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[PHOTO]
MARKS BROS. JEWELERS
EST. 1895
1996 Annual Report
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Company Profile
Marks Bros. Jewelers, Inc. is a leading national specialty retailer of fine
jewelry, currently operating 176 stores in 24 states. Founded in 1895, the
Company operates stores in regional and superregional shopping malls under the
names Whitehall Co. Jewelers, Lundstrom Jewelers and Marks Bros. Jewelers. Marks
Bros. Jewelers, Inc.'s common stock is traded on the NASDAQ National Market
System under the symbol "MBJI."
[MAP OF THE UNITED STATES]
o Stores open at end of 1996
* Planned store openings in 1997
MARKS BROS. JEWELERS
EST. 1895
Financial Highlights
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(In thousands, Fiscal Fiscal Percent
except per share data) 1996 1995 Change
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Statement of Operations Data:
Sales ................................... $155,474 $131,022 18.7%
Income from operations .................. 19,031 15,413 23.5%
Pro forma income(1) ..................... 8,416 5,914 42.3%
Pro forma income per share(1) ........... $ 0.89 $ 0.64 39.1%
=================================
(1) Pro forma results reflect the equity offering and debt recapitalization of
Marks Bros. Jewelers, Inc. ("Marks Bros." or the "Company") on May 7, 1996
as if it had occurred on February 1 of each year, and reflect the equity
offering on November 7, 1996 as if it had occurred on November 1 of each
year. These pro forma results also exclude the extraordinary gain on the
extinguishment of debt in the second quarter of fiscal 1996, the
extraordinary loss on the extinguishment of debt in the fourth quarter of
fiscal 1996, and apply a 40% tax provision to 1995 pro forma net income
from operations and exclude a one time tax benefit in the fourth quarter of
fiscal 1995.
[THE FOLLOWING 3 TABLES WERE REPRESENTED AS BAR CHARTS IN THE PRINTED MATERIAL]
Net Sales
(In Millions)
1993.............................
1994.............................
1995.............................
1996.............................
Operating Income
(In Millions)
1993.............................
1994.............................
1995.............................
1996.............................
Operating Margin
(Percentage)
1993.............................
1994.............................
1995.............................
1996.............................
MARKS BROS. JEWELERS
EST. 1895
1
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To Our Shareholders:
In fiscal 1996, Marks Bros. Jewelers, Inc. achieved its fifth consecutive
year of record sales and earnings. Our recent financial progress, which builds
on the Company's decades-long commitment to growth and excellence, reflects a
sound operating strategy and an expansion of our base of profitable stores in
regional malls across the United States. In fiscal 1996, our mission was clear
and we did what we set out to do--improve the productivity of our fine jewelry
stores while accelerating the opening of new locations. The Company's initial
public offering in May 1996, as well as a follow-on offering in November, have
strengthened our balance sheet and given us the capital resources to support our
accelerated growth.
Financial Highlights
Net sales for the fiscal year ended January 31, 1997 were $155.5 million, up
18.7% over the previous fiscal year. This increase reflects a 7.9% rise in
comparable store sales, as well as sales from productive new stores opened
during 1996. Operating margins increased to 12.2% in fiscal 1996 from 11.8% in
the previous fiscal year.
Income from operations increased 23.5% to $19.0 million. Pro forma net
income in fiscal 1996 rose 42.3% to $8.4 million, or $0.89 per share, compared
to pro forma net income of $5.9 million, or $0.64 per share, in fiscal 1995. Pro
forma net income gives effect to the two equity offerings and debt
recapitalization in both periods and excludes the impact of extraordinary items
in fiscal 1996 and the one-time income tax-benefit in fiscal 1995.
Strategy for Growth
Our financial progress in 1996 reflects our commitment to accelerating store
openings and improving the operations of existing stores.
o Accelerated Store Openings. In 1996, Marks Bros. opened 19 stores, compared
to 14 during 1995. The new stores expanded the Company's presence in many
of its existing markets. During the first 12 months of operation, new Marks
Bros. stores typically average sales of about 85% of the sales posted by
mature stores, and generally contribute profits in their second month of
operation.
The Company's two equity offerings in 1996, which together raised $66.1
million, have permitted us to accelerate our new store growth in 1997 and
beyond. We plan to open 30 new stores in 1997, including expansion into new
markets in San Diego and Orange County in Southern California.
[PHOTO]
Our talented sales associates focus on
selling and customer service.
o Improving Store Productivity. The Company will continue to develop
strategic marketing and promotional campaigns designed to increase store
sales. For example, we will test new marketing initiatives in order to
develop an effective program for the 1997 Holiday selling season. Other
efforts designed to increase store productivity include a broadened
merchandise selection,
MARKS BROS. JEWELERS
EST. 1895
2
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[PHOTO]
Our open-store format in high-traffic "center court" locations
provides an attractive and inviting shopping environment.
enhanced employee incentive programs, and specialized computer-based
systems to improve customer loyalty.
Proven Operating Formula
Behind our financial success and growth plan is a proven, well-honed retailing
strategy committed to providing a high-quality shopping experience for our
customers and economic value for investors. This is how we do it:
o Premium store locations in regional malls. The Company currently operates
176 upscale jewelry stores in malls in 24 states primarily under the
Whitehall Co. Jewellers and Lundstrom Jewelers nameplates. Our store format
is small and flexible, allowing us to obtain highly visible "center court"
locations in malls, while reducing fixed occupancy costs. Obtaining such
high-traffic sites is critical to our retailing strategy. The Company's
stores average approximately 800 square feet and generate average sales per
store of $990,000 and sales per square foot of more than $1,200, which is
among the highest in the industry.
o Non-Recourse Private Label Credit. We offer our customers the convenience
of instant private label credit without assuming credit risk. By offering
our customers a private label credit option, we increase the average sale
and produce higher earnings, while our third-party credit purveyors assume
the credit risk if a customer does not pay. Our non-recourse arrangement
offers the Company two key benefits: first, the quality of our earnings is
greater since we don't risk bad debt write-offs during economic downturns
and, second, since credit granting and administrative functions are
outsourced, our sales associates are able to focus more time and energy on
selling jewelry.
o Differentiated Merchandising. Because of our smaller store size, our
non-recourse credit program and our middle-income to affluent customer
base, Marks Bros. focuses on selling upscale merchandise. Unlike many of
our mall-based competitors, the Company does not sell giftware or costume
jewelry and offers only a limited selection of watches. Instead, we offer a
greater selection of higher margin fine jewelry, including a wider
assortment of diamond jewelry. This contributed to an increase in our
average merchandise sale from $210 in 1993 to $255 for fiscal 1996. Last
year, we tested our Signature Collection concept, which is an expanded
assortment of upscale merchandise, in 35 stores. This program was quite
productive and we are expanding it to about 50 additional stores this year.
MARKS BROS. JEWELERS
EST. 1895
3
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[PHOTO]
Hugh M. Patinkin
Chairman, President and
Chief Executive Officer
o Experienced, incentivized sales personnel. To meet its staffing needs, Marks
Bros. employs sales associates with proven retail experience. To motivate sales
personnel, a portion of their compensation is incentive-based, providing
numerous bonus opportunities. Our talented and motivated sales associates are a
key factor in our continuing success.
o Hands-on management. A hallmark of the Company's management is its close
communication with stores and daily monitoring of performance. Our most
senior executives, myself included, spend a significant amount of time in
stores. The vast majority of our stores are visited by senior executives
several times a year. In view of our accelerated expansion plans, executive
management continues to emphasize close communication with store-based
personnel.
Outlook
As we look ahead to fiscal 1997 and beyond, we are very enthusiastic about Marks
Bros.' future. The jewelry market is highly fragmented and continues to
consolidate, creating opportunities for us to increase our market share. Over
the longer term, we are encouraged by demographic trends that favor the retail
jewelry industry, including an increase in personal jewelry expenditures and the
aging of baby-boomers, who are entering the years when jewelry purchases are
highest.
Our growth plan for opening new stores in premium "center court" locations
is on track in 1997. The Company is also working aggressively to develop and
deploy marketing programs designed to increase the sales and profitability of
our stores. Finally, our dedicated and motivated people have been given the
tools they need to continue to pursue profitable selling. In short, Marks Bros.
is looking forward to another great year.
[PHOTO]
We feature an extensive selection of
upscale fine jewelry including
diamonds, gold, precious and
semi-precious jewelry.
We would like to thank all of our employees, customers and shareholders
whose support throughout the year has enabled us to achieve our many successes
and whose continued assistance will provide the means for us to enhance
shareholder value.
/s/ Hugh M. Patinkin
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Hugh M. Patinkin
Chairman, President and Chief Executive Officer
MARKS BROS. JEWELERS
EST. 1895
4
Marks Bros. Jewelers, Inc.
Selected Historical Financial and
Operating Data
The following table sets forth certain financial and operating data of the
Company. The selected statement of operations data and balance sheet data as of
and for the fiscal year ended January 31, 1997 (fiscal 1996) and each of the
four prior fiscal years, are derived from audited financial statements of the
Company. The selected financial information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's audited financial statements
appearing elsewhere herein.
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(Dollars in thousands,
except per share and Fiscal Fiscal Fiscal Fiscal Fiscal
selected operating data) 1996 1995 1994 1993 1992
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Statement of Operations Data:
Net Sales ................................ $ 155,474 $ 131,022 $ 106,683 $ 91,106 $ 88,141
Cost of sales ............................ 91,134 77,722 64,223 54,511 52,106
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Gross profit ........................... 64,340 53,300 42,460 36,595 36,065
Selling, general and administrative
expenses ............................... 45,309 37,887 30,748 28,340 27,971
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Income from operations ................. 19,031 15,413 11,712 8,255 8,064
Interest expense ......................... 6,993 12,314 10,594 8,920 7,821
Stock award expense ...................... -- 461 -- -- --
ESOP compensation expense ................ -- 590 547 511 3,800
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Income (loss) from continuing
operations before income taxes ......... 12,038 2,048 571 (1,176) (3,557)
Income tax expense (benefit)(1) .......... 4,695 (14,924) -- -- --
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Income (loss) from continuing operations 7,343 16,972 571 (1,176) (3,557)
Gain on disposal of discontinued
operations(2) ............................ -- -- -- 2,700 --
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Net income (loss) before cumulative effect
of accounting change for ESOP and
extraordinary gain ................... 7,343 16,972 571 1,524 (3,557)
Cumulative effect of accounting change
for ESOP(3) ............................ -- -- -- (8,526) --
Extraordinary item, net(4) ............... 10,057 -- -- -- --
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Net income (loss) ...................... $ 17,400 $ 16,972 $ 571 $ (7,002) $ (3,557)
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Earnings Per Share
Net income from continuing operations .... $ 0.87 $ 3.16 $ 0.11 -- --
Selected Operating Data
Stores open at end of period ............. 164 146 131 122 113
Average net sales per store(5) ........... $ 990,000 $ 936,000 $ 836,000 $ 791,000 $ 784,000
Average net sales per gross square foot(6) $ 1,247 $ 1,187 $ 1,068 $ 1,013 $ 1,008
Average merchandise sale ................. $ 255 $ 245 $ 229 $ 210 $ 192
Comparable store sales increase
(decrease)(7) .......................... 7.9% 11.0% 7.6% (0.5)% 12.5%
Balance Sheet Data (at end of period)
Working capital .......................... $ 25,824 $ 21,512 $ 20,460 $ 20,079 $ 15,123
Total assets ............................. 93,533 87,403 61,512 51,677 59,174
Total debt ............................... 21,267 107,891 110,806 105,953 112,247
Stockholders' equity (deficit) ........... 37,507 (47,858) (66,578) (67,659) (69,634)
(1) Income tax benefit in the year ended January 31, 1996 (fiscal 1995)
resulted from the reversal of the Company's deferred tax valuation
allowance and corresponding recognition of a deferred tax asset. (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Background" and Note 11 of Notes to Financial Statements.)
(2) The Company sold its direct marketing division as of January 31, 1992
(fiscal 1993). In connection with this disposition, the Company recorded a
$2.7 million gain on the sale of the discontinued operations in the year
ended January 31, 1994 upon its receipt of deferred proceeds from the sale.
(3) Reflects a charge for the cumulative effect of the Company's change in
accounting in the amount of $8.5 million to adopt AICPA SOP 93-6 for the
recognition of compensation expense on shares allocated to the ESOP.
(4) Reflects net extraordinary gain in connection with the extinguishment of
debt (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Background" and Note 9 of Notes to Financial
Statements).
(5) Average net sales per store represents the total net sales for stores open
for a full fiscal year divided by the total number of such stores.
(6) Average net sales per gross square foot represents total net sales for
stores open for a full fiscal year divided by the total gross square feet
of such stores.
(7) A store becomes comparable after it has been open for 12 full months.
MARKS BROS. JEWELERS
EST. 1895
5
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's financial
statements, including the notes thereto.
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Background
The Company is a leading national specialty retailer of fine jewelry, currently
operating 176 stores in 24 states. The Company's sales and income from
operations have increased consistently since fiscal 1991 to $155.5 million and
$19.0 million, respectively, in fiscal 1996. During that same period, the number
of Company stores grew from 111 to 164, and the Company's operating margins
improved from 7.0% in fiscal 1991 to 12.2% in fiscal 1996.
To strengthen its capital structure and provide greater financial flexibility
for new store openings, in May 1996, the Company completed an initial public
offering (the "IPO") and a concurrent restructuring of outstanding indebtedness
(the "Recapitalization") which substantially reduced the Company's indebtedness
and ongoing interest expense. In November 1996, the Company completed a second
public offering (the "Offering") which further strengthened the Company's
capital structure, reduced indebtedness and accelerated the pace of new store
openings. The Recapitalization resulted in a one-time extraordinary gain on
early extinguishment of debt in the amount of $18.3 million ($11.2 million net
of tax) in the second quarter of fiscal 1996. In connection with the reduction
of indebtedness from the application of the proceeds of the Offering, the
Company incurred an extraordinary charge of approximately $1.8 million ($1.1
million net of tax) in the fourth quarter of fiscal 1996.
The growth of the Company's net sales and earnings will depend to a significant
degree on the Company's ability to successfully expand its operations through
the opening of new stores. The Company plans to open a total of 30 stores in
calendar 1997, and a similar number of stores in 1998. The Company's policy is
to charge as incurred pre-opening costs associated with new stores.
In fiscal 1996, the Company upgraded its personnel to increase sales and expects
to continue to incur selling, general and administrative expenses in the near
term in association with this ongoing process. The Company is increasing its
inventory in connection with its merchandising programs and, in particular, in
connection with its expanded offerings of higher priced merchandise in a number
of its stores.
A variety of factors affect the sales results for the Company's stores,
including economic conditions, the retail sales environment, the availability
and cost of credit from third party credit purveyors, the results of the
Company's merchandising and marketing strategies, and the Company's ability to
otherwise execute its business strategy. The Company experienced a 7.9%
comparable store sales increase in fiscal 1996. There can be no assurance that
the Company will achieve comparable store sales increases in future reporting
periods.
The Company's business is highly seasonal, with a significant portion of its
sales and most of its income generated during the fourth fiscal quarter ending
January 31. The Company has historically experienced lower net sales in each of
its first three fiscal quarters and expects this trend to continue. The Company
has experienced net losses from time to time in one or more of its first three
fiscal quarters (see Note 18 of Notes to Financial Statements for unaudited
quarterly results). The Company's quarterly and annual results of operations
also may fluctuate significantly as a result of factors, including the timing of
new store openings, net sales contributed by new stores, increases or decreases
in comparable store sales, timing of certain holidays, changes in the Company's
merchandise, the timing and number of store remodelings, general economic,
industry and weather conditions that affect consumer spending, and pricing,
merchandising, marketing, credit and other programs of competitors.
MARKS BROS. JEWELERS
EST. 1895
6
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Results of Operations
The following table sets forth for the periods indicated certain information
derived from the statements of operations of the Company expressed as a
percentage of net sales for such periods.
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Fiscal Fiscal Fiscal
Percentage of Net Sales 1996 1995 1994
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Net sales ............................................. 100.0% 100.0% 100.0%
Cost of sales (including buying and occupancy expenses) 58.6 59.3 60.2
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Gross profit ........................................ 41.4 40.7 39.8
Selling, general and administrative expenses .......... 29.2 28.9 28.8
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Income from operations .............................. 12.2 11.8 11.0
Interest expense ...................................... 4.5 9.4 9.9
Stock award expense ................................... -- 0.4 --
ESOP compensation expense ............................. -- 0.5 0.5
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Income before income taxes .......................... 7.7 1.6 0.5
Income tax expense (benefit) .......................... 3.0 (11.4) --
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Income before extraordinary item .................... 4.7 13.0 0.5
Extraordinary item, net ............................... 6.5 -- --
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Net income .......................................... 11.2% 13.0% 0.5%
==============================
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Fiscal 1996 Compared to Fiscal 1995
Net sales in fiscal 1996 increased $24.5 million, or 18.7%, to $155.5 million
from $131.0 million in fiscal 1995. Comparable store sales increased $10.1
million, or 7.9%, during fiscal 1996. Sales from new stores contributed $14.9
million to the overall sales increase while sales from layaways increased sales
by $0.5 million. These sales increases were partially offset by a decrease in
sales of $1.0 million related to the closing of two stores. The average number
of units sold on a comparable store basis increased by approximately 4.0% in
fiscal 1996, while the average price per merchandise sale increased to $255 in
fiscal 1996 from $245 in fiscal 1995. Comparable store sales increased in part
due to the implementation of certain return/exchange policies, increased use of
non-recourse credit, increased inventory levels, and ongoing improvements in the
quality of the Company's sales force, as well as a solid retail environment for
most of the year. The Company opened 20 stores and closed 2 stores during fiscal
1996, increasing the number of stores operated to 164 as of January 31, 1997
compared to 146 as of January 31, 1996.
Gross profit increased $11.0 million in fiscal 1995, to $64.3 million in fiscal
1996. The gross profit percentage increased to 41.4% in fiscal 1996 from 40.7%
in fiscal 1995, primarily due to the leveraging of certain buying and occupancy
costs over the Company's higher sales.
Selling, general and administrative expenses increased $7.4 million, or
19.6%, to $45.3 million in fiscal 1996 from $37.9 million in fiscal 1995. As a
percentage of net sales, selling, general and administrative expenses increased
to 29.2% in fiscal 1996 from 28.9% in fiscal 1995. The dollar increase primarily
related to higher payroll expenses ($4.5 million), higher credit expenses ($1.2
million), and higher other store expenses ($1.0 million). Selling, general and
administrative expenses attributable to the 20 stores opened in fiscal 1996 and
15 stores opened in fiscal 1995 account for $4.3 million of the increase.
Comparable store payroll costs increased 8.6% in fiscal 1996, as compared to
fiscal 1995, primarily due to an effort to upgrade the quality of the sales
force and increase incentive-based compensation paid to store personnel. Private
label credit sales as a percentage of net sales increased to 40.1% in fiscal
1996 from 36.9% in fiscal 1995. These non-recourse credit sales carry higher
discount rates than bankcard sales, which resulted in higher credit expense. The
first-time buyer program as a percentage of net sales increased to 4.2% in
fiscal 1996 from 1.9% in fiscal 1995. The first-time buyers program was
discontinued in December 1996.
Interest expense decreased $5.3 million to $7.0 million in fiscal 1996 from
$12.3 million in fiscal 1995. This resulted from lower outstanding debt balances
and lower average interest rates on revolver and term borrowings resulting
primarily from the IPO, Recapitalization and Offering.
No ESOP compensation expense has been recorded in fiscal 1996. ESOP compensation
expense recorded in fiscal 1995 was $590,000. Also, in fiscal 1995, the Company
recognized a $461,000 expense relating to restricted stock awards.
MARKS BROS. JEWELERS
EST. 1895
7
An income tax expense of $11.1 million was recorded in fiscal 1996 ($4.7 million
has been charged to income tax expense and $6.4 million has been charged against
the extraordinary item) reflecting an effective annual tax rate of 39%. A
one-time income tax benefit of $14.9 million was recorded in fiscal 1995. The
one-time recognition of the deferred tax benefit resulted from a reduction in
the valuation allowance relating to the Company's expectation that future
taxable income would be at least $41.5 million, prior to the expiration of the
deferred tax assets. The deferred tax asset principally relates to the Company's
net operating loss carryforwards and a temporary difference arising from the
recognition of interest expenses and fees on outstanding debt as of January 31,
1996. At February 1, 1997 and 1996, respectively, the Company had available net
operating loss tax carryforwards in the amount of $11.3 million and $17.9
million, which begin expiring in 2008. While these carryforwards are expected to
reduce future income tax payments, the benefits of such carryforwards have
already been recognized in the Company's balance sheets and results of
operations for fiscal 1995.
An extraordinary gain on the extinguishment of debt was recorded for $10.1
million ($6.4 million net of taxes). This includes debt discounts on senior
accreting loans of $0.6 million, zero coupon loans of $4.0 million and
subordinated debt of $13.7 million offset by a prepayment premium on
subordinated debt of $1.0 million and the write-off of deferred financing costs
of $0.8 million.
Net income increased to $17.4 million in fiscal 1996 from $17.0 million in
fiscal 1995 as a result of the factors discussed above.
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Fiscal 1995 Compared to Fiscal 1994
Net sales increased $24.3 million, or 22.8%, to $131.0 million in fiscal 1995
from $106.7 million in fiscal 1994. Comparable store sales increased $11.6
million, or 11.0%, in fiscal 1995. Sales from new stores contributed $12.5
million to the overall increase in net sales. The average number of units sold
per store increased by approximately 4.4% from fiscal 1994 to fiscal 1995, while
the average price per merchandise sale increased to $245 in fiscal 1995 from
$229 in fiscal 1994. Comparable store sales increased in large part due to
improvements in the quality of the Company's personnel, increased use of
non-recourse credit, and the implementation of new return/exchange policies. The
Company opened 15 stores in fiscal 1995, increasing the number of store operated
to 146 as of January 31, 1996 from 131 as of January 31, 1995.
Gross profit increased $10.8 million, or 25.5%, to $53.3 million in fiscal 1995,
from $42.5 million in fiscal 1994. Gross margin increased to 40.7% in fiscal
1995 from 39.8% in fiscal 1994. This increase was due primarily to a slight
shift in product mix to the Company's higher margin jewelry items, as well as
stricter discounting policies implemented during fiscal 1995. Occupancy,
distribution and buying costs decreased as a percentage of net sales, due to
economies of scale achieved through the Company's larger store base and
increased net sales.
Selling, general and administrative expenses increased $7.1 million, or 23.2%,
to $37.9 million in fiscal 1995 from $30.7 million in fiscal 1994. As a
percentage of net sales, selling, general and administrative expenses increased
slightly to 28.9% in fiscal 1995 from 28.8% in fiscal 1994. The dollar increase
primarily related to higher payroll expenses ($4.9 million) and credit expense
($1.7 million), partially offset by a decrease in advertising expenses ($0.4
million). Selling, general and administrative expenses attributable to the 15
stores opened in fiscal 1995 and 11 stores opened in fiscal 1994 account for
$3.6 million of the total increase in selling, general and administrative
expenses. Payroll costs increased in fiscal 1995, as compared to fiscal 1994,
primarily due to an effort to upgrade the quality of store managers and an
increase in incentive compensation paid to store-based personnel. Private label
credit sales as a percentage of net sales increased to 36.9% in fiscal 1995 from
29.3% in fiscal 1994 as a result of an increase in use of the Company's "private
label" credit programs (including its new "First Time Buyers" program). These
non-recourse credit sales carry higher discount rates than bankcard sales, which
resulted in higher credit expense. The increased usage of private label credit
contributed to higher sales as well as an increase in the average price per
merchandise sale. Advertising expenses decreased as a result of eliminating
radio advertising in fiscal 1995.
As a result of the factors discussed above, income from operations increased
31.6%, to $15.4 million in fiscal 1995 from $11.7 million in fiscal 1994. As a
percentage of net sales, income from operations increased to 11.8% in fiscal
1995 from 11.0% in fiscal 1994.
MARKS BROS. JEWELERS
EST. 1895
8
Interest expense increased $1.7 million to $12.3 million in fiscal 1995 from
$10.6 million in fiscal 1994. As a percentage of net sales, interest expense
decreased to 9.4% in fiscal 1995 from 9.9% in fiscal 1994. The dollar increase
in interest expense was due primarily to higher average indebtedness and higher
interest rates. Approximately two-thirds of fiscal 1995 interest expense
consisted of non-cash interest accrued on the Company's senior accreting notes
and subordinated indebtedness.
ESOP compensation expense increased $43,000, or 7.9%, to $590,000 in fiscal 1995
from $547,000 in fiscal 1994. The expense is related to the estimated fair value
of shares held by the ESOP committed to be released to participants' accounts.
The Company also recognized a one-time $461,000 expense relating to restricted
stock awards made in fiscal 1995.
At the end of fiscal 1995, the Company recognized into net income a one-time
deferred tax benefit of $14.9 million. The recognition of the one-time deferred
tax benefit resulted from a reduction in the valuation allowance relating to the
Company's expectation that future taxable income would be at least $41.5
million, prior to the expiration of the deferred tax assets. The deferred tax
asset principally relates to the Company's net operating loss carryforwards and
a temporary difference arising from the recognition of interest expenses and
fees on outstanding debt as of January 31, 1996. At February 1, 1996, the
Company had available net operating loss tax carryforwards in the amount of
$17.9 million, which begin expiring in 2006. While these carryforwards are
expected to reduce future income tax payments, the benefits of such
carryforwards have already been recognized in the Company's balance sheets and
results of operations for fiscal 1995.
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Liquidity and Capital Resources
The Company's cash flows from operating activities decreased from a positive
cash flow of $9.6 million in fiscal 1995 to a cash flow shortfall of $3.6
million in fiscal 1996. Higher income from operations together with increases in
accounts payable ($5.7 million) and accrued expenses ($3.9 million) were more
than offset by increases in merchandise inventories ($24.4 million) (before the
effects of the Company's gold consignment facility) and deferred financing costs
($2.5 million). Cash used by investing activities include the funding of capital
expenditures ($7.0 million), primarily related to the opening of 20 stores in
fiscal 1996. Cash generated from financing activities included (i) proceeds from
the IPO and the Offering ($66.1 million), (ii) proceeds from a term loan ($15.0
million), (iii) proceeds from the gold consignment facility ($15.3 million),
(iv) proceeds from subordinated debt ($20.0 million), (v) an increase in
revolver borrowings under the current revolving credit facility ($10.7 million),
and (vi) proceeds from the exercise of stock options ($0.5 million), less a $0.7
million decrease in the net amount of outstanding checks. The Company utilized
cash in fiscal 1996 primarily to (i) repay outstanding bank borrowings on
revolving loans under the previous credit facility ($2.1 million), (ii) to repay
the Company's term loans ($41.6 million), (iii) to repay senior accreting loans
($50.5 million), (iv) to repay revolving zero coupon notes ($2.0 million), and
(v) to repay or repurchase subordinated debt ($20.1 million). Primarily as a
result of the financing transactions described above, stockholders' equity
increased from a deficit of ($47.9) million at January 31, 1996 to $37.5 million
at January 31, 1997.
The Company's cash flows from operating activities increased from $4.7 million
in fiscal 1994 to $9.6 million in fiscal 1995, primarily due to higher income
from operations. In fiscal 1995, the sources of the Company's liquidity included
cash flow from operating activities, together with a $5.5 million increase in
outstanding checks less a $4.7 million decrease in amounts outstanding under the
Company's revolver. The Company utilized cash during fiscal 1995 primarily to
(i) increase inventories, net of corresponding payables ($6.3 million), (ii)
repay the Company's term loan ($6.4 million), and (iii) fund capital
expenditures ($3.9 million). The increase in inventories and capital
expenditures primarily related to the opening of the Company's 15 stores in
fiscal 1995.
At February 1, 1997, the Company had net operating loss tax carryforwards in the
amount of $11.3 million, which will reduce cash payments for income taxes in
future periods but which have already been recognized for financial reporting
purposes. The timing of the use of some portion of these carryforwards is
expected to be deferred under Section 382 of the Code.
The Company has a $44.0 million revolving credit facility and a $16.0 million
gold consignment facility, totaling $60.0 million through April 30, 2001.
Interest rates and commitment fees charged on the unused facility float in a
grid based on the Company's quarterly performance. Since these interest rates
are determined by reference to Eurodollar or prime rates, changes in market
interest rates can materially affect the Company's interest expense. Borrowings
under the revolver are limited to a borrowing base determined based on levels of
inventory and accounts receivable. The
MARKS BROS. JEWELERS
EST. 1895
9
peak outstanding borrowing under the Company's revolver during fiscal 1996 and
1995 was $19.0 million and $10.7 million, respectively. The unused facility was
$22.0 million as of January 31, 1997.
The Company has a gold consignment facility with a lending institution pursuant
to which the Company accepts as consignee, and is responsible to return at some
future date, a fixed number of ounces of gold. The periodic charges paid by the
Company are computed based on a percentage of the value of the gold consigned.
Therefore, an increase in the price of gold could substantially increase the
annual costs to the Company of the gold consignment and the eventual cost to the
Company upon the termination of this arrangement. During fiscal 1996, the
Company sold and simultaneously consigned 39,000 troy ounces of gold for $15.3
million.
A substantial portion of the merchandise sold by the Company is carried on a
consignment basis prior to sale or is otherwise financed by vendors, thereby
reducing the Company's direct capital investment in inventory. The peak
consigned inventories from merchandise vendors was $17.4 million and $18.0
million during fiscal 1996 and 1995, respectively. The willingness of vendors to
enter into such arrangements may vary substantially from time to time based on a
number of factors, including the merchandise involved, the financial resources
of vendors, interest rates, availability of financing, fluctuations in gem and
gold prices, inflation, the financial condition of the Company and a number of
economic or competitive conditions in the jewelry business or the economy
generally. Any change in these relationships could have a material adverse
effect on the Company's results from operations or financial condition.
The Company's cash requirements consist primarily of funding increases in
inventory at existing stores, capital expenditures and working capital
(primarily inventory) associated with the Company's new stores. The Company's
primary sources of liquidity have been cash flow from operations and bank
borrowings.
During 1997, the Company plans to open 30 stores. New stores on average require
inventory of approximately $400,000 and capital expenditures of approximately
$230,000. The Company is in the process of increasing the amount of inventory
(especially higher priced items) carried in its stores. Pre-opening expenses for
each new store average approximately $20,000. The Company anticipates capital
expenditures of approximately $10.0 million for new store openings and other
fixed assets to be placed in service during fiscal 1997. Also, the Company
intends to modify and upgrade its existing computer systems to be year 2000
compliant.
The Company's inventory levels and working capital requirements have
historically been highest in advance of the Christmas season. The Company has
funded these seasonal working capital needs through borrowings under the
Company's revolver and increases in trade payables and accrued expenses.
Management expects that cash flows from operating activities and funds available
under its revolving credit facility should be sufficient to support the
Company's current new store expansion program and seasonal working capital needs
for the foreseeable future.
- --------------------------------------------------------------------------------
Inflation
The Company believes that inflation generally has not had a material effect on
the results of its operations.
All statements, trend analysis and other information contained in this report
relative to markets for the Company's products and trends in the Company's
operations or financial results, as well as other statements including words
such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and
other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things: (1) the extent and results of the Company's store expansion
strategy; (2) the seasonality of the Company's business; (3) the Company's
leverage; (4) economic conditions, the retail sales environment and the
Company's ability to execute its business strategy and the related effects on
comparable store sales and other results; (5) the extent to which the Company is
able to retain and attract key personnel; (6) competition; (7) the availability
and cost of consumer credit; (8) relationships with suppliers; (9) fluctuations
in gem and gold prices; (10) regulation; and (11) the risk factors listed from
time to time in the Company's filings with the Securities and Exchange
Commission.
MARKS BROS. JEWELERS
EST. 1895
10
Statements of Operations
for the years ended January 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------------------------
(in thousands, except for
per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------
Net sales ............................................. $ 155,474 $ 131,022 $ 106,683
Cost of sales (including buying and occupancy expenses) 91,134 77,722 64,223
----------------------------------
Gross profit ........................................ 64,340 53,300 42,460
Selling, general and administrative expenses .......... 45,309 37,887 30,748
----------------------------------
Income from operations .............................. 19,031 15,413 11,712
Interest expense ...................................... 6,993 12,314 10,594
Stock award expense ................................... -- 461 --
ESOP compensation expense ............................. -- 590 547
----------------------------------
Income before income taxes .......................... 12,038 2,048 571
Income tax expense (benefit) .......................... 4,695 (14,924) --
----------------------------------
Income before extraordinary item .................... 7,343 16,972 571
Extraordinary item, net ............................... 10,057 -- --
----------------------------------
Net income .......................................... $ 17,400 $ 16,972 $ 571
==================================
Primary and fully diluted earnings per share:
Income before extraordinary item .................... $ .87 $ 3.16 $ 0.11
Extraordinary item, net ............................. 1.18 -- --
----------------------------------
Net income .......................................... $ 2.05 $ 3.16 $ 0.11
==================================
Weighted average common share and
common share equivalents ............................ 8,508 5,375 5,204
The accompanying notes are an integral part of the financial statements.
MARKS BROS. JEWELERS
EST. 1895
11
Balance Sheets
as of January 31, 1997 and 1996
- --------------------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------------------
Assets
Current assets:
Accounts receivable, net ....................................... $ 1,354 $ 1,169
Layaway receivables, net ....................................... 2,041 1,576
Merchandise inventories ........................................ 64,482 55,401
Other current assets ........................................... 638 714
Deferred income taxes, net ..................................... 1,326 817
Deferred financing costs ....................................... 292 --
----------------------
Total current assets ....................................... 70,133 59,677
Property and equipment, net .................................... 16,305 12,852
Deferred income taxes, net ..................................... 5,947 14,874
Deferred financing costs ....................................... 1,148 --
----------------------
Total assets ............................................... $ 93,533 $ 87,403
======================
- --------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity (Deficit)
- --------------------------------------------------------------------------------------------
Current liabilities:
Outstanding checks, net ........................................ $ 7,242 $ 7,991
Revolver loans ................................................. 10,747 2,119
Current portion of long-term debt .............................. -- 9,846
Accounts payable ............................................... 14,706 9,037
Accrued payroll ................................................ 2,607 2,324
Other accrued expenses ......................................... 9,007 6,848
----------------------
Total current liabilities .................................. 44,309 38,165
Total long-term debt, net of current portion ..................... 10,520 95,926
Other long-term liabilities ...................................... 1,197 1,170
----------------------
Total liabilities .......................................... 56,026 135,261
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.001 par value; 60,000,000 shares authorized;
10,061,142 shares, 2,559,793 shares issued and outstanding,
respectively ................................................. 10 --
Class B common stock, $1.00 par value; 29,567 shares authorized;
101 and 26,026 shares issued and outstanding, respectively ... -- 30
Class C common stock, $.001 par value; 39,371 shares authorized;
0 and 39,370 shares issued and outstanding ................... -- --
Class D common stock, $.001 par value; 60,000 shares authorized;
no shares issued and outstanding ............................. -- --
Additional paid-in capital ..................................... 59,804 8,766
Accumulated deficit ............................................ (22,307) (14,673)
Treasury stock, 0 and 1,400,326 shares at cost, respectively ... -- (20,333)
Deferred ESOP compensation ..................................... -- (21,648)
----------------------
Total stockholders' equity (deficit), net .................. 37,507 (47,858)
----------------------
Total liabilities and stockholders' equity (deficit) ....... $ 93,533 $ 87,403
======================
The accompanying notes are an integral part of the financial statements.
MARKS BROS. JEWELERS
EST. 1895
12
Statements of Stockholders' Equity (Deficit)
for the years ended January 31, 1997, 1996 and 1995
- -----------------------------------------------------------------------------------------------------------------------
(in thousands) Class B Additional Deferred
Common Common Paid-In Accumulated Treasury ESOP
Stock Stock Capital Deficit Stock Compensation
- -----------------------------------------------------------------------------------------------------------------------
Balance at
January 31, 1994 ......... $ -- $ 30 $ 15,971 $(32,216) $(20,233) $(31,211)
Net income ................. -- -- -- 571 -- --
Repurchase of
ESOP shares .............. -- -- -- -- (37) --
ESOP amortization .......... -- -- (4,116) -- -- 4,663
-----------------------------------------------------------------------------------
Balance at
January 31, 1995 ......... -- 30 11,855 (31,645) (20,270) (26,548)
Net income ................. -- -- -- 16,972 -- --
Repurchase of
ESOP shares .............. -- -- -- -- (63) --
ESOP amortization .......... -- -- (4,310) -- -- 4,900
Income tax effect of the
difference between the
average fair market
value and the cost of
the released shares ........ -- -- 767 -- -- --
Issuance of stock awards ... -- -- 454 -- -- --
-----------------------------------------------------------------------------------
Balance at
January 31, 1996 ......... -- 30 8,766 (14,673) (20,333) (21,648)
Net income ................. -- -- -- 17,400 -- --
Issued 3,269,500 shares
in initial public offering 3 -- 40,413 -- -- --
Conversion of stock ........ 6 (24) 18 -- -- --
Restructuring of ESOP ...... -- -- (15,609) (3,027) (3,012) 21,648
Cancellation of
treasury stock ........... (1) (6) (5) (23,333) 23,345 --
Issued 1,265,000 shares
in secondary public
offering ................... 1 -- 25,697 -- -- --
Exercise of options ........ 1 -- 524 -- -- --
Tax effect of the
disqualifying disposition
of stock options ........... -- -- -- 1,326 -- --
-----------------------------------------------------------------------------------
Balance at
January 31, 1997 ......... $ 10 $ -- $ 59,804 $(22,307) $ -- $ --
===================================================================================
The accompanying notes are an integral part of the financial statements.
MARKS BROS. JEWELERS
EST. 1895
13
Statements of Cash Flows
for the years ended January 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income ................................................... $ 17,400 $ 16,972 $ 571
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Gain on extinguishment of debt, net of taxes ............. (10,687) -- --
Loss on disposition of assets ............................ 132 -- --
Depreciation and amortization ............................ 3,656 2,948 2,815
Stock award expense non-cash portion ..................... -- 454 --
ESOP compensation expense ................................ -- 590 547
Income tax benefit ....................................... -- (14,924) --
Interest on zero coupon notes ............................ 121 434 402
Interest on senior accreting notes ....................... 1,339 4,994 3,860
Interest on subordinated debt ............................ 790 2,743 2,423
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net ........ (185) 325 509
(Increase) in layaway receivables, net ................. (465) (170) (112)
Decrease in deferred income taxes ...................... 1,584 -- --
(Increase) in deferred financing costs ................. (2,503) -- --
(Increase) in merchandise inventories .................. (24,376) (9,347) (9,460)
Decrease (increase) in other assets .................... 76 (24) 239
Increase in accounts payable ........................... 5,669 3,031 2,903
Increase (decrease) in accrued and long-term liabilities 3,869 1,575 (26)
-------------------------------------
Net cash (used in) provided by operating activities (3,580) 9,601 4,671
-------------------------------------
Cash flows from investing activities:
Capital expenditures ......................................... (7,041) (3,932) (3,974)
Proceeds from assets sold, net ............................... 8 -- 30
-------------------------------------
Net cash used in investing activities .............. (7,033) (3,932) (3,944)
-------------------------------------
Cash flows from financing activities:
Borrowing on old revolver loan ............................... 38,078 127,109 99,159
Repayment of old revolver loan ............................... (40,197) (131,795) (98,993)
Borrowing on new revolver loan ............................... 224,835 -- --
Repayment on new revolver loan ............................... (214,088) -- --
Repayment on term loan ....................................... (15,000) -- --
Repayment on old term loan ................................... (26,600) (6,400) (2,500)
Repayment of senior accreting notes .......................... (50,502) -- --
Repayment of zero coupon note ................................ (2,000) -- --
Repayment of old subordinated debt ........................... (10,618) -- --
Repayment of new subordinated debt ........................... (9,480) -- --
Proceeds from term loan ...................................... 15,000 -- --
Proceeds from subordinated debt .............................. 20,000 -- --
Proceeds from gold consignment ............................... 15,295 -- --
Proceeds from stock issuance, net ............................ 66,114 -- --
Proceeds from exercise of stock options ...................... 525 -- --
Repurchase of ESOP shares .................................... -- (63) (37)
(Decrease) increase in outstanding checks, net ............... (749) 5,480 1,644
-------------------------------------
Net cash provided by financing activities .......... 10,613 (5,669) (727)
-------------------------------------
Net change in cash and cash equivalents ........................ -- -- --
Cash and cash equivalents at beginning of year ................. -- -- --
-------------------------------------
Cash and cash equivalents at end of year ....................... $-- $-- $--
=====================================
Supplemental disclosure of cash flow information:
Interest paid during the year ................................ $ 4,304 $ 3,891 $ 3,814
Income taxes paid during the year ............................ 82 64 347
Non-cash financing activity:
Tax effect of compensation expense ........................... $ -- $ 767 $ --
Tax effect of the disqualifying disposition of stock options . 1,326 -- --
The accompanying notes are an integral part of the financial statements.
MARKS BROS. JEWELERS
EST. 1895
14
Notes to Financial Statements
- --------------------------------------------------------------------------------
1 Description of Operations
The financial statements of Marks Bros. Jewelers, Inc. (the "Company")
include the results of the Company's chain of specialty retail fine jewelry
stores. The Company operates exclusively in one business segment, specialty
retail jewelry. The Company has a national presence with 164 stores located
in 24 states operating in regional or super-regional shopping malls.
- --------------------------------------------------------------------------------
2 Summary of Significant Accounting Policies
Cash and Cash Equivalents
For the purpose of the statements of cash flows, the Company considers all
temporary cash investments purchased with a maturity of three months or
less to be cash equivalents.
Outstanding Checks
Outstanding checks are stated net of store cash balances, of which cash
balances were approximately $878,000 and $639,000 as of January 31, 1997
and 1996, respectively.
Layaway Receivables, Net
Layaway receivables include those sales to customers under the Company's
layaway policies which have not been fully collected as of the end of the
year. Layaway receivables are net of customer payments received to date and
net of an estimate for those layaway sales which the Company anticipates
will never be consummated. This estimate is based on the Company's
historical calculation of layaway sales that will never be completed. While
it is reasonably possible that the estimate will change, it is the
Company's expectation that the financial impact will not be significant in
the near term. The Company records income to cover their costs generated by
the administration of inactive layaways.
Merchandise Inventories
Merchandise inventories are stated principally at the lower of average cost
or market. The Company also obtains merchandise from vendors under various
consignment agreements. This consigned inventory and related contingent
obligations are not reflected in the Company's financial statements. At the
time of sale, the Company records the purchase liability and the related
cost of merchandise in cost of sales.
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Furniture and fixtures are depreciated on a straight-line
basis over estimated useful lives ranging from five to ten years. Leasehold
improvements are amortized on a straight-line basis over the lesser of the
remaining lease terms or ten years.
Upon retirement or disposition of property and equipment, the applicable
cost and accumulated depreciation are removed from the accounts and any
resulting gains or losses are included in the results of operations.
Long Lived Assets
When facts and circumstances indicate potential impairment, the Company
evaluated the recoverability of long lived asset carrying values, using
estimates of undiscounted future cash flows over remaining asset lives.
When impairment is indicated, any impairment loss is measured by the excess
of carrying values over fair values.
Deferred Financing Costs
In connection with the Recapitalization (see Note 7, Equity Offering and
Recapitalization), the Company incurred various financing costs which have
been deferred on the Company's balance sheet and are amortized over the
terms of the agreements.
MARKS BROS. JEWELERS
EST. 1895
15
Notes to Financial Statements
(Continued)
Store Preopening Expense
Expenses associated with the opening of new store locations are expensed in
the period such costs are incurred.
Lease Expense
The Company leases office facilities and all retail stores. Certain leases
require increasing annual minimum lease payments over the term of the
lease. Minimum lease expense under these agreements is recognized on a
straight-line basis over the terms of the respective leases.
Virtually all leases covering retail stores provide for additional
contingent rentals based on a percentage of sales. These costs are expensed
in the period incurred.
Earnings Per Share
Earnings per share are calculated by dividing net income by the weighted
average common share equivalents outstanding during the period.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis and liabilities and their
financial reporting amounts based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to
affect taxable earnings. A valuation allowance is established when
necessary to reduce deferred tax assets to the amount expected to be
realized.
Stock Based Compensation
The Company accounts for stock based compensation under the basis of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and will continue to do so in the future. However, the
disclosure requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123) have been adopted
for the year ended January 31, 1997.
Management Estimates
The preparation of financial statements in conjunction with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain amounts for the years ended January 31, 1996 and 1995 were
reclassified to conform to the current year presentation.
- --------------------------------------------------------------------------------
3 Accounts Receivable
---------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------
(in thousands)
Accounts receivable ....................... $ 2,062 $ 1,734
Less: allowance for doubtful accounts ..... (708) (565)
-----------------------
Accounts receivable, net .................. $ 1,354 $ 1,169
=======================
The Company has charged $1,037,000, $918,000, and $615,000 for doubtful
accounts for the years ended January 31, 1997, 1996, and 1995,
respectively.
MARKS BROS. JEWELERS
EST. 1895
16
- --------------------------------------------------------------------------------
4 Inventory
As of January 31, merchandise inventories consist of:
---------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------
(in thousands)
Raw materials.................................. $ 5,908 $ 2,944
Finished goods inventory....................... 58,574 52,457
-----------------------
$64,482 $55,401
=======================
Raw materials primarily consist of diamonds, precious gems, semi-precious
gems and gold. Included within finished goods inventory are allowances for
inventory shrink, scrap, and miscellaneous costs of $1,711,000 and
$1,263,000 for the years ended January 31, 1997 and 1996, respectively. As
of January 31, 1997 and 1996, merchandise consignment inventories held by
the Company that are not included in its balance sheets are $17,395,000 and
$14,876,000 respectively. In addition, gold consignments of $15,295,000 are
not included in the Company's balance sheet at January 31, 1997 (see Note
10, Financing Arrangements).
- --------------------------------------------------------------------------------
5 Property and Equipment
Property and equipment includes the following as of January 31:
---------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------
(in thousands)
Furniture and fixtures .......................... $26,735 $23,261
Leasehold improvements .......................... 11,616 9,894
--------------------
Property and equipment .......................... 38,351 33,155
Less accumulated depreciation and amortization .. 22,046 20,303
--------------------
Property and equipment, net ..................... $16,305 $12,852
====================
Depreciation expense was $3,374,000, $2,948,000, and $2,815,000 for the
years ended January 31, 1997, 1996, and 1995, respectively.
- --------------------------------------------------------------------------------
6 Long-Term Liabilities
Included in long-term liabilities at January 31, 1997 and 1996 are
$1,197,000 and $1,002,000, respectively, of deferred lease costs.
- --------------------------------------------------------------------------------
7 Equity Offering and Recapitalization
On May 7, 1996, the Company completed an initial public offering (the
"IPO"). The Company issued 3,269,500 shares of common stock after giving
effect to a stock split of approximately 35.4 for 1 and received proceeds
of $40.4 million net of underwriting discounts and offering costs.
Concurrent with the IPO, the outstanding warrants for 177,887 shares of
common stock were exercised, and 39,370 shares of Class C common stock were
converted into 1,349,521 shares of common stock.
With the completion of the IPO, the Company completed a recapitalization
(the "Recapitalization"), consisting of a Revolving Credit, Term Loan and
Gold Consignment Agreement totaling $60.0 million and $20.0 million of
Senior Subordinated Notes.
MARKS BROS. JEWELERS
EST. 1895
17
Notes to Financial Statements
(Continued)
Approximately $87.0 million of the funds available from the
Recapitalization were used by the Company principally to repay all
outstanding bank borrowings under the Company's bank agreements, including
approximately $7.8 million outstanding under the Company's revolving credit
facility, $26.6 million outstanding under the Company's term loan, $51.1
million of senior accreting notes and $6.0 million of zero coupon notes due
May 31, 1997.
In addition, the Company used $10.6 million of the funds available from the
Recapitalization to repurchase the Company's subordinated notes at a
discount.
The bank borrowing and subordinated debt repayments utilized a debt
discount due to the early repayment of the debt of $18.3 million, less $7.1
million of taxes (see Note 9, Extraordinary Items).
In conjunction with the completion of the IPO and the Recapitalization, the
Company restructured its Employee Stock Ownership Plan (see Note 13,
Employee Stock Ownership Plan).
- --------------------------------------------------------------------------------
8 Secondary Offering
During November, 1996 the Company completed a secondary public offering
(the "Offering"). The Company issued 1,265,000 shares of Common Stock and
received proceeds of $25.7 million net of underwriting discounts and
offering costs. The Company used such proceeds to reduce the Company's
indebtedness, to accelerate the pace of new store openings and for working
capital and other general corporate purposes.
Net proceeds from the Offering of $8,960,000 were used to redeem at a
premium all $8.0 million in principal amount of the Company's Series D
Notes. The Series D Notes would otherwise have matured in October, 2004,
and bear interest at a rate of 15.0% per annum plus, for subsequent periods
commencing May 1, 1998, 1% per annum (increasing in 1% increments per each
subsequent year commencing May 1, 1999). The Company used the remaining net
proceeds from the Offering to repay the term loan and reduce borrowings
under its Revolving Credit Facility which bear interest at fluctuating
rates.
In conjunction with the Offering, the Company amended the Revolving Credit,
Term Loan and Gold Consignment Agreement to allow for the prepayment of
Series D Notes and up to $5,000,000 of Series C Notes (including any
prepayment premiums), increase the capital expenditures limitations, and
repay the term loan.
- --------------------------------------------------------------------------------
9 Extraordinary Items
In connection with the IPO and Recapitalization, the Company utilized a
debt discount due to the early repayment of the debt of approximately $18.3
million, less taxes of $7.1 million, resulting in an extraordinary gain on
extinguishment of debt.
The $18.3 million of debt discount consists of the following:
i) $0.6 million on the senior accreting notes
ii) $4.0 million on the zero coupon notes
iii) $13.7 million on the senior subordinated debt
MARKS BROS. JEWELERS
EST. 1895
18
In the fourth quarter, the Company recorded an extraordinary loss of $1.1
million, net of $0.7 million tax in connection with the Offering (see Note
8, Secondary Offering). The loss consisted of $1.0 million of costs
associated with the extinguishment of debt and $0.8 million write-off of
deferred financing costs.
- --------------------------------------------------------------------------------
10 Financing Arrangements
The Company completed a restructuring of its outstanding indebtedness in
conjunction with the IPO and Recapitalization. Effective May 3, 1996, the
Company entered into a Revolving Credit, Term Loan and Gold Consignment
agreement ("Credit Agreement") with a group of banks totaling $60,000,000
which expires April 30, 2001.
In conjunction with the Offering, the Company amended the Credit Agreement
effective October 9, 1996. Under the terms of this agreement the Company is
provided a revolving line of credit facility of up to a maximum of
$43,750,000. The Company made a payment of $250,000 in October, 1996, which
reduced the facility to $43,500,000. Additionally, on January 31, 1997, the
balance was further reduced by $500,000, resulting in a facility of
$43,000,000. This facility then decreases based on the following schedule:
- --------------------------------------------------------------------------------
July 31, 1997 and January 31, 1998............................ $1,000,000
July 31, 1998 and January 31, 1999............................ 1,500,000
July 31, 1999 and January 31, 2000............................ 2,000,000
July 31, 2000 and January 31, 2001............................ 2,500,000
- --------------------------------------------------------------------------------
Under this agreement, the banks have a security interest in substantially
all of the assets of the Company. The Credit Agreement contains certain
restrictions on capital expenditures, payment of dividends and assumption
of additional debt and requires the Company to maintain specified minimum
levels of certain financial and balance sheet measures, including the fixed
charge ratio.
Revolver Loan
The revolving credit facility is available up to a maximum of $43,000,000
as of January 31, 1997, and is limited by a borrowing base computed based
on the value of the Company's inventory and accounts receivable. A
commitment fee of 50 basis points per annum on the unused portion of the
commitment is payable monthly.
Interest rates for these borrowings under this agreement are, at the
Company's option, Eurodollar rates plus 200 basis points or the banks'
prime rate. Interest is payable monthly for prime borrowings and upon
maturity for Eurodollar borrowings. The interest expense for the years
ended January 31, 1997, 1996 and 1995 was $793,000, $701,000 and $488,000,
respectively, reflecting a weighted average interest rate of 10.2% , 10.6%
and 9.1%.
Term Loan
In conjunction with the Offering, the term loan was repaid and the term
loan facility canceled. Interest rates for these borrowings were, at the
Company's option, Eurodollar rates plus 250 basis points or the banks'
prime rate. Interest was payable monthly for prime borrowings and upon
maturity for Eurodollar borrowings. The interest expense for the years
ended January 31, 1997, 1996 and 1995 was $1,330,000, $3,485,000 and
$3,279,000, respectively, reflecting a weighted average interest rate of
9.2%, 10.6% and 9.1%, respectively.
MARKS BROS. JEWELERS
EST. 1895
19
Notes to Financial Statements
(Continued)
Gold Consignment Facility
During the second quarter of 1996, the Company sold and simultaneously
consigned a total of 39,000 troy ounces of gold for $15,295,000 under a
gold consignment facility, which provides for the sale of a maximum 39,000
troy ounces or $16,000,000. Under the agreement, the Company agreed to pay
consignment fees of 200 basis points over the rate set by the bank based on
the London Interbank Bullion Rates payable monthly. A commitment fee of 50
basis points per annum on the unused portion of the gold consignment
facility is payable monthly. The consignment fees total $445,000 for the
year ended January 31, 1997 at a weighted average rate of 3.8%. On April
30, 2001, the Company is required to repurchase 39,000 troy ounces of gold
under this agreement at the prevailing gold rate in effect on that date, or
the facility will be renewed.
Subordinated Notes
In conjunction with the IPO and Recapitalization, the Company issued Senior
Subordinated Notes totaling $20,000,000 due 2004. Series A Subordinated
Notes due 2004 (the "Series A Notes") totaling $12,000,000 bear interest at
12.15% per annum payable in cash, with interest payments due quarterly. The
Series B Subordinated Notes due 2004 (the "Series B Notes") totaling
$8,000,000 bear interest at 15% per annum increasing 1% per annum beginning
May 1, 1998, payable in cash, with interest payment due quarterly.
The Series A Notes were subsequently exchanged for the Company's Series C
Subordinated Notes due 2004 (the "Series C Notes") which are identical in
all material respects to the Series A Notes, except that the Series C Notes
have been registered under the Securities Act of 1933, as amended. The
Series B Notes were subsequently exchanged for the Company's Series D
Subordinated Notes due 2004 (the "Series D Notes") which are identical in
all material respects to the Series B Notes, except that the Series D Notes
have been registered under the Securities Act of 1933, as amended.
In conjunction with the Offering the Series D Notes were redeemed at a
premium (see Note 9, Extraordinary Items). In January, 1997, $1,480,000 of
Series C Notes were redeemed for a total of $1,554,000. Interest expense
was $757,000 for the year ended January 31, 1997.
As of January 31, 1997 and 1996, respectively, the current portion and
noncurrent portion of long-term debt consisted of the following:
---------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------
(in thousands)
Current portion of long-term debt:
Term loan, old ............................ $ -- $ 7,938
Senior accreting notes .................... -- 1,908
----------------------
Total ................................... $ -- $ 9,846
======================
Long-term debt, net of current portion:
Term loan, old ............................ $ -- $18,662
Senior accreting notes .................... -- 47,819
Zero coupon notes ......................... -- 5,847
Subordinated debt, old .................... -- 23,598
Subordinated debt ......................... 10,520 --
----------------------
Total ................................... $10,520 $95,926
======================
MARKS BROS. JEWELERS
EST. 1895
20
Of the $10,520,000 long-term debt, $2,719,000 is due during the year ending
January 31, 2002; the remainder is due thereafter.
The carrying amount of the Company's borrowings under the Credit Agreement
and other long-term borrowings approximate fair value.
Interest Rate Caps
During fiscal 1994, the Company entered into certain interest rate cap
agreements with various banks to cap the cost of a portion of its floating
rate debt. In exchange for $600,000 paid to the banks, the maximum interest
rate on approximately $40,800,000 of the Company's debt was not to exceed
9.75% through December 31, 1996. To the extent the variable interest rate
exceeded 9.75% on this amount of debt, the banks remitted the difference to
the Company quarterly. In April, 1996 the Company canceled this agreement
resulting in a loss of $41,000.
Interest income recognized on these agreements was approximately $16,000,
$343,000, and $31,000 in the years ended January 31, 1997, 1996 and 1995,
respectively.
Deferred Financing Costs
In conjunction with the Recapitalization, the Company incurred $2,503,000
in deferred financing costs which are being amortized over the term of the
agreements. In conjunction with the Offering and subsequent repayment of
debt, $781,000 of these costs were included in extraordinary loss on
repayment of debt. Amortization expense in the year ended January 31, 1997
was $282,000.
- --------------------------------------------------------------------------------
11 Income Taxes
The types of temporary differences between the tax basis of assets and
liabilities and their financial reporting amounts that give rise to a
significant portion of the deferred tax asset and deferred tax liability
and their approximate tax effects are as follows, as of the years ended
January 31:
--------------------------------------------------------------------------------------------
1997 1996
--------------------------------------------------------------------------------------------
Temporary Tax Temporary Tax
Difference Effect Difference Effect
--------------------------------------------------------------------------------------------
(in thousands)
Merchandise inventories.................. $ 868 $ 339 $ 809 $ 299
Property and equipment, net.............. 1,131 441 410 152
Accrued rent............................. 1,244 485 1,173 434
Long-term debt........................... -- -- 19,384 7,172
Other.................................... 2,531 987 1,996 739
Net operating loss carryforwards......... 11,296 4,405 17,883 6,617
AMT credit carryforward.................. 691 691 552 552
-----------------------------------------------
Total deferred tax asset............... 17,761 7,348 42,207 15,965
-----------------------------------------------
Layaway receivables...................... -- -- 597 221
Other liability.......................... 192 75 142 53
-----------------------------------------------
Total deferred tax liability........... (192) (75) (739) (274)
-----------------------------------------------
Net deferred tax asset................. $17,569 $7,273 $41,468 $15,691
===============================================
MARKS BROS. JEWELERS
EST. 1895
21
Notes to Financial Statements
(Continued)
The net current and non-current components of deferred income taxes
recognized in the balance sheets at January 31 are as follows (in
thousands):
---------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------
Net current assets..................................... $1,326 $ 817
Net non-current assets................................. 5,947 14,874
-----------------
$7,273 $15,691
=================
Net operating loss carryforwards of $11,296,000 and $17,883,000 in the
years ended January 31, 1997 and 1996, respectively, begin expiring in
2008. Section 382 of the Internal Revenue Code of 1986 limits the use of
net operating losses and net operating loss carryforwards following an
ownership change. The restrictions under Section 382, if applicable, would
impose an annual limitation on the use of the net operating loss
carryforwards in any taxable year ending after the ownership change. Such
limitations do not apply to the year ended January 31, 1997. The AMT credit
carryforwards at January 31, 1997 and 1996 of $691,000 and $552,000,
respectively, have no expiration.
Effective January 31, 1996, the Company reversed its valuation allowance
and recognized a net deferred tax asset of $15,691,000. Realization of the
asset is dependent on generating sufficient taxable income prior to the
expiration of the loss carryforward and other deferred tax costs. Although
realization is not assured, the Company believes it is more likely than not
that all of the deferred tax asset will be realized. The amount of the
asset considered realizable, however, could be reduced in the near term if
the estimates of future taxable income during the carryforward period are
reduced.
The income tax expense (benefit) for the years ended January 31, consists
of the following:
---------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------
(in thousands)
Current expense........................... $ 1,381 $ -- $ --
Deferred tax expense (benefit)............ 9,744 (14,924) --
-------------------------------
Total income tax expense (benefit)........ $11,125 $(14,924) $ --
===============================
Of the $11,125,000 income tax expense charged in the year ended January 31,
1997, $4,695,000 has been charged to the income statement as an income tax
expense and $6,430,000 has been charged against the extraordinary items.
$1,326,000 has been credited to additional paid in capital, as it relates
to the tax effect of the disqualifying dispositions of stock options.
The provision for income taxes on income differs from the statutory tax
expense computed by applying the federal corporate tax rate of 34% for the
years ended January 31 as follows:
-------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------
(in thousands)
Taxes computed at statutory rate...................... $ 9,699 $ 696 $ 194
Deferred tax asset valuation (benefit) allowance...... -- (15,104) 860
ESOP tax benefit...................................... -- (602) (1,083)
Deferred state tax expense............................ -- 47 18
State tax expense, net of federal benefit............. 1,457 -- --
Other................................................. (31) 39 11
----------------------------
Total income tax expense (benefit).................... $11,125 $(14,924) $ --
============================
MARKS BROS. JEWELERS
EST. 1895
22
- --------------------------------------------------------------------------------
12 Common Stock
Following are the number of shares issued for each of the Company's classes
of common stock as of January 31:
---------------------------------------------------------------------------------------------------------------
Class B Class C Class D
Common Common Stock Common Stock Common Stock
(Par Value $.001) (Par Value $1.00) (Par Value $.001) (Par Value $.001)
---------------------------------------------------------------------------------------------------------------
Balance at January 31, 1994....... 3,450,411 29,567 39,370 --
Balance at January 31, 1995....... 3,450,411 29,567 39,370 --
------------------------------------------------------------------------
Issuance of Stock Awards.......... 506,147 -- -- --
------------------------------------------------------------------------
Balance at January 31, 1996....... 3,956,558 29,567 39,370 --
------------------------------------------------------------------------
Exercise of Warrants.............. 177,887 -- -- --
Conversion of Class C Shares
to Common....................... 1,394,521 -- (39,370) --
Conversion of Class B Shares
to Common....................... 918,270 (25,915) -- --
Cancellation of Shares Received
from ESOP....................... (74,384) -- -- --
Cancellation of Treasury Shares... (1,396,785) (3,551) -- --
Initial Offering.................. 3,269,500 -- -- --
Secondary Offering................ 1,265,000 -- -- --
Exercise of Options............... 550,592 -- -- --
------------------------------------------------------------------------
Balance at January 31, 1997....... 10,061,159 101 -- --
========================================================================
The Company declared a stock split of approximately 35.4 to 1 on April 1,
1996, and the financial statements have been revised to give effect for
this split.
Each share of Class B common stock and Class D common stock are convertible
into common stock on a 35.4 for 1 basis.
The Class C common stock has been converted on a 35.4 for 1 basis to common
stock.
Each share of common stock is entitled to one vote and each share of Class
B common stock is entitled to the number of votes equal to the number of
shares of common stock into which it is convertible.
- --------------------------------------------------------------------------------
13 Employee Stock Ownership Plan
In 1988, the Company established an Employee Stock Ownership Plan, which is
a noncontributory plan established to acquire shares of the Company's Class
B Common Stock for the benefit, effectively, of all employees.
In conjunction with completion of the IPO and the Recapitalization, the
Company restructured its Employee Stock Ownership Plan ("ESOP"). The
Company canceled the remaining unamortized portion of the ESOP debt owed to
the Company. In settlement of the debt, the trustee transferred to the
Company 8,206 shares of Class B common stock held in suspense by the ESOP.
The Company transferred to the ESOP 216,263 shares of common stock in
exchange for the ESOP's cancellation of the accumulated dividend preference
and other preferences associated with the Class B common stock. The ESOP
also exchanged the 17,719 shares of allocated Class B stock for 627,624
shares of common stock of the Company. The restructuring resulted in an
elimination of the deferred ESOP compensation equity account.
MARKS BROS. JEWELERS
EST. 1895
23
Notes to Financial Statements
(Continued)
During the years ended January 31, 1997, 1996 and 1995, the Company
recognized compensation expense of $0, $590,000 and $547,000, respectively,
based on the estimated fair value of shares committed to be released for
the years then ended. The excess of the cost of the ESOP shares allocated
to participants over the estimated fair value of $4,310,000 and $4,116,000
during the years ended January 31, 1996 and 1995, respectively, has been
recorded as a reduction of additional paid-in capital. As of January 31,
1997, all remaining shares have been released to participants.
In the event of death, disability or retirement, a participant (or
beneficiary) in the ESOP may receive his account balance as soon as
practicable. If the participant terminates employment with the Company for
any other reason, he may choose to receive his account after the last day
of the fifth year following his termination date. During the years ended
January 31, 1996 and 1995, the Company repurchased shares from the ESOP
participants at a total purchase price of approximately $63,000 and
$37,000, respectively. As long as the Company's stock is publicly traded,
the Company is not required to repurchase shares from ESOP participants.
- --------------------------------------------------------------------------------
14 Commitments
The Company leases office facilities and all retail stores, generally under
noncancelable agreements for periods ranging from 7 to 13 years. Most
leases require the payment of taxes, insurance and maintenance costs.
Future minimum rentals under noncancelable operating leases as of January
31, 1997 are as follows:
---------------------------------------------------------------------------
Year Ending January 31 Amount
---------------------------------------------------------------------------
(in thousands)
1998...................................................... $10,117
1999...................................................... 9,275
2000...................................................... 8,307
2001...................................................... 7,763
2002...................................................... 7,377
Thereafter................................................ 25,236
-------
$68,075
=======
Total rental expense for all operating leases is as follows, for the years
ended January 31:
---------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------
(in thousands)
Rental expense:
Minimum.................................... $ 8,947 $8,044 $6,951
Rentals based on sales..................... 1,523 1,135 760
-------------------------
$10,470 $9,179 $7,711
=========================
- --------------------------------------------------------------------------------
15 Related Party Transactions
The Company purchased $57,000, $80,000 and $161,000 of inventory from MBM
Company, Inc., an entity affiliated with two of the Company's directors,
during the years ended January 31, 1997, 1996 and 1995, respectively.
MARKS BROS. JEWELERS
EST. 1895
24
Certain members of senior management are active investors in a business
that operates retail snack food stores. This related entity reimburses the
Company a set amount each month for certain incidental expenses including
postage, delivery, telephone and other administrative expenses. Such
amounts were approximately $4,000 during each of the years ended January
31, 1997, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
16 Stock Plans
On September 28, 1995, the Company authorized the equivalent of 693,098
options under the Incentive Stock Option Plan (the "1995 Plan") to be
granted to certain members of the Company's management. Options for the
equivalent of 688,228 shares were issued at exercise prices ranging from
$0.90 to $0.99 per share. These prices are greater than or equal to the
fair market value at the date of grant, as determined by an independent
third party valuation. The options allow the holders to purchase common
stock within a period ranging from five years to five years and eight
months, at a fixed price. No expense was recorded in connection with these
options.
On September 28, 1995, the Company granted the equivalent of 506,148 shares
of Restricted Stock to certain members of the Company's management. During
1995, the Company recognized $461,000 in compensation expense relating to
the issuance of these shares. This amount represents the fair market value
of the shares at the grant date, as determined by an independent third
party valuation.
In April, 1996, the Company approved the 1996 Long-Term Incentive Plan (the
"1996 Plan"). Under the 1996 Plan, the Company may grant incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or nonqualified stock options. In addition, the Company
may grant stock appreciation rights, bonus stock awards which are vested
upon grant, stock awards which may be subject to a restriction period and
specified performance measures, and performance shares. Performance shares
are rights, contingent upon the attainment of the performance measures
within a specified performance period, to receive one share of Common
Stock, which may be restricted, or the fair market value of such
performance share in cash. A total of 771,189 shares of Common Stock have
been reserved for issuance under the 1996 Plan. No grants may be made under
the 1996 Plan after ten years after its effective date. For the year ended
January 31, 1997, options for 761,716 shares were granted with exercise
prices ranging from $9.38 to $27.00 per share.
The 1996 Plan includes vesting requirements related to the participants'
termination of employment with the Company. Options and shares granted
under the plans are subject to forfeiture based on, among other things, the
nature and timing of the termination of employment. Options expire ten
years after date of grant.
During the year ended January 31, 1997, the Company canceled and reissued
57,176 options that had been granted earlier in the year. These options
were granted at various dates at current market prices ranging from $14.00
to $27.00 per share, with a weighted-average exercise price of $19.57.
These options were reissued at terms equal to the originally issued options
with reduced exercise prices ranging from $10.13 to $10.75 per share, and a
weighed-average exercise price of $10.53 per share. The reissued options
were issued at exercise prices equal to the current market price of the
Company's stock at the date of reissuance. No options which had been
granted to executive officers were reissued.
MARKS BROS. JEWELERS
EST. 1895
25
Notes to Financial Statements
(Continued)
Option activity for the years ended January 31, 1996 and 1997 was as
follows:
---------------------------------------------------------------------------
Weighted-
Average
Exercise Options
Shares Price Exercisable
---------------------------------------------------------------------------
Balance at January 31, 1995 .. -- $ -- --
Options granted .............. 688,228 0.94 688,228
Options exercised ............ -- -- --
Options forfeited ............ (7,758) 0.90 (7,758)
------------------------------------
Balance at January 31, 1996 .. 680,470 0.94 680,470
--------------------------------------
Options granted .............. 761,716 14.30 --
Options exercised ............ (550,602) 0.95 (550,602)
--------------------------------------
Balance at January 31, 1997 .. 891,584 $ 11.78 129,868
======================================
For the years ended January 31, 1997 and 1996, respectively, the
weighted-average fair value of 761,716 and 335,247 options at the date of
grant with an exercise price equal to market price was $7.65 and $0.27 per
share. For the year ended January 31, 1996, the weighted-average fair value
of 352,971 options at the date of grant with an exercise price equal to
110% of market price was $0.16 per share. No options were granted with an
exercise price below market price.
The following table summarizes the status of outstanding stock options as
of January 31, 1997:
--------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------------
Number of Remaining Weighted- Number of Weighted-
Range of Options Contractual Life Average Options Average
Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price
--------------------------------------------------------------------------------------------------------
$ 0.90 $ 0.99 129,868 4.3 $ 0.92 129,868 $0.92
9.00 11.00 77,176 9.6 10.35 -- --
14.00 14.00 684,540 9.3 14.00 -- --
-------------------------------------------------------------------------------------------------------
$ 0.90 $14.00 891,584 8.6 $11.78 129,868 $0.92
=======================================================================================================
Had the Company elected to apply the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation"
(SFAS 123) regarding recognition of compensation expense to the extent of
the calculated fair value of stock options granted during the years ended
January 31, 1997 and 1996, reported net income and earnings per share would
have been reduced as follows:
---------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------
(in 000's except per share)
Net income, as reported........................ $17,400 $16,972
Pro forma net income........................... 16,495 16,888
Earnings per share, as reported................ 2.05 3.16
Pro forma earnings per share................... 1.94 3.14
For purposes of the SFAS 123 pro forma net income and earnings per share
calculation, the fair value of each option granted under the 1995 Plan is
estimated as of the date of grant using the Minimum Value method, using a
weighted-average assumption of 6.1% risk-free interest rate and 5.5 year
option life. The fair value of each option granted under the 1996 Plan is
estimated as of the date of grant using the Black-Scholes option-pricing
model, utilizing weighted-average assumptions of 6.7% risk-free interest
rate, a zero dividend yield, a 6 year option life, and a 45% stock price
volatility.
MARKS BROS. JEWELERS
EST. 1895
26
- --------------------------------------------------------------------------------
17 Subsequent Events
Effective March 17, 1997, the Company and its bank group amended the Credit
Agreement to provide for a total facility of $60.0 million through April
30, 2001. Interest rates and the commitment fee charged on the unused
facility float in a grid based upon the Company's quarterly financial
performance.
On February 24, 1997, the Board of Directors approved the 1997 Long-Term
Incentive Plan (the "1997 Plan") which provides stock based compensation
for the benefit of its directors and employees. Under the 1997 Plan, the
Company may grant incentive stock options, stock appreciation rights, bonus
stock awards which are vested upon grant, stock awards which may be subject
to a restriction period and specified performance measures, and performance
shares. A total of 400,000 shares of Common Stock have been reserved for
issuance under the 1997 Plan.
In the case of options granted under the 1997 Plan, the purchase price of
shares of Common Stock will be determined by the Compensation Committee at
the time of grant, but may not be less than 100% of the fair market value
of such shares of Common Stock on the date of grant.
- --------------------------------------------------------------------------------
18 Unaudited Quarterly Results
The Company's results of operations fluctuate on a
quarterly basis.
The following table sets forth summary unaudited financial information of
the Company for each quarter in fiscal 1996 and fiscal 1995. In the opinion
of management, this quarterly information has been prepared on a basis
consistent with the Company's audited financial statements appearing
elsewhere in this annual report and reflects adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of such
unaudited quarterly results when read in conjunction with the audited
financial statements and notes thereto.
1996 Quarters Ended
- -----------------------------------------------------------------------------------------------------
Apr. 30, July 31, Oct. 31, Jan. 31,
1996 1996 1996 1997
- -----------------------------------------------------------------------------------------------------
(in thousands, except for per share amounts)
Net Sales........................................... $29,560 $34,906 $32,573 $58,435
Gross profit........................................ 11,626 14,214 13,064 25,436
Income from operations.............................. 1,608 3,847 2,310 11,266
Income (loss) before extraordinary item............. (858) 1,406 457 6,338
Net income (loss)................................... (858) 12,570(1) 457 5,231(1)
Earnings per share:
Income (loss) before extraordinary item........... $ (0.17) $ 0.16 $ 0.05 $ 0.51
1995 Quarters Ended
- -----------------------------------------------------------------------------------------------------
Apr. 30, July 31, Oct. 31, Jan. 31,
1995 1995 1995 1996
- -----------------------------------------------------------------------------------------------------
(in thousands, except for per share amounts)
Net Sales........................................... $23,676 $28,398 $27,688 $51,260
Gross profit........................................ 8,880 11,235 10,724 22,461
Income from operations.............................. 854 2,803 1,800 9,956
Net income (loss)................................... (2,232) (423) (2,048) 21,675
Earnings per share:
Income (loss)..................................... $ (0.49) $ (0.09) $ (0.43) $ 3.80(2)
(1) Reflects extraordinary gain on extinguishment of debt in the second
quarter of fiscal 1996 and extraordinary loss on extinguishment of
debt in the fourth quarter of fiscal 1996 (see Note 9, Extraordinary
Items).
(2) Income tax benefit reflects reversal of the Company's deferred tax
valuation allowances and corresponding reduction of a deferred tax
asset (see Note 11, Income Taxes).
MARKS BROS. JEWELERS
EST. 1895
27
Report of Independent Accountants
To the Board of Directors of
Marks Bros. Jewelers, Inc.
We have audited the accompanying balance sheets of Marks Bros. Jewelers, Inc.
(the "Company") as of January 31, 1997 and 1996, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended January 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Marks Bros. Jewelers, Inc. as
of January 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended January 31, 1997, in
conformity with generally accepted accounting principles.
Chicago, Illinois
March 17, 1997
Market for the Registrant's Common Equity
and Related Stockholder Matters
The Company's common stock began trading on the NASDAQ National Market System
under the symbol MBJI on May 2, 1996. At April 22, 1997, there were
approximately 170 registered shareholders.
High Low
- -------------------------------------------------------------------------------
Second Quarter (commencing May 2, 1996)..................... $24.75 $20.00
Third Quarter............................................... 28.25 20.00
Fourth Quarter.............................................. 23.75 8.00
----------------
The Company has not declared any dividends in 1995 and intends to retain its
earnings to finance future growth. Therefore, the Company does not anticipate
paying any cash dividends in the foreseeable future. The declaration and payment
of dividends, if any, is subject to the discretion of the Board of Directors of
the Company and to certain limitations under the General Corporation Law of the
State of Delaware. In addition, the Company's Credit Agreement and Senior
Subordinated Notes Indenture contain restrictions on the Company's ability to
pay dividends. The timing, amount and form of dividends, if any, will depend,
among other things, on the Company's results of operations, financial condition,
cash requirements and other factors deemed relevant by the Board of Directors.
28
================================================================================
Corporate Information
Board of Directors
Hugh M. Patinkin
Chairman of the Board,
Chief Executive Officer,
President
John R. Desjardins
Executive Vice President--
Finance and Administration,
Treasurer, Secretary
Matthew M. Patinkin
Executive Vice President--
Store Operations
Rodney Goldstein(1,2)
Frontenac Company
Daniel H. Levy(1)
Norman Patinkin(1,2)
Winfield Marketing
Jack A. Smith(2)
The Sports Authority
1-Audit Committee
2-Compensation Committee
Corporate Officers
Hugh M. Patinkin
Chairman of the Board,
Chief Executive Officer,
President
John R. Desjardins
Executive Vice President--
Finance and Administration,
Treasurer, Secretary
Matthew M. Patinkin
Executive Vice President--Store Operations
Lynn Eisenheim
Executive Vice President--Merchandising
Independent Auditors
Coopers &Lybrand, LLP
203 North LaSalle Street
Chicago, IL 60601
Transfer Agent
Boston EquiServe
150 Royall Street
Canton, MA 02021
Corporate Headquarters
155 North Wacker Drive
Chicago, IL 60606
Annual Meeting
The Annual Meeting of Stockholders will be
held June 5, 1997 at 10:00 am.
General Counsel
Sidley & Austin
One First National Plaza
Chicago, IL 60603
Stockholder Inquiries
John R. Desjardins
Executive Vice President--
Finance and Administration
312-782-6800, extension 151
Common Stock Listing
Shares of common stock of Marks Bros.
Jewelers, Inc. are listed and traded on the
NASDAQ National Market System (MBJI).
Designed by Curran & Connors, Inc.
MARKS BROS. JEWELERS
EST. 1895