ITEM 1. BUSINESS
GENERAL -- RECENT DEVELOPMENTS
The information in this section pertains to the business of Mayor's Jewelers, Inc. and its subsidiaries ("Mayor's" or the "Company"). Fiscal 2001, throughout this document, refers to the Company's fiscal year ended February 2, 2002. Please refer to Item 7 regarding "Forward-Looking Statements."
On May 17, 2002, Mayor's executed an agreement in principle (the "Agreement") with Henry Birks & Sons Holdings Inc. of Canada. The Agreement provides for Birks to invest in or cause to be provided to Mayor's $11.5 million in cash. Upon completion of the transaction, Birks will receive Preferred Stock that will be convertible into Common Stock of Mayor's generally representing 58% of the Common Stock on a fully diluted basis. Prior to conversion, Birks will be able to elect a majority of the Board of Directors of Mayor's. Birks will also receive warrants to purchase an additional 10% of the Common Stock (on fully diluted basis) at an exercise price of $.50 per share.
Mayor's and Birks will enter into a series of agreements through which Birks will provide management, merchandising and sales support of Mayor's. Completion of the transaction is subject to certain conditions, including without limitation, execution of definitive agreements (which the parties hope to accomplish in June) and the affirmative vote of the stockholders of Mayor's at a meeting of stockholders to be held as soon as practicable. Pending the closing, Birks will provide consulting services to Mayor's pursuant to a consulting agreement.
MAYOR'S JEWELERS
Mayor's is an upscale retailer of fine quality guild jewelry, watches and giftware. Mayor's was founded in 1910 and as of February 2, 2002, operated 24 stores in Florida, four stores in Texas, two stores each in California and Illinois, 1 store each in Arizona, Michigan, Nevada and metropolitan Washington DC, and five stores in the Atlanta, Georgia metropolitan area. The Nevada store was closed in March, 2002. Mayor's has a long-established reputation in its principal market areas as a premier guild jeweler offering fine quality merchandise in an elegant environment conducive to the purchase of luxury items. As a guild jeweler, the Company does not sell "costume" or gold filled jewelry; rather, all of its jewelry products are constructed of 18 karat gold, platinum, or sterling silver, with or without precious gemstones, with significant emphasis on quality and craftsmanship. The average price per item of all merchandise sold in Fiscal 2001 was approximately $1,400, an amount the Company believes is substantially higher than that of any other publicly-traded domestic jewelry retailer.
Mayor's distinguishes itself from most of its competitors by offering a larger selection of distinctive and higher quality merchandise at many different price points, and by placing substantial emphasis on professionalism and training in its sales force. Mayor's buyers procure distinctive merchandise directly from manufacturers, diamond cutters and other suppliers throughout the world, enabling Mayor's to sell fine quality merchandise often not available from other jewelers in its markets. Management believes it has one of the best trained staff of sales professionals in the industry as a result of Mayor's emphasis on classroom training, in-store training and participation in industry-recognized educational programs.
The Company's principal offices are located at 14051 Northwest 14th Street, Sunrise, Florida 33323 (telephone: (954) 846-8000).
RESTRUCTURING PLAN
During Fiscal 1999, the Company embarked upon an expansion strategy that saw it open five stores in Fiscal 1999, ten stores in Fiscal 2000 and seven stores in Fiscal 2001. Merchandising and marketing issues, the poor economic climate combined with a capital intensive expansion strategy that the Company executed in Fiscal 1999 through Fiscal 2001 served to force the Company to retrench from that strategy as part of a restructuring plan recently adopted that the Company will seek to execute during Fiscal 2002 (the
"Restructuring Plan"). Included in the Restructuring Plan are the hiring of a new CEO with a strong background in merchandising, and initiatives to properly capitalize the Company, refinance its existing debt, close unprofitable stores and re-merchandise stores in its core Florida and Georgia markets. For a description of the Restructuring Plan, please refer to Item 7 regarding "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Restructuring Plan."
The object of the Restructuring Plan is to put the Company back on the path to future profitability. Accordingly, the Company believes short-term growth will come from rebuilding the Company's presence within existing markets where Mayor's has enjoyed strong brand recognition. Only upon successful implementation of this plan will management then revisit initiatives for future growth outside its existing core marketplace. In the event the Company is unable to successfully implement its Restructuring Plan, its business, financial condition, operating results and cash flows will be materially adversely affected. Furthermore, failure to obtain adequate funding will most probably prevent the Company from being able to pay its Fiscal 2002 debt service obligations and sustain the Company's working capital needs. In this event, there would be substantial doubt that the Company would be able to continue operations in the normal course of business at which time the Company would have to consider all of its alternatives. Please refer to Item 7 regarding "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Restructuring Plan" and "Forward-Looking Statements."
PRODUCTS
Mayor's offers a large selection of distinctive and high quality merchandise at many different price points. This merchandise includes designer jewelry, diamond fashion and precious gemstones, rings, wedding bands, earrings, bracelets, necklaces, pearls, charms, its own private label baby jewelry and Swiss timepieces that are often not available from other jewelers in its markets. All of Mayor's jewelry products are constructed of 18 karat gold, platinum, or sterling silver with significant emphasis on quality and craftsmanship. Mayor's carries a large selection of brand name watches, including watches made by Rolex, Cartier, Patek Philippe, Baume & Mercier, Omega, Charriol, Tag Heuer, Ebel, Breitling, Locman, Corum, Rado, Chopard, Jaeger le Coultre and Raymond Weil, designer jewelry including jewelry made by David Yurman, Jose Hess, Ponte Vecchio, Antonini and Peter Storm and a variety of high quality giftware, including giftware made by Correia, Mont Blanc and Moser.
During Fiscal 2001 net sales by product were as follows: watches -- 41%; diamond basic -- 22%; jewelry -- 25%; other -- 12%. The Rolex brand, which is included in watch sales, accounted for approximately 24% of total Mayor's net sales. While Mayor's has historically enjoyed excellent relationships with its vendors, certain of the Company's vendors have expressed some concerns about the Company's current financial condition. If such vendors terminated their relationships with the Company, it could have a material adverse effect on the Company's business, financial condition and operating results.
PURCHASING
The Mayor's staff of buyers procures distinctive merchandise directly from manufacturers, diamond cutters, and other suppliers worldwide enabling Mayor's to sell fine quality merchandise often not available from others jewelers in its markets. Buyers generally specialize in purchasing merchandise in categories such as diamonds, precious gemstones, pearls, watches, gold jewelry, and giftware. Buyers frequently visit both Mayor's and competitors' stores to compare value, selection, and service, as well as to observe client reaction to merchandise selection and determine future needs.
The Company's buying power has allowed Mayor's to pass its savings on to its clients through competitively-priced merchandise at Mayor's stores. While Mayor's does not emphasize discounting, it does actively compete with other jewelry retailers on the basis of price, particularly with regard to brand name items such as watches, with respect to which comparison shopping is common.
Watches
Mayor's purchases watches from a number of leading manufactures and suppliers. During Fiscal 2001, merchandise supplied by Rolex, the Company's largest supplier, accounted for approximately 24% of Mayor's net sales. Certain brand name watch manufacturers, including Rolex, have distribution agreements with the Company that among other matters provide for specific sales locations, yearly renewal terms, and early termination provisions at the manufacturer's discretion. Rolex has informed the Company that its account has been placed on "hold status." In the event that Rolex does not lift the hold and begin accepting new orders for watches or if Rolex terminates its distribution agreement with the Company, it would have a material adverse effect on the Company's business, financial condition and operating results. Moreover, certain of the Company's vendors have expressed some concerns about the Company's current financial condition. If such vendors terminated their relationships with the Company, it could also have a material adverse effect on the Company's business, financial condition and operating results. Please refer to Item 7 regarding "Forward-Looking Statements and Cautionary Factors That May Affect Future Results."
Diamond and Gemstones
During Fiscal 2001, revenues from sales of diamond jewelry and diamond jewelry with gemstones represented approximately 31% of Mayor's net sales. Whenever possible, Mayor's purchases unset diamonds and other precious gemstones directly from cutters in international markets, such as Antwerp, Bangkok and Tel Aviv, gold jewelry from Italy, and pearls from Japan. These diamonds and other gemstones are frequently furnished to independent goldsmiths for setting, polishing and finishing pursuant to Company instructions as well as to Mayor's facilities in order to deliver a finished product at the best possible value.
Other Products
In Fiscal 2001, Mayor's purchased jewelry and giftware for sale in Mayor's stores from over 500 suppliers. Many of these suppliers have long-standing relationships with Mayor's. However, certain of the Company's vendors have expressed some concerns about the Company's current financial condition. If such vendors terminated their relationships with the Company, it could also have a material adverse effect on the Company's business, financial condition and operating results. Please refer to Item 7 regarding "Forward-Looking Statements."
AVAILABILITY OF PRODUCTS
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.
CHANGING PRICES AND AVAILABILITY
Changes in foreign or domestic laws and policies affecting international trade may also have an adverse effect on the availability or price of the diamonds, gemstones and precious metals required by the Company. Other risks to the Company's supplies of merchandise include fluctuation in the price of precious gems and metals. Because substantially all of the Company's purchase transactions are denominated in U.S. dollars, the Company does not engage in any hedging activities in foreign currencies. The Company does not speculate in gems or precious metals or engage in any hedging activity with respect to possible fluctuations in the prices of these items, since historically the Company has been able to make compensatory adjustments in its retail prices as material fluctuations in the price of supplies have occurred. If such fluctuations should be unusually large, rapid or prolonged, there is no assurance that the necessary adjustments could be made quickly enough to prevent the Company from being adversely affected. Please refer to Item 7 regarding "Forward-Looking Statements."
SEASONALITY
The Company's jewelry business is highly seasonal, with the fourth quarter (which includes the Holiday shopping season) historically contributing significantly higher sales than any other quarter during the year. Approximately 36% of the Company's Fiscal 2001 net sales were made during the fourth quarter.
MANUFACTURING
In addition to Mayor's purchasing finished jewelry and the subcontracting of certain fabrication activities to others, Mayor's also has a jewelry design studio and manufacturing and repair facility located in its executive offices. In keeping with Mayor's identity as a full-service guild jeweler, this studio and workshop offers custom designed jewelry in response to customers' special requests and manufactures jewelry for retail sale when it is economical to do so. Mayor's also provides jewelry and watch refurbishment and repair services, which are performed in stores or at the Mayor's centralized repair facility. In addition to repair work, jewelers will perform other work, including ring sizing on new purchases and repairs covered under warranty.
RETAIL OPERATIONS, MERCHANDISING AND MARKETING
General
The Company distinguishes itself from most of its competitors by offering a selection of distinctive and higher quality merchandise at many different price points. Mayor's keeps substantially its entire inventory on display in its stores rather than at its distribution facility. Although each store stocks a representative array of jewelry, watches, giftware and other accessories, certain inventory is tailored to meet local tastes and historical merchandise sales patterns of the individual store.
The Company believes that the elegant ambiance of its stores and attractive merchandise displays play an important role in providing an atmosphere for encouraging sales. The Company pays careful attention to detail in the design and layout of each of its stores, particularly lighting, colors, choice of materials and placement of display cases. The Company also places substantial emphasis on its window displays as a means of attracting walk-in traffic and reinforcing its distinctive image. The Company's display department designs and creates window and store merchandise case displays for all stores. Window displays are frequently changed to provide variety and to reflect seasonal events such as Christmas, Valentine's Day and Mother's Day.
A manager, an assistant manager, four additional sales professionals, and an office manager along with an office associate staff a typical Mayor's store, which has a historical average of approximately $4 million in annual sales. Each store manager reports to one of three regional directors. The three regional directors report to the Vice President of Stores. Many Mayor's stores also have a watchmaker or jeweler on the premises to make repairs. Management believes that the availability of these craftsmen reinforces the Company's image as a full-service guild jeweler and encourages customers to patronize its stores.
Personnel and Training
Mayor's places substantial emphasis on the professionalism of its sales force to maintain its position as a leading upscale jeweler. Mayor's strives to hire only highly motivated, friendly and customer-oriented individuals. All new sales professionals attend a course where they are trained in technical areas of the jewelry business, specific service techniques and Mayor's commitment to client service. In general, Mayor's trains its sales personnel to establish a personal rapport with each client, to identify client preferences with respect to both product and price range, and to successfully conclude a sale. Management believes that attentive personal service and knowledgeable sales professionals are key components of Mayor's success.
As part of Mayor's commitment to training, the Company established "Mayor's University", a formalized system of in-house training with a primary focus on client service that involves extensive classroom training, the use of detailed operational manuals, in-store mentorship programs and product knowledge testing. In order to retain their employment with the Company, all attendees must perform satisfactorily on written tests and quizzes that are administered during the training program. To help ensure successful skill transference from the classroom training environment to the sales floor, a manager works with each new sales professional on a
one-to-one basis in the store for a structured 90 day period and then a bi-weekly coaching session on an ongoing basis. Each new sales professional is partnered with a mentor in the store who trains the new associate on basic operational procedures. In addition, the Company conducts in-house training seminars on a periodic basis and administers training modules with audits to (i) enhance the quality and professionalism of all sales professionals, (ii) measure the level of knowledge of each sales professional, and (iii) identify needs for additional training. The Company also provides store managers with more extensive management and client service training that emphasizes "on-the-job" coaching and training instruction techniques.
Mayor's also stresses external training for its sales professionals. The Company encourages all associates to complete a series of courses offered by the Gemological Institute of America (GIA), an independent industry-recognized diamond grading laboratory and gemological school.
Advertising and Promotion
Mayor's marketing intent is to build on its well-established reputation in its traditional market areas as a premier guild jeweler offering fine quality merchandise in an elegant, sophisticated environment conducive to the purchase of luxury items. Mayor's stresses its role as a fashion leader that does not promote discounting, but instead prices all of its merchandise with the goal of delivering consistent value to its clients. Mayor's marketing efforts, which consist of advertising, direct mailings, promotional events, attractive store design and elegant display, are shaped in large part by demographic and consumer trends affecting both the jewelry industry generally and Mayor's specifically.
Mayor's advertisements stress its image as a full-service guild jeweler, its tradition of integrity, value and reliability, its longevity in the jewelry business and its emphasis on superior client service. In addition, advertisements frequently associate Mayor's with internationally recognized brand names such as Rolex, Patek Philippe, Cartier and Mikimoto. Advertising and promotions for all stores are developed by Company personnel at its headquarters in conjunction with outside advertising agencies.
Credit Operations
Sales under Mayor's proprietary credit card accounted for approximately 31% of the Company's net sales during Fiscal 2001. Mayor's credit programs are intended to complement its overall merchandising and sales strategy by encouraging larger and more frequent sales to a loyal customer base.
Mayor's extends credit solely to its Mayor's customers under its own private label revolving charge account. Clients may select from two financing plans: the 3 Month Interest Free Plan or the Revolving Plan with interest. Finance charges, which are subject to a rate ceiling imposed by state law, are currently assessed on the average daily balance method at a rate of 1.5% per month, unless otherwise controlled by state law.
Mayor's credit operations are located at the Company's corporate office. The credit staff makes all credit decisions; sales personnel or store managers are not authorized to grant credit. Mayor's has developed a detailed creditworthiness analysis on which it bases its credit decisions. Mayor's custom-designed, computerized accounts receivable systems provide credit personnel with on-line decision making information, including new account processing, credit authorizations and client inquiries.
As of February 2, 2002, Mayor's had approximately 62,000 credit card holders. Mayor's utilizes its credit card client base in its targeted marketing programs.
Mayor's has an Account Receivable Management Department, which manages delinquent accounts. Representatives are trained on advanced account management techniques and programs, which have been developed in-house by the credit organization. Early stage delinquencies are handled with an approach to client goodwill. If an account continues to progress in delinquency, more assertive action is taken. Ultimately, if a delinquent account cannot be collected in-house, outside legal action is undertaken. During Fiscal 2001, Mayor's net bad debt expense as a percentage of credit sales was approximately 5.2 percent.
All clients may also take advantage of Mayor's layaway plan, which allows them to set aside and pay for items over a limited period of time with no interest charges.
DISTRIBUTION
The Company's retail locations receive the majority of their merchandise directly from the Company's distribution warehouse located in Sunrise, Florida. Merchandise is shipped from the distribution warehouse utilizing various air and ground carriers. Presently, a small portion of merchandise is delivered directly to the retail locations from suppliers. The Company transfers merchandise between retail locations to balance inventory levels and to fulfill customer requests.
COMPETITION
The retailing industry is highly competitive and particularly subject to the level of consumer discretionary income and the subsequent impact on the type and value of goods purchased. The Company's competitors include foreign and domestic jewelry retailers, national and regional jewelry chains, department stores, catalog showrooms, discounters, direct mail suppliers, televised home shopping networks, manufacturers, distributors and large wholesalers and importers, some of whom have greater resources than the Company. The Company believes that competition in its markets is based primarily on price, design, product quality and service. With the consolidation of the retail industry that is occurring, the Company believes that competition with other general and specialty retailers and discounters will continue to increase. The success of the Company will depend on various factors, including the successful implementation of the Restructuring Plan, general economic and business conditions affecting consumer spending, the performance of the Company's retail operations, the acceptance by consumers of the Company's retail programs and concepts, and the ability of the Company to manage its stores. Please refer to Item 7 regarding "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Restructuring Plan" and "Forward Looking Statements."
REGULATION
The Company generally utilizes the services of independent customs agents to comply with U.S. customs laws in connection with its purchases of gold, diamond and other jewelry merchandise from foreign sources.
The Company's operations are affected by numerous federal and state laws that impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts and limitations on the maximum amount of finance charges that may be charged by a credit provider. In addition to the Company's private label credit cards, credit to the Company's customers is primarily through bank cards such as Visa(R), Mastercard(R) and Discover(R), without recourse to the Company based upon a customer's failure to pay. Any change in the regulation of credit that would materially limit the availability of credit to the Company's traditional customer base could adversely affect the Company's results of operations or financial condition. Please refer to Item 7 regarding "Forward-Looking Statements."
EMPLOYEES
As of April 1, 2002, the Company employed approximately 519 persons on a full-time basis, including approximately 379 in regional and local sales in the Mayor's stores, 15 in inventory and distribution and 125 in administrative and support functions. In addition, the Company also employed approximately 6 persons on a part-time or temporary basis, which varies with the seasonal nature of its business. In connection with the Company's restructuring plan, the Company intends to reduce the number of employees. None of its employees are governed by a collective bargaining agreement, and the Company believes that its relations with employees are good, although there can be no assurances that such relations will not be adversely affected by the Company's Restructuring Plan. Please refer to Item 7 regarding "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Restructuring Plan" and "Forward Looking Statements."
ITEM 2.
ITEM 2. PROPERTIES
The Company's corporate headquarters is owned by the Company and located on 11.1 acres in a 131,000 square-foot building in Sunrise, Florida.
As of April 1, 2002, Mayor's had a total of 40 leased stores, all of which are currently operating; the Desert Passage store in Las Vegas, Nevada was closed in March, 2002. Mayor's leases its stores, with rent being a fixed minimum base plus a percentage of the store's sales volume (subject to certain adjustments) over a specified threshold. The Mayor's lease terms are generally ten years from inception. Lease rental payments are also subject to annual increases for tax and maintenance. The Company intends to close 12 of the stores listed below pursuant to its restructuring plan. Stores noted with "*" are expected to be closed during 2002 as part of the Company's Restructuring Plan. Please refer to Item 7 regarding "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Restructuring Plan." The following table summarizes all operating store leases:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incident to the conduct of its business. There are no pending legal proceedings reportable pursuant to this Item 3. Although certain litigation of the Company is routine and incidental, and such litigation can result in large monetary awards for compensatory or punitive damages, the Company believes that no litigation that is currently pending involving the Company will have a material adverse effect on the Company's financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in the fourth quarter of the fiscal year ended February 2, 2002.
PART II
ITEM 5.
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.
The last reported sales price of the Common Stock on the American Stock Exchange Composite Tape on April 12, 2002 was $1.05. On April 12, 2002, the Company had 691 stockholders of record.
The Company has never paid a cash dividend on its Common Stock. The Company currently anticipates that any earnings will be retained for use in the operation and expansion of its business and does not intend to pay any cash dividends on its Common Stock in the foreseeable future. Any future determination as to cash dividends will depend upon the earnings, capital requirements and financial condition of the Company at that time, applicable legal restrictions and such other factors as the Board of Directors may deem appropriate. Currently, the Company's working capital facility prohibits dividend payments.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the Consolidated Financial Statements and Related Notes thereto appearing elsewhere in this Form 10-K and "Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The discussion and analysis below contains trend analysis and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those anticipated in any forward-looking statements as a result of certain factors set forth below and elsewhere in this report and in other reports filed with the Securities and Exchange Commission.
The years ended February 2, 2002, February 3, 2001 and January 29, 2000 are referred to herein as Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively.
The success of the Company's operations depends to a certain extent on the ability of mall anchor tenants and other attractions to generate customer traffic in the vicinity of the Mayor's stores. The loss of mall anchor tenants in the regional malls where the Mayor's stores are located, the opening of competing regional malls or other economic downturns affecting customer mall traffic could have an adverse effect on the Company's net sales and profitability.
The retail jewelry business is seasonal in nature with a higher proportion of sales and a significant portion of earnings generated during the fourth quarter holiday selling season.
RESTRUCTURING PLAN
Mayor's Jewelers operated 41 luxury jewelry stores in ten states as of February 2, 2002. The Desert Passage store in Las Vegas, Nevada was closed in March, 2002. Merchandising and marketing issues, the poor economic climate and a capital intensive expansion strategy that the Company executed in Fiscal 1999 through Fiscal 2001, were dominant factors in contributing to the Company's poor operating performance for Fiscal 2001. These results have drained the Company of significant amounts of capital, which in turn has required Mayor's to restructure itself in an effort to position the Company for future profitability. Accordingly during Fiscal 2001, Mayor's adopted a multi-faceted Restructuring Plan. The Restructuring Plan includes the hiring of a new CEO with extensive merchandising and marketing experience, an infusion of capital, the refinancing or restructuring of the Company's $80 million bank facility, the closure of 13 unprofitable stores and termination of three leases for stores that are not yet built, the remerchandising of its 28 core Florida and Georgia stores, the termination of redundant employees and the disposition of certain non-performing assets.
As part of its Restructuring Plan, on May 17, 2002, Mayor's executed an agreement in principle (the "Agreement") with Henry Birks & Sons Holdings Inc. of Canada ("Birks"). The Agreement provides for Birks to invest in or cause to be provided to Mayor's $11.5 million in cash. Upon completion of the transaction, Birks will receive Preferred Stock that will be convertible into Common Stock of Mayor's generally representing 58% of the Common Stock on a fully diluted basis. Prior to conversion, Birks will be able to elect a majority of the Board of Directors of Mayor's. Birks will also receive warrants to purchase an additional 10% of the Common Stock (on a fully diluted basis) at an exercise price of $.50 per share.
Mayor's and Birks will enter into a series of agreements through which Birks will provide management, merchandising and sales support to Mayor's. Completion of the transaction is subject to certain conditions, including without limitation, execution of definitive agreements (which the parties hope to accomplish in June) and the affirmative vote of the stockholders of Mayor's at a meeting of stockholders to be held as soon as practicable. Pending the closing, Birks will provide consulting services to Mayor's pursuant to a consulting agreement.
The Company continues to work on the refinancing of a senior revolving facility for which refinancing it has a commitment letter subject to certain future developments. Until the time a refinancing is in place, the Company will continue to operate under an amendment to its existing working facility and may seek extensions of such amendment. There can be no assurances that the Company will be successful in its refinancing efforts.
A significant condition to any investment by Birks and any refinancing will be the payment of the exit costs for the closing of 13 unprofitable stores and the termination of three lease commitments for stores that have not been built. The 13 unprofitable stores include 11 properties outside of the Company's core Florida and Georgia marketplace as well as two stores in Florida. The Nevada store was closed in March, 2002. See "Item 2 -- Properties." The closing of these stores marks a significant retrenchment of the Company's recent expansion strategy into states where Mayor's does not enjoy the brand loyalty that it has enjoyed in the Southeast U.S. The three lease commitments for stores that are not built include one in Ohio and two in Florida. While the Company believes the two Florida locations would enhance the Company's core market, their construction is dependent upon funding of additional capital resources in order to fund their construction.
The Company believes short-term growth will come from rebuilding the Company's presence within existing markets where Mayor's has enjoyed strong brand recognition. If the Company successfully executes its Restructuring Plan, the Company may consider limited growth opportunities including acquisitions of, or investments in businesses similar or complimentary to that of the Company. In the event the Company is unable to successfully implement its Restructuring Plan, its business, financial condition, operating results and cash flows will be materially adversely affected. Furthermore, failure to obtain adequate funding will most probably prevent the Company from being able to pay its Fiscal 2002 debt service obligations and sustain the Company's working capital needs. In this event, there would be substantial doubt that the Company would be able to continue operations in the normal course of business at which time the Company would have to consider all of its alternatives.
As the Company refocuses on its core business, it hopes to execute a productive merchandising strategy in its remaining 28 stores. The Company believes that with the appropriate capital resources that the above mentioned investment will hopefully provide, it will be able to execute initiatives that will drive the business toward positive comparable store sales results, although there can be no assurance that such results shall occur.
The following table for continuing operations sets forth for the periods indicated the percentage of net sales for certain items in the Company's Consolidated Statements of Operations and other information:
SALES
The Company's net sales from continuing operations for Fiscal 2001 were $163.7 million compared to $181.3 million and $157.6 million for Fiscal 2000 and Fiscal 1999, respectively. Comparative store net sales for Fiscal 2001 decreased 17.1% compared to Fiscal 2000. The decrease in net sales for Fiscal 2001 is due to merchandising and marketing issues coupled with the slowdown of the economy and the effects that the tragic events of September 11th had on the Company's retail environment. Comparative store net sales for Fiscal
2000 increased 2.9% compared to Fiscal 1999. The increase in net sales in Fiscal 2000 is due to revenue contribution of new stores as well as the comparable store sales increase, created in part because of the fifty-three week calendar for Fiscal 2000.
The retail jewelry market is particularly subject to the level of consumer discretionary income and the subsequent impact on the type and value of goods purchased. With the consolidation of the retail industry, the Company believes that competition both within the luxury goods retail industry and with other competing general and specialty retailers and discounters will continue to increase. The luxury watch brands business comprises a significant portion of the Mayor's business, which is a result of the Company's ability to effectively market high-end watches. Rolex has informed the Company that its account has been placed on "hold status." In the event that Rolex does not lift the hold and begin accepting new orders for watches or if Rolex terminates its distribution agreement with the Company, it would have a material adverse affect on the Company's business, financial condition and operating results. Moreover, certain of the Company's vendors have expressed some concerns about the Company's current financial condition. If such vendors terminated their relationships with the Company, it could also have a material adverse affect on the Company's business, financial condition and operating results. Please refer to Item 7 regarding "Forward-Looking Statements."
COST OF SALES AND GROSS PROFIT
Gross profit as a percentage of net sales in Fiscal 2001 was 37.1% compared to 43.5% and 39.6% in Fiscal 2000 and Fiscal 1999, respectively. The decrease in gross profit as a percentage of net sales for Fiscal 2001 is primarily due to the liquidation of slow moving and discontinued inventory through caravan events that traveled through various stores. The increase in gross profit as a percentage of net sales for Fiscal 2000 compared to Fiscal 1999 is a primarily because of improvements achieved through sales and purchasing efficiencies and merchandise management initiatives that improved initial markup and inventory management.
If the Restructuring Plan is successful, the Company is hopeful that the opportunity exists to increase gross profit over the next couple of years. Areas for gross margin improvement include strategies to lower the cost of merchandise purchased and to move the mix of sales towards higher margin jewelry items. In addition, the Company expects to refine the allocation and management of inventory in its stores, and as a result, other direct costs such as slow moving reserves are expected to decrease. There can be no assurance that the Company will be able to increase gross profit.
STORE OPERATING AND SELLING EXPENSES
Store operating and selling expenses were $53.8 million, or 32.9% of sales for Fiscal 2001 compared to $45.3 million, or 25.0% of sales, and $43.2 million, or 27.4% of sales, for Fiscal 2000 and Fiscal 1999, respectively. The increase in store operating and selling expenses for Fiscal 2001 over Fiscal 2000 is mainly attributable to an increase in the number of stores. The increase in percentage for Fiscal 2001 is attributable to a decline in comparable store sales and in lack of performance in the new stores. The decrease in store operating and selling costs as a percentage of sales for Fiscal 2000 over Fiscal 1999 is a result of increased comparable store sales. The increase in store operating and selling expenses for Fiscal 2000 over Fiscal 1999 is mainly attributable to an increase in the number of stores, and to increases in chargecard and check processing fees and in percentage rent, which are all directly related to the increased sales. As a percentage of sales, store operating and selling costs fell to 25.0% in Fiscal 2000 from 27.4% in Fiscal 1999 as a result of increased comparable store sales.
The Company does not believe there is significant opportunity to reduce these expenses other than the decrease that will occur as a result of the 13 closing stores as discussed under "Restructuring Plan" above.
STORE CONTRIBUTION
Store contribution fell to $6.9 million, or 4.2% of sales, in Fiscal 2001 from $33.5 million, or 18.5% of sales, in Fiscal 2000 primarily because of the lack of profitability of the Company's newly constructed stores and reduction in same store sales. Store contribution increased to $33.5 million, or 18.5% of sales, in Fiscal
2000 from $19.3 million, or 12.2% of net sales, in Fiscal 1999 as a result of improvements in sales and gross margin.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $14.6 million for Fiscal 2001 compared to $16.2 million and $16.5 million for Fiscal 2000 and Fiscal 1999, respectively. General and administrative expenses as a percentage of net sales decreased to 8.9% in Fiscal 2001 and Fiscal 2000 compared to 10.4% Fiscal 1999. The decrease in general and administrative expenses in Fiscal 2001 is primarily a result of a corporate restructuring. The decrease in Fiscal 2000 is primarily a result of the greater efficiencies in these expenses as sales increased. General and administrative expenses also include store opening costs of $187,000, $674,000 and $392,000 for Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively. These costs are expensed as incurred.
ADVERTISING AND MARKETING EXPENSES
Advertising and marketing expenses were $8.8 million in Fiscal 2001 compared to $8.6 million and $3.5 million in Fiscal 2000 and Fiscal 1999, respectively. The increase in Fiscal 2001 is primarily attributable to a watch and bridal book that was produced that fiscal year. The increase in Fiscal 2000 is primarily attributable to the Company's efforts to introduce the Mayor's name for the new stores in metropolitan Washington DC, Nevada, Michigan, Texas and California, as well as starting to develop a national brand identity during that year.
RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES
Restructuring, Asset Impairments and Other Charges for Fiscal 2001 were $28.2 million. This includes consulting fees related to a strategic cost reduction project, non-recurring legal fees associated with shareholder related matters, a write-down of the corporate headquarters building which the Company placed on the market for sale, the write-down of the fixed assets for the stores that are scheduled to be closed, and a reserve for early termination of the leases for the stores that are scheduled to be closed.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses were $9.8 million for Fiscal 2001, compared to $8.0 million and $7.6 million for Fiscal 2000 and Fiscal 1999, respectively. The increase in depreciation expense for Fiscal 2001 and Fiscal 2000 is a result of the capital expenditures associated with the construction of new and remodeled stores. The increase in amortization expense for Fiscal 2001 and Fiscal 2000 is primarily attributable to the amortization of goodwill recorded in connection with the Mayor's acquisition, as well as to the amortization of financing costs relating to the Company's revolving credit facility.
GOODWILL IMPAIRMENT WRITEDOWN
Goodwill impairment writedown for Fiscal 2001 was $22.3 million. Management determined that the long term future cash flows did not support the carrying value and recorded an impairment charge to take the goodwill to zero.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE
Interest and other income was $174,000 in Fiscal 2001, $213,000 in Fiscal 2000 and $90,000 in Fiscal 1999, respectively. Interest expense was $3.8 million for Fiscal 2001, compared to $3.5 million and $2.6 million for Fiscal 2000 and Fiscal 1999, respectively. The increase in interest expense for Fiscal 2001 and Fiscal 2000 is primarily attributable to the increase in the outstanding balance of the credit facility due to the build out of new stores and the incremental inventory needed to stock these stores.
LIQUIDITY AND CAPITAL RESOURCES
On May 17, 2002, Mayor's executed an agreement in principle (the "Agreement") with Henry Birks & Sons Holdings Inc. of Canada ("Birks"). The Agreement provides for Birks to invest in or cause to be provided to Mayor's $11.5 million in cash. Upon completion of the transaction, Birks will receive Preferred Stock that will be convertible into Common Stock of Mayor's representing 58% of the Common Stock on a fully diluted basis. Prior to conversion, Birks will be able to elect a majority of the Board of Directors of Mayor's. Birks will also receive warrants to purchase an additional 10% of the Common Stock (on a fully diluted basis) at an exercise price of $.50 per share.
The Company continues to work on the refinancing of a senior revolving facility, depending upon successful negotiation of the revolving credit and security agreement. Until the time a refinancing is in place, the Company will continue to operate under an amendment to its existing working facility which expires May 30, 2002 and may seek extensions of such amendment. There can be no assurances that the Company will be successful in its refinancing efforts.
The failure to obtain adequate funding will most probably prevent the Company from being able to pay its Fiscal 2002 debt services obligations and sustain the Company's working capital needs. In this event, there would be substantial doubt that the Company would be able to continue operations in the normal course of business at which time the Company would have to consider all of its alternatives.
The Company currently has an $80 million working capital facility with a syndicate of lenders. Availability under this facility is determined based upon a percentage formula applied to inventory and accounts receivable. This working capital facility was amended in September 2001 after the Company's second quarter of Fiscal 2001 operating performance caused it to fail to comply with certain financial covenants of the facility. At that time the facility was amended to waive all financial covenants for the second quarter as well as for the remainder of Fiscal 2001. As consideration for this amendment, the Company agreed to increase the interest margin from LIBOR plus 2.25% to LIBOR plus 4.00%. The rate on the facility as of February 2, 2002 was 5.9%. Further, as conditions for the amendment, the Company agreed to restrictions regarding borrowing availability, which included requiring the Company to provide the bank group with an $8 million cushion on the lesser of collateral availability or the $80 million cap provided for by the facility. This amendment had an original expiration of April 30, 2002. However, on April 30, 2002, the Company executed an additional amendment to extend the deadline for restructuring the facility from April 30, 2002 to May 30, 2002.
As of February 2, 2002, after accounting for the foregoing borrowing restrictions, the Company had approximately $59.8 million of borrowing capacity and, after netting the outstanding borrowings of $53.5 million and letter of credit commitments of $675,000, the Company had a net borrowing availability of approximately $5.6 million. Additionally, because the Company has experienced deterioration in its leverage ratio, its commitment fee has been raised to .375% from .25% and it also pays a 2.5% fee on outstanding letters of credit. The working capital facility also currently contains financial covenants that limit capital expenditures, limit incurring of additional debt and prohibits the payment of dividends. There can be no assurance that the Company's future operating results will be sufficient to meet the requirements of the foregoing covenants.
The Company presented its Restructuring Plan to its bank group on April 9, 2002. The plan outlined several initiatives including the need to fund the exit from unprofitable stores, the need to fund current operating losses and the purchases of inventories needed to remerchandise the stores in its core Florida and Georgia markets. The plan also indicated that the sources of capital for these funding requirements would come from selling the Company's headquarters, obtaining certain presently restricted cash assets and from outside additional debt and equity capital. Accordingly, the Company has asked for and received from the bank group an amendment to extend the deadline from April 30, 2002 to May 30, 2002 for restructuring the working capital facility. The Company currently is in negotiation with Birks to participate in the funding of this requirement; however, no assurances can be made that management will succeed in its efforts. Failure to do so will not allow the Company to execute its Restructuring Plan. Further, it will most probably prohibit the Company from being able to sustain Fiscal 2002 debt service and working capital needs. In this event, there
would be substantial doubt that the Company would be able to continue operations in the normal course of business at which time the Company would have to consider all of its alternatives.
During Fiscal 2001, cash flows from continuing operating activities provided $5.2 million in cash. Cash flows net of discontinued operations used $4.8 million in cash. The Company's business is highly seasonal. Consequently, seasonal working capital needs peak in October and November, before the holiday shopping season. During Fiscal 2001, these seasonal needs and the Company's additional stores opened during Fiscal 2001 were supplied primarily by the Company's cash from operating activities. During Fiscal 2001, the Company's peak level of inventory for both continuing and discontinued operations was $114.2 million requiring a maximum outstanding borrowing on the line of credit of $71.0 million.
Net cash used in investing activities was $6.4 million in Fiscal 2001, primarily related to capital expenditures for seven new stores opened in 2001. Fiscal 2001 capital expenditures also include back office computer software and hardware.
On April 16, 1999, the Company's Board of Directors authorized the expenditure of up to $15 million to repurchase the Company's common stock over a period of one year. On October 29, 1999, the authorized amount to repurchase was increased by an additional $5 million, which has subsequently increased another $10 million to a total of $30 million. The acquired shares will be held in treasury or canceled. As of February 2, 2002, the Company had repurchased 9,983,954 shares at a cost of $29.4 million, all held in treasury.
RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES
Merchandising and marketing issues and the poor economic climate combined with a capital intensive expansion strategy that the Company executed in Fiscal 1999 through Fiscal 2001, were dominant factors in contributing to the Company's poor operating performance in Fiscal 2001. The results have drained the Company of significant amounts of capital which in turn has required Mayor's to restructure itself in an effort to position the Company for future profitability. Accordingly during Fiscal 2001, the Company adopted a multi-faceted restructuring plan. The Restructuring Plan includes the hiring of a new CEO with a strong background in merchandising, an infusion of capital, the refinancing or other working out of the Company's $80 million bank facility, the closure of 13 unprofitable stores and termination of three leases for stores that are not yet built, the re-merchandising of its 28 core Florida and Georgia stores, the termination of redundant employees and the disposition of certain non-performing assets. The Restructuring Plan is expected to be completed by the end of the Fiscal 2002.
A summary of the charges recorded in Fiscal 2001 is as follows (in thousands):
The restructuring costs include employee severance costs of approximately $0.9 million and total costs to exit stores including lease termination and professional fees of $7.7 million. As of February 2, 2002, an accrual of $8.6 million remained for restructuring costs expected to be paid in Fiscal 2002. The write-down of assets includes $11.3 million for the write-down of leasehold improvements and assets related to the closing locations and $4.9 million for the write-down of the corporate headquarters building and related assets to reflect their estimated fair value determined by comparable market information. These assets will be taken out of service at the time properties are vacated and consequently will not be depreciated further after they are vacated. Depreciation expense related to these assets was approximately $2.7 million annually. The Restructuring Plan included the elimination of approximately 207 positions in the field and the closure of 13 locations during Fiscal 2002. The Nevada location was closed in March 2002.
The goodwill impairment of $22.3 million is a write off of goodwill associated with the Mayor's acquisition. Management determined that the long-term future cash flows did not support the carrying value and recorded an impairment charge to take the goodwill to zero.
Other charges consist of one-time charges of $1.3 million for strategic cost reduction, $0.7 million for non-recurring legal fees associated with shareholder related matters, and $1.4 million related to severance.
EFFECTS OF INFLATION
Gold prices are affected by political, industrial and economic factors and by changing perceptions of the value of gold relative to currencies. Investors commonly purchase gold and other precious metals perceived to be rising in value as a hedge against a perceived increase in inflation, thereby bidding up the price of such metals. The Company's sales volume and net income are potentially affected by the fluctuations in prices of gold, diamonds and other precious or semi-precious gemstones as well as watches and other accessories. The Company does not hedge its gold inventories. Hedging is not available with respect to possible fluctuations in the price of precious and semi-precious gemstones, watches or other accessories.
The Company's selling, general and administrative expenses are directly affected by inflation resulting in an increased cost of doing business. Although inflation has not had and the Company does not expect it to have a material effect on operating results, there is no assurance that the Company's business will not be affected by inflation in the future.
INTEREST RATE RISK
The Company's credit facility accrues interest at floating rates, currently based upon LIBOR plus 4.00% or the bank's adjusted base rate plus 2.75%, at the Company's option. The Company manages its borrowings under this credit facility each day in order to minimize interest expense. The impact on the Company's earnings per share of a one-percentage point interest rate change on the outstanding balance as of February 2, 2002 would increase or decrease earnings per share by $.01 per share.
The Company extends credit to its Mayor's customers under its own revolving charge plan with up to two-year payment terms. Finance charges are generally currently assessed on customers' balances at a rate of 1.5% per month. Since the interest rate is fixed at the time of sale, market interest rate changes would not impact the Company's finance charge income.
FORWARD-LOOKING STATEMENTS
This report and other written reports and releases and oral statements made from time to time by the Company contain forward-looking statements which can be identified by their use of words like "plans," "expects," "believes," "will," "anticipates," "intends," "projects," "estimates," "could," "would," "may," "planned," "goal," and other words of similar meaning. All statements that address expectations, possibilities or projections about the future, including without limitation, statements about the Company's strategies for growth, expansion plans, sources or adequacy of capital, expenditures and financial results are forward-looking statements.
One must carefully consider such statements and understand that many factors could cause actual results to differ from the forward-looking statements, such as inaccurate assumptions and other risks and uncertainties, some known and some unknown. No forward-looking statement is guaranteed and actual results may vary materially. Such statements are made as of the date provided, and the Company assumes no obligation to update any forward-looking statements to reflect future developments or circumstances.
One should carefully evaluate such statements by referring to the factors described in the Company's filings with the SEC, especially on Form's 10-K, 10-Q and 8-K. Particular review is to be made of Items 1, 2, 3 and 7 of the Form 10-K and Item 2 of the Form's 10-Q where the Company discusses in more detail various important risks and uncertainties that could cause actual results to differ from expected or historical results. The Company notes these factors for investors as permitted by the Private Securities Litigation Act of 1995.
Since it is not possible to predict or identify all such factors, the identified items are not a complete statement of all risks or uncertainties.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results may differ from those estimates. These estimates and assumptions are evaluated on an on-going basis and are based on historical experience and on various factors that are believed to be reasonable.
The Company's accounting policies are more fully discussed in Note E to the financial statements. The Company has identified certain critical accounting policies below.
Allowance for slow moving and obsolete inventory. The Company writes down its inventory for estimated unmarketable inventory or obsolescence equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Accrued Restructuring Estimates. The Company has recorded a reserve for the early termination of the leases, legal fees and store closing costs for stores that are scheduled to be closed as discussed previously.
The Company's accrual for lease liabilities could be materially affected by factors such as our ability to secure subleases, the creditworthiness of sublessees and our success at negotiating early termination agreements with lessors. These factors are significantly dependent on the general health of the economy and resultant demand for commercial property.
While management believes that the current estimates of discontinued operations liabilities are adequate, it is possible that future events could require the Company to make significant adjustments for revisions to these estimates.
Allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Mayor's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Mayor's Jewelers, Inc Sunrise, Florida
We have audited the accompanying consolidated balance sheets of Mayor's Jewelers, Inc. and its subsidiaries (the "Company") as of February 2, 2002 and February 3, 2001 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three fiscal years in the period ended February 2, 2002. Our audits also included the financial statement schedule listed at Item 14(a)(2). These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Mayor's Jewelers, Inc. and subsidiaries as of February 2, 2002 and February 3, 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 2, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the consolidated financial statements, the Company's recurring losses from continuing operations, the need to obtain a new or restructured credit facility, need for an additional capital infusion, and ability to successfully accomplish its restructuring plan raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note B. The consolidated financial statements do not contain any adjustments that might result from the outcome of this uncertainty.
As discussed in Note E(6) to the consolidated financial statements during the year ended January 29, 2000, the Company changed its method of accounting for certain direct and indirect costs related to inventory in prior years.
/s/ DELOITTE & TOUCHE LLP Certified Public Accountants
Miami, Florida May 3, 2002, except for the eighth and ninth paragraphs of Note B, as to which the date is May 17, 2002.
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (AMOUNTS SHOWN IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
See notes to consolidated financial statements.
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS SHOWN IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
See notes to consolidated financial statements.
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
See notes to consolidated financial statements.
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS SHOWN IN THOUSANDS)
See notes to consolidated financial statements.
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FISCAL YEARS ENDED FEBRUARY 2, 2002, FEBRUARY 3, 2001 AND JANUARY 29, 2000
A. NATURE OF BUSINESS:
Mayor's Jewelers, Inc. and subsidiaries ("Mayor's" or the "Company") is primarily engaged in the sale of jewelry, watches and other consumer products, operating Mayor's luxury jewelry stores. The Company operates 40 locations in South and Central Florida, metropolitan Atlanta, Georgia, Chicago, Illinois, metropolitan Washington DC, Scottsdale, Arizona, Troy, Michigan, Dallas, Texas and Newport Beach and Sacramento, California.
The Company's consolidated financial statements are prepared on a 52/53-week retail fiscal year basis. The fifty-two weeks ended February 2, 2002, the fifty-three weeks ended February 3, 2001 and the fifty-two weeks ended January 29, 2000 are referred to herein as Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively.
B. BASIS OF PRESENTATION AND MANAGEMENT PLANS:
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring losses from continuing operations and is dependent on equity and debt financing to sustain its operations and to execute its Restructuring Plan in Fiscal 2002. Additionally, certain of the Company's vendors have expressed some concerns about the Company's current financial condition. Rolex, a vendor which accounted for approximately 24% of the Company's total net sales in Fiscal 2001, has informed the Company that its account has been put on "hold status." In the event Rolex does not lift the hold and begin accepting new orders for Rolex or if Rolex, or any other such vendors, terminates its distribution agreement with the Company, it would have a material adverse affect on the Company's business, financial condition and operating results. These conditions indicate that the Company may be unable to continue as a going concern for a reasonable period of time.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern. Management of the Company is taking several actions in its attempts to alleviate this situation.
MANAGEMENT'S PLANS
The multi-faceted Restructuring Plan includes, among other significant initiatives, seeking an infusion of new debt and equity including the possibility of, the refinancing of the Company's current bank debt, the closing of thirteen unprofitable and under-performing stores, the liquidation of certain non-performing assets and the reduction of various field and corporate costs. See Note C for costs associated with the Restructuring Plan.
The stores targeted for closure include eleven properties outside of the Company's core Florida and Georgia marketplace, as well as two stores in Florida. The closing of these stores marks a significant retrenchment of the Company's recent expansion strategy into states where Mayor's does not enjoy the brand loyalty that it has enjoyed in Florida and Georgia.
Assets earmarked for liquidation include certain unproductive inventories, the Company's headquarters building and associated real estate in Sunrise, Florida, fixed assets in the stores targeted for closure and certain other assets.
As part of its Restructuring Plan the Company is in the process of seeking additional capital. The effort includes but is not limited to a possible refinancing of the Company's existing bank debt and a potential infusion of new debt and equity from a third party investor.
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consistent with that effort, the Company has executed a term sheet with Fleet Retail Finance and Back Bay Capital for a three year $80 million revolving facility. The financing is subject to certain conditions, including but not limited to certain lease payment termination provisions related to the Restructuring Plan, due diligence, document preparation and negotiation of financial covenants. Further, the Company has executed an amendment whereby the Company's existing $80 million bank facility has been continued until May 30, 2002. See Note H for the terms of the existing bank facility.
Additionally, on May 17, 2002, Mayor's executed a non-binding agreement in principle (the "Agreement") with Henry Birks & Sons Holdings Inc. of Canada ("Birks"). The Agreement provides for Birks to invest in or cause to be provided to Mayor's $11.5 million in cash. Upon completion of the transaction, Birks will receive Preferred Stock that will be convertible into a majority interest in the common stock of Mayor's on a fully diluted basis. Prior to conversion, Birks will be able to elect a majority of the Board of Directors of Mayor's. Birks will also receive warrants to purchase an additional 10% of the Common Stock (on a fully diluted basis).
Mayor's and Birks will enter into a series of agreements through which Birks will provide management, merchandising and sales support to Mayor's. Completion of the transaction is subject to certain conditions, including without limitation, execution of definitive agreements and the affirmative vote of the stockholders of Mayor's at a meeting of stockholders to be held as soon as practicable. Pending the closing, Birks will provide consulting services to Mayor's pursuant to a consulting agreement.
No assurance, however, can be given that the Company will be successful in refinancing the revolving credit facility or closing such a transaction with Birks.
C. RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES
Merchandising and marketing issues and the poor economic climate combined with a capital intensive expansion strategy that the Company executed in Fiscal 1999 through Fiscal 2001 were dominant factors in contributing to the Company's poor operating performance in Fiscal 2001. The results have drained the Company of significant amounts of capital which in turn has required Mayor's to restructure itself in an effort to position the Company for future profitability. Accordingly, the Company recently has embarked on a multi- faceted restructuring plan (the "Restructuring Plan"). The Restructuring Plan was adopted in the fourth quarter of Fiscal 2001 to terminate redundant employees, close underperforming stores and dispose of certain non performing assets. The Restructuring Plan is expected to be completed by the end of the second quarter of 2002.
A summary of the charges recorded in Fiscal 2001 is as follows (in thousands):
The restructuring costs include employee severance costs of approximately $.9 million and total costs to exit stores including lease termination and professional fees of $7.7 million. As of February 2, 2002, an accrual of $8.6 million remained for restructuring costs expected to be paid in Fiscal 2002. The write-down of assets includes $11.3 million for the write-down of leasehold improvements and assets related to the closing locations and $4.9 million for the write-down of the corporate headquarters building and related assets to reflect their estimated fair value determined by comparable market information. These assets will be taken out of service at the time properties are vacated and consequently will not be depreciated further after they are vacated.
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense related to these assets was approximately $2.7 million annually. The Restructuring Plan included the elimination of approximately 207 positions in the field as well as Mayor's former chief executive officer and the closure of 13 locations during Fiscal 2002. The Nevada location was closed in March, 2002.
The goodwill impairment of $22.3 million is a write off of goodwill associated with the Mayor's acquisition. Management determined that the long term future cash flows did not support the carrying value and recorded an impairment charge to take the goodwill to zero.
Other charges consists of one-time charges of $1.3 million for strategic cost reduction, $.7 million for non-recurring legal fees associated with shareholder related matters and $1.4 million related to severance.
D. DISCONTINUED OPERATIONS:
The Company also retailed fine jewelry, watches and certain other select non-jewelry consumer products primarily to warehouse club members through Sam's Club, a division of Wal-Mart, Inc., pursuant to an agreement whereby the Company operated a concession at all of Sam's domestic and Puerto Rico locations through February 1, 2001. During April 1999, the Company was informed by Sam's that the concession agreement would not be renewed beyond its expiration date.
Sam's Division is therefore accounted for as a discontinued operation due to the expiration on February 1, 2001. In connection therewith, the Company recorded a gain from disposition of $13.6 million, net of a tax liability of $393,000, in Fiscal 2000. Sam's Division sales for Fiscal 2000 and Fiscal 1999 were $227.3 million and $277.6 million, respectively. Income (loss) from discontinued operations for Fiscal 2000 and Fiscal 1999 were ($1.6) million and $26.4 million, respectively. The net liabilities of the discontinued operations for Fiscal 2000 included $4.7 million in accounts payable and $187,000 in other liabilities.
E. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(1) Principles of Consolidation -- The consolidated financial statements include the accounts of the Mayor's Jewelers, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidation.
(2) Use of Estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(3) Sales of Consignment Merchandise -- Income is recognized on the sale of inventory held on consignment at such time as the merchandise is sold.
(4) Sales Returns -- The Company generally gives its customers the right to return merchandise purchased by them and records an accrual at the time of sale for the effect of the estimated returns.
(5) Accounts Receivable -- Accounts receivable arise primarily from customers' use of the Mayor's credit cards. Several installment sales plans are offered which vary as to repayment terms and finance charges assessed. Finance charges, when applicable, accrue at rates ranging from 10% to 18% per annum. Finance charge income for Fiscal 2001 was $3.6 million, Fiscal 2000 was $3.0 million and Fiscal 1999 was $2.1 and is recorded as net sales in the accompanying Consolidated Statements of Operations.
Certain sales plans of Mayor's provide for revolving lines of credit under which the payment terms may exceed one year. In accordance with industry practice, these receivables are included in current assets in the accompanying Consolidated Balance Sheets. The portion of these receivables as of February 2, 2002 that is
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not scheduled to be collected during the year ending February 1, 2003 is approximately $12.8 million or 44% of Mayor's chargecard receivable.
(6) Inventories -- The Mayor's inventories are valued at last-in, first-out ("LIFO") cost which is not in excess of market. Under the first-in, first-out ("FIFO") cost method of accounting, the Mayor's LIFO inventories would have been substantially the same as what is reported at February 2, 2002. The Company records reserves for lower of cost or market, damaged goods, and slow-moving inventory.
Costs incurred in acquiring, receiving, preparing and distributing inventory to the point of being ready for sale were included in inventories prior to Fiscal 1999. The amount of these costs included in inventory as of January 29, 2000 was approximately $2.2 million. During Fiscal 1999, the Company changed its methodology from capitalizing such costs in the inventory balance to expensing these costs as incurred. As a result of this change in accounting principle, the Company recognized a $2.2 million charge.
(7) Property -- Property is stated at cost net of accumulated deprecation and is depreciated using the straight-line method over the following estimated useful lives of the respective assets:
Leasehold improvements are amortized over the shorter of the term of the respective lease, including renewal options, or the useful life of the asset.
(8) Income Taxes -- The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS 109, deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the bases for income tax purposes, and (b) operating loss and tax credit carryforwards.
(9) Cash and Cash Equivalents -- The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
(10) Cost in Excess of Fair Value of Assets Acquired ("Goodwill") -- The Company on an ongoing basis evaluates the recoverability of the carrying amount of Goodwill based on projected operating income. Goodwill resulting from the Mayor's acquisition was written-off in full during Fiscal 2001 due to management having determined that the long term cash flows did not support the carrying value and is included in operating loss in the Consolidated Statement of Operations. Accumulated amortization as of February 3, 2001 was $4.0 million.
(11) Long-lived Assets -- Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Measurement of an impairment loss for such long-lived assets would be based on the fair value of the asset. Long-lived assets to be disposed of are reported generally at the lower of the carrying amount or fair value less cost to sell.
(12) Deferred Financing Costs -- The Company amortizes deferred financing costs incurred in connection with its financing agreements using the effective interest method over the related period. Such deferred costs are included in other assets in the accompanying Consolidated Balance Sheets.
(13) Advertising Costs -- Advertising costs are charged to expense as incurred. The Company and its vendors participate in cooperative advertising programs in which the vendors reimburse the Company for a
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
portion of certain advertising costs. Advertising expense, net of vendor cooperative advertising allowances, amounted to $8.8 million, $8.6 million and $3.5 million in Fiscal 2001, 2000 and 1999, respectively.
(14) Pre-opening Expenses -- Pre-opening expenses related to the opening of new and relocated stores are expensed as incurred.
(15) Comprehensive Income (Loss) -- Comprehensive income (loss) includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
(16) Reclassifications -- Certain amounts in the prior years' financial statements have been reclassified to conform to the current year presentation.
(17) Newly Issued Accounting Standards -- In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133". SFAS 137 amends SFAS 133 "Accounting for Derivative Instruments for Hedging Activities" by deferring the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133 was amended in June 2000 by SFAS No. 138 for certain derivative instruments and hedging activities as indicated by SFAS 138. The effect of adopting SFAS 133 did not have a significant effect on the Company's consolidated financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." These standards establish accounting and reporting for business combinations. SFAS No. 141 requires all business combinations entered into subsequent to June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment on an annual basis. Mayor's will adopt SFAS No. 142 in the first quarter of 2002. The impact of such adoption is not anticipated to have a material effect on Mayor's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal years beginning after December 15, 2001. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that opinion). This statement also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for subsidiaries for which control is likely to be temporary. Mayor's will adopt SFAS No. 144 in the first quarter of 2002. The impact of such adoption is not anticipated to have a material effect on Mayor's financial statements.
(18) Earnings (Loss) Per Share -- Earnings (loss) per share is calculated based upon the weighted average number of shares outstanding during each period. Diluted earnings (loss) per share is not presented as the assumed conversion of options and warrants would be anti-dilutive and as a result, such presentation is not warranted.
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
F. INVENTORIES:
Inventories are summarized as follows:
G. PROPERTY:
The components of property are as follows:
Depreciation expense for Fiscal 2001, Fiscal 2000 and Fiscal 1999 was approximately $7.4 million, $5.8 million and $5.7 million, respectively.
During Fiscal 2001, certain capital assets were impaired in connection with the Company's restructuring plan (see Note C) resulting in a charge to operations and a write-down of fixed assets of approximately $16.2 million.
H. LONG-TERM DEBT:
The Company currently has an $80 million working capital facility with a bank group that expires on July 28, 2003 and is collateralized by substantially all of the Company's assets. Availability under this facility is determined based upon a percentage formula applied to inventory and accounts receivable. This working capital facility was amended in September 2001 after the Company's second quarter of Fiscal 2001 operating performance caused it to fail to comply with certain financial covenants of the facility. At that time the facility was amended to waive all financial covenants for the second quarter as well as for the remainder of Fiscal 2001. As consideration for this amendment, the Company agreed to increase the interest margin from LIBOR plus 2.25% to LIBOR plus 4.00%. The rate on the facility as of February 2, 2002 was 5.9%. Further, as conditions for the amendment, the Company agreed to restrictions regarding borrowing availability, which included requiring the Company to provide the bank group with an $8 million cushion on the lesser of
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
collateral availability or the $80 million cap provided for by the facility. Based on this, the Company had a $59.8 million borrowing capacity at February 2, 2002. This amendment had an original expiration of April 30, 2002. However, on April 30, 2002, the Company executed an additional amendment to extend the deadline for restructuring the facility from April 30, 2002 to May 30, 2002. At February 2, 2002, the Company had approximately $53.5 million outstanding under its facility which is classified as a current liability and had $.7 million in letters of credit outstanding.
The Company presented its restructuring plan to its bank group on April 9, 2002. The plan outlined several initiatives including the need to fund the exit from unprofitable stores, current operating losses and the purchases of inventories needed to remerchandise the stores in its core Florida and Georgia markets. The plan also indicated that the sources of capital for these funding requirements would come from selling the Company's headquarters, from liquidating restricted cash assets and from outside additional debt and equity capital. Accordingly, the Company has asked for and received from the bank group an amendment to extend the deadline from April 30, 2002 to May 30, 2002 for restructuring the working capital facility. The Company currently is in negotiation with outside capital resources to participate in the funding of this requirement and management believes that it will be successful in reaching an agreement by the May 30th deadline; however, no assurance can be made that management will succeed in its efforts. Failure to do so will not allow the Company to execute its restructuring plan. Further, it will most probably prohibit the Company from being able to sustain Fiscal 2002 debt service and working capital needs. In this event, there would be substantial doubt that the Company would be able to continue operations in the normal course of business at which time the Company would have to consider all of its alternatives.
The Company continues to work on the refinancing of a senior revolving facility (see Note B), depending upon certain future developments. Until the time a refinancing is in place, the Company will continue to operate under an amendment to its existing working facility and may seek extensions of such amendment. There can be no assurances that the Company will be successful in its refinancing efforts.
Information concerning the Company's short-term borrowings follows. Under the credit facility, borrowings that exceed $50 million are considered short term. As of February 3, 2001, there were no short-term borrowings.
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
I. INCOME TAXES:
The significant items comprising the Company's net deferred taxes as of February 2, 2002 and February 3, 2001 are as follows:
The components of the provision (benefit) for income taxes consists of the following:
The provision (benefit) for income taxes varies from the amount computed by applying the statutory rate for the reasons summarized below:
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a federal net operating loss carryforward of approximately $3.3 million and state net operating loss carryforward of approximately $21.6 million. The amount of Mayor's NOL included in the $3.3 million is approximately $1.4 million, of which, due to Section 382 limitations, the Company can utilize each year approximately $1.5 million. The federal net operating loss carryforward expires beginning in 2010 through 2020 and the state net operating loss carryforward expires beginning in 2005 through 2020. The Company also has an alternative minimum tax credit carryforward of approximately $1.8 million to offset future federal income taxes. The valuation allowance has been recorded to offset the net deferred tax asset to the amount that the Company believes, after evaluating the currently available evidence, will more likely than not be realized.
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 "approved enterprise" tax benefit was available to EDI until the year 2000. Upon its sale or liquidation, EDI will be subject to a 10% tax on any income that was previously exempted from tax as a result of its "approved enterprise" status. Furthermore, depending on the specific form of the transaction, the Company may be subject to additional Israeli taxes, at rates ranging from 15% to 36%, upon the sale of either EDI's assets or the Company's stock of EDI.
Mayor's 1994, 1995 and 1996 federal income tax returns are currently under examination by the IRS. The impact of the IRS examination on the Company's financial condition, results of operations and cash flow, if any, cannot be ascertained at this time.
J. COMMITMENTS AND CONTINGENCIES:
In connection with prior financing arrangements, there are outstanding warrants to purchase 519,756 shares of common stock at $2.25 per share which expire May 31, 2005 and warrants to purchase 234,000 shares of common stock at $3.25 to $4.00 per share which expire May 1, 2005.
Operating Leases. The Company leases all of its Mayor's division retail stores under operating leases. The rentals are based primarily on a percentage of sales with required minimum annual rentals. In addition, most leases are subject to annual adjustment for increases in real estate taxes and maintenance costs. The Company also has non-cancelable operating leases for copiers, postage machines, and computer equipment. At February 2, 2002, the Company was obligated for the following minimum annual rentals under non-cancelable operating leases (excluding the leases related to the stores included in the Restructuring Plan):
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of February 2, 2002, the minimum annual rentals related to the stores included in the Restructuring Plan are:
Rent expense for the Mayor's stores was approximately $11.8 million including $1.0 million of contingent rent for Fiscal 2001, $9.6 million including $1.8 million of contingent rent for Fiscal 2000 and $7.7 million including $2.4 million of contingent rent for Fiscal 1999.
K. LEGAL PROCEEDINGS:
The Company is involved in litigation arising from the normal course of business. The Company believes the facts and the law support its position and those matters should not materially affect the Company's financial position; however, there can be no assurance as to the final result of legal matters.
L. EMPLOYEE BENEFIT PLANS:
STOCK OPTION PLANS
As of February 2, 2002 the Company had 1,310,039 shares of common stock available for grant to its key employees and directors under its 1987 and 1991 Stock Option Plans. Under these plans, the option price must be equal to the market price of the stock on the date of the grant, or in the case of an individual who owns 10% or more of common stock, the minimum price must be 110% of the market price.
Options granted to date generally become exercisable from six months to three years after the date of grant, provided that the individual is continuously employed by the Company, or in the case of directors, remains on the Board of Directors. All options generally expire no more than ten years after the date of grant.
EMPLOYEE STOCK PURCHASE PLAN
In June 1987, the Board of Directors approved an Employee Stock Purchase Plan, which permits eligible employees to purchase common stock from the Company at 85% of its fair market value through regular payroll deductions.
A total of 562,500 shares are reserved for issuance under the Employee Stock Purchase Plan of which 71,503, 87,796 and 76,261 shares were issued during the Fiscal years 2001, 2000 and 1999.
PROFIT SHARING PLANS
In December 1992, the Board of Directors approved the Jan Bell Marketing, Inc. 401(k) Profit Sharing Plan & Trust (the "Plan"), which permits eligible employees to make contributions to the Plan on a pretax salary reduction basis in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The Company makes a cash contribution of 25% of the employee's pretax contribution, up to 4% of the employee's
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation, in any calendar year. The employer match for Fiscal 2001, Fiscal 2000 and Fiscal 1999 were $133,086, $187,587 and $202,094, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for such plans. Had compensation cost for the Company's stock-based compensation plans been determined using the fair value method described in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," at the grant dates for awards granted in Fiscal 2001, Fiscal 2000 and Fiscal 1999 under these plans, the Company's net earnings and earnings per share would have been reduced to the proforma amounts presented below:
The fair value of each option grant was estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in Fiscal 2001, Fiscal 2000 and Fiscal 1999: expected volatility of 59%, 59% and 84%, respectively, risk-free interest rate of 4.50%, 4.70% and 6.58%, respectively, expected lives of approximately five years and a dividend yield of zero for all three fiscal years presented. The weighted average fair values of options granted during Fiscal 2001, Fiscal 2000 and Fiscal 1999 were $2.83, $2.94 and $3.03, respectively.
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the activity in the option plans during Fiscal 2001, Fiscal 2000 and Fiscal 1999:
A summary of the status of the option plans as of February 2, 2002 is presented below:
M. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of the amounts that would be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate fair value:
- The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of their short term nature.
- The fair value of the Company's long term debt approximates carrying value based on the quoted market prices for the same or similar issues.
MAYOR'S JEWELERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
N. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions of the Company's directors and officers.
BIOGRAPHICAL INFORMATION
JOSEPH CICIO
Mr. Cicio is the Chief Executive Officer of the Company. Prior to joining the Company, Mr. Cicio was a Retail Merchandising and Marketing Consultant from spring 2000 through February 2002. From December 1997 through September 2001, Mr. Cicio served as President of Retail Development for Sun International. From June 1996 through June 1997, he was President of Retail Development for Donna Karan International. From February 1995 through June 1996, Mr. Cicio was Co-Chairman, Chief Executive Officer and Chief Merchandising Officer of the Randy Kemper Corporation, a manufacturer of women's designer sportswear. From March 1992 through February 1995, Mr. Cicio held executive positions with I. Magnim Department Stores. From February 1976 through March 1992 he held a variety of executive and management positions with R.H. Macys & Co., Inc.
DAVID BOUDREAU
Mr. Boudreau is the Chief Financial Officer and Senior Vice President of Finance and Treasurer of the Company. Prior to becoming Chief Financial Officer of the Company in 1997, Mr. Boudreau was Senior Vice President of Finance from 1994 through 1997 and Senior Vice President of Special Projects from 1989 through 1994. He joined the company as Controller and Treasurer in 1986 after working with the Company as an outside staff accountant from 1983 through 1986. He has been a Director of the Company since 2000.
MARC WEINSTEIN
Marc Weinstein has been employed as the Chief Operating Officer and Senior Vice President of the Company since July 1996. Prior to joining the Company, Mr. Weinstein spent approximately 19 years with the Burger King Corporation. During his tenure at Burger King, he gained extensive retailing, operations and human resource knowledge on both a domestic and international basis while holding a multitude of positions
such as Vice President Managing Director of Europe, Vice President of Operations and Vice President of Human Resources. He has been a Director of the Company since 2000.
ALBERT RAHM, II
Mr. Rahm has been the Vice President of Stores of the Company since January 2000. From April 1991 through January 2000, Mr. Rahm served as an Assistant Manager, a Manager and a Regional Vice President for the Company. Prior to joining the Company in April 1991, Mr. Rahm owned and operated three retail jewelry stores for a fourteen-year period in Shreveport, Louisiana.
AIDA ALVAREZ
Ms. Alvarez has been the Vice President of Merchandising and Marketing for the Company since February 2001. From August 1989 through February 2001, Ms. Alvarez served as General Merchandise Manager, Divisional Merchandise Manager and Head Watch Buyer for the Company.
GREGG BEDOL
Mr. Bedol has worked to help retailers improve profitability through application of advanced technologies and operational improvements for more than twenty years. He is the founder and Chief Executive Officer of Bedol Retail Ventures, Inc., a retail consulting firm and umbrella company that holds investments in other businesses that have served the retail industry since 1991. From 1997 through 2001, Mr. Bedol served as Chief Executive Officer of RetailOps LLC. Mr. Bedol has retail consulting experience at several organizations, including the predecessor of Accenture. He has been a Director of the Company since 1996.
THOMAS EPSTEIN
Mr. Epstein has been a private investor and financial consultant since 1990. Mr. Epstein was affiliated with Zaleski, Sherwood & Co., Inc. from April 1986 to September 1990. From 1980 to 1986, Mr. Epstein was employed by Bankers Trust Company in various capacities, including Vice President. Mr. Epstein was chairman of the Board of Directors of GSS/Array Technology Public Co., Ltd. until July 2001. He has been a Director of the Company since 1995.
MARGARET GILLIAM
Ms. Gilliam is the founder and President of Gilliam & Co., a company that advises potential investors on both public and private investments and advises businesses on strategic initiatives. From 1975 through 1997, Ms. Gilliam oversaw investment research in the retail and soft goods industries. Her most recent position in this field was as Director-Equity Research at Credit Suisse First Boston. She has also held similar positions with other financial service organizations such as Goldman, Sachs & Company. Ms. Gilliam is a director of Horizon Group Properties, a real estate entity specializing in outlet malls, Harold's Stores, a fashion retailer, and the Walking Company, a specialty footwear and accessory retailer. She is also a Director of Family Counseling Service in Westhampton Beach, New York and Friends of McGill University. She has been a Director of the Company since 1998.
AVIGDOR KAPLAN
Since 1997, Mr. Kaplan has been the President of Clal Insurance Group and served as Chairman of the Board of various subsidiary companies within Clal Insurance Group. From 1992 to 1997, Mr. Kaplan served as Director General of Kupat-Holim "Sick (Health/Welfare) Fund" and also served as Chairman of the Board of various subsidiaries for the Fund. Mr. Kaplan has been a Director of the Company since 2001.
PETER OFFERMANN
Since May 1994, Mr. Offermann has been the President of Offermann Financial, Inc., a financial consulting firm providing strategic financial advice. Mr. Offermann is also the Chairman and Chief Executive
Officer of ATC Group Services, Inc., an environmental consulting company. From 1999 to February 2002, he served as a Director of Philip Services Corporation. From 1994 to 1999 Mr. Offermann was Executive Vice President and Chief Financial Officer of TLC Beatrice. From 1968 through May 1994, he served in a number of positions with Bankers Trust Company and its affiliates, including as Managing Director of BT Investment Partners, Inc. from October 1992 through May 1994, Managing Director of BT Securities Corporation from October 1991 through October 1992, and Managing Director of Bankers Trust Company from 1986 through 1991. Mr. Offermann serves as a director of National Auto Finance, Inc. He has been a Director of the Company since 1996 and Chairman of the Board since February 28, 2002.
ROBERT G. ROBISON
Mr. Robison has been a partner of the law firm of Morgan, Lewis & Bockius LLP since 1991. He has been a Director of the Company since 1996.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT")
Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission ("SEC") initial reports of ownership and reports of changes in ownership of voting common stock and other equity securities of the Company. Officers, directors and greater-than-ten-percent stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended February 2, 2002("Fiscal 2001"), all Section 16(a) filing requirements applicable to its officers, directors and greater-than-ten-percent beneficial owners were complied with.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation paid by the Company to the Chief Executive Officer and to each of the three other most highly compensated executive officers (the
"Named Executive Officers") of the Company during Fiscal 2001 and during each of the past three fiscal years:
SUMMARY COMPENSATION TABLE
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(1) Except as otherwise explained, the amounts set forth in this column for each individual represent payments of annual premiums by the Company for whole life insurance policies or financial investments provided to executive officers. (2) February 28, 2002, Mr. Arguetty's employment as Chief Executive Officer was terminated by the Company. On May 6, 2002, Mr. Arguetty resigned as a Director of the Company. (3) Includes a $31,800 reimbursement for a club membership used for business development purposes. (4) Mr. Bowers was employed as the General Counsel and Senior Vice President of Legal until November 9, 2001. (5) Includes payment of $245,507 in severance benefits under the terms of Mr. Bowers' employment agreement.
Shown below is further information regarding employee stock options awarded during Fiscal 2001 under the 1991 Stock Option Plan to the Named Executive Officers. No stock appreciation rights were awarded during Fiscal 2001.
OPTION GRANTS IN LAST FISCAL YEAR
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(1) Individual option grants generally become exercisable in installments over a three-year period commencing on the date of grant subject to continued employment. Options can become immediately exercisable upon the occurrence of certain corporate events, including a change in control of the Company or delivery of written notice of stockholder's meeting to consider a merger, sale of assets or similar reorganization. (2) All grants were made at or above 100% of fair market value as of the date of the grant. (3) In accordance with SEC rules, the Black-Scholes pricing model was used to estimate the grant date present value. The values indicated were calculated using the following assumptions: (i) an expected
volatility of 59%; (ii) an expected dividend yield of 0%; (iii) a risk-free interest rate at the date of grant based upon a term equal to the expected life of the option of 4.5%; (iv) an expected option life equal to the anticipated period of time from date of grant to exercise of five years; and (v) no discounts for non-transferability or risk of forfeiture. The estimated values have been included solely for purposes of disclosure in accordance with the rules of the SEC and represent theoretical values. The actual value, if any, an executive may realize will depend upon the increase in the market price of voting common stock through the date of exercise. Such an increase would benefit all stockholders.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table shows stock option exercises by Named Executive Officers in Fiscal 2001, including the aggregate value of gains on the date of exercise. In addition, the table includes the number of shares covered by both exercisable and unexercisable stock options as of February 2, 2002. Also reported are the values for "in-the-money" options which represent the positive spread between the exercise price of any such existing stock options and the fiscal year-end price of $1.21 per share of voting common stock. No Named Executive Officers exercised stock options in Fiscal 2001.
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(1) Fair market value of shares at exercise minus the exercise price.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL PROVISIONS
Mr. Arguetty was employed as the Chief Executive Officer until February 28, 2002, when he was terminated by the Company. Under the terms of Mr. Arguetty's employment agreement, he receives payment of base salary for a one-year period, the vesting of certain options plus other severance benefits. The total amount of the severance payment due to Mr. Arguetty is $458,800. On May 15, 2002, Mr. Arguetty received a payment of $100,921.62 towards his total severance payment. The remaining portion of the severance payment will be made by the Company on a bi-weekly basis in equal installments.
Mr. Boudreau is employed as the Chief Financial Officer, Senior Vice President of Finance and Treasurer. Under the terms of his employment agreement, Mr. Boudreau receives a base annual salary of $220,000 and has the opportunity to receive an annual cash bonus based upon the achievement of objective performance criteria, such as net income, operating cash flow and return on working capital. The agreement allows the Company to terminate Mr. Boudreau for cause without termination benefits or without cause upon the payment of base salary for a one-year period and the vesting of certain options. If Mr. Boudreau is terminated within a two-year period after a change in control, he will receive the payment of base salary for up to two years plus certain benefits.
Mr. Weinstein is employed as the Chief Operating Officer and Senior Vice President of the Company. Under the terms of his employment agreement, Mr. Weinstein receives a base annual salary of $200,000 and has the opportunity to receive an annual cash bonus based upon the achievement of objective performance criteria, such as net income, operating cash flow and return on working capital. The agreement allows the Company to terminate Mr. Weinstein for cause without termination benefits or without cause upon the payment of base salary for a one-year period and the vesting of certain options. If Mr. Weinstein is terminated within a two-year period after a change in control, he will receive the payment of base salary for up to two years plus certain benefits.
Mr. Bowers was employed as the General Counsel and Senior Vice President of Legal until November 9, 2001 when he left the Company. Under the terms of Mr. Bowers' employment agreement, he received payment of base salary for a one-year period, the vesting of certain options plus other severance benefits.
Albert Rahm, II and Aida Alvarez were appointed executive officers on May 15, 2002.
Mr. Rahm is employed as the Vice President of Stores. Mr. Rahm receives a base annual salary of $185,000 and has the opportunity to receive an annual cash bonus based upon the achievement of objective performance criteria, such as net income, operating cash flow and return on working capital. The agreement allows the Company to terminate Mr. Rahm for cause without termination benefits or without cause upon the payment of base salary for a one-year period and the vesting of certain options. If Mr. Rahm is terminated within a two-year period after a change in control, he will receive the payment of base salary for up to two years plus certain benefits. In May 2002, Mr. Rahm received a Stay Bonus in the amount of $92,500. During Fiscal 2001, Mr. Rahm received a grant of 36,000 stock options with an exercise price of $3.79 per share and a grant of 10,000 stock options with an exercise price of $1.56 per share.
Ms. Alvarez is employed as the Vice President of Merchandising and Marketing. Ms. Alvarez receives a base annual salary of $144,000 and has the opportunity to receive an annual cash bonus based upon the achievement of objective performance criteria, such as net income, operating cash flow and return on working capital. The agreement allows the Company to terminate Ms. Alvarez for cause without termination benefits or without cause upon the payment of base salary for a one-year period and the vesting of certain options. If Ms. Alvarez is terminated within a two-year period after a change in control, she will receive the payment of base salary for up to two years plus certain benefits. In May 2002, Ms. Alvarez received a Stay Bonus in the amount of $72,000. During Fiscal 2001, Ms. Alvarez received a grant of 72,000 stock options with an exercise price of $3.79 per share and a grant of 10,000 stock options with an exercise price of $1.56 per share.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive compensation of $20,000 per year plus reimbursement of reasonable expenses for attending meetings and automatically receive options to purchase at an exercise price equal to the market price on the grant date, 20,000 voting common shares on the date of their initial election and 10,000 each year thereafter on January 1. Such options are fully exercisable six months after the grant date and until two years after a person ceases to be a director. Directors who are employees of the Company do not receive additional compensation for services as a director.
ITEM 12.
ITEM 12. SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of May 13, 2002, 19,525,749 shares of common stock were outstanding. The following table sets forth, as of May 13, 2002, the beneficial ownership of voting common stock of the Company by each director,
executive officer, by all directors and executive officers as a group and by all persons known by the Company to be the beneficial owners of more than 5% of the voting common stock:
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(1) Unless otherwise provided, the address for each "Beneficial Owner" is 14051 Northwest 14th Street, Sunrise, Florida 33323. (2) Unless otherwise noted, each person has sole voting and investment power over the shares listed opposite his or her name. An asterisk is used to indicate less than 1% of the class outstanding. (3) Includes options to purchase 2,668,133 shares, of which certain options are held by various family and estate planning vehicles. Does not include shares of common stock registered in the name of Marbella Resources Limited, wholly owned by the Amid Trust, of which Mr. Arguetty's family has beneficial interests, but with respect to which Mr. Arguetty is not a beneficiary and has no voting or dispositive power. See footnote (15) below. (4) Includes options to purchase 80,000 shares. (5) Includes options to purchase 411,667 shares. (6) Includes options to purchase 115,000 shares. (7) Includes options to purchase 60,000 shares. (8) Includes options to purchase 30,000 shares. (9) Includes options to purchase 80,000 shares. (10) Includes options to purchase 80,000 shares. (11) Includes options to purchase 361,334 shares. (12) Includes options to purchase 34,666 shares. (13) Includes options to purchase 53,334 shares.
(14) Includes all shares held by Eliahu Ben-Shmuel, E.P. Family Partners, Hay Foundation and Tropical Time, Inc. as set forth in a Schedule 13D filed on February 21, 2001. (15) Marbella Resources Limited reported this ownership as of May 27, 1999. (16) Dimensional reported this ownership as of January 30, 2002. (17) Franklin reported this ownership as of February 2, 2001. (18) Includes 4,007,799 shares issuable upon the exercise of stock options for all executive officers and directors.
ITEM 13.
ITEM 13. CERTAIN RELATED TRANSACTIONS
The law firm of Morgan, Lewis & Bockius LLP, of which Mr. Robison is a partner, performs certain legal services for the Company.
The Company has engaged Samuel A. Getz, a former Officer and Director of the Company, as a consultant until September 22, 2002, at the rate of $12,500 per month. His consulting arrangements also provide that if (1) Isaac Arguetty ceases to be the Chief Executive Officer of the Company, or (2) the individuals who constitute the "Incumbent Board" (generally individuals serving as directors on March 24, 2001 and their successors) cease for any reason to constitute at least a majority of the members of the Board, then the entire amount of the remaining consulting fees shall be paid to him on the date that either (1) or (2) occurs.
On April 26, 2001, the Company entered into a Voting and Standstill Agreement with Eliahu Ben-Shmuel and Phillip Goldstein. Messrs. Ben-Shmuel and Goldstein had previously indicated their respective intentions to present certain proposals and an opposition slate of three directors at the forthcoming annual meeting. The agreement generally provides that if the Company has not entered into an agreement to merge with, or sell substantially all of its assets to, another person by October 26, 2001, Mr. Ben-Shmuel will be entitled to designate one director to fill an existing vacancy in the class of directors that serve until the 2002 Annual Meeting. Mr. Ben-Shmuel's designee must qualify as an "independent" director, must not be an affiliate (as defined under the Securities Act of 1933, as amended) of his, and must be reasonably acceptable to the Company at the time of his designation. Under certain circumstances, the agreement will terminate (a) if Mr. Ben-Shmuel does not beneficially own at least 5% of the voting securities of the Company, (b) on October 26, 2002, (c) the date that the Company enters into an agreement to sell the Company, (d) on November 26, 2001 and Ben-Shmuel's designee has not been appointed to the Board of Directors or (e) the day following the 2002 Annual Meeting and Ben-Shmuel's designee is not elected to the Board of Directors at the 2002 Annual Meeting.
In addition, Messrs. Ben-Shmuel and Goldstein agreed to vote all of their beneficially owned voting securities of the Company with respect to the election or removal of directors either (i) in accordance with the recommendations of a majority of the Board of Directors or (ii) in the same proportions as the stockholders. Mr. Ben-Shmuel, however, reserved the right to vote for the election or retention of his designee. Messrs. Ben-Shmuel and Goldstein also granted to the Company an irrevocable proxy to vote their voting securities of the Company with respect to the foregoing. Each also agreed that until October 26, 2002, he will not take certain actions, including any "solicitation" for "proxies", initiate or propose any stockholder proposals for submission to a vote of stockholders, or form, join or in any way participate in any "group" with respect to the foregoing.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The following is a list of the consolidated financial statements of Mayor's Jewelers, Inc. and subsidiaries included in Item 8 of Part II.
INDEPENDENT AUDITORS' REPORT.
CONSOLIDATED BALANCE SHEETS -- February 2, 2002 and February 3, 2001.
CONSOLIDATED STATEMENTS OF OPERATIONS -- Years Ended February 2, 2002, February 3, 2001 and January 29, 2000.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- Years Ended February 2, 2002, February 3, 2001 and January 29, 2000.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- Years Ended February 2, 2002, February 3, 2001 and January 29, 2000.
(a)(2) Financial Statement Schedules. The following is the financial statement schedule filed as part of this Form 10-K: Schedule II. All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto.
(a)(3) The following list of schedules and exhibits are included or incorporated by reference as indicated in this Form 10-K:
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the fourth quarter ended February 2, 2002.
SCHEDULE II
MAYOR'S JEWELERS, INC. VALUATION AND QUALIFYING ACCOUNTS (AMOUNTS SHOWN IN THOUSANDS)
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(1) Net of recoveries
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.
MAYOR'S JEWELERS, INC.
Date: May 20, 2002 /s/ JOSEPH CICIO -------------------------------------- Joseph Cicio, 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:
INDEX TO EXHIBITS