubs in the short-term. Certain factors, such as the Sam's Clubs historical
ability to attract a higher membership base and member traffic, may mitigate
this adverse effect on sales in the long-term; however, there are no assurances
that this will occur.
Traditionally, a substantial portion of sales in the retail jewelry
industry has been made at prices discounted from listed retail prices by
emphasizing special events and sale prices. The Company endeavors to generally
undersell competition while maintaining uniform prices, except where lower
prices are necessary to meet local competition. The Company's objective is to
maximize sales volume and inventory turn while minimizing expenses. The
Company sells its merchandise at gross margin levels significantly below that
of traditional retail jewelers and does not use the sales concepts of high
initial markups followed by sale priced events using significant markdowns.
The Company will permanently markdown its program goods to clear out
slow-moving or discontinued merchandise.
DEPARTMENT COUNT
The following table sets forth data regarding the number of
departments which the Company operated:
1991(a) 1992 1993(b)
------- ---- -------
Departments:
- -----------
Operated, beginning of period 0 87 114
Opened during period 91 28 339
Closed during period 4 1 35
Operated, end of period 87 114 418
--- --- ---
Net increase 87 27 304
=== === ===
(a) In April, 1991, the lease arrangement with Pace commenced. Includes
the initial conversion of 62 Pace locations and the subsequent
acquisition of 19 Price Savers Clubs by Pace.
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(b) Includes the initial conversion of 315 Sam's retail departments and
the closing of 30 locations as a result of Pace ceasing operations.
Generally the Company's departments have been between 260 and 275 of
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 and
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 the Sam's philosophy, the Company does not promote
its products sold in the departments by direct mail catalogs, newspaper or
other periodical advertising or the broadcast media. The Company does utilize
promotional materials such as signage, banners and takeaway brochures within
the clubs to promote its products. The Company also advertises in connection
with its licensed products.
During the fourth quarter of 1993, the Company did advertise in
newspapers and radio for promotional events in the Pace clubs. Such
advertising ceased with the acquisition of the Pace clubs by Sam's.
DISTRIBUTION
The Company's retail departments receive the majority of their
merchandise directly from distribution warehouses located in Sunrise, Florida.
Merchandise is shipped from the distribution warehouses utilizing various air
and ground carriers. Presently, a small portion of merchandise is delivered
directly to the retail departments from suppliers. The Company anticipates
increasing the amount of merchandise shipped directly from suppliers in the
future. The Company transfers merchandise between retail departments to
balance inventory levels and to fulfill customer requests.
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During 1993, the Company operated three distribution warehouses in
Sunrise, Florida to distribute merchandise to its retail departments. The
Company's primary distribution warehouse located in the same facility with the
corporate headquarters was principally utilized to warehouse and distribute
diamonds and gemstones, gold products and fine watches. The Company's two
satellite warehouses were utilized to distribute promotional watches and
sunglasses, fine writing instruments, fragrances and collectibles.
During 1993, the Company began construction of a new 123,000 square
foot distribution center in Sunrise, Florida. The new distribution center was
substantially completed in March 1994 and the consolidation of warehousing and
distribution activities previously handled by the three separate distribution
warehouses is projected to be completed by June 1994.
WHOLESALE OPERATIONS
The Company's wholesale shipments are processed through its
distribution warehouses in Sunrise, Florida and regional centers in Miami,
Florida and Los Angeles, California.
The Company operates a distribution facility in Mexico City, Mexico;
this facility warehouses and distributes merchandise sold to Club Aurrera.
The Company does not believe that the dollar amount of unfilled orders
is significant to an understanding of the Company's business due to the
relatively short time between receipt of a customer order and shipment of the
product.
COMPETITION
The Company's competitors include foreign and domestic jewelry
retailers, national and regional jewelry chains, department stores, catalog
showrooms, discounters, direct mail suppliers, televised home shopping
networks, manufacturers, distributors and large wholesalers and importers, some
of whom have greater resources than the Company. The Company believes that
competition in its markets is based primarily on price, design, product quality
and service. With the increase in the consolidation of the retail industry,
the Company believes that competition both within the warehouse club industry
and with other competing general and specialty retailers and discounters will
continue to increase.
REGULATION
The Company utilizes the services of independent customs agents to
comply with U.S. customs laws in connection with its purchases of gold,
diamonds and other raw materials from foreign sources.
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Jan Bell bears certain risks in purchasing parallel marketed goods
which include a substantial portion of watches and other accessories. 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 holders and their licensees initiate private suits or
administrative agency proceedings seeking damages or injunctive relief based on
alleged trademark infringement by purchasers and sellers of parallel marketed
goods. While Jan Bell believes that its practices and procedures with respect
to the purchase of parallel marketed goods lessen the risk of significant
litigation or liability, Jan Bell is from time to time involved in such
proceedings and there can be no assurance that additional claims or suits will
not be initiated against Jan Bell or any of its affiliates, or, if any such
claims or suits are initiated, as to the results thereof. Further, legislation
has been introduced in Congress in recent years and is currently pending
regarding parallel marketed goods. Certain legislative or regulatory
proposals, if enacted, could materially limit Jan Bell's ability to sell
parallel marketed goods in the United States. For instance, a court recently
issued an order enjoining the customs service from enforcing a regulatory
exception regarding foreign made goods that bear a trademark identical to a
valid United States trademark but which are materially physically different.
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, although the cost of certain products
may increase or their availability may be lessened.
EMPLOYEES
As of March 5, 1994, the Company employed approximately 1,490 persons
on a full-time basis, including approximately 920 in regional and local sales,
(primarily the Sam's retail locations) 350 in inventory, distribution and
manufacturing and 220 in administrative and support functions. In addition,
the Company also employed approximately 920 persons on a part-time basis which
varies with the seasonal nature of its business. None of its employees are
governed by a collective bargaining agreement, and the Company believes that
its relations with employees are good.
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ITEM 2. PROPERTIES
PROPERTIES AND LEASES
The Company's corporate headquarters and primary distribution
facility are owned by the Company and located on 3.7 acres in a 60,000
square foot building in Sunrise, Florida. The Company owns an additional
11.1 acres adjacent to the existing facility. A 123,000 square foot building
for use primarily in distribution and shipping was substantially completed
during March 1994. The Company leases an aggregate of 26,402 square feet of
warehouse space in Sunrise, Florida for shipping and distribution and
approximately 3,000 square feet of office space in Miami, Florida. Such
leases are expected to be terminated during April 1994.
The Company leases approximately 5,500 square feet of office and
warehouse space in Los Angeles, California. Such lease expires in March 1995.
The Company leases one distribution and one office facility with an
aggregate of approximately 7,000 square feet in Mexico City pursuant to leases
which expire in May 1994. The Company leases facilities in Israel of 3,800
square feet for manufacturing and 1,140 square feet for production and offices.
As of March 25, 1994, the Company has leased department operations at
424 Sam's club's located in 48 states throughout the United States and Puerto
Rico. The typical leased department consists of approximately 266 square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incident to the
conduct of its business. While it is not possible to predict with certainty
the outcome of such matters, management believes that all litigation currently
pending to which the Company is a party will not have a material adverse
effect on the Company's financial position or results of operations.
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 ending December 31, 1993.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Jan Bell are:
Name Age Position Year Joined Jan Bell
---- --- -------- --------------------
Alan H. Lipton 43 CEO and President 1983
Eliahu Benshmuel 51 Executive V.P. of 1991
Procurement, Watches
& Accessories
Richard W. Bowers 42 Sr. Executive V.P., 1991
Secretary and General Counsel
Jon E. Fuller 38 COO and Executive V.P. 1993
of Operations
Frank S. Fuino, Jr. 47 CFO and Executive V.P. of 1993
Finance
Donovan H. Larsen 58 Executive V.P. of 1993
Merchandising and General
Merchandise Manager
ALAN H. LIPTON
Mr. Lipton has been a Director of the Company and its predecessors since
1983, the President from 1983 and the Chief Executive Officer since July 1987.
ELIAHU BENSHMUEL
Mr. Benshmuel has been a Director of the Company since June, 1993 and
has been Executive Vice President of Procurement - Watches and Accessories
since May 1993. Mr. Benshmuel had been Director of the Watch Division of Jan
Bell since September 1991. From 1990 to September 1991, Mr. Benshmuel was
President of Big Ben '90, a watch joint venture formed with the Company. Prior
to this, Mr. Benshmuel was engaged in the marketing and sale of watches with
Big Ben Corporation based in Miami.
RICHARD W. BOWERS
Mr. Bowers has been the Senior Executive Vice President and General
Counsel of Jan Bell since May 1991, Vice Chairman of the Board since July 1991
and Secretary since September 1992. Prior to such time, he was engaged in the
private practice of law with the firm of Gaston & Snow.
JON E. FULLER
Mr. Fuller was appointed Executive Vice President of Operations and
Chief Operating Officer of Jan Bell in May 1993. From June 1982 to May 1993,
Mr. Fuller was with the accounting firm of Deloitte & Touche.
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FRANK S. FUINO, JR.
Mr. Fuino was appointed Executive Vice President of Finance and Chief
Financial Officer of Jan Bell in May 1993. From January 1992 to April 1993,
Mr. Fuino was an independent consultant providing financial services. From
June 1988 to January 1992, Mr. Fuino served as a reorganization and management
specialist for various corporations. Prior to this, Mr. Fuino served in
various capacities, including Vice President and Treasurer for Allied Stores
Corporation from May 1977 to September 1987.
DONOVAN H. LARSEN
Mr. Larsen was appointed Executive Vice President of Merchandising and
General Merchandise Manager in December 1993. From July 1990 to December 1993,
Mr. Larsen was the Assistant Vice President with Service Merchandise. Mr.
Larsen was Vice President of Sales at Gruen Marketing Corp. from August 1986 to
July 1990.
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.
Calendar Year High Low
- ------------- ---- ---
1993
First Quarter .............................. $20.63 $14.88
Second Quarter ............................. 18.38 13.25
Third Quarter .............................. 14.00 8.50
Fourth Quarter ............................. 13.13 8.63
1992
First Quarter .............................. $18.13 $13.75
Second Quarter ............................. 17.00 12.88
Third Quarter .............................. 16.75 12.50
Fourth Quarter ............................. 23.00 13.75
The last reported sales price of the Common Stock on the American
Exchange Composite Tape on March 25, 1994 was $6.75. On March 25, 1994, the
Company had 835 stockholders of record.
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19
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 bank lines and senior debt prohibit
dividend payments.
ITEM 6. SELECTED FINANCIAL DATA
The following selected data should be read in conjunction with the
Consolidated Financial Statements and Related Notes thereto appearing elsewhere
in this Form 10-K and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Net Sales $275,177 $333,521 $224,261 $177,246 $181,366
Less: Effect of
Sam's agreement (1) 99,718 --- --- --- ---
-------- -------- -------- -------- --------
175,459 333,521 224,261 177,246 181,366
-------- -------- -------- -------- --------
Cost of Sales 245,310 276,872 184,447 151,466 149,199
Less: Effect of
Sam's agreement (1) 79,687 --- --- --- ---
-------- -------- -------- -------- --------
165,623 276,872 184,447 151,466 149,199
-------- -------- -------- -------- --------
Gross profit 9,836 56,649 39,814 25,780 32,167
Selling, general and
administrative expenses 44,492 34,826 23,685 15,093 7,560
Other costs (2) 10,217 --- 6,440 --- ---
-------- -------- -------- -------- --------
Income (loss) before interest,
taxes and minority interest (44,873) 21,823 9,689 10,687 24,607
Interest expense 3,195 916 2,419 757 390
Interest and other income 635 550 3,033 3,444 2,147
-------- -------- -------- -------- --------
Income (loss) before income
taxes and minority interest (47,433) 21,457 10,303 13,374 26,364
Provision (benefit) for income
taxes (11,709) 6,682 2,674 4,052 9,896
Minority interest in consolidated
joint venture --- --- 684 2,569 ---
-------- -------- -------- -------- --------
Net income (loss) $(35,724) $ 14,775 $ 6,945 $ 6,753 $ 16,468
-------- -------- -------- -------- --------
Net income (loss) per common
share $ (1.40) .59 .31 .30 .82
======== ======== ======== ======== ========
BALANCE SHEET DATA (AT PERIOD END):
Working capital $174,496 $198,043 $140,855 $154,148 $160,024
Total assets 312,254 301,958 228,833 208,898 194,141
Notes payable 33,496 33,047 --- 18,001 2
Stockholders' equity 205,382 234,974 208,248 172,940 173,906
- --------------------------
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20
(1) As a result of the new agreement with Sam's, the Company recorded a
sales reversal of $99.7 million for the amount of inventory previously
sold by Jan Bell to Sam's which was subject to repurchase. In
addition, cost of sales was reduced by $79.7 million resulting in a
$20.0 million one-time charge to pre-tax earnings.
(2) Other costs in 1993 are approximately $6.0 million in one-time charges
related to the Sam's agreement and other retail transition costs, and
charges of $4.2 million related to compensation costs in connection
with the departure of Mr. Mills as Chairman of the Board. Other costs
in 1991 include expenses of $2.0 million incurred as a result of the
terminated acquisition of Michael Anthony Jewelers, Inc. in August of
that year, and $4.4 million for the settlement of the class action
litigation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
A YEAR OF TRANSITION
In early 1991, the Company signed an agreement to be the primary
supplier of fine jewelry, watches and fragrances to all present and future
Sam's Wholesale Club ("Sam's") locations for a two year period ending in
February 1993. During 1992, the term of the agreement was extended to February
1997. Goods were sold to Sam's and revenues were recognized when goods were
shipped to Sam's.
In May 1993, the Company commenced its transition to a fully-integrated
retailer in the wholesale club industry by entering into an agreement with
Sam's to operate an exclusive leased jewelry department at all existing and
future Sam's locations through February 1, 1999. The operational rollout began
on September 21, 1993 and was completed on October 28, 1993, during which time
the Company took over the operations of the then existing 331 jewelry
departments at Sam's.
Under the terms of the agreement, the Company repurchased Sam's
existing inventory which included goods that Sam's had previously purchased
from the Company as well as from other vendors. In addition, as consideration
for this agreement, the Company paid to Sam's a one-time fee of $7.0 million
which is being amortized by the Company over the term of the contract and will
pay a tenancy fee to Sam's of 9 1/4% of future net sales.
As a result of this new agreement with Sam's, the Company recorded a
sales reversal of $99.7 million for the amount of inventory previously sold by
Jan Bell to Sam's which became subject to repurchase. In addition, cost of
sales was reduced by $79.7 million resulting in a $20.0 million one-time charge
to pre-tax earnings. The Company had previously estimated the amount of
inventory subject to repurchase at $77.1 million and the related cost of sales
at $59.0 million which resulted in an $18.1 million one-time charge to pre-tax
earnings which was recorded in the first quarter of 1993. In connection with
the transition to become a fully-integrated retailer, Jan Bell also incurred
approximately $6.0 million (included in "Other Costs") additional one-time
charges for costs such as hiring and training personnel, systems
implementations, other activities related to commencing operations under the
new agreement, the transition to primarily retail operations, and a valuation
adjustment for certain inventory acquired which Sam's had purchased from other
vendors. Of this amount, $805,000 was recorded in the third quarter of 1993
and the balance during the fourth quarter.
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22
When the Company began operating the departments, its operating
expenses increased significantly for items such as payroll, tenancy, interest
costs associated with the inventory repurchase and other costs typically
associated with retail operations. The Company believes that although these
incremental operating expenses will be offset in part by the incremental margin
the Company will achieve as a result of selling at retail rather than wholesale
prices, sales increases will also be necessary. Although this arrangement is
resulting in an initial negative impact on earnings, management believes that
this arrangement will further strengthen the Company's relationship with Sam's
and better position the Company for growth. In addition, this agreement will
provide the Company with the ability to generate increased sales by having its
own trained and incentivised sales force behind the counter. It will also
enable the Company to control inventory levels while expanding into new product
lines.
In 1991, the Company signed an agreement with Pace Membership
Warehouses ("Pace") to operate departments at all present and future Pace
locations and to merchandise fine jewelry, watches, fragrances, fine writing
instruments and sunglasses on an exclusive basis until January 1997. The Pace
agreement required payments based upon a percentage of monthly net sales
subject to an adjustment based on Pace total merchandise sales growth.
In early November 1993, Wal-Mart Stores, Inc. announced that it would
purchase in late 1993 most of the Pace locations and would operate them as
Sam's. The Pace locations not being acquired would be closed. As of the date
of the announcement, Jan Bell was operating the jewelry department at all 117
Pace locations, of which 30 were closed after the Christmas selling season and
87 were converted to Sam's during January 1994. Jan Bell continues to operate
its jewelry departments in the converted locations in accordance with the terms
of leased department arrangement with Sam's. Included in selling, general and
administrative expenses are $648,000 in direct costs associated with the Pace
location closings.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of net sales for certain items in the Company's Statements of Operations:
Income and Expense Items as a
Percentage of Net Sales(1)
-----------------------------
Years Ended December 31,
1993 1992 1991
---- ---- ----
Net sales (1) 100.0% 100.0% 100.0%
Cost of sales (1) 89.1 83.0 82.2
----- ----- -----
Gross profit (1) 10.9 17.0 17.8
Net effect of Sam's agreement (7.3) -- --
----- ----- -----
Gross profit 3.6 17.0 17.8
Selling, general and administrative
expenses 16.2 10.5 10.6
Other costs 3.7 -- 2.9
----- ----- -----
Income (loss) before interest, taxes and
minority interest (16.3) 6.5 4.3
Interest expense 1.2 .3 1.1
Interest and other income .2 .2 1.4
----- ----- -----
Income (loss) before income taxes
and minority interest (17.3) 6.4 4.6
Provision (benefit) for income taxes (4.3) 2.0 1.2
Minority interest -- -- .3
----- ----- -----
Net income (loss) (13.0)% 4.4% 3.1%
===== ===== =====
(1) Excluding effect of Sam's agreement.
SALES
In 1993, net sales (excluding the effect of the Sam's agreement)
decreased $58.3 million following an increase of $109.3 in 1992 from 1991.
Approximately 85% of 1993 net sales were derived from the combined retail
operations of Sam's and Pace. The remaining 15% was from the Company's
wholesale operations in Mexico, Israel and the United States.
The operational rollout at Sam's commenced on September 21, 1993 and
was completed on October 28, 1993. Until such time as the Company began
operating the departments, the Company continued to ship and bill Sam's under
the same terms as it did prior to the new agreement. However, beginning with
the second quarter of 1993, Jan Bell recognized sales and costs of sales as
goods were sold to the club member rather than when goods were shipped to
Sam's. The sales continued to be recorded at Jan Bell's selling price to Sam's
until such time as Jan Bell began operating the departments at which point
sales began to be recorded at retail prices to the club member.
23
24
The transition period had a significant adverse impact on the Company
financially. Sales prior to the rollout were lost due to certain factors,
including reduced merchandise levels, lower staffing levels by Sam's personnel
and a decline in the number of promotional events. These factors, when combined
with the closing of 30 Pace locations and the resultant loss of sales even
prior to the closings and the overall decline in same store sales at the
warehouse clubs, were the primary factors contributing to the 1993 sales
decline.
Wholesale sales to customers other than Sam's were $42 million in 1993
compared to $64 million in 1992 as the Company concentrated its focus on the
transition with Sam's.
The Company believes that current and future promotional events are an
important response to consumer demand based upon providing quality and value at
low prices. Promotional events must constantly be updated and evaluated for
consumer demand and involve significant operating and marketing efforts.
Promotional events were significantly curtailed during 1993, and the Company is
working closely with Sam's towards developing new events, consistent with Sam's
merchandising philosophy.
The 1992 sales increase was primarily a result of expanded volume of
goods sold, principally from the expansion of existing business as well as
additional locations with core customers and an increase in promotional sales
events.
Future sales may be adversely impacted by uncertain general economic
conditions, the level of spending in the wholesale club environment and changes
to the Company's existing relationship with Sam's. The retail jewelry market
is particularly subject to the level of consumer discretionary income and the
subsequent impact on the type and value of goods purchased. With the
consolidation of the retail industry, the Company believes that competition
both within the warehouse club industry and with other competing general and
specialty retailers and discounters will continue to increase.
COST OF SALES
Gross margin in 1993 (excluding the effect of the new agreement with
Sam's) was 10.9% compared to 17.0% and 17.8% in 1992 and 1991, respectively.
Gross margin for the nine months ended September 30, 1993 was 16.8%, but
declined to 4.8% in the fourth quarter of 1993 resulting in the 10.9% margin
for the year.
The fourth quarter margins were primarily impacted by a number of
significant factors including the following; First, as a result of purchasing
more inventory than anticipated under the Sam's agreement, the Company had to
liquidate third party merchandise at below normal margin levels. Second, during
the fourth quarter the Company recorded a provision for shrinkage which
approximated 5% of sales. The Company recognizes that the level of shrinkage
is unacceptable and believes this amount to be primarily related to
24
25
transition issues. The Company has enhanced its control procedures related to
inventory shrinkage and believes that significant improvement will be achieved
in 1994. Third, as a result of the inventory repurchase from Sam's, the
Company's normal fourth quarter purchases and manufacturing of inventory were
significantly curtailed. Due to the lower than normal level of inventory
production, certain costs which would normally relate to inventory production
were charged directly to cost of sales. Finally, due to the high inventory
levels, the Company determined that reserves had to be established during the
fourth quarter to address slow moving, valuation and damaged inventory issues.
The decrease in gross margin in 1992 was a result of several factors,
none of which were individually significant.
To reduce its exposure to the effects of changes in the price of its
gold inventories, the Company hedges its gold positions and commitments with
gold futures contracts. Accordingly, changes in the market value of gold
during the holding period are generally offset by changes in the market value
of the futures contracts. As a result of the Company's conversion to a
retailer from a wholesaler, the Company is in the process of evaluating the
need for continued hedging.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $9.7 million
in 1993 from 1992 and $11.1 million in 1992 from 1991. Of the 1993 increase,
$1.8 million was incurred during the nine months ended September 30, 1993,
while the remaining increase of $7.9 million was incurred during the fourth
quarter of 1993. The increase as of September 30, 1993 reflected the higher
costs associated with servicing approximately 100 additional retail locations
in 1993 versus 1992. The fourth quarter increase was primarily attributable to
the payroll and other costs related to the Sam's leased department operation
and also includes $648,000 in costs related to the Pace location closings. The
increase in 1992 was due primarily to the payroll and related costs associated
with the increase in the Pace retail operations as well as costs associated
with product marketing and development.
Future expenses will continue to be impacted by costs associated with
the Sam's leased department operation, expenditures related to expansion of
management, systems and controls, and costs associated with new marketing
concepts, other promotional events and product development.
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26
OTHER COSTS
Included in Other Costs are the previously mentioned $6.0 million of
charges related to the Sam's agreement and retail transition. Also included in
Other Costs are charges of $4.2 million related to the compensation costs in
connection with the departure of Mr. Mills as Chairman of the Board of
Directors on March 29, 1994, consisting primarily of the acceleration of
vesting of previously granted stock bonus awards and amounts due under his
employment contract.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE
Interest and other income was $635,000 in 1993, $550,000 in 1992 and
$3.0 million in 1991. The increase in 1993 is not deemed to be significant.
The decrease for 1992 reflects the decline of interest income resulting from
the non-interest bearing refundable deposit of $17.8 million established as a
result of the Company's agreement with Sam's, and an overall drop in interest
rates.
Interest expense in 1993 increased to $3.2 million from $0.9 million in
1992. The increase primarily is attributable to the $33.5 million (net of debt
financing costs) long-term debt which was outstanding for all of 1993, and only
for three months in 1992. In addition, average short-term borrowings increased
to $5.6 million in 1993 from $4.1 million last year. Interest expense
decreased to $0.9 million in 1992 from $2.4 million in 1991 as the Company
reduced its need for short-term borrowings through improved timing of the
purchase of its inventories and lower interest rates.
INCOME TAXES
The Company's provision (benefit) for income taxes were (24.7%), 31.1%
and 25.9% of income before income taxes for the years ended 1993, 1992 and
1991, respectively. The Company will have a federal net operating loss
carryforward, after carryback, of approximately $12.6 million, and state net
operating loss carryforward of approximately $48.2 million. The Federal net
operating loss carryforward expires in 2008 and the state net operating loss
carryforward expires beginning in 1998 through 2008. The Company also will
have an alternative minimum tax credit carryforward of $794,000 to offset
future federal income taxes. The changes in the effective rates primarily
relate to the level of earnings in 1993, 1992 and 1991 of the Company's
subsidiaries in Israel in relation to consolidated earnings. When the Company
purchased Exclusive Diamonds International, Limited ("EDI") in August of 1990,
EDI applied to and received from the Israeli government under the Encouragement
of Capital Investments Law of 1959 "approved enterprise" status, which results
in reduced tax rates given to foreign owned corporations to stimulate the
export of Israeli manufactured products. This benefit allows a favorable tax
rate ranging from zero to ten percent during the first ten years in which the
subsidiary recognizes a profit. The "approved enterprise" benefit is available
to the Company until the year 2000. The Company has not provided for federal
and state income taxes on earnings of foreign subsidiaries which are considered
indefinitely invested. The Company adopted Statement of Financial
26
27
Accounting Standards No. 109 ("Accounting for Income Taxes"), effective January
1, 1993. Such adoption did not have a material effect on the financial
statements. See Note H to the Financial Statements.
INVENTORY LEVELS
As of December 31, 1993, the Company had $177.5 million of inventory,
an increase of $70.8 million over 1992. Although a significant portion of the
increase is attributable to becoming a fully integrated retailer, inventory
levels are in excess of desired levels and the Company expects that it will
experience margin pressures during the first nine months of the new year as
inventory is reduced to such levels.
The primary area of overstock in inventory is watches. At year-end
approximately 35% of inventory was watches compared to 39% in 1992. However,
watch sales as a percent of total net sales decreased to 26% in 1993 from 38%
in 1992. The Company believes that watch sales as a percent of total net sales
will further decline in 1994. As a result, the Company has significantly
curtailed its watch purchases, has developed a number of promotional events
based on existing inventory and is utilizing its wholesale operation to sell
watch inventory.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1993, cash and cash equivalents totalled $30.2
million and the Company had no short-term borrowings outstanding under its
revolving credit facility. However, the Company owed Sam's approximately
$42.5 million, of which $33.4 million is for inventory repurchased from Sam's
and $9.1 million, which is included in accounts payable, is for certain
third-party merchandise acquired by the Company from Sam's. Final payment
of these amounts is due in May 1994.
Working capital decreased by $23.5 million in 1993. The decrease is
reflective of the loss sustained in 1993 and capital expenditures of $12.0
million.
A refundable non-interest bearing cash deposit of $17.8 million was
posted with Sam's in 1991 in consideration for the Company becoming the primary
jewelry vendor over the term of the agreement and any renewals. In July 1992,
the Company and Sam's agreed to reduce the amount of the deposit to be refunded
to $15.8 million. The $2 million reduction represented a payment for the
extension of the agreement for a three year period from February 1, 1994 to
February 1, 1997. The aggregate $17.8 million was applied towards the $7.0
million one-time fee and the repurchased inventory.
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28
The Company has partially financed its inventory and accounts
receivable with short-term borrowings. During 1993, 1992 and 1991, the
Company's peak levels of inventory and accounts receivable were $275.5 million,
$224.2 million and $152.5 million and peak outstanding short-term borrowings
pursuant to lines of credit were $20.0 million, $29.4 million and $30.4 million
respectively. Average amounts of outstanding short-term borrowings for the
respective years were $5.6 million, $4.1 million and $21.0 million.
The Company has historically financed its working capital requirements
through a combination of proceeds of public offerings, internally generated
cash, short-term borrowings under bank lines of credit and a senior note
placement. The Company finalized in August 1992 a $50 million, two year
unsecured revolving bank credit facility. The bank facility, which was due to
expire in August 1994 and bears interest at the bank's prime rate or two
percent over LIBOR (London Interbank Offered credit) or the applicable
secondary CD rate, was renewed for $25 million and extended to February 1, 1995.
In addition, the Company is seeking renewal of the remaining $25 million. In
October 1992, the Company finalized a $35 million unsecured private placement
of senior notes with an interest rate of 6.99%. Semi-annual interest payments
on the notes began in April 1993 and annual principal payments of $6.5 million
commence in April 1996 with a final $9.0 million principal payment due in
October 1999. Each of the agreements requires the Company to maintain various
financial ratios and covenants and prohibit dividend payments. The Company has
obtained waivers and amendments for less restrictive levels related to
covenants with which the Company did not comply as a result of the 1993 loss.
See Note F to the Financial Statements.
The Company's net capital expenditures were $12.0 million in 1993 and
$6.7 million in 1992. The increase was primarily attributable to costs
associated with the new distribution facility and fixturization costs
associated with Sam's retail locations. Funds will continue to be required to
expand management systems, controls and physical facilities. Funding is
anticipated to come from operations, bank lines of credit or the capital
markets. In addition, the Company believes its asset management program,
which is primarily focused on reducing the working capital requirements of the
Company by eliminating excess inventory, will represent a significant source
of funds in 1994.
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29
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. During 1993, gold prices increased $65.60
per ounce, or 20.0% percent, and in 1992 they had decreased by $24.00 per
ounce, or 6.8%. 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. In general
the Company has historically sought to protect its gold inventory against gold
price fluctuations through its hedging transactions. Hedging is not available
with respect to possible fluctuations in the price of precious and
semi-precious gemstones, watches or other accessories. The Company is in the
process of evaluating the need for continued hedging due to its transition from
being primarily a wholesale operation to being primarily a retail operation.
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.
CHANGE IN FISCAL YEAR
In February 1994, the Company determined to change its fiscal year from
December 31 to a retail 52/53 week fiscal year ending on the last Sunday of
each January. The first such fiscal year began on January 31, 1994 and will
end on January 29, 1995. The period from January 1, 1994 to January 30, 1994
will be reported on Form 10-Q for the first quarter ending May 1, 1994 of the
new fiscal year.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX Page No.
Independent Auditors' Report .......................................... 31
Consolidated Balance Sheets as of
December 31, 1993 and 1992 ....................................... 32
Consolidated Statements of Operations for
Each of the Three Years in the
Period Ended December 31, 1993 ................................... 33
Consolidated Statements of Stockholders'
Equity for Each of the Three
Years in the Period Ended
December 31, 1993 ................................................ 34
Consolidated Statements of Cash Flows
for Each of the Three Years
in the Period Ended December 31, 1993 ............................ 35
Notes to Consolidated Financial Statements............................. 37
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31
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 December 31, 1993
and 1992, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1993. Our audits also included the financial statement schedules listed at
Item 14(a)(2). These financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules 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 financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1993 and
1992, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
Certified Public Accountants
Fort Lauderdale, Florida
March 31, 1994
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32
JAN BELL MARKETING, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS SHOWN IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
-------------------------------------
1993 1992
-------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 30,178 $ 49,634
Accounts receivable (net of
allowance for doubtful
accounts and sales returns
of $3,428 and $5,005) 22,064 66,794
Inventories (Notes C and D) 177,538 106,739
Refundable income taxes (Note H) 15,075 5,387
Prepaid expenses 1,103 1,344
Other current assets 1,914 2,082
-------- --------
Total current assets 247,872 231,980
Property, net (Note E) 28,846 20,804
Excess of cost over fair
value of net assets acquired 27,850 28,979
(Notes C and G)
Customer deposit (Note B) --- 15,822
Other assets (Note B) 7,686 4,373
-------- --------
$312,254 $301,958
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 29,339 $ 25,851
Accrued expenses 8,734 4,122
Accrued lease payment 1,877 1,882
Liability for inventory
repurchased (Note B) 33,426 ---
Deferred income taxes (Note H) --- 2,082
-------- --------
Total current liabilities 73,376 33,937
-------- --------
Long-term debt (Note F) 33,496 33,047
-------- --------
Commitments and contingencies (Note I)
Stockholders' Equity (Notes I and K)
Common stock, $.0001 par value,
50,000,000 shares authorized,
25,851,738 and 26,553,664
shares issued 3 3
Additional paid-in capital 180,367 182,158
Retained earnings (Note F) 28,871 64,595
-------- --------
209,241 246,756
Treasury stock, at cost
(1,120,700 shares) --- (8,468)
Deferred compensation (3,859) (3,314)
-------- --------
205,382 234,974
-------- --------
$312,254 $301,958
======== ========
See notes to consolidated financial statements.
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JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS SHOWN IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Years ended December 31,
-------------------------------------------------
1993 1992 1991
-------------------------------------------------
Net sales $275,177 $333,521 $224,261
Less:
Effect of Sam's
agreement (Note B) 99,718 --- ---
-------- -------- --------
175,459 333,521 224,261
-------- -------- --------
Cost of sales 245,310 276,872 184,447
Less:
Effect of Sam's
agreement (Note B) 79,687 --- ---
-------- -------- --------
165,623 276,872 184,447
-------- -------- --------
Gross profit 9,836 56,649 39,814
Interest and other
income 635 550 3,033
-------- -------- --------
10,471 57,199 42,847
Selling, general and
administrative
expenses 44,492 34,826 23,685
Other costs (Notes B and J) 10,217 --- 6,440
Interest expense 3,195 916 2,419
-------- -------- --------
Income (loss) before income
taxes and minority interest (47,433) 21,457 10,303
Income tax provision
(benefit) (Note H) (11,709) 6,682 2,674
Minority interest -- --- 684
-------- -------- --------
Net income (loss) $(35,724) $ 14,775 $ 6,945
======== ======== ========
Net income (loss) per
common share $ (1.40) $ .59 $ .31
======== ======== ========
Weighted average number
of common shares 25,484,544 25,164,798 22,624,956
========== ========== ==========
See notes to consolidated financial statements.
33
34
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND SHARE DATA)
Common Total
Shares Common Paid-in Retained Treasury Deferred Stockholders'
Issued Stock Capital Earnings Stock Compensation Equity
----------- ------ ----------- ----------- -------- ------------ -------------
Balance at December 31, 1990 22,346,131 $ 2 $138,531 $ 42,875 $(8,468) $172,940
Purchase plan exercise 4,142 25 25
Exercise of options 126,819 1,051 1,051
Issuance of common stock 2,646,688 1 26,246 26,247
Stock bonus plan issuance 325,000 4,392 $(4,392) ---
Tax benefit on exercise of
stock options 243 243
Amortization of deferred
compensation 797 797
Net income 6,945 6,945
---------- ----- -------- -------- -------- ------- --------
Balance at December 31, 1991 25,448,780 3 170,488 49,820 (8,468) (3,595) 208,248
Purchase plan exercise 12,101 133 133
Exercise of options 844,178 8,132 8,132
Issuance of common stock 63,688 550 550
Exercise of warrants 141,717
Stock bonus plan issuance 43,200 584 (584) ---
Tax benefit on exercise of
stock options 2,271 2,271
Amortization of deferred
compensation 865 865
Net income 14,775 14,775
---------- ----- -------- -------- -------- ------- --------
Balance at December 31, 1992 26,553,664 3 182,158 64,595 (8,468) (3,314) 234,974
Purchase plan exercise 12,236 112 112
Exercise of options 37,580 323 323
Issuance of common stock 63,688 550 550
Stock bonus plan issuance 331,500 5,925 (5,925)
Repurchase of common stock (258) (258)
Retirement of treasury stock (1,149,500) (8,726) 8,726
401(k) Plan contribution 2,570 25 25
Amortization of deferred
compensation 5,380 5,380
Net loss (35,724) (35,724)
---------- ----- -------- --------- -------- ------- --------
Balance at December 31, 1993 25,851,738 $ 3 $180,367 $ 28,871 $ - 0 - $(3,859) $205,382
========== ===== ======== ======== ======== ======= ========
See notes to consolidated financial statements.
34
35
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS SHOWN IN THOUSANDS)
Years ended December 31,
----------------------------------------------------
1993 1992 1991
----------------------------------------------------
Cash flows from operating
activities:
Cash received from customers $319,907 $ 303,951 $222,541
Cash paid to suppliers and
employees (324,893) (296,273) (210,699)
Interest and other income
received 635 411 2,313
Interest paid (3,195) ( 348) (1,982)
Income tax refunds received 4,297 --- ---
Income taxes paid (3,798) (9,109) (3,333)
Cash paid for
customer deposit --- --- (17,822)
-------- --------- --------
Net cash (used in)
operating
activities (7,047) (1,368) (8,982)
-------- --------- --------
Cash flows from investing
activities:
Capital
expenditures -- net (12,611) (6,693) (4,388)
Acquisition costs --- --- (600)
Increase in other assets --- (966) (615)
-------- --------- --------
Net cash (used in) investing
activities (12,611) (7,659) (5,603)
-------- --------- --------
Cash flows from financing
activities:
Net (repayments) borrowings
under lines of credit --- --- (18,001)
Proceeds from long-term
debt financing --- 35,000 ---
Debt financing costs --- (1,953) ---
Proceeds from exercise
of options 323 8,132 1,294
Proceeds from issuance of
common stock 25 --- ---
Stock purchase plan payments
withheld 112 104 61
Distribution of minority
interest --- --- (2,569)
Purchase of treasury stock (258) --- ---
-------- -------- --------
Net cash provided by
(used in) financing
activities 202 41,283 (19,215)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents (19,456) 32,256 (33,800)
Cash and cash equivalents at
beginning of year 49,634 17,378 51,178
-------- -------- --------
Cash and cash equivalents at
end of year $ 30,178 $ 49,634 $ 17,378
======== ======== ========
35
36
JAN BELL MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS SHOWN IN THOUSANDS)
(CONTINUED)
Years ended December 31,
--------------------------------------------------
1993 1992 1991
---------------------------------------------------
Reconciliation of net income (loss)
to net cash (used in)
operating activities:
Net income (loss) $(35,724) $14,775 $ 6,945
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 6,761 5,076 3,893
Minority interest in
consolidated joint venture --- --- 685
Stock compensation expense 5,929 1,415 1,346
Debt financing costs 449 --- ---
(Increase) decrease
in assets:
Accounts receivable
(net) 44,730 (29,571) (1,721)
Inventories (70,799) (4,348) (8,922)
Refundable income taxes (9,688) --- ---
Prepaid expenses 241 (536) 937
Other assets (4,207) (1,559) 1,206
Customer deposit 15,822 --- (17,822)
Increase (decrease) in
liabilities:
Accounts payable 3,488 14,357 3,971
Accrued expenses 4,607 1,268 2,683
Liability for inventory
repurchased 33,426 --- ---
Deferred income taxes (2,082) (2,245) (2,183)
-------- ------- ------
Net cash (used in)
operating activities $ (7,047) $(1,368) $ (8,982)
======== ======= ========
See notes to consolidated financial statements.
36
37
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
A. The Company:
The Company is principally engaged in the sale of jewelry, watches and
other consumer products through leased departments in wholesale clubs and
through its own wholesale operations.
B. Agreement with Sam's Wholesale Club:
In May 1993, the Company entered into an agreement (the "Agreement") to
operate an exclusive leased department at all existing and future Sam's
Wholesale Club ("Sam's") locations through February 1, 1999. Under the terms of
the Agreement, the Company repurchased Sam's existing inventory which included
goods Sam's had previously purchased from the Company as well as from other
vendors. As consideration for entering into the Agreement, the Company paid to
Sam's a one-time fee of $7.0 million, which is included in Other Assets in 1993
and is being amortized over the term of the Agreement. The unamortized amount
as of December 31, 1993 was approximately $6.7 million. The Company will pay
Sam's a tenancy fee of 9 1/4% of future net sales.
As a result of this new Agreement with Sam's, the Company recorded a
sales reversal of $99.7 million for the amount of inventory previously sold by
Jan Bell to Sam's which became subject to repurchase. In addition, cost of
sales was reduced by $79.7 million resulting in a $20.0 million one-time charge
to pre-tax earnings. The Company had originally estimated the amount of
inventory subject to be repurchase at $77.1 million and the related cost of
sales at $59.0 million which resulted in an $18.1 million one-time charge to
pre-tax earnings which was recorded in the first quarter of 1993. In
connection with the transition to become a fully-integrated retailer, Jan Bell
also incurred approximately $6.0 million (included in "Other Costs"), including
additional one-time charges for costs such as hiring and training personnel,
systems implementations, other activities related to commencing operations
under the new Agreement, and
37
38
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
the transition to primarily retail operations, and a valuation adjustment for
certain inventory acquired which Sam's had purchased from other vendors. As of
year end, the Company owed Sam's approximately $42.5 million, of which
approximately $33.4 million is for inventory repurchased from Sam's and
approximately $9.1 million which is included in accounts payable, for certain
third party merchandise acquired by the Company from Sam's. Final payment of
this amount is due in May 1994.
A refundable non-interest bearing cash deposit of $17.8 million was
paid with Sam's in 1991 in consideration for the Company becoming the primary
jewelry vendor over the term of the agreement and any renewals. In July 1992,
the Company and Sam's agreed to reduce the amount of the deposit to be refunded
to $15.8 million. The $2.0 million reduction represented a payment for the
extension of the Agreement for a three year period from February 1, 1994 to
February 1, 1997. The aggregate $17.8 million was applied towards the $7.0
million one-time fee and the repurchased inventory.
During 1991, the Company entered into an agreement with Pace Membership
Warehouse ("Pace") to operate leased jewelry departments at all present and
future Pace locations and to merchandise fine jewelry, watches, fragrances,
fine writing instruments and sunglasses on an exclusive basis until January
1997. The Pace agreement required payments based upon a percentage of monthly
net sales subject to an adjustment based on Pace total merchandise sales
growth.
In November 1993, Wal-Mart Stores, Inc. announced that it would
purchase most of the Pace locations and operate them as Sam's. The Pace
locations not being acquired would be closed. At that time, the Company was
operating leased jewelry departments at all 117 Pace locations, 30 of which
were closed and 87 were converted to Sam's during January 1994. The Company is
operating leased jewelry departments in the converted Pace locations in
accordance with the Sam's Agreement through February 1, 1999. Included in
selling, general and administrative expenses are $648,000 in direct costs
associated with the Pace location closings.
Net sales to certain customer relationships which exceed ten percent of
the Company's net sales for the respective periods were as follows:
Customer relationship (in thousands)
--------------------------------------
Sam's Pace
Years ended December 31,
1993 $169,686 $64,018
1992 200,067 69,498
1991 116,076 39,148
C. Summary of Significant Accounting Policies:
(1) Principles of Consolidation -- The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in the consolidation.
(2) Sales of Consignment Merchandise -- Income is recognized on the
sale of consignment merchandise at such time as the merchandise is sold by the
consignee.
38
39
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
(3) Allowance for Sales Returns -- The Company generally gives its
customers the right to return merchandise purchased by them and records an
allowance for the amount of gross profit on estimated returns.
(4) Hedging Activities -- The Company uses gold commodities futures
contracts to hedge gold inventories. Commodity futures contracts are contracts
for delayed delivery of commodities in which the seller agrees to make and the
purchaser agrees to take delivery at a specified future date of a specified
commodity, at a specified price. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
commodity values and interest rates. Gains and losses on futures used to hedge
gold inventories valued at cost are deferred and included in the determination
of income upon disposition of such inventories. Gains and losses on futures
contracts used to hedge gold inventories valued at market are included in the
determination of income currently. At December 31, 1993, the Company had
futures contracts maturing at various dates through December 1994 to purchase
277,000 ounces and sell 308,400 ounces of gold at various specified prices for
an aggregate of $95.2 million and $120.6 million, respectively. U.S. Treasury
securities with a carrying value of $500,000 and $350,000 at December 31, 1993
and 1992, respectively, have been pledged to cover margin requirements under
futures contracts. The Company is in the process of evaluating the need for
continued hedging activities due to its transition from being primarily a
wholesale operation to being primarily a retail operation.
(5) Inventories -- Inventories of precious and semi-precious stones
and gem jewelry-related merchandise (and associated gold) watches, and other
consumer products are valued at the lower of cost (first-in, first-out method)
or market.
Inventories of gold jewelry-related merchandise, exclusive of the gold
component of precious and semi-precious gem jewelry related inventories, are
valued principally at market, which includes adjustments for unrealized gains
or losses.
Costs of activities related to acquiring, receiving, preparing and
distributing inventory to the point of being ready for sale are included in
inventory.
(6) Property -- Property is stated at cost and is depreciated using
the straight-line method over the estimated useful lives of the respective
assets.
39
40
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
(7) Income Taxes -- The Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS No. 109")
effective January 1, 1993. This Statement supersedes SFAS No. 96, "Accounting
for Income Taxes," which was adopted by the Company in 1988. During 1993, the
Company provided deferred taxes in accordance with SFAS No. 109 for the future
effects on income taxes of temporary differences between financial reporting
and tax bases of assets and liabilities.
(8) Net Income (Loss) Per Common Share -- Net income (loss) per common
share is based upon the weighted average number of shares of common stock
outstanding in each period, adjusted for the dilutive effects, if any, of
options granted under the Company's option plans.
(9) Cash and Cash Equivalents -- For the purpose of the statements of
cash flows, the Company considers all highly-liquid investments purchased with
maturities of three months or less to be cash equivalents.
(10) Cost in Excess of Fair Value of Assets Acquired -- Cost in excess
of fair value of assets acquired, which arises from acquisitions, is amortized
on a straight-line basis over 20 to 30 years. Accumulated amortization of these
assets at December 31, 1993 and 1992 was approximately $2.7 million and $1.6
million, respectively. Amortization expense for 1993, 1992 and 1991 was
approximately $1.1 million, $1.1 million and $0.5 million, respectively.
(11) Reclassifications - Certain reclassifications have been made to
the 1992 and 1991 consolidated financial statements to conform to the 1993
presentation.
D. Inventories:
Inventories are summarized as follows:
December 31,
---------------------------
1993 1992
---------------------------
(amounts shown in thousands)
Precious and semi-precious jewelry-
related merchandise (and associated
gold):
Raw materials $ 10,885 $ 12,103
Finished goods 57,158 33,209
Gold jewelry-related merchandise:
Raw materials 13 492
Finished goods 26,794 12,592
Watches 62,688 41,387
Other consumer products 20,000 6,956
-------- -------
$177,538 $106,739
======== ========
40
41
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
E. Property:
The components of property are as follows:
December 31,
----------------------------
1993 1992
----------------------------
(amounts shown in thousands)
Land $ 4,171 $ 4,171
Buildings 4,384 4,908
Furniture and fixtures 26,649 19,299
Leasehold improvements 514 187
Automobiles and trucks 892 865
-------- -------
36,610 29,430
Less accumulated depreciation (12,055) (8,626)
-------- --------
24,555 20,804
Construction in progress-distribution center 4,291 ---
------- --------
$ 28,846 $ 20,804
======== ========
Depreciation expense for the years ended December 31, 1993, 1992 and
1991 was approximately $4.6 million, $3.6 million and $2.8 million,
respectively.
F. Financing Arrangements
The Company finalized in August 1992 a $50 million two year unsecured
revolving bank credit facility. The bank credit facility, which was due to
expire in August 1994 and bears interest at the bank's prime rate or two
percent over LIBOR (London Interbank Offered Rate) or the applicable secondary
CD rate, was renewed for $25 million and extended to February 1, 1995. In
addition, the Company is seeking renewal of the remaining $25 million. In
October 1992, the Company finalized a $35 million unsecured private placement
of senior notes with an interest rate of 6.99%. Semi-annual interest payments
on the notes began in April 1993 and annual principal payments of $6.5 million
commence in April 1996 with a final $9.0 million principal payment due in
October 1999. Each of these financing agreements require the Company to
maintain various financial ratios and covenants and with respect to the bank
credit facility, prohibit dividend payments. As of year-end, the Company had
violated certain covenants in the foregoing arrangements with respect to fixed
charge coverage. The Company has obtained waivers and amendments with
respect to such violations and amendments to make such violated covenants less
restrictive for the next fiscal year.
41
42
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
In connection with issuing the senior notes, the Company entered into
agreements to protect against interest rate increases while preparing the
documentation and completing other activities necessary to obtain fixed
interest rate commitments from the purchasers of the senior notes. The impact
of these arrangements resulting from decreases in interest rates has been
deferred as debt financing costs and are amortized using the interest method
over the term of the senior notes.
Information concerning the Company's short-term borrowings follows:
Year ended December 31,
---------------------------------------------
1993 1992 1991
----------------------------------------------
(amounts shown in thousands)
Maximum borrowings outstanding
during the period........... $19,950 $29,400 $30,431
Average outstanding balance
during the period........... 5,607 4,092 20,969
Weighted average interest rate
for the period.............. 6.00% 6.00% 8.44%
G. Joint Venture and Acquisition:
In May 1990, the Company and a watch distributor formed a joint venture
partnership, Big Ben '90. The Company contributed $10.0 million to the
partnership's capital and received a 50.1% controlling interest and,
accordingly, the accounts of the partnership have been consolidated in the
accompanying financial statements.
During September 1991, the Company acquired the remaining minority
interest, in exchange for 2,583,000 newly issued shares of the Company's common
stock. The acquisition was accounted for under the purchase method of
accounting. Proforma consolidated net income for 1991, assuming the
acquisition of the minority interest had occurred as of January 1, 1991, is
$6.7 million ($.27 per share).
H. Income Taxes:
Effective January 1, 1993, the Company adopted SFAS No. 109. SFAS No.
109 supersedes SFAS No. 96, "Accounting for Income Taxes," which the Company
previously used. There was no material effect of adopting SFAS No. 109 on the
Company's financial statements.
42
43
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
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 amounts used for income
tax purposes, and (b) operating loss and tax credit carryforwards. The tax
effects of significant items composing the Company's net deferred tax liability
as of January 1, and December 31, 1993 are as follows:
December 31, 1993 January 1, 1993
----------------- ---------------
(amounts shown in thousands)
Deferred Tax Liabilities:
Difference between book
and tax basis of property $ 331 $ 401
Unrealized gains on hedging,
net 5,483 3,415
Other 34 173
------ ------
5,848 3,989
------ ------
Deferred Tax Assets:
Sales returns and doubtful
accounts allowances not
currently deductible 1,942 1,882
Inventory reserves not
currently deductible 579 ---
Federal net operating loss and
tax credit carryforward 5,084 ---
State net operating loss
carryforward 3,376 ---
Charitable contribution
carryforward 43 ---
Other 1,660 25
------ -------
12,684 1,907
------ -------
Valuation allowance 6,836 ---
------- -------
Net Deferred Tax Liability $ --- $ 2,082
======= =======
43
44
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
The components of income (loss) before taxes are as follows:
Years ended December 31,
-----------------------
1993 1992 1991
---- ---- ----
(amounts shown in thousands)
Domestic $(51,665) $14,132 $ 7,692
Foreign 4,232 7,325 2,611
------- ------ ------
$(47,433) $21,457 $10,303
======= ====== ======
The current and deferred income tax components of the provision
(benefit) for income taxes consist of the following:
Years ended December 31,
-----------------------
1993 1992 1991
---- ---- ----
(amounts shown in thousands)
Current:
Federal $(10,170) $ 6,887 $ 3,491
State --- 1,165 601
Foreign 543 875 75
------- ------ ------
(9,627) 8,927 4,167
------- ------ ------
Deferred:
Federal (1,778) (1,917) (1,293)
State (304) (328) (200)
------- ------ ------
(2,082) (2,245) (1,493)
------- ------ ------
$(11,709) $ 6,682 $ 2,674
======== ======= =======
The provision (benefit) for income taxes varies from the amount computed
by applying the statutory rate for reasons summarized below:
Years ended December 31,
-----------------------
1993 1992 1991
---- ---- ----
Statutory rate 35.0% 34.0% 34.0%
Benefit of graduated rates (1.0) -- --
State taxes (net of federal
benefit) .4 2.6 2.6
Tax effect of income from
foreign subsidiaries 1.9 (7.5) (8.6)
Tax effect of minority
interest in consolidated
joint return -- -- (2.3)
Valuation allowance (14.4) -- --
Other 2.8 2.0 .2
---- ---- ----
24.7% 31.1% 25.9%
==== ==== ====
44
45
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
The Company will have a federal net operating loss carryforward, after
carryback, of approximately $12.6 million and a state net operating loss
carryforward of approximately $48.2 million. The Federal net operating loss
carryforward expires in 2008 and the state net operating loss carry forward
expires beginning in 1998 through 2008. The Company also will have an
alternative minimum tax credit carryforward of $794,000 to offset future
federal income taxes.
At the time the Company purchased Exclusive Diamonds International,
Limited ("EDI") in August of 1990, EDI applied to and received from the Israeli
government under the Capital Investments Law of 1959 "approved enterprise"
status, which results in reduced tax rates given to foreign owned
corporations to stimulate the export of Israeli manufactured products. The
benefit to the Company amounted to approximately $1.2 million or $0.05 per
share, $2.0 million or $0.08 per share, and $1.1 million or $0.05 per share in
1993, 1992, and 1991, respectively. The "approved enterprise" tax benefit
is available to the Company until the year 2000.
The Company has not provided federal and state taxes on approximately
$12.4 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 December 31, 1993 approximates $4.6 million exclusive of any
benefit from utilization of foreign tax credits. At December 31, 1993, the
Company has approximately $1.3 million of unrecognized foreign tax credits
which, depending on circumstances, may be available to reduce federal income
taxes on the unremitted earnings of the foreign subsidiaries in the event such
earnings are repatriated.
I. Commitments and Contingencies:
(1) The Company leases approximately 84,000 square feet of office and
warehouse space in various locations. Such leases expire between March 1994
and June 1997. The aggregate commitment under such leases was $1.5 million at
December 31, 1993.
(2) At December 31, 1993 commitments under letters of credit amounted
to $9.0 million.
(3) The Company has entered into employment agreements with certain
employees providing for minimum annual compensation of $2.8 million in the
aggregate between 1994 through 1997. Five of these agreements provide for
additional annual compensation aggregating three and one-half percent of income
before income taxes and after minority interest.
45
46
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
(4) During 1994, under various licensing and agency agreements, the
Company is obligated to pay minimum amounts approximating $2.7 million in the
aggregate between 1994 through 1998.
(5) The Company has issued warrants to purchase 700,000 shares of
common stock. The warrants expire December 16, 1998 and have an exercise
price of $24.70.
(6) In connection with the acquisition of EDI, the Company entered
into non-compete agreements with the prior owners which provide for the
issuance of an aggregate of 317,881 shares of the Company's common stock over
five years commencing August 1991. During 1991, 1992 and 1993, 63,688 shares
valued at $550,000 were issued each year.
J. Legal Proceedings and Other Costs:
The Company is from time to time involved in litigation incident to the
conduct of its business. While it is not possible to predict with certainty
the outcome of such matters, management believes that all litigation currently
pending to which the Company is a party will not have a material adverse
effect on the Company's financial position and results of operations.
Other costs in 1991 include expenses of $2.0 million incurred as a
result of the terminated acquisition of Michael Anthony Jewelers, Inc. in
August of that year. Such costs include legal, accounting, investment banking
and certain compensation related expenses. Additionally, $4.4 million in other
costs reflects the expense for the settlement of the class action litigation
which includes the amounts of cash paid, legal and other professional expenses,
estimated value of the warrants issued, and certain costs which resulted from
terminated customer relationships that were involved in the litigation.
Included in Other Costs in 1993 are the $6.0 million in charges
discussed in Note B related to the Sam's agreement and retail transition.
Also included are compensation costs of $4.2 million in connection with the
departure of Mr. Mills as Chairman of the Board of Directors on March 29, 1994,
consisting primarily of the acceleration of vesting of previously granted stock
bonus awards and amounts due under his employment contract.
K. Stock Benefit Plans:
The Company maintains various stock option, bonus and purchase plans
for the benefit of its employees, officers, directors and certain third
parties. A summary of the activity in the stock option plans is as follows:
46
47
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
STOCK
OPTION PLANS
SHARES PRICE
--------------------------------
Outstanding, December 31, 1990 1,057,500 $ 7.88-14.09
Granted 484,500 $ 9.63-14.50
Exercised ( 126,819) $ 7.88-14.09
Expired/cancelled --- ---
--------------------------------
Outstanding, December 31, 1991 1,415,181 $ 7.88-14.50
Granted 537,500 $13.50-14.50
Exercised ( 844,178) $ 7.88-14.09
Expired/cancelled ( 62,123) ---
--------------------------------
Outstanding, December 31, 1992 1,046,380 $ 7.88-14.50
Granted 954,675 $ 9.00-19.63
Exercised (37,580) $ 7.88-13.25
Expired/cancelled (92,286) $ 7.88-13.50
--------------------------------
Outstanding, December 31, 1993 1,871,189 $ 7.88-19.63
================================
Shares reserved under
the Plans 3,497,609
=========
As of December 31, 1993, options to purchase 596,743 shares were
exercisable.
Bonus shares have been granted to various executive officers.
Deferred compensation relating to these plans is included in stockholders'
equity and is being amortized to expense over the term of the agreements.
A total of 562,500 shares are reserved for issuance under the Employee
Stock Purchase Plan of which 12,236, 12,101, and 4,142 shares were issued
during the years ended December 31, 1993, 1992 and 1991, respectively.
L. 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 necessarily required in interpreting market data to develop the
estimates of fair value.
47
48
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that would be realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
(1) Cash and Cash Equivalents, Accounts Receivable, Accounts Payable,
Accrued Expenses, and Liability for Inventory Repurchased -- The carrying
amount of these items are a reasonable estimate of their fair value.
(2) Long Term Debt -- The present value of the future principal and
interest payments on the senior notes issued in October, 1992 is used to
estimate fair value for this debt which is not quoted on an exchange. The
notes have a net book value of $33.5 million and are estimated to have a fair
value at December 31, 1993 and 1992 of approximately $36.2 million and $37.0
million, respectively.
(3) Gold Futures Contracts -- The fair value of gold futures contracts
is the amount at which they could be settled, based on market prices on
commodity exchanges. At December 31, 1993 and 1992 open gold futures
contracts are included in the financial statements at their fair value which
approximates $13.2 million and $9.9 million, respectively.
(4) Letters of Credit -- Letters of credit principally support
corporate obligations. At December 31, 1993, $4.1 million of commercial
letters of credit expire within a 30 day period, and $4.9 million of standby
letters of credit expire within a 120 day period. At December 31, 1992, $2.0
million of commercial letters of credit expired within a 30 day period, and
$1.1 million of standby letters of credit expired within a 334 day period.
The estimated fair value, which is estimated using fees currently charged
for similar arrangements, is insignificant.
48
49
JAN BELL MARKETING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
M. Selected Quarterly Financial Data (unaudited):
Quarters Ended
----------------------------------------------------------------
March 31, June 30, September 30, December 31,
------------- ---------- --------------- --------------
(In thousands, except per share data)
1993
Net Sales...................... $ 45,571 $ 49,845 $ 42,601 $ 137,160
Less: Effect of Sam's
agreement (1)................. 77,052 --- --- 22,666
------- ------- ------- -------
(31,481) 49,845 42,601 114,494
------- ------- ------- -------
Cost of sales.................. 36,934 41,319 36,547 130,510
Less: Effect of Sam's
agreement (1)................. 58,945 --- --- 20,742
------- ------- ------- -------
(22,011) 41,319 36,547 109,768
------- ------- ------- -------
Gross Profit (loss)............ ( 9,470) 8,526 6,054 4,726
Net Income (loss) (2).......... (10,154) 181 (2,887) (22,864)
Net income (loss) per Common
Share......................... ( .40) .01 ( .11) ( .90)
1992
Net Sales...................... $ 40,010 $ 60,736 $ 80,014 $ 152,761
Gross Profit................... 7,473 11,417 15,529 22,230
Net Income..................... 1,399 2,926 4,665 5,785
Income per Common Share........ .06 .12 .19 .23
(1) As a result of the new agreement with Sam's, the Company recorded a sales
reversal of $99.7 million for the amount of inventory previously sold by
Jan Bell to Sam's which became subject to repurchase. In addition, cost
of sales was reduced by $79.7 million resulting in a $20.0 million
one-time charge to pre-tax earnings. In the first quarter of 1993, the
Company had estimated the amount of inventory subject to repurchase at
$77.1 million and the related cost of sales at $59.0 million which
resulted in an $18.1 million one-time charge to pre-tax earnings.
(2) Pre-tax income in the fourth quarter of 1993 was decreased by (a)
Other Costs consisting of $5.2 million of one-time charges related to the
Sam's agreement and other retail transition costs, and compensation
expense of $4.2 million related to the departure of the Company's
Chairman of the Board and (b) adjustments for slow-moving and damaged
inventory and shrinkage of approximately $8.5 million.
49
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Form 8-K filed within 24 months prior to the date of
the most recent financial statements reporting a change of accountants or
reporting disagreements on any matter of accounting principle or financial
statement disclosure.
PART III
ITEMS 10 THROUGH 13.
Within 120 days after the close of the fiscal year, the Company intends
to file with the Securities and Exchange Commission a definitive proxy
statement pursuant to Regulation 14A which will involve the election of
directors. The answers to Items 10 through 13 are incorporated by reference
pursuant to General Instruction G(3); provided, however, the Compensation
Committee Report, the Performance Graphs, and all other items of such report
that are not required to be incorporated are not incorporated by reference into
this Form 10-K or any other filing with the Securities and Exchange Commission
by the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The following is a list of the financial
statements of Jan Bell Marketing, Inc. included in Item 8 of Part II.
Independent Auditors' Report.
Consolidated Balance Sheets - December 31, 1993 and 1992.
Consolidated Statements of Operations - Years Ended December 31, 1993, 1992 and
1991.
Consolidated Statements of Stockholders' Equity - Years Ended December 31,
1993, 1992 and 1991.
Consolidated Statements of Cash Flows - Years Ended December 31, 1993, 1992 and
1991.
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules. The following is a list of financial
statement schedules filed as part of this annual report on Form 10-K: Schedule
II and Schedule VIII. 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.
50
51
(a)(3) The following list of schedules and exhibits are incorporated
by reference as indicated in this Form 10-K:
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
2.1 - Acquisition of Joint Venture Interest. Incorporated by reference from Company's Form 8-K filed in October
1991.
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 8-K filed in July 1993.
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. 1990 Stock Bonus Plan. Incorporated by reference from Company's Form 10-K filed
in March 1991.
4.5 - Jan Bell Marketing, Inc. 1991 Stock Bonus Plan. Incorporated by reference from Company's Definitive Proxy
Statement filed in April 1991.
4.6 - Jan Bell Marketing, Inc. 1991 Stock Option Plan. Incorporated by reference from Company's Definitive Proxy
Statement filed in April 1993.
10.1 - Employment Agreement dated August 1, 1991 between Alan Lipton and the Company. Incorporated by reference
from Company's Form 10-K filed in March 1992.
10.2 - Amended Employment Agreement dated August 1, 1991 between Lee Mills and the Company. Incorporated by
reference from Company's Form 10-K filed in March 1992.
10.3 - Employment Agreement dated May 1, 1991 between Richard Bowers and the Company. Incorporated by reference
from Company's Form 10-K filed in March 1992.
10.4 - Form of Indemnification Agreement. Incorporated by reference from Company's Form S-1 (No. 33-26947)
declared effective in February 1989.
10.5 - Credit Agreement dated August 6, 1992. Incorporated by reference from Company's Form 10-Q filed in
November 1992.
10.6 - Note Purchase Agreement dated October 8, 1992. Incorporated by reference from Company's Form 10-Q filed in
November 1992.
10.7 - Agreement with Sam's dated July 19, 1993. Incorporated by reference from Company's 8-K filed in July 1993.
10.8 - Employment Agreement dated May 4, 1993 between Frank S. Fuino, Jr. and the Company.
21.1 - Subsidiaries of Registrant:
Wholly-owned subsidiaries of the Company include JBM Venture Co., Inc., JBM Retail Company, Inc., Delaware
corporations, Exclusive Diamonds International, Ltd., an Israeli company, Jan Bell de Mexico, S.A. de C.V., and
Elico Mexicana, a Mexican corporation, and Jan Bell Marketing/Puerto Rico, Inc., a Puerto Rican corporation.
23.1 - Consent of Deloitte & Touche
(b) Reports on Form 8-K. The Company filed reports on Form 8-K during the fourth quarter ending December 31, 1993
as follows:
None
51
52
SCHEDULE II.
JAN BELL MARKETING, INC.
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND
UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER
THAN RELATED PARTIES
(Amounts shown in thousands)
Balance at Balance
Beginning Amounts at End
Name of Debtor of Period Additions Deductions Written Off of Period
- -------------- ---------- --------- ---------- ----------- ---------
Richard Bowers
Year Ended:
December 1991 -- $ 125 -- -- $ 125
December 1992 $ 125 -- $ 125 -- --
52
53
SCHEDULE VIII.
JAN BELL MARKETING, INC.
VALUATION AND QUALIFICATION ACCOUNTS
(Amounts shown in thousands)
Charged to
Beginning Costs and Ending
Description Balance Expenses Deductions Balance
- ----------- --------- ---------- ---------- -------
December 31, 1991
Allowance for Doubtful
Accounts $ 30 -- -- $ 30
Allowance for Sales
Returns $2,232 6,901 5,913 $3,220
December 31, 1992
Allowance for Doubtful
Accounts $ 30 200 -- $ 230
Allowance for Sales
Returns $3,220 7,145 5,590 $4,775
December 31, 1993
Allowance for Doubtful
Accounts $ 230 594 74 $ 750
Allowance for Sales
Returns $4,775 24,531 26,628 $2,678
Allowance for Damaged and
slow moving Inventory $ 300 1,700 -- $2,000
53
54
INDEX TO EXHIBITS
SEQUENTIALLY
NUMBERED
PAGE
------------
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
SEE PAGE 51 FOR A COMPLETE LIST OF EXHIBITS FILED,
INCLUDING EXHIBITS INCORPORATED BY REFERENCE FROM
PREVIOUSLY FILED DOCUMENTS.
10.8 - Employment Agreement dated May 4, 1993 between Frank S. Fuino, Jr. and the Company.
21.1 - Subsidiaries of Registrant:
Wholly-owned subsidiaries of the Company include JBM Venture Co., Inc., JBM Retail
Company, Inc., Delaware corporations, Exclusive Diamonds International, Ltd., an
Israeli company, Jan Bell de Mexico, S.A. de C.V., and Elico Mexicana, a Mexican
corporation, and Jan Bell Marketing/Puerto Rico, Inc., a Puerto Rican corporation.
23.1 - Consent of Deloitte & Touche
54
55
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: March 31, 1994 By: /s/ Alan Lipton
---------------------------------
Alan Lipton, 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/ Alan Lipton Chairman of the Board, 3/31//94
- ------------------------- President, and
Alan Lipton Chief Executive
Officer (Principal
Executive Officer)
/s/ Richard W. Bowers Senior Executive Vice 3/31/94
- ------------------------- President and Vice
Richard W. Bowers Chairman of the Board
/s/ Rosemary B. Trudeau Director, Senior Vice 3/31/94
- ------------------------- President-Investor
Rosemary B. Trudeau Relations
/s/ Eliahu Benshmuel Executive Vice President 3/31/94
- ------------------------- of Procurement and
Eliahu Benshmuel Director
/s/ Alan Gosule Director 3/31/94
- -------------------------
Alan Gosule
/s/ Richard S. Banick Director 3/31/94
- -------------------------
Richard S. Banick
/s/ Frank S. Fuino, Jr. Executive Vice President 3/31/94
- ------------------------- of Finance and Chief
Frank S. Fuino, Jr. Financial Officer