1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: October 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _____________________
Commission File number: 0-028176
Marks Bros. Jewelers, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-1433610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 No. Wacker, Chicago, IL. 60606
(Address of principal executive offices)
312/782-6800
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of the Registrant's common stock $.001 par value per share,
outstanding as of November 19, 1996 was 9,808,362 and the number of the
Registrant's Class B common stock $1.00 par value as of such date was 90.715.
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MARKS BROS. JEWELERS, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 1996
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three months and nine months ended
October 31, 1996 and 1995 (unaudited)
Balance Sheets - October 31, 1996, January 31, 1996 and October 31,
1995 (unaudited)
Statements of Cash Flows for the nine months ended October 31, 1996
and 1995 (unaudited)
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
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PART 1 - FINANCIAL INFORMATION - Item 1. Financial Statements
Marks Bros. Jewelers, Inc.
Statements of Operations
for the three months and nine months ended October 31, 1996 and 1995
(unaudited, in thousands, except for per share data)
Three Months Ended Nine Months Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1996 1995 1996 1995
---- ---- ---- ----
Net Sales $32,573 $27,688 $97,039 $79,762
Cost of sales (including buying
and occupancy) 19,509 16,964 58,135 48,923
------- ------- ------- -------
Gross Profit 13,064 10,724 38,904 30,839
Selling, general and administrative
expenses 10,754 8,924 31,139 25,382
------- ------- ------- -------
Income from operations 2,310 1,800 7,765 5,457
Interest expense 1,561 3,240 6,118 9,257
Stock award expense --- 461 --- 461
ESOP compensation expense --- 147 --- 442
------- ------- ------- -------
Income (loss) before
income taxes 749 (2,048) 1,647 (4,703)
Income tax expense 292 --- 642 ---
------- ------- ------- -------
Income (loss) before
extraordinary gain 457 (2,048) 1,005 (4,703)
Extraordinary gain on
extinguishment of debt,
net of taxes --- --- 11,164 ---
------- ------- ------- --------
Net income (loss) $ 457 $(2,048) $12,169 $ (4,703)
======= ======= ======= ========
Primary earnings per share:
Income (loss) before
extraordinary gain $ 0.05 $ (0.43) $ 0.13 $ (1.02)
Extraordinary gain on
extinguishment of debt,
net of taxes --- --- 1.41 ---
------- ------- ------- --------
Net income (loss) $ 0.05 $ (0.43) $ 1.54 $ (1.02)
======= ======= ======= ========
Weighted average common share
and common share equivalents 9,208 4,741 7,922 4,618
Fully diluted earnings per share:
Income (loss) before
extraordinary gain $0.05 $ (0.43) $ 0.13 $ (1.02)
Extraordinary gain on
extinguishment of debt,
net of taxes --- --- 1.40 ---
------- ------- ------ -------
Net income (loss) $ 0.05 $ (0.43) $ 1.53 $ (1.02)
======= ======= ====== =======
Weighted average common share
and common share equivalents 9,208 4,741 7,968 4,618
The accompanying notes are an integral part of the financial statements.
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Marks Bros. Jewelers, Inc.
Balance Sheets
(unaudited)
(in thousands)
October 31, January 31, October 31,
1996 1996 1995
----------- ----------- -----------
ASSETS
Current Assets:
Accounts receivable, net $ 1,071 $ 1,169 $ 2,292
Layaway receivables, net 1,890 1,576 1,289
Merchandise inventories 68,920 55,401 60,458
Other current assets 296 714 566
Deferred income taxes, net 817 817 ---
Deferred financing costs 427 --- ---
-------- ------- -------
Total current assets 73,421 59,677 64,605
Property and equipment, net 15,843 12,852 13,654
Deferred financing costs 1,871 --- ---
Deferred income taxes, net 7,141 14,874 ---
-------- ------- -------
Total assets $ 98,276 $ 87,403 $78,259
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Outstanding checks, net $ 1,247 $ 7,991 $ 2,789
Revolver loans 15,908 2,119 9,810
Current portion of long-term debt 1,500 9,846 6,400
Accounts payable 28,567 9,037 17,628
Accrued payroll 2,370 2,324 1,246
Other accrued expenses 9,696 6,848 5,905
-------- ------- -------
Total current liabilities 59,288 38,165 43,778
Total long-term debt, net of
current portion 33,000 95,926 103,657
Other long-term liabilities 1,136 1,170 1,215
-------- ------- -------
Total liabilities 93,424 135,261 148,650
Commitments and contingencies
Stockholders' equity (deficit):
Common stock 8 --- ---
Class B common stock --- 30 30
Class C common stock --- --- ---
Class D common stock --- --- ---
Additional paid-in capital 33,708 8,766 9,249
Accumulated deficit (28,864) (14,673) (36,348)
Treasury Stock --- (20,333) (20,276)
Deferred ESOP compensation --- (21,648) (23,046)
-------- ------- -------
Total stockholders' equity
(deficit), net 4,852 (47,858) (70,391)
-------- ------- -------
Total liabilities and
stockholders' equity
(deficit) $ 98,276 $ 87,403 $78,259
======== ======== =======
The accompanying notes are an integral part of the financial statements.
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Marks Bros. Jewelers, Inc.
Statements of Cash Flows
for the nine months ended October 31, 1996 and 1995
(unaudited, in thousands)
Nine Months Ended
-----------------
October 31, October 31,
1996 1995
---- ----
Cash flows from operating activities:
Net income (loss) $12,169 $ (4,703)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Gain on extinguishment of debt, net of taxes (11,164) ---
Depreciation and amortization 2,361 2,183
Stock award expense non-cash portion --- 454
ESOP compensation expense --- 442
Interest on zero coupon notes 121 323
Interest on senior accreting notes 1,339 3,708
Interest on subordinated debt 790 2,025
Loss on disposition of assets 2 ---
Changes in assets and liabilities:
Decrease(increase) in accounts receivable, net 98 (798)
(Increase) decrease in layaway receivables, net (314) 117
(Increase) in merchandise inventories, net
of gold consignment (28,814) (14,404)
Decrease in other current assets 418 124
(Increase) in deferred financing costs (2,298) ---
Decrease in deferred taxes, net 595 ---
Increase in accounts payable 19,530 11,622
Increase (decrease) in accrued liabilities 2,860 (401)
------- -------
Net cash (used in) provided by
operating activities (2,307) 692
Cash flows from investing activities:
Capital expenditures (5,354) (3,969)
------- -------
Net cash used in investing activities (5,354) (3,969)
Cash flows from financing activities:
Borrowing on old revolver loan 38,078 87,818
Repayment of old revolver loan (40,197) (84,813)
Borrowing on new revolver loan 85,346 ---
Repayment of new revolver loan (69,438) ---
Repayment of term loan (500) ---
Repayment of old term loan (26,600) ---
Repayment of senior accreting notes (50,502) ---
Repayment of zero coupon note (2,000) ---
Repayment of subordinated debt (10,618) ---
Proceeds from term loan 15,000 ---
Proceeds from subordinated debt 20,000 ---
Proceeds from gold consignment 15,295 ---
Proceeds from stock issuance, net 40,416 ---
Proceeds from exercise of stock options 123 ---
Proceeds from exercise of warrants 2 ---
Repurchase of ESOP shares --- (6)
(Decrease) increase in outstanding checks, net (6,744) 278
------- -------
Net cash provided by financing activities 7,661 3,277
------- -------
Net change in cash and cash equivalents --- ---
Cash and cash equivalents at beginning of period --- ---
------- -------
Cash and cash equivalents at end of period $ --- $ ---
======= =======
The accompanying notes are an integral part of the financial statements.
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Marks Bros. Jewelers, Inc.
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 as of
October 31, 1996, located in 24 states, operating in regional and
super-regional shopping malls.
2. Summary of Significant Accounting Policies
Basis for Presentation
The accompanying Balance Sheet as of January 31, 1996 was derived from the
audited financial statements for the year ended January 31, 1996. The
accompanying unaudited Balance Sheets as of October 31, 1996 and 1995 and the
Statements of Operations for the three months and nine months ended October 31,
1996 and 1995 and the Statements of Cash Flows for the nine months ended
October 31, 1996 and 1995 have been prepared in accordance with generally
accepted accounting principles for interim financial information. The interim
financial statements reflect all adjustments (consisting only of normal
recurring accruals) which are, in the opinion of management, necessary for a
fair statement of the results for the interim periods presented. The interim
financial statements should be read in the context of the Financial Statements
and footnotes thereto included in the Marks Bros. Jewelers, Inc. Prospectus
dated May 2, 1996 for the fiscal year ended January 31, 1996. The Company
operates on a fiscal year which ends on January 31. References in the
following notes to years and quarters are references to fiscal years and fiscal
quarters.
Stock Based Compensation
The Company accounts for stock based compensation plans under the basis of
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees". The disclosure requirements of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" has been adopted
during the first quarter of the year ending January 31, 1997.
3. Equity Offering and Recapitalization
On May 7, 1996 the Company completed an initial public offering (the
"IPO"). The Company issued 3,737,500 shares of common stock after giving
effect to the stock split described below and received net proceeds of $40.4
million after deducting underwriting discounts and offering costs.
Contemporaneously, the outstanding warrants for 177,887 shares of common stock
were exercised.
Simultaneous with the completion of the IPO, the Company completed a
recapitalization (the "Recapitalization"). The Recapitalization consisted of:
(i) a $44.0 million secured credit facility, consisting of a $29.0
million revolving line of credit and a $15.0 million term loan;
(ii) $20.0 million of senior subordinated notes due 2004; and
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(iii) the sale of $15.0 million of gold in its inventory
to a financial institution and consignment of such gold to
the Company under the terms of a Consignment Agreement.
The facility has an availability of up to $16.0 million.
There has been a subsequent sale of gold on July 8, 1996 of
774 ounces for approximately $300,000.
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:
(i) approximately $7.8 million outstanding under the
Company's revolving credit facility, which bore interest at
a floating rate (with an annual weighted average interest
rate of 10.6% in fiscal 1995), and which required a paydown
to a certain level on an annual basis and would have
otherwise been available through May 31, 1997;
(ii) $26.6 million outstanding under the Company's term
loan, which bore interest at a floating rate (with an
annual weighted average interest rate of approximately
10.6% in fiscal 1995), and of which $0.7 million would have
otherwise matured on September 15, 1996, $7.2 million would
have otherwise matured on January 31, 1997, and the balance
would have otherwise been due on May 31, 1997;
(iii) approximately $51.1 million of senior accreting
notes, which bore interest at a floating rate (with an
annual weighted average interest rate of approximately
11.0% during fiscal 1995), and of which $2.0 million would
have otherwise matured on September 15, 1996, and the
balance would have otherwise been due on May 31, 1997; and
(iv) approximately $6 million of zero coupon notes due May
31, 1997, which would have begun accruing interest on June
1, 1996 at a floating rate per annum (based on the lender's
base rate or certificate of deposit rate plus 1.8%).
In addition, the Company used approximately $10.6 million of the funds
available from the Recapitalization to repurchase the Company's subordinated
notes at a discount. As of May 7, 1996, one of these subordinated notes had a
principal amount outstanding of $23.5 million and bore interest at a rate per
annum of 12.5% and the other subordinated note had a principal amount
outstanding of $0.9 million and bore interest at a rate per annum of 13.75%.
The bank borrowing and subordinated debt repayments utilized a debt
discount due to the early repayment of the debt of approximately $18.3 million,
net of $7.1 million of taxes, resulting in a net of tax gain on extinguishment
of debt of $11.2 million.
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 Note.
(iii) $13.7 million on the Senior Subordinated debt.
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Simultaneous 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 of allocated Class B shares for 627,624 shares of common stock of
the Company. Approximately 91 shares of Class B common stock, currently held
by former employees, remain outstanding. All Class B shares transferred to the
Company and the shares held in treasury were canceled. The restructuring
resulted in an elimination of the deferred ESOP compensation equity account,
and eliminated the future annual allocation of shares and the related
compensation expense in the Company's income statement in periods subsequent to
January 31, 1996. The Company expects that no compensation expense will be
recognized in the year ending January 31, 1997 as a result of this transaction.
The financial statements have been revised to give effect to a stock split
of the shares of common stock of approximately 35.4-for-1.
The Company has adopted a new Long-Term Equity Incentive Plan. Options
granted under this plan will have a term of not more than ten years and an
exercise price not less than the market price at the date of grant.
The Company has also:
(i) eliminated the 60,000 shares of Class D common stock
authorized and unissued at January 31, 1996; and
(ii) converted into 1,394,521 shares of common stock the
39,370 shares of Class C common stock authorized, issued
and outstanding at January 31, 1996.
In connection with the Recapitalization and the IPO, the Company incurred
various financing costs and transaction costs, which have been recorded as
deferred financing costs. As of October 31, 1996, the deferred financing costs
totaling $2,298,000, of which $427,000 are classified as current, will be
amortized over the term of the loan agreements as interest expense.
4. Accounts Receivable, Net
Accounts receivable are shown net of the allowance for doubtful accounts
of $623,000, $565,000 and $655,000 as of October 31, 1996, January 31, 1996 and
October 31, 1995, respectively.
5. Inventory
As of October 31, 1996, January 31, 1996 and October 31, 1995,
merchandising inventories consist of:
October 31, 1996 January 31, 1996 October 31, 1995
(in thousands)
Raw Materials $ 6,753 $ 2,944 $ 3,600
Finished Goods 62,167 52,457 56,858
------- ------- -------
Inventory $68,920 $55,401 $60,458
======= ======= =======
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Raw materials primarily consist of diamonds, precious gems, semi-precious
gems and gold. There was no work-in-progress at October 31, 1996, January 31,
1996 or October 31, 1995. Included within finished goods inventory are
allowances for inventory shrink, scrap, and miscellaneous costs of $890,000,
$1,263,000 and $889,000 as of October 31, 1996, January 31, 1996 and October
31, 1995, respectively. As of October 31, 1996, January 31, 1996 and October
31, 1995, consignment inventories held by the Company that are not included in
the balance sheets total $30,393,000, (including $15,295,000 under the Gold
Facility), $15,940,000, and $16,744,000, respectively.
Gold Consignment
During the third quarter of 1996, the Company sold a total of 39,000
ounces of gold for approximately $15,300,000 under the Gold 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 a consignment fee 250 basis points
over the rate set by the bank based on the London Interbank Bullion Rate
payable monthly. A commitment fee of .5% per annum on the unused portion of
the Gold Facility is payable monthly. The consignment fees totaled $142,000
for the quarter ended October 31, 1996 at a weighted average rate of 3.7%.
6. Financing Arrangements
In conjunction with the IPO and Recapitalization, the Company completed a
restructuring of its outstanding indebtedness. Effective May 3, 1996 the
Company entered into a Revolving Credit, Term Loan and Gold Consignment
agreement with a group of banks totaling $60,000,000 which expires April 30,
2001. (See Note 3 Equity Offering and Recapitalization.)
Under this agreement, the banks have a security interest in 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 measures, including fixed charge ratio and certain balance sheet
measures.
Revolver Loan
The Revolving Credit Facility is available up to a maximum of $29,000,000
and is limited by a borrowing base computed based on the value of the Company's
inventory and accounts receivable. A commitment fee of .5% 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 2.5% or the banks' prime rate.
Interest is payable monthly for prime borrowings and upon maturity for
Eurodollar borrowing. The interest expense for the quarter ended October 31,
1996 was $245,000 reflecting a weighted average interest rate of 9.1%.
Term Loan
Outstanding term loan borrowings as of October 31, 1996 were $14,500,000
of which $1,500,000 were due within one year. Principal payments are due
quarterly. Interest rates for these borrowings under this agreement are, at the
Company's option, Eurodollar rates plus 2.5% or the banks' prime rate.
Interest is payable monthly for prime borrowings and upon maturity for
Eurodollar borrowings. The interest expense for the period ended October 31,
1996 was $298,000 reflecting a weighted average interest rate of 8.0%.
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Scheduled maturities under the term loan borrowings are as follows:
Fiscal Year Amount
- ----------- -----------
1996 $ 250,000
1997 1,750,000
1998 2,750,000
1999 3,750,000
2000 4,750,000
Thereafter 1,250,000
-----------
$14,500,000
===========
Subordinated Notes
In conjunction with the IPO and Recapitalization the Company issued Senior
Subordinated Notes totaling $20,000,000 due in 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. Interest expense was
$664,500 for the quarter ended October 31, 1996.
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.
As of October 31, 1996, January 31, 1996 and October 31, 1995,
respectively, the current portion and noncurrent portion of long term debt
consisted of the following:
October 31, 1996 January 31, 1996 October 31, 1995
---------------- ---------------- ----------------
(in thousands)
Current portion of
long-term debt
Term loan, old $ --- $ 7,938 $ 6,400
Senior accreting notes 1,908 ---
Term debt 1,500 --- ---
------- ------- --------
Total $ 1,500 $ 9,846 $ 6,400
======= ======= ========
Long-term debt, net of
current portion
Term loan, old $ --- $18,662 $ 26,600
Senior accreting notes --- 47,819 48,441
Zero coupon notes --- 5,847 5,736
Term loan 13,000 --- ---
Subordinated debt, old --- 23,598 22,880
Subordinated debt 20,000 --- ---
------- ------- --------
Total $33,000 $95,926 $103,657
======= ======= ========
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7. Stock Incentive Plans
In connection with the IPO, the Board of Directors and stockholders of the
Company approved the 1996 Long-Term Incentive Plan (the "1996 Plan"). Under
the 1996 Plan, the Company may grant incentive stock options ("ISOs") or
nonqualified stock options. The 1996 Plan also provides for the grant of stock
appreciation rights ("SARs"), 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 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 774,631 shares of Common Stock have been reserved for issuance under
the 1996 Plan. Grants may be made under the 1996 Plan during the ten years
after its effective date.
As of October 31, 1996, the Company has made grants under the 1996 Plan
totaling 741,716 options. Stock options generally become exercisable in
cumulative annual installments of 25% of the shares subject to option beginning
on the first anniversary of the date of the option grant. The stock options
granted and exercise price under the 1996 Plan are as follows:
Options Exercise Price
- ------- --------------
702,216 $14.00
10,000 $20.00
15,000 $21.00
10,000 $23.50
4,500 $27.00
- -------
741,716
=======
The weighted average exercise price of outstanding options under the 1996
Plan is $14.43.
8. Pro Forma Earnings Per Share
On a pro forma basis, to reflect the IPO and Recapitalization as though it
had occurred at the beginning of each of the periods ending October 31, net
income, earnings per shares and average shares outstanding would have been as
follows:
Three Months Ended Nine Months Ended
October 31, October 31, October 31, October 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
(in thousands, except per share amounts)
Pro forma net income $ 457 $ (67) $2,059 $ 397
Pro forma earnings per
share $ 0.05 $(0.01) $ 0.22 $ 0.04
Average shares outstanding 9,210 8,382 9,205 8,899
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9. Subsequent Event
During November, 1996 the Company completed a secondary public offering
(the "Offering"). The Company issued 1,265,000 shares of Common Stock and
received net proceeds of approximately $25.9 million after deducting
underwriting discounts and offering costs. The Company intends to use 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). In addition, 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. The
Company expects to borrow under its Bank Facility as needed to fund its store
expansion program, working capital needs and for general corporate purposes,
possible including a purchase of a portion of its outstanding Series C Notes.
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.
The amendment also increased the total revolver commitment to $43,500,000,
however, the total revolver commitment will be reduced based on the following
schedule:
January 31, 1995 $ 500,000
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
In addition, the Company intends to write off the deferred financing costs
associated with the Subordinated debt and the Bank Facility to the extent debt
has been extinguished.
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PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations - For the three months ended October 31, 1996
Net sales for the third quarter of fiscal 1996 increased by $4.9 million
or 17.6% to $32.6 million. Comparable store sales increased $2.3 million or
8.5% in the third quarter of fiscal 1996. Sales from new stores contributed
$3.0 million to the overall sales increase. The average number of units sold
on a comparable store basis increased by approximately 6.2% in the third
quarter of fiscal 1996, while the average price per merchandise sale increased
to $281 in the fiscal 1996 quarter from $277 in the fiscal 1995 quarter.
Comparable store sales increased in part due to the implementation of certain
return/exchange policies, ongoing improvements in the quality of the Company's
sales force, increased use of non-recourse credit and increased inventory
levels, as well as a solid retail environment. The Company opened nine new
stores in the third quarter of fiscal 1996, increasing the number of stores
operated to 164 as of October 31, 1996 compared to 146 as of October 31, 1995.
Gross profit increased $2.3 million to $13.1 million in the third quarter
of fiscal 1996. The gross profit percentage increased to 40.1% in the third
quarter of fiscal 1996 from 38.7% for the same period in the prior year,
primarily due to the leveraging of certain buying and occupancy costs over the
Company's higher sales.
Selling, general and administrative expenses increased by $1.9 million or
20.5% to $10.8 million in the third quarter of fiscal 1996 from $8.9 million in
the prior year period. New stores accounted for $1.0 million of this increase.
As a percentage of net sales, selling, general and administrative expenses
increased to 33.0% in the third quarter of fiscal 1996 from 32.3% in the third
quarter of 1995. The dollar increase primarily related to higher payroll
expenses of $1.2 million and $0.3 million in credit expense. Comparable store
payroll costs increased 8.6% in the third quarter of fiscal 1996, as compared
to the third quarter of fiscal 1995, primarily due to a continuing effort to
upgrade the quality of the sales force. Private label non-recourse credit
sales as a percentage of net sales increased to 45.0% in the third quarter of
fiscal 1996 from 41.6% in the third quarter of fiscal 1995. These non-recourse
credit sales carry higher discount rates than bankcard sales, which resulted in
higher credit expense.
Interest expense decreased by $1.7 million to $1.6 million in the third
quarter of fiscal 1996 from $3.2 million in the third quarter of fiscal 1995.
This resulted from lower outstanding debt balances and lower average interest
rates on revolver and term borrowings.
No ESOP compensation expense has been recorded in fiscal 1996. ESOP
compensation expense recorded in the third quarter of fiscal 1995 was $0.1
million. Also, in the third quarter of fiscal 1995, the Company recognized a
$0.5 million expense relating to restricted stock awards.
An income tax expense of $0.5 million was recorded in the third quarter of
fiscal 1996 reflecting an expected effective annual tax rate of 39%. No income
tax benefit was recorded in the third quarter of 1995 because at that time
utilization of the Company's net operating loss was not reasonably assured.
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Net income increased to $.05 million in the third quarter of fiscal 1996
from a loss of $2.0 million in the third quarter of fiscal 1995 as a result of
the factors discussed above.
Results of Operations - For the nine months ended October 31, 1996
Net sales for the nine months ended October 31, 1996 increased by $17.3
million or 21.7% to $97.0 million. Comparable store sales increased $9.1
million or 11.7% in the same period. Sales from new stores contributed $8.5
million to the overall sales increase. The average number of units sold on a
comparable store basis increased by approximately 7.1% in the nine months ended
October 31, 1996, while the average price per merchandise sale increased to
$268 in the fiscal 1996 period from $261 in the fiscal 1995 period. Comparable
store sales increased in part due to increased use of non-recourse credit, the
implementation of certain return/exchange policies, ongoing improvements in the
quality of the Company's sales force, and increased inventory levels, as well
as, a solid retail environment. The Company opened nineteen new stores and
closed one in the nine months ended October 31, 1996, increasing the number of
stores operated to 164 as of October 31, 1996 compared to 146 as of October 31,
1995.
Gross profit increased $8.1 million to $38.9 million in the nine months
ended October 31, 1996. The gross profit percentage increased to 40.1% in the
nine months ended October 31, 1996 from 38.7% in the nine months ended October
31, 1995, due to the leveraging of certain buying and occupancy costs over the
higher sales.
Selling, general and administrative expenses increased by $5.8 million or
22.7% to $31.1 million in the nine months ended October 31, 1996 from $25.4
million in the prior year period. New stores accounted for $2.8 million of
this increase. As a percentage of net sales, selling, general and
administrative expenses increased to 32.1% in the nine months ended October 31,
1996 from 31.8% in the nine months ended October 31, 1995. The dollar increase
primarily relates to higher payroll expenses of $3.3 million and higher credit
expenses of $1.2 million. Comparable store payroll costs increased 9.5% in the
nine months ended October 31, 1996, as compared to the same period in 1995,
primarily due to a continuing effort to upgrade the quality of the sales force
and an increase in incentive compensation paid to store based personnel.
Private label non-recourse credit sales as a percentage of net sales increased
to 44.7% in the nine months ended October 31, 1996 from 38.2% in the nine
months ended October 31, 1995. These non-recourse credit sales carry higher
discount rates than bankcard sales, which resulted in higher credit expense.
Interest expense decreased by $3.1 million to $6.1 million in the nine
months ended October 31, 1996 from $9.3 million in the nine months ended
October 31, 1995. This resulted from lower outstanding debt balances and lower
average interest rates on revolver and term borrowings.
No ESOP compensation expense has been recorded in fiscal 1996. ESOP
compensation expense recorded in the nine months ended October 31, 1995 was
$0.4 million. Also, in the third fiscal quarter, the Company recognized a $0.5
expense relating to restricted stock awards made in fiscal 1995.
Income tax expense of $0.6 million was recorded in the nine months ended
October 31, 1996 reflecting an expected effective annual tax rate of 39%. No
income tax benefit was recorded in the nine months ended October 31, 1995, as
utilization of the Company's net operating loss was not reasonably assured at
that time.
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A gain on the extinguishment of debt was recorded for $11.2 million, net
of taxes, as an extraordinary item. This reflects debt discounts on senior
accreting loans of $0.6 million, zero coupon notes of $4.0 million and
subordinated debt of
$13.7 million.
Liquidity and Capital Resources
The Company's cash requirements consist principally of funding increases
in inventory at existing stores, capital expenditures and working capital
(primarily inventory) associated with the Company's new stores and scheduled
debt payments. The Company's primary sources of liquidity have been cash flow
from operations and bank borrowings under the Company's revolver.
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.
The Company's cash flow from operations changed from $0.7 million provided
by operations in the first nine months of 1995 to cash flow used by operations
of $2.3 million in the first nine months of 1996. Higher income from
operations together with increases in accounts payable and accrued expenses
were more than offset by increases in merchandise inventories (before the
effects of gold consignment) and deferred financing costs. The inventory
increase was due primarily to the Company's store expansion program, the
purchase of inventory earlier in the holiday season in fiscal 1996 and the
overall increase of store inventory levels. Cash generated from financing
activities included proceeds from the initial public offering of $40.4 million,
$15.0 million from proceeds of term loan, $15.3 million from proceeds from the
gold consignment and a $6.7 million dollar increase in the net amount of
outstanding checks. The Company utilized cash in the first nine months of 1996
primarily to repay outstanding bank borrowings of $13.8 million on revolving
loans, $26.6 million on the term loans, $50.5 million on senior accreting loans
and $2.0 on zero coupon notes and to repay subordinated debt of $10.6 million
in addition to funding capital expenditures of $5.4 million, primarily related
to the opening of nineteen new stores in the first nine months of 1996.
In November 1996, the Company completed a secondary public offering (the
"Offering") in which the Company issued 1,265,000 shares of Common Stock and
received net proceeds of approximately $25.9 million. Approximately $9.0
million of the proceeds from the Offering were used to redeem at a premium all
$8.0 million in principal amount of the Company's Series D Subordinated Notes
due 2004. The remaining net proceeds from the Offering were used to reduce the
Company's borrowing under the Company's senior bank facility (including the
revolving line of credit). The Company expects to borrow under its senior bank
facility revolver as needed to fund its store expansion program (including a
planned 28 new stores for fiscal 1997), working capital needs and for general
corporate purposes, possibly including a purchase of a portion of the Company's
outstanding 12.15% Series C Notes.
Management expects that cash flows from operations and funds available
under its senior bank facility should be sufficient to support the Company's
planned new store expansion, debt service and seasonal working capital needs
for the foreseeable future.
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Inflation
Management believes that inflation generally has not had a material effect
on results of its operations.
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PART II - OTHER INFORMATION
Item 5 - Other Information
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
Certain statements in this filing, and elsewhere (such as in other filings by
the Company with the Securities and Exchange Commission, press releases,
presentations by the Company or its management and oral statements) constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, (i)
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, (ii) the Company's leverage and its limited stockholders'
equity, (iii) the extent and results of the Company's store expansion program,
(iv) the seasonality of the Company's business, (v) the extent to which the
Company is able to retain and attract key personnel, (vi) competition, (vii)
relationships with providers of third party credit and the availability and
cost of such credit, (viii) relationships with suppliers of merchandise, (ix)
fluctuations in gem and gold prices, and (x) regulation.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 -- Indenture dated as of April 15, 1996 (the "Indenture") between the
Company and Norwest Bank Minnesota, National Association, as Trustee,
governing the Company's Series C Senior Subordinated Notes Due 2004 (the
"Series C Notes")(incorporated by reference to Exhibit 4.3 of the Debt
Registration Statement)
4.2 -- Form of First Supplemental Indenture of the Indenture (incorporated
by reference to Exhibit 4.4 of the Debt Registration Statement)
4.3 -- Form of Series C Notes (included in Exhibit 4.2 to this Quarterly
Report on Form 10-Q)
10.1 -- Revolving Credit, Term Loan and Gold Consignment Agreement, dated as
of May 3, 1996, among the Company, the Banks (as defined therein), The
First National Bank of Boston and Rhode Island Hospital Trust National
Bank, as agents for the Banks as amended by the First Amendment
thereto, the Second Amendment thereto and the Third Amendment thereto
(incorporated by reference to Exhibit 10.10 of the Company's
Registration Statement on Form S-1 (Commission File No. 333-13903)).
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Exhibit 11 Statement re Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule (SEC/EDGAR only)
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARKS BROS. JEWELERS, INC.
(Registrant)
Date: November 21, 1996 By: /s/ John R. Desjardins
-------------------------------
John R. Desjardins
Executive Vice President -
Finance and Administration
and Treasurer (principal
financial officer)
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