<PAGE> 1
2,202,000 Shares
MARKS BROS. JEWELERS LOGO
COMMON STOCK
Of the 2,202,000 shares of Common Stock offered hereby, 1,100,000 shares
are being offered by Marks Bros. Jewelers, Inc. (the "Company") and 1,102,000
shares are being offered by certain stockholders (the "Selling Stockholders").
The Company will not receive any of the proceeds from the sale of shares of
Common Stock being offered hereby by the Selling Stockholders. See "Principal
and Selling Stockholders."
The Common Stock is quoted on the Nasdaq National Market under the symbol
"MBJI." The last sale price of the Common Stock as reported on the Nasdaq
National Market on October 31, 1996 was $23.25. See "Price Range of Common
Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............. $22.25 $1.11 $21.14 $21.14
Total(3).............. $48,994,500 $2,444,220 $23,254,000 $23,296,280
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting offering expenses payable by the Company, including certain
expenses of the Selling Stockholders, estimated at $800,000.
(3) The Company and certain of the Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to 330,300 additional shares of
Common Stock solely to cover over-allotments, if any. If the Underwriters
exercise this option in full, the Price to Public will total $56,343,675,
the Underwriting Discounts and Commissions will total $2,810,853, the
Proceeds to Company will total $26,742,100, and the Proceeds to Selling
Stockholders will total $26,790,722. See "Principal and Selling
Stockholders" and "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein when, as and if delivered to and accepted by the Underwriters and subject
to their right to reject any orders in whole or in part. It is expected that
delivery of the certificates representing such shares will be made against
payment therefor at the office of Montgomery Securities on or about November 6,
1996.
------------------------------
MONTGOMERY SECURITIES WILLIAM BLAIR & COMPANY
November 1, 1996
<PAGE> 2
MARKS BROS. JEWELERS LOGO
WHITEHALL LOGO LUNDSTROM LOGO
[MAP OF STORE LOCATIONS]
<TABLE>
<S> <C>
----------------------- - = Stores as of 1995 Fiscal Year End
Whitehall Stores 123
Lundstrom Stores 35 * = Stores opened or scheduled to open
Marks Bros. Stores 5 during Fiscal 1996
</TABLE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND CERTAIN SELLING
GROUP MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 3
Photo of Lundstrom Jewelers Store
Photo of Whitehall Co. Store
<PAGE> 4
Photo of Whitehall Co. Store
Photo of Whitehall Co. Window display
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
The Company's fiscal year ends on January 31. References to fiscal years by date
refer to the fiscal year beginning February 1 of that calendar year; for
example, "fiscal 1995" began on February 1, 1995 and ended on January 31, 1996.
Certain statements in this Prospectus (including this Prospectus Summary)
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"). See
"Special Note Regarding Forward-Looking Statements."
THE COMPANY
Marks Bros. Jewelers, Inc. (the "Company") is a leading, national specialty
retailer of fine jewelry, operating 163 stores in 24 states. Founded in 1895,
the Company operates stores in regional and super-regional shopping malls under
the names Whitehall Co. Jewellers(R) (123 stores), Lundstrom Jewelers(R) (35
stores) and Marks Bros. Jewelers(TM) (5 stores). The Company offers at
competitive prices an in-depth selection of fine jewelry in the following key
categories: diamond, gold, precious and semi-precious jewelry. The Company's
target customers are middle to upper middle income women over 25 years old.
Central to the Company's growth in operating profits and its high store
productivity are its small but flexible store format, the absence of recourse
credit risk, its strong sales culture, and its operating efficiencies at both
the store and corporate levels.
From fiscal 1991 to fiscal 1995, the Company's net sales grew at a compound
annual rate of 14.3%, from $76.7 million to $131.0 million, while income from
operations grew at a compound annual rate of 30.2%, from $5.4 million to $15.4
million. The Company's growth during this period is attributable to (i) new
store openings, which resulted in an increase in the number of stores from 111
to 146 stores, (ii) higher store productivity, as average annual sales per store
increased from $699,000 to $936,000, and (iii) improved operating efficiencies,
which resulted in an increase in the Company's operating margin from 7.0% to
11.8%. For the six months ended July 31, 1996, the Company's net sales increased
by 23.8% as compared to net sales in the first six months of fiscal 1995, and
operating margin improved from 7.0% to 8.5%.
The Company believes it has significant opportunities to increase sales and
profitability through an increased number of planned store openings, the
implementation of several new sales and merchandising programs designed to
produce comparable store sales growth, and continued adherence to its strict
operating standards regarding performance of sales personnel, store
profitability and cost control.
The key elements of the Company's multi-faceted operating strategy are as
follows:
- Small, Flexible Store Format in Regional Malls. The Company believes it has
a competitive advantage in obtaining high traffic, "center court" locations
in desirable regional and super-regional malls due principally to (i) its
small average store size of approximately 790 square feet, which, while
considerably smaller than the average store size of most of the Company's
competitors, generates comparable sales volumes, (ii) its ability to adapt
its store design to various sizes and configurations, and (iii) its high
average annual sales per square foot (approximately $1,200 in fiscal 1995).
Over two-thirds of the Company's stores are located in high traffic, "center
court" locations. The stores' small, flexible format (which lowers the
Company's fixed occupancy costs) and high productivity are desirable to mall
owners.
- Absence of Recourse Credit Risk. The Company operates based upon a "no
credit risk" policy. When purchasing on credit, customers must use their
personal credit cards, the Company's private label credit card (which is
available through a third party and is non-recourse to the Company), or
other non-recourse third party credit arrangements. The Company's strict
credit policy eliminates its credit risk associated with the customer's
failure to pay. This policy also distinguishes the Company from most of its
competitors, which not only bear such credit risk, but also rely on finance
income in addition to merchandise sales.
3
<PAGE> 6
- Motivated, Sales-Oriented Store Personnel. The primary responsibility of
store sales personnel is selling to customers. Most non-sales activities are
largely centralized. Incentive compensation and bonus programs reinforce
sales and margin goals on a daily, weekly and monthly basis. The Company
continually seeks to enhance the selling skills of its sales associates
through recruitment of experienced sales personnel and extensive, ongoing
training programs.
- Differentiated Merchandising. The Company offers an in-depth selection of
merchandise in several key categories of fine jewelry: diamond, gold,
precious and semi-precious jewelry. This "key category" focus is oriented to
the Company's target customer, the middle to upper middle income woman.
Unlike many of its competitors, the Company carries only a limited selection
of watches and virtually no costume jewelry or gift merchandise.
- Strict Operating Controls. The Company emphasizes high performance
standards, backed by strong incentive programs. Adherence to these standards
in the areas of store site selection, sales targets, store profitability and
cost control is fundamental to the Company's success.
RECENT DEVELOPMENTS
Strong Operating Performance. The Company's 23.8% increase in net sales for
the first six months of fiscal 1996 was driven by a comparable store sales
increase of 13.4% and the strong performance of recently opened stores.
Operating margin increased 150 basis points to 8.5% for the first six months of
fiscal 1996 from 7.0% over the prior year period, and pro forma net income per
share increased to $0.18 from $0.05. Store sales productivity continued to
increase, as average store sales grew to $972,000 per store ($1,224 per square
foot) for the 12 months ended July 31, 1996, from average store sales of
$936,000 ($1,187 per square foot) for fiscal 1995. For the first two months of
the third quarter of fiscal 1996, comparable store sales increased by 7.8% on
top of a 15.9% comparable store sales increase in the corresponding prior year
period.
Acceleration of Expansion Program. As of October 31, 1996, the Company has
opened 18 new stores and plans to open one additional store for a total of 19
new stores by the end of fiscal 1996, compared to the 18 originally planned. As
a result of this offering, the Company plans to accelerate its store expansion
program to 28 stores scheduled for fiscal 1997 (compared to the 23 originally
planned) and already has executed leases for 11 of these locations. The Company
intends to open a total of approximately 60 new stores in fiscal 1997 and 1998
combined.
Strengthening of Capital Structure. To facilitate its continuing expansion,
the Company intends to use proceeds from this offering to strengthen its capital
structure, retire $8.0 million of principal amount of its 15% subordinated notes
and pay down other outstanding borrowings.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company......................... 1,100,000 shares
Common Stock Offered by the Selling Stockholders............ 1,102,000 shares
Common Stock to be Outstanding Immediately After the
Offering.................................................. 9,604,250 shares(1)
Use of Proceeds............................................. To reduce indebtedness,
accelerate new store openings
and for working capital and
other general corporate
purposes.
Nasdaq National Market Symbol............................... MBJI
</TABLE>
- ------------------------------
(1) Excludes 1,163,476 shares of Common Stock subject to outstanding stock
options at a weighted average exercise price of $9.54 per share, of which
421,760 are currently exercisable at a weighted average exercise price of
$0.95 per share. See "Management -- Stock Plans."
4
<PAGE> 7
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, SIX MONTHS ENDED JULY 31,
----------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $ 76,749 $ 88,141 $ 91,106 $106,683 $131,022 $52,074 $64,466
Gross profit...................... 31,143 36,035 36,595 42,460 53,300 20,115 25,840
Income from operations............ 5,362 8,064 8,255 11,712 15,413 3,657 5,455
Interest expense.................. 9,397 7,821 8,920 10,594 12,314 6,017 4,557
ESOP compensation expense......... -- 3,800 511 547 -- 295 --
Income (loss) from continuing
operations before income tax.... (17,157) (3,557) (1,176) 571 2,048 (2,655) 898
Net income (loss)(1)(2)(3)........ $(24,454) $ (3,557) $ (7,002) $ 571 $ 16,972 $(2,655) $11,712
SUPPLEMENTAL PRO FORMA STATEMENT OF
OPERATIONS DATA(4): (UNAUDITED)
Net sales......................... $131,022 $52,074 $64,466
Income from operations............ 15,413 3,657 5,455
Interest expense.................. 3,282 1,585 1,672
Net income........................ 7,002 1,243 2,270
Net income per share.............. $ 0.70 $ 0.12 $ 0.22
Weighted average number of
common shares and common share
equivalents outstanding(5)...... 10,001,306 10,007,701 10,164,668
SELECTED OPERATING DATA:
Stores open at end of period...... 111 113 122 131 146 143 155
Average net sales per store(6).... $699,000 $784,000 $791,000 $836,000 $936,000
Average net sales per gross square
foot(7)......................... $ 883 $ 1,008 $ 1,013 $ 1,068 $ 1,187
Average merchandise sale.......... $ 192 $ 210 $ 229 $ 245 $ 253 $ 262
Comparable store sales increase
(decrease)(8)................... 0.4% 12.5% (0.5)% 7.6% 11.0% 11.8% 13.4%
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1996
-------------------------
ACTUAL AS ADJUSTED(9)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................................................... $15,030 $ 15,101
Total assets............................................................................ 75,300 75,144
Total debt.............................................................................. 43,532 21,919
Stockholders' equity.................................................................... 4,395 25,852
</TABLE>
- ------------------------------
(1) The Company sold its direct marketing division as of January 31, 1992. In
connection with this disposition, the Company recorded a $7.3 million loss
in the year ended January 31, 1992 on the sale of the discontinued
operations and a $2.7 million gain in the year ended January 31, 1994 upon
its receipt of the deferred proceeds from the sale.
(2) Net loss for the year ended January 31, 1994 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Background" and
Note 5 of Notes to Financial Statements.
(3) Net income for the year ended January 31, 1996 reflects an income tax
benefit of $14.9 million, resulting from the reversal of the Company's
deferred tax valuation allowance and recognition of a corresponding net
deferred tax asset. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Background" and Note 6 of Notes to
Financial Statements.
(4) Supplemental pro forma statement of operations data reflect (i) the
Company's initial public offering (the "IPO") and recapitalization in May
1996 (see "The Company"); (ii) the issuance of 1,100,000 shares of Common
Stock offered hereby (the "Offering") and the anticipated use of the
estimated net proceeds therefrom; and (iii) the
5
<PAGE> 8
application of a tax provision (assuming a statutory rate of 40%) to the pro
forma net income from continuing operations, as if each such transaction
occurred on the first day of the period presented.
(5) The pro forma weighted average number of common shares and common share
equivalents outstanding for the year ended January 31, 1996, and the six
months ended July 31, 1995 and July 31, 1996, respectively, consisted of (i)
9,604,267, 9,610,662 and 9,604,250 shares of Common Stock outstanding
(including 3,269,500 shares of Common Stock issued in the IPO and 1,100,000
shares of Common Stock offered hereby); (ii) 3,588, 3,588 and 3,213 common
share equivalents relating to Class B Common Stock; (iii) 393,451, 393,451
and 402,358 common share equivalents relating to the Company's 1995
incentive stock option plan and (iv) -0-, -0- and 222,654 common share
equivalents relating to the Company's 1996 incentive stock option plan.
(6) 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.
(7) 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.
(8) A store becomes comparable after it has been open for 12 full months.
(9) As adjusted to give effect to (i) the Offering; (ii) the receipt of $0.1
million in proceeds to the Company from the exercise of stock options in
connection with the Offering; and (iii) the anticipated use of proceeds from
the Offering (including a $0.96 million ($0.58 million net of tax)
prepayment premium in connection with the redemption of subordinated debt
and a non-cash extraordinary charge of $0.9 million ($0.5 million net of
tax) relating to the write-off of deferred financing costs). See "Use of
Proceeds."
6
<PAGE> 9
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing any of the shares of Common Stock offered hereby.
Certain statements in "Risk Factors" constitute "forward-looking statements"
within the meaning of the Litigation Reform Act. See "Special Note Regarding
Forward-Looking Statements."
EXPANSION PROGRAM
The growth of the Company's net sales and earnings will depend to a
significant degree on the Company's ability to expand its operations through the
opening of new stores in existing and new markets and to operate those stores
profitably. The results achieved by new stores may vary substantially. The
Company currently operates 163 stores in 24 states and plans to open a total of
19 new stores in fiscal 1996 (including 18 which have already been opened)
compared to 15 new stores in fiscal 1995. The Company is increasing its planned
store openings to 28 from 23 for fiscal 1997 and to a total of approximately 60
for fiscal 1997 and 1998 combined, contingent upon the completion of the
Offering. The cost of opening a new store on average is approximately $550,000,
including inventory, capital expenditures and pre-opening expenses. The Company
expects to fund the opening of new stores with cash flow from operating
activities and borrowings under its bank facility. Achieving the Company's
expansion goals will depend on a number of factors, including the Company's
ability to secure suitable locations on acceptable terms, open new stores in a
timely manner, hire and train additional store and supervisory personnel, and
integrate new stores into its operations on a profitable basis. Furthermore, the
Company will continually need to evaluate the adequacy of its store management
and systems to manage its planned expansion. The Company anticipates that there
will continue to be significant competition among specialty retailers for
desirable store sites and qualified personnel. There can be no assurance that
the Company will be able to open and operate new stores on a timely and
profitable basis. See "Business -- Operating Strategies" and "Business -- Growth
Strategies."
If the Company expands more rapidly than its current plans anticipate, or
if the Company fails to generate sufficient cash flow, it may require additional
capital (in addition to the proceeds of the Offering) in order to finance its
expansion. There can be no assurance as to the future availability of additional
financing or the terms thereof. Failure to obtain such financing on acceptable
terms could require the Company to alter its expansion plans or otherwise
adversely affect the Company. A change in the Company's expansion plans could
have a material adverse effect on the Company's results of operations or
financial condition.
FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS
A variety of factors affect the Company's comparable store sales results,
including economic conditions, the retail sales environment, the availability
and cost of credit from third party credit providers, the results of its
merchandising strategies, and the Company's ability to otherwise execute its
business strategy. The Company experienced an 11.0% comparable store sales
increase in fiscal 1995 and a 13.4% comparable store sales increase for the
first six months of fiscal 1996. The Company does not expect comparable store
sales to increase at such rates in the future, and there can be no assurance
that the Company will continue to achieve comparable store sales gains. The
Company's comparable store sales results could cause the price of the Common
Stock to fluctuate substantially. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
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. Sales in the fourth quarters of fiscal 1995 and 1994
accounted for 39.1% and 40.2%, respectively, of annual sales for such fiscal
years. Income from operations for the fourth quarters of fiscal 1995 and 1994
accounted for 64.6% and 75.5%, respectively, of annual income from operations
for such fiscal years. The Company has historically experienced lower net sales
in each of its first three fiscal quarters and expects this trend to continue
for the foreseeable future. The Company has from time to time experienced net
losses in one or more of its first three fiscal quarters. The
7
<PAGE> 10
Company expects to continue to experience fluctuations in its net sales and net
income due to a variety of factors. A shortfall in results for the fourth
quarter of any fiscal year could have a material adverse effect on the Company's
annual results of operations. The Company's quarterly results of operations also
may fluctuate significantly as a result of a variety 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, general economic, industry and weather conditions that
affect consumer spending, and actions of competitors. "See Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Quarterly Results."
LEVERAGE
The Company will remain substantially leveraged following the Offering. The
Company's debt as of July 31, 1996 would have been approximately 46% of its
total debt and stockholders' equity, calculated on an as-adjusted basis after
giving effect to the Offering and the anticipated use of net proceeds generated
thereby. As of such date, the Company's stockholders' equity, calculated on such
an as-adjusted basis, would have been approximately $25.9 million. The Company's
ratio of earnings to fixed charges for fiscal 1995, on a pro forma basis to give
effect to the IPO and the related recapitalization and as so adjusted to give
effect to the Offering, was approximately 2.9x. See "The Company."
The degree to which the Company is leveraged could have important
consequences to the holders of the Common Stock, including the following: (i)
the Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or other purposes
may be impaired; (ii) a substantial portion of the Company's cash flow from
operations will be dedicated to the payment of the principal and interest on its
indebtedness; (iii) the Company may be more highly leveraged than some of its
competitors, which may place the Company at a competitive disadvantage; and (iv)
the Company's significant degree of leverage could make it more vulnerable to
changes in general economic conditions or factors affecting the jewelry business
in particular. A substantial portion of the Company's indebtedness bears
interest at fluctuating rates, and the Company's payments under its gold
consignment facility will vary, and changes in interest rates or rates charged
under its gold consignment facility could adversely affect the Company's results
of operations or financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Summary of Debt Instruments." Furthermore, because the Company's
bank facility is secured by substantially all of the Company's assets, the
lender thereunder could look to the pledged assets to satisfy their claims.
IMPACT OF GENERAL ECONOMIC CONDITIONS
Jewelry purchases are discretionary for consumers and may be particularly
affected by adverse trends in the general economy. The success of the Company's
operations depends to a significant extent upon a number of factors relating to
discretionary consumer spending, including economic conditions affecting
disposable consumer income such as employment, business conditions, interest
rates, availability and cost of credit and taxation, for the economy as a whole
and in regional and local markets where the Company operates. In addition, the
Company is dependent upon the continued popularity of malls as a shopping
destination and the ability of malls or tenants and other attractions to
generate customer traffic for its stores, particularly because the Company does
not engage in media advertising. There can be no assurance that consumer
spending will not be adversely affected by general economic conditions or a
decrease in mall traffic, thereby negatively impacting the Company's results of
operations or financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent upon the ability and experience of its
senior executives and other key employees, including Hugh M. Patinkin, its
Chairman, President and Chief Executive Officer, John R. Desjardins, its
Executive Vice President, Finance and Administration, Matthew M. Patinkin, its
Executive Vice President, Store Operations, and Lynn D. Eisenheim, its Executive
Vice President, Merchandising. The loss of services of these individuals or
other members of management could have a material adverse effect on the
Company's results of operations or financial condition. The Company does not
maintain "key executive"
8
<PAGE> 11
life insurance on, or have employment agreements with, any executives of the
Company. See "Management." There can be no assurance that the Company will be
able to attract and retain additional qualified personnel as needed in the
future.
COMPETITION
The retail jewelry business is fragmented and highly competitive. The
Company competes with national and regional jewelry chains and local
independently owned jewelry stores, especially those that operate in malls, as
well as with department stores, catalog showrooms, discounters, direct mail
suppliers and televised home shopping networks. Certain of the Company's
competitors are substantially larger and have greater financial resources than
the Company. Management believes that the primary competitive factors affecting
its operations are store location and atmosphere, quality of sales personnel and
service, breadth and depth of merchandise offered, pricing, credit and
reputation. The Company also believes that it competes for consumers'
discretionary spending dollars with retailers that offer merchandise other than
jewelry. In addition, the Company competes with jewelry and other retailers for
desirable locations and qualified personnel. The foregoing competitive
conditions (which could intensify) may adversely affect the Company's results of
operations or financial condition. See "Business--Competition."
CONSUMER CREDIT
Third party credit offered by the Company to its customers is supplied
primarily through a "private label" credit card arrangement with Bank One, N.A.
("Bank One") and other credit programs offered by other financial institutions.
The loss or any substantial modification of any of these arrangements could have
a material adverse effect on the Company's results of operations or financial
condition. The Company and Bank One have determined to either eliminate or
substantially modify the Company's "First Time Buyers" program which was
introduced by the Company and Bank One late in fiscal 1995. During recent
periods there has been an increase in consumer credit delinquencies in the
retail industry generally, which has resulted in financial institutions
reexamining their lending practices and procedures. There can be no assurance
that the increased delinquencies being experienced by providers of consumer
credit generally will not cause providers of third party credit offered by the
Company to decrease the availability or increase the cost of such credit. See
"Business -- Credit."
SUPPLIERS; AVAILABILITY OF CONSIGNED MERCHANDISE
The Company does not manufacture its own merchandise but instead works
closely with a number of suppliers. For the twelve months ended July 31, 1996,
the Company's largest supplier accounted for approximately 19% of the Company's
total purchases, and its largest five suppliers accounted for approximately 39%
of such purchases. Although the Company believes that there are a number of
suppliers of fine jewelry, the loss of one or more of its major suppliers,
particularly at certain critical times during the year, could have a material
adverse effect on its results of operations or financial condition.
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 weighted
average percentage of the Company's total inventory that was carried on
consignment for fiscal 1993, 1994, 1995 and the twelve months ended July 31,
1996 (based on the inventory levels at the end of each fiscal quarter) was
24.8%, 25.8%, 27.1% and 20.5%, 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 of operations or financial condition. See
"Business -- Purchasing."
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<PAGE> 12
EFFECT OF FLUCTUATIONS IN GEM AND GOLD PRICES
The Company and the jewelry industry in general are affected by
fluctuations in the prices of diamonds and gold and, to a lesser extent, other
precious and semi-precious metals and stones. During fiscal 1995, diamonds,
gold, precious and semi-precious jewelry accounted for approximately 95% of the
Company's net merchandise sales. A significant change in prices or in the
availability of diamonds, gold or other precious and semi-precious metals and
stones could have a material adverse effect on the Company's results of
operations or financial condition. The supply and price of diamonds in the
principal world markets are significantly influenced by a single entity, the
Central Selling Organization ("CSO"), a marketing arm of DeBeers Consolidated
Mines Ltd. of South Africa. The CSO has traditionally controlled the marketing
of a substantial majority of the world's supply of diamonds and sells rough
diamonds to worldwide diamond cutters from its London office in quantities and
at prices determined in its sole discretion. The CSO has recently announced
price increases for a number of the sizes and quality grades of diamonds. The
availability of diamonds to the CSO and the Company's suppliers is to some
extent dependent on the political situation in diamond producing countries, such
as South Africa, Botswana, Zaire, republics of the former Soviet Union and
Australia, and on continuation of the prevailing supply and marketing
arrangements for raw diamonds. Until alternate sources could be developed, any
sustained interruption in the supply of diamonds or any oversupply from the
producing countries could adversely affect the Company and the retail jewelry
industry as a whole. The Company is in the process of increasing the amount of
inventory (especially higher priced items) carried in its stores. Higher priced
jewelry items tend to have a slower rate of turnover, thereby increasing the
risks to the Company associated with price fluctuations and changes in fashion
trends.
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. See
"Summary of Debt Instruments -- Gold Consignment Facility."
REGULATION
The Company's operations are affected by numerous federal and state laws
that impose disclosure and other requirements upon the origination, servicing
and enforcement of credit accounts, and limitations on the maximum amount of
finance charges that may be charged by a credit provider. Although credit to the
Company's customers is provided by third parties without recourse to the Company
based upon a customer's failure to pay, any restrictive change in the regulation
of credit, including the imposition of, or changes in, interest rate ceilings,
could adversely affect the cost or availability of credit to the Company's
customers and, consequently, the Company's results of operations or financial
condition.
The Company's operations are also affected by federal and state laws
relating to marketing practices in the retail jewelry industry. In marketing to
its customers, the Company compares many of its prices to "reference prices."
The Company's literature indicates to customers that its reference price for an
item is either the manufacturer's suggested retail price or the Company's
determination of the non-discounted price at which comparable merchandise of
like grade or quality is advertised or offered for sale by competitive retailers
and is not the Company's current selling price or the price at which it formerly
sold such item. Although the Company believes that pricing comparisons are
common in the jewelry business and that the Company's practice is in compliance
with applicable laws relating to trade practices, there can be no assurance that
this practice would be upheld. See "Business -- Regulation."
AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS
At February 1, 1996, the Company had $18.4 million of net operating loss
carryforwards for federal income tax purposes. 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. However, Section 382 of the Internal
Revenue Code of 1986, as amended (the
10
<PAGE> 13
"Code"), limits the use of net operating losses and net operating loss
carryforwards with respect to periods following an "ownership change." If the
limitations imposed by Section 382 applied, the Company might pay taxes earlier
or in larger amounts than would be the case if all net operating losses could be
used in future years to reduce federal income taxes without restrictions.
The Company believes that an ownership change did not occur with respect to
the Company as a result of the IPO. However, the Company's belief is based on
certain assumptions, including assumptions as to factual matters, as well as
interpretations of law which the Internal Revenue Service might challenge. There
can be no assurance as to any position that might be taken by the Internal
Revenue Service with respect to the consequences of the IPO on the utilization
of net operating loss carryforwards.
The Company expects that the Offering will result in an ownership change.
As a result, the Company's ability to utilize net operating losses with respect
to periods after the Offering will be subject to an annual limitation on the
Company under Section 382 of the Code, which limitation is likely to cause the
Company to pay a limited amount of taxes earlier than would otherwise be the
case if all net operating losses could be used immediately in future years to
reduce federal income taxes without restriction.
See "Principal and Selling Stockholders -- Limitations on the Company's Use
of Net Operating Loss Carryforwards."
ANTI-TAKEOVER EFFECT OF CHARTER AND STATUTORY PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and Restated By-Laws and certain sections of the Delaware General Corporation
Law, including those which authorize the Company's Board of Directors to issue
shares of preferred stock and to establish the voting rights, preferences and
other terms thereof without further action by stockholders, may be deemed to
have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors (including takeovers which some stockholders
may deem to be in their best interests). These provisions could delay or
frustrate the removal of incumbent directors or the assumption of control by an
acquiror, even if such removal or assumption of control would be beneficial to
stockholders. These provisions also could discourage or make more difficult a
merger, tender offer or proxy contest, even if such events would be beneficial,
in the short term, to the interests of stockholders. Such provisions include,
among other things, a classified Board of Directors serving staggered three-year
terms, the elimination of stockholder voting by consent, a provision providing
that only the President or Board of Directors may call special meetings of
stockholders, the removal of Directors without cause only by the holders of at
least 75% of the shares entitled to vote, a provision permitting the Board of
Directors to take into account factors in addition to potential economic
benefits to stockholders, and certain advance notice requirements for
stockholder proposals and nominations for election to the Board of Directors.
The Company will be subject to Section 203 of the Delaware General Corporation
Law which, in general, imposes restrictions upon certain acquirors (including
their affiliates and associates) of 15% or more of the Company's Common Stock.
The Company has entered into severance agreements with its senior executives
which could increase the cost of any potential acquisition of the Company. See
"Management -- Severance Agreements."
In addition, the Board of Directors has adopted a stockholders rights plan
pursuant to which each share of Common Stock has associated with it one right
entitling the holder thereof, upon the occurrence of a triggering event, to
purchase shares of preferred stock of the Company or shares of the acquiror at a
discount from the prevailing market price. Triggering events are generally
events or transactions that relate to a potential acquisition, merger or
consolidation of the Company that has not been approved by the Board of
Directors. The stockholders rights plan may be deemed to have an anti-takeover
effect and may discourage or prevent takeover attempts not first approved by the
Board of Directors (including takeovers which certain stockholders may deem to
be in their best interests). See "Description of Capital Stock -- Delaware Law
and Certain Charter and By-Law Provisions" and "-- Rights."
11
<PAGE> 14
OWNERSHIP BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
After consummation of the Offering, the Company's four senior executive
officers (Messrs. H. Patinkin, Desjardins, M. Patinkin and Eisenheim) will
beneficially own approximately 14.1% of the shares of Common Stock and, together
with other officers, directors and certain other stockholders affiliated with
directors, will beneficially own approximately 24.4% of the shares of Common
Stock. By virtue of such holdings and if and to the extent such stockholders act
in concert, such stockholders will have substantial influence over the election
of directors and other matters, including the outcome of certain fundamental
corporate transactions (such as certain mergers and sales of assets) requiring
stockholder approval. See "Principal and Selling Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
There will be 9,604,250 shares of Common Stock outstanding upon the
consummation of the Offering. Of such shares, 3,737,500 shares sold in the IPO
are freely tradeable, and upon completion of the Offering, an additional
2,202,000 shares will be freely tradeable. Of the 3,664,750 remaining shares,
3,157,760 shares are held by executive officers, directors and certain
stockholders who, together with the Company, have agreed not to sell, contract
to sell, or otherwise dispose of, any shares of Common Stock without the consent
of Montgomery Securities for a period of 90 days after the date of this
Prospectus. Upon expiration of such agreements, such shares will be eligible for
sale in the public markets in accordance with Rule 144 ("Rule 144") promulgated
under the Securities Act of 1933, as amended (the "Securities Act"), including
458,501 shares (plus an additional 491,129 shares not subject to any lock-up
agreements) which may be sold in accordance with Rule 144(k) without regard to
Rule 144's volume or manner of sale limitations. In addition, upon consummation
of the Offering, there will be outstanding options to purchase a total of
1,163,476 shares of Common Stock (including 421,760 currently exercisable
options). Except as limited by the agreements described above and by Rule 144
volume limitations applicable to affiliates, shares issued upon the exercise of
stock options generally are available for sale in the open market. Future sales
of substantial amounts of Common Stock in the open market, or the availability
of such shares for sale following the Offering, could adversely affect the
prevailing market price of the Common Stock. See "Management," "Principal and
Selling Stockholders," "Description of Capital Stock," "Shares Eligible for
Future Sale" and "Underwriting."
VOLATILITY OF STOCK PRICE
The Common Stock is currently quoted on the Nasdaq National Market, which
has experienced and is likely to experience in the future significant price and
volume fluctuations which could adversely affect the market price of the Common
Stock without regard to the operating performance of the Company. In addition,
the Company believes that factors such as quarterly fluctuations in the
financial results of the Company, the Company's comparable store sales results,
announcements by other jewelry retailers, the overall economy and the condition
of the financial markets could cause the price of the Common Stock to fluctuate
substantially.
12
<PAGE> 15
THE COMPANY
The Company is a leading, national specialty retailer of fine jewelry
(based on number of stores), operating 163 stores in 24 states. Founded in 1895,
the Company operates stores in regional and super-regional shopping malls under
the names Whitehall Co. Jewellers(R) (123 stores), Lundstrom Jewelers(R) (35
stores) and Marks Bros. Jewelers(TM) (5 stores). The Company offers at
competitive prices an in-depth selection of fine jewelry in the following key
categories: diamond, gold, precious and semi-precious jewelry. The Company's
target customers are middle to upper middle income women over 25 years old.
Central to the Company's growth in operating profits and its high store
productivity are its small but flexible store format, the absence of recourse
credit risk, its strong sales culture, and its operating efficiencies at both
the store and corporate levels.
In May 1996, the Company completed an initial public offering (the "IPO")
of 3,269,500 shares of its Common Stock, which generated aggregate proceeds of
$40.4 million. Concurrently with the consummation of the IPO, the Company
completed a restructuring of its outstanding indebtedness consisting of (i) a
new $44 million five-year secured credit facility (the "Bank Facility"),
consisting of a $29 million senior secured revolving line of credit (the
"Revolver") and a $15 million senior secured term loan (the "Term Loan"); (ii) a
notes offering (the "Notes Offering") of $12.0 million aggregate principal
amount of Senior Subordinated Notes Due 2004 (the "Series C Notes") and $8.0
million aggregate principal amount of Senior Subordinated Notes due 2004 (the
"Series D Notes," and together with the Series C Notes, the "Subordinated
Notes"), and (iii) a bank gold consignment facility (the "Gold Consignment
Facility") in an amount up to $16 million.
The Company used the net proceeds of the IPO, together with the funds
generated by the Notes Offering, the Bank Facility and the Gold Consignment
Facility, to retire all of the Company's then outstanding bank indebtedness and
subordinated debt (thereby allowing the Company to realize the benefits of a
debt discount of approximately $18.3 million) and for working capital and other
general corporate purposes. Simultaneously with the completion of the IPO, the
Company completed a restructuring of its employee stock ownership plan (the
"ESOP"). The Notes Offering, the establishment of the Bank Facility and the Gold
Consignment Facility and the repayment and redemption of outstanding debt,
together with the restructuring of the Company's ESOP, as herein described, is
referred to as the "Recapitalization." See "Certain Transactions -- ESOP
Restructuring" and "Summary of Debt Instruments."
Marks Bros. Jewelers, Inc. was incorporated in Delaware in 1947 as the
successor to a business dating back to 1895. Its principal place of business is
located at 155 North Wacker Drive, Chicago, Illinois 60606, and its telephone
number is (312) 782-6800.
13
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,100,000 shares of
Common Stock offered by the Company, after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$22.5 million ($25.9 million if the Underwriters' over-allotment option is
exercised in full). 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. The Company will not
receive any proceeds from the sale of Common Stock offered by the Selling
Stockholders.
Approximately $8,960,000 of the net proceeds from the Offering will be 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 mature 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 intends to use
the remaining net proceeds from the Offering to reduce borrowings under its Bank
Facility ($24.1 million outstanding as of October 10, 1996), which bear interest
at fluctuating rates (an average of 8.0% as of October 9, 1996). 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, possibly
including a purchase of a portion of its outstanding 12.15% Series C
Subordinated Notes due 2004. Pending such uses, a portion of the proceeds of the
Offering will be invested in short term, interest-bearing investments.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock in recent
years. The Company currently intends to retain earnings to finance the growth
and development of its business and does not anticipate paying cash dividends on
its Common Stock in the foreseeable future. Any payment of cash dividends in the
future will depend upon the financial condition, capital requirements and
earnings of the Company, limitations on dividend payments pursuant to the terms
of current or future debt agreements and such other factors as the Board of
Directors may deem relevant. The agreement governing the Bank Facility prohibits
the Company from paying cash dividends without the prior consent of the lenders.
In addition, the indenture governing the Subordinated Notes contains substantial
restrictions on the Company's ability to pay dividends. See "Summary of Debt
Instruments."
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"MBJI." The Common Stock was initially offered to the public on May 2, 1996 at
$14.00 per share. The following table sets forth for the periods indicated the
high and low reported sales prices of per share for the Common Stock as reported
by the Nasdaq National Market. There is no established trading market for the
Company's Class B Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1996
- ------------------------------------------------------------------------------
Second Quarter (commencing May 2)............................................. $24 3/4 $20
Third Quarter................................................................. 28 1/4 20
</TABLE>
On October 8, 1996, the number of stockholders of record of Common Stock
was approximately 50 and the number of stockholders of record of the Class B
Common Stock was approximately 100. The Company estimates that the number of
beneficial owners of its Common Stock is significantly greater than the number
of record owners of its Common Stock. On October 31, 1996, the last reported
sale price of the Common Stock as reported by the Nasdaq National Market was
$23.25 per share.
14
<PAGE> 17
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company at July 31, 1996 and as adjusted to give effect to the issuance and
sale of 1,100,000 shares of Common Stock offered hereby by the Company, before
underwriting discounts and commissions and estimated offering expenses, and the
application of the estimated net proceeds therefrom. See "Use of Proceeds." This
table should be read in conjunction with the financial statements, including the
notes thereto, of the Company appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JULY 31, 1996
-----------------------
AS
ACTUAL ADJUSTED(1)
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of long-term debt(2):
Bank Facility........................................................ $ 10,032 $ 9,919
Outstanding checks, net.............................................. 4,207 4,207
-------- -------
Total short-term debt............................................. $ 14,239 $ 14,126
======== =======
Long-term debt(2):
Term Loan............................................................ $ 13,500 $ --
Subordinated Notes................................................... 20,000 12,000
-------- -------
Total long-term debt.............................................. 33,500 12,000
Stockholders' equity:
Preferred stock...................................................... -- --
Common stock and additional paid-in capital.......................... 33,716 56,289
Accumulated deficit.................................................. (29,321) (30,437)
-------- -------
Total stockholders' equity........................................ 4,395 25,852
-------- -------
Total capitalization............................................ $ 37,895 $ 37,852
======== =======
</TABLE>
- -------------------------
(1) As adjusted to give effect to (i) the Offering; (ii) the receipt of $0.1
million in proceeds to the Company from the exercise of stock options in
connection with the Offering; and (iii) the anticipated use of proceeds from
the Offering (including a $0.96 million ($0.58 million net of tax)
prepayment premium in connection with the redemption of subordinated debt
and a non-cash extraordinary charge of $0.9 million ($0.5 million net of
tax) relating to the write-off of deferred financing costs). See "Use of
Proceeds."
(2) See "Summary of Debt Instruments" for a description of the Company's
long-term and short-term debt.
15
<PAGE> 18
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 each of the five years ended January 31, 1996 are derived from audited
financial statements of the Company. The balance sheet and statement of
operations data as of, and for the six months ended, July 31, 1995 and 1996 have
been derived from and should be read in conjunction with the unaudited financial
statements of the Company. In the opinion of the Company, such unaudited
financial statements 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 selected
financial and operating data for the six months ended July 31, 1996 are not
necessarily indicative of the results to be expected for the fiscal year ending
January 31, 1997. Supplemental pro forma financial data for the year ended
January 31, 1996 and for the six months ended July 31, 1996 and July 31, 1995
are unaudited. 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 and unaudited financial
statements and the related notes appearing elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JULY 31,
------------------------------------------------------ -----------------------
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 76,749 $ 88,141 $ 91,106 $106,683 $131,022 $52,074 $64,466
Cost of sales............................ 45,606 52,106 54,511 64,223 77,722 31,959 38,626
-------- ------- ------- -------- ---------- ---------- ----------
Gross profit........................... 31,143 36,035 36,595 42,460 53,300 20,115 25,840
Selling, general and administrative
expenses............................... 25,781 27,971 28,340 30,748 37,887 16,458 20,385
-------- ------- ------- -------- ---------- ---------- ----------
Income from operations................. 5,362 8,064 8,255 11,712 15,413 3,657 5,455
Interest expense......................... 9,397 7,821 8,920 10,594 12,314 6,017 4,557
Stock award expense...................... -- -- -- -- 461 -- --
ESOP compensation expense................ -- 3,800 511 547 590 295 --
Provision for store closings(1).......... 491 -- -- -- -- -- --
Refinancing costs(2)..................... 12,631 -- -- -- -- -- --
-------- ------- ------- -------- ---------- ---------- ----------
Income (loss) from continuing
operations before income taxes....... (17,157) (3,557) (1,176) 571 2,048 (2,655) 898
Income tax benefit (provision)(3)........ -- -- -- -- 14,924 -- (350)
-------- ------- ------- -------- ---------- ---------- ----------
Income (loss) from continuing
operations........................... (17,157) (3,557) (1,176) 571 16,972 (2,655) 548
Gain (loss) on disposal of discontinued
operations(4).......................... (7,297) -- 2,700 -- -- -- --
-------- ------- ------- -------- ---------- ---------- ----------
Net income (loss) before cumulative
effect of accounting change for ESOP
and extraordinary gain............... (24,454) (3,557) 1,524 571 16,972 (2,655) 548
Cumulative effect of accounting change
for ESOP(5)............................ -- -- (8,526) -- -- -- --
Extraordinary gain on extinguishment of
debt, net of taxes..................... -- -- -- -- -- -- 11,164
-------- ------- ------- -------- ---------- ---------- ----------
Net income (loss)...................... $(24,454) $ (3,557) $ (7,002) $ 571 $ 16,972 $(2,655) $11,712
======== ======= ======= ======== ========== ========== ==========
SUPPLEMENTAL PRO FORMA STATEMENT OF
OPERATIONS DATA(6): (UNAUDITED)
Net sales................................ $131,022 $52,074 $64,466
Income from operations................... 15,413 3,657 5,455
Interest expense......................... 3,282 1,585 1,672
Net income............................... 7,002 1,243 2,270
Net income per share..................... $ 0.70 $ 0.12 $ 0.22
Weighted average number of common shares
and common share equivalents
outstanding(7)......................... 10,001,306 10,007,701 10,164,668
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JULY 31,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Stores open at end of period................... 111 113 122 131 146 143 155
Average net sales per store(8)................. $699,000 $784,000 $791,000 $836,000 $936,000
Average net sales per gross square foot(9)..... $ 883 $ 1,008 $ 1,013 $ 1,068 $ 1,187
Average merchandise sale....................... $ 192 $ 210 $ 229 $ 245 $ 253 $ 262
Comparable store sales increase
(decrease)(10)............................... 0.4% 12.5% (0.5)% 7.6% 11.0% 11.8% 13.4%
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital................................ $ 29,731 $ 15,123 $ 20,079 $ 20,460 $ 21,512 $ 20,217 $ 15,030
Total assets................................... 59,376 59,174 51,677 61,512 87,403 70,468 75,300
Total debt..................................... 97,932 112,247 105,953 110,806 107,891 118,191 43,532
Stockholders' equity (deficit)................. (69,877) (69,634) (67,659) (66,578) (47,858) (68,944) 4,395
</TABLE>
- ------------------------------
(1) During the year ended January 31, 1992, the Company recorded a charge to
provide for the closure of certain stores it expected to close subsequent
to year-end as well as for contingent liabilities on stores closed
previously.
(2) In connection with its fiscal 1991 refinancing of debt, the Company
recorded refinancing costs in the amount of $12.6 million, which included
$2 million in interest and fees payable under interest rate hedge
agreements, $1.8 million in default interest, $4.3 million in zero coupon
notes, $1.5 million in restructuring fees, $2.3 million in accrued legal
and other professional fees, and $0.7 million of previously deferred costs
incurred in connection with the establishment of the ESOP.
(3) Income tax benefit in the year ended January 31, 1996 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 6 of Notes to Financial Statements.
(4) The Company sold its direct marketing division as of January 31, 1992. In
connection with this disposition, the Company recorded a $7.3 million loss
in the year ended January 31, 1992 on the sale of the discontinued
operations and a $2.7 million gain in the year ended January 31, 1994 upon
its receipt of deferred proceeds from the sale.
(5) 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Background" and Note 5 of Notes to Financial Statements.
(6) Supplemental pro forma statement of operations data reflect (i) the IPO and
the Recapitalization; (ii) the Offering and the anticipated use of the
estimated net proceeds therefrom; and (iii) the application of a tax
provision (assuming a statutory rate of 40%) to the pro forma net income
from continuing operations, as if each transaction occurred on the first
day of the period presented.
(7) The pro forma weighted average number of common shares and common share
equivalents outstanding for the year ended January 31, 1996, and six months
ended July 31, 1995 and July 31, 1996, respectively, consisted of (i)
9,604,267, 9,610,662 and 9,604,250 shares of Common Stock outstanding
(including 3,269,500 shares of Common Stock issued in the IPO and 1,100,000
shares of Common Stock offered hereby); (ii) 3,588, 3,588 and 3,213 common
share equivalents relating to Class B Common Stock; (iii) 393,451, 393,451
and 402,358 common share equivalents relating to the Company's 1995
incentive stock option plan; and (iv) -0-, -0- and 222,654 common share
equivalents relating to the Company's 1996 incentive stock option plan.
(8) 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.
(9) 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.
(10) A store becomes comparable after it has been open for 12 full months.
17
<PAGE> 20
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, appearing elsewhere in this
Prospectus. Certain statements in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" constitute "forward-looking
statements" within the meaning of the Litigation Reform Act. See "Special Note
Regarding Forward-Looking Statements."
BACKGROUND
The Company is a leading, national specialty retailer of fine jewelry
(based on number of stores, according to the May 16, 1995 issue of National
Jeweler), operating 163 stores in 24 states. The Company's sales and income from
operations have increased consistently since fiscal 1991 to $131.0 million and
$15.4 million, respectively, in fiscal 1995. During that same period, the number
of Company stores grew from 111 to 146, and the Company's operating margins
improved from 7.0% in fiscal 1991 to 11.8% in fiscal 1995. The Company achieved
this operating performance despite significant financial leverage.
To strengthen its capital structure and provide greater financial
flexibility for new store openings, in May 1996, the Company completed the IPO
and the Recapitalization which substantially reduced its indebtedness and
ongoing interest expense. The net proceeds from the Offering are expected to
further strengthen the Company's capital structure, reduce indebtedness and
accelerate 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 expects to incur an extraordinary charge
of approximately $1.5 million (approximately $0.9 million net of tax) in the
fourth quarter of fiscal 1996.
The Company anticipates opening a total of 19 stores in fiscal 1996
(including the 18 stores opened through the date of this Prospectus) and,
contingent upon the completion of the Offering, 28 stores in fiscal 1997 and a
total of approximately 60 stores in fiscal 1997 and 1998 combined. The Company's
policy is to charge as incurred pre-opening costs associated with new stores. In
fiscal 1995, the Company enhanced and upgraded its personnel to increase sales
and expects to continue to incur selling, general and administrative expense in
the near term in association with this ongoing upgrade. 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. The Company's continuing efforts to
increase the use of its private label credit programs are expected to result in
higher credit-related expense. In addition, the Company experienced an 11.0%
comparable store sales increase in fiscal 1995 and a 13.4% comparable store
sales increase in the first six months of fiscal 1996. There can be no assurance
that the Company will achieve comparable store sales increases in future
reporting periods.
RECENT SALES RESULTS
For the first two months of the third quarter of fiscal 1996 (i.e., August
and September) net sales increased $3.0 million, or 15.9%, to $22.0 million from
$19.0 million in the first two months of the third quarter of fiscal 1995.
Comparable store sales increased by 7.8% ($1.4 million) in the first two months
of the third quarter of fiscal 1996. This 7.8% comparable store sales increase
was achieved on top of a 15.9% increase in the first two months of the third
quarter of fiscal 1995.
18
<PAGE> 21
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.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JANUARY 31, ENDED JULY 31,
------------------------- --------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (including buying and occupancy
expenses)............................................ 59.8 60.2 59.3 61.4 59.9
----- ----- ----- ----- -----
Gross profit......................................... 40.2 39.8 40.7 38.6 40.1
Selling, general and administrative expenses........... 31.1 28.8 28.9 31.6 31.6
----- ----- ----- ----- -----
Income from operations............................... 9.1 11.0 11.8 7.0 8.5
Interest expense....................................... 9.8 9.9 9.4 11.6 7.1
Stock award expense.................................... -- -- 0.4 -- --
ESOP compensation expense.............................. 0.6 0.6 0.4 0.5 --
----- ----- ----- ----- -----
Income (loss) from continuing operations before
income taxes...................................... (1.3) 0.5 1.6 (5.1) 1.4
Income tax benefit (expense)........................... -- -- 11.4 -- (0.5)
----- ----- ----- ----- -----
Income (loss) from continuing operations............. (1.3) 0.5 13.0 (5.1) 0.9
Gain on disposal of discontinued operations............ 3.0 -- -- -- --
----- ----- ----- ----- -----
Income (loss) before cumulative effect of change in
accounting for ESOP............................... 1.7 0.5 13.0 (5.1) 0.9
Cumulative effect of change in accounting for ESOP..... (9.4) -- -- -- --
----- ----- ----- ----- -----
Net income (loss) before extraordinary gain.......... (7.7)% 0.5% 13.0% (5.1)% 0.9%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JULY 31, 1996 COMPARED TO SIX MONTHS ENDED JULY 31, 1995
Net sales for the six months ended July 31, 1996 increased by $12.4
million, or 23.8%, to $64.5 million. Comparable store sales increased $6.8
million, or 13.4%, in the same period. Sales from new stores contributed $5.5
million to the overall sales increase. The average number of units sold on a
comparable store basis increased by approximately 7.6% in the six months ended
July 31, 1996, while the average price per merchandise sale increased to $262 in
the fiscal 1996 period from $253 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 ten new stores and closed one in
the six months ended July 31, 1996, increasing the number of stores operated to
155 as of July 31, 1996 compared to 143 as of July 31, 1995.
Gross profit increased $5.7 million to $25.8 million in the six months
ended July 31, 1996. The gross profit percentage increased to 40.1% in the six
months ended July 31, 1996 from 38.6% in the six months ended July 31, 1995, due
to the spreading of certain buying and occupancy costs over the increased sales
base.
Selling, general and administrative expenses increased by $3.9 million, or
23.9%, to $20.4 million in the six months ended July 31, 1996 from $16.5 million
in the corresponding period of the prior year. New stores accounted for $1.7
million of this increase. As a percentage of net sales, selling, general and
administrative expenses remained consistent at 31.6% in the six months ended
July 31, 1996 and 1995. The dollar increase primarily relates to higher payroll
expenses of $2.4 million and higher credit expenses of $0.9 million. Comparable
store payroll costs increased 9.9% in the six months ended July 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 44.6% in the six months ended July 31, 1996
from 36.4% in the six months ended July 31, 1995. These non-recourse credit
sales carry higher discount rates than bankcard sales, which resulted in higher
credit expense.
19
<PAGE> 22
Interest expense decreased $1.5 million or 24.3% to $4.6 million in the six
months ended July 31, 1996 from $6.0 million in the six months ended July 31,
1995. This decrease in interest expense was attributable to lower average
outstanding debt balances resulting from the Recapitalization and lower average
interest rates on bank borrowings.
No ESOP compensation expense has been recorded in fiscal 1996. The
compensation expense recorded in the six months ended July 31, 1995 was $0.3
million.
Income tax expense of $0.4 million was recorded in the six months ended
July 31, 1996 reflecting an expected effective annual tax rate of 39%. No income
tax benefit was recorded in the six months ended July 31, 1995, as utilization
of the Company's net operating loss was not reasonably assured at that time.
In connection with the Recapitalization, the Company recorded a gain on the
early extinguishment of debt in the amount of $11.2 million, net of taxes, which
was reflected as an extraordinary item. This gain 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.
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 by 7.0%, 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 new stores in fiscal 1995, increasing the weighted average
number of stores to 141 in fiscal 1995 from 126 in fiscal 1994.
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 base.
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 relates 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 accounted 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. 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. These non-recourse credit sales carry higher discount rates
than bankcard sales. The increased usage of private label credit contributed to
higher sales as well as increases in the average price per merchandise sale. The
Company intends to continue to upgrade its sales staff and expand its credit
programs. 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.
Interest expense increased $1.7 million, or 16.2%, 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
20
<PAGE> 23
on the Company's senior accreting note and subordinated indebtedness, which
indebtedness was subsequently retired in fiscal 1996 in connection with the
Recapitalization.
ESOP compensation expense increased by $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. As a result of the Recapitalization, the Company does
not expect to record any future ESOP compensation expense. 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
deferred tax benefit of $14.9 million. The recognition of the deferred tax
benefit resulted from a reduction in the valuation allowance relating to the
Company's expectation of future taxable income being, at a minimum, $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 the currently outstanding debt. At February 1, 1996, the Company had
available net operating loss tax carryforwards in the amount of $18.4 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. The Company realized $7.1 million of the deferred tax asset in May 1996,
in connection with the recognition of the gain relating to the debt forgiveness
as part of the Recapitalization.
Giving pro forma effect to the IPO and realization of a portion of the
deferred tax asset in the amount of $7.1 million associated with the debt
forgiveness, the Company would have a remaining net deferred tax asset in the
amount of $8.5 million as of January 31, 1996. This deferred tax asset relates
primarily to net operating tax loss carryforwards generated in prior years. Full
utilization of the remaining deferred tax asset will require the Company to
generate aggregate future taxable income of approximately $22.1 million prior to
the carryforwards' expiration, which will begin in 2006. For the fiscal year
ended January 31, 1996 the Company had pro forma taxable income of $9.2 million,
giving effect to the Offering and the Recapitalization.
In years prior to the fiscal year ended January 31, 1996, the Company
determined that, in accordance with the criteria set forth in Statement of
Accounting Standards No. 109 ("SFAS 109"), realization of the tax benefits was
not "more likely than not." As a result, in accordance with SFAS 109, in years
prior to the fiscal year ended January 31, 1996, the Company recorded a full
valuation allowance with respect to the deferred tax asset. See Note 6 of Notes
to Financial Statements.
The Company's results of operations have improved significantly over the
past five fiscal years and, despite nominal net income and net losses due
primarily to significant interest expense associated with its high debt level,
the Company has generated positive cash flow from operations and strong gross
margins. Based on its significantly improved operating performance in the year
ended January 31, 1996 and its expectations of future profitability (without
regard to the Offering made hereby) as of January 31, 1996, the Company
determined that it is more likely than not that it will generate sufficient
taxable income to utilize its deferred tax asset prior to the expiration of the
net operating loss carryforwards. Accordingly, in accordance with SFAS 109,
effective January 31, 1996, the Company reversed the valuation allowance and
recognized a corresponding net deferred tax asset. Realization of the net
deferred tax asset is not assured, however, and the amount of the asset
considered realizable could be reduced in future periods if the Company's
estimates of future taxable income during the carryforward period are reduced
for any reason. A number of factors could affect the Company's future results of
operations, including without limitation, general economic conditions,
competition and fluctuations in gem and gold prices. See "Risk Factors," Note 6
of Notes to Financial Statements and "Principal and Selling Stockholders --
Possible Limitations on the Company's Use of Net Operating Loss Carryforwards."
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales increased $15.6 million, or 17.1%, to $106.7 million in fiscal
1994 from $91.1 million in fiscal 1993. Comparable store sales increased $6.7
million, or 7.6% in fiscal 1994. Sales from new stores contributed $10.1 million
to the overall increase in net sales. These increases were partially offset by a
decrease in net sales
21
<PAGE> 24
related to the closing of stores in fiscal 1994 and 1993. In addition, the
average price per merchandise sale increased by 9.0%, to $229 in fiscal 1994
from $210 in fiscal 1993. Comparable store sales increased in large part due to
the Company's competitive pricing strategy, its selection of key merchandise
inventory categories, and an increase in average price per merchandise sale due
to a higher proportion of non-recourse credit sales. Stores closed in fiscal
1994 and 1993 accounted for a $1.3 million decrease in net sales. The Company
opened 11 new stores in fiscal 1994, increasing the weighted average number of
stores to 126 in fiscal 1994 compared to 117 in fiscal 1993.
Gross profit increased $5.9 million, or 16.0%, to $42.5 million in fiscal
1994 from $36.6 million in fiscal 1993. The increase in gross profit was
attributable to the Company's increase in net sales. Gross margin decreased to
39.8% in fiscal 1994 from 40.2% in fiscal 1993 due to the implementation of
certain more competitively priced merchandise programs, which were introduced in
the second half of fiscal 1993. At the same time, tighter controls over store
discounting were implemented to achieve margin improvements on other
merchandise. 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 base.
Selling, general and administrative expenses increased $2.4 million, or
8.5%, to $30.7 million in fiscal 1994 from $28.3 million in fiscal 1993. As a
percentage of net sales, selling, general and administrative expenses decreased
to 28.8% in fiscal 1994 from 31.1% in fiscal 1993. The dollar increase primarily
relates to higher payroll expenses, credit expense and supplies and other
expenses attributable to 11 stores opened in fiscal 1994 and 11 stores opened in
fiscal 1993. Payroll costs as a percentage of net sales decreased in fiscal
1994, as compared to fiscal 1993. This gain in sales productivity was primarily
due to a reduction in average store staffing hours. Automation of certain store
functions and centralization of certain activities at the corporate office
permitted this reduction without impacting sales. Advertising costs decreased
slightly as a result of discontinuing radio advertising in certain markets.
As a result of the factors discussed above, income from operations
increased 41.9% to $11.7 million in fiscal 1994 from $8.3 million in fiscal
1993. As a percentage of net sales, income from operations increased to 11.0% in
fiscal 1994 from 9.1% in fiscal 1993.
Interest expense increased $1.7 million, or 18.8%, to $10.6 million in
fiscal 1994 from $8.9 million in fiscal 1993. This increase in interest expense
was due primarily to higher average indebtedness and to higher interest rates.
As a percentage of net sales, interest expense increased to 9.9% in fiscal 1994
from 9.8% in fiscal 1993.
ESOP compensation expense increased $36,000, or 7.0%, to $547,000 in fiscal
1994 from $511,000 in fiscal 1993. The expense is related primarily to an
increase in the estimated fair value of the shares held by the ESOP committed to
be released to participant's accounts.
QUARTERLY RESULTS
The Company's results of operations fluctuate on a quarterly basis. 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.
The following table sets forth summary unaudited quarterly financial
information of the Company for each quarter in fiscal 1994 and fiscal 1995 and
the first two quarters of fiscal 1996. 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 Prospectus 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. The operating results for
any quarter are
22
<PAGE> 25
not necessarily indicative of results for any future period and there can be no
assurance that any trends reflected in such results will continue in the future.
<TABLE>
<CAPTION>
1996 QUARTERS ENDED
1994 QUARTERS ENDED 1995 QUARTERS ENDED
----------------------------------------- ----------------------------------------- --------------------
APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31,
1994 1994 1994 1995 1995 1995 1995 1996 1996 1996
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....... $ 19,091 $ 22,578 $ 22,125 $ 42,889 $ 23,676 $ 28,398 $ 27,688 $ 51,260 $ 29,560 $ 34,906
Gross profit.... 6,968 8,494 8,326 18,672 8,880 11,235 10,724 22,461 11,626 14,214
Income from
operations.... 370 1,424 1,079 8,839 854 2,803 1,800 9,956 1,608 3,847
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Over the last three fiscal years, the Company's primary ongoing capital
requirements have been to amortize its term debt incurred as part of the
Company's 1991 debt restructuring, to fund increases in inventory at existing
stores and to fund capital expenditures and working capital (primarily
inventory) associated with the Company's new stores. During the same period, the
Company's primary sources of liquidity have been cash flow from operations and
bank borrowings under the Company's revolver.
The Company's cash flows from operating activities decreased from a
positive cash flow of $2.0 million in the first six months of fiscal 1995 to a
cash flow shortfall of $0.4 million in the first six months of fiscal 1996.
Higher income from operations together with increases in accounts payable were
more than offset by increases in merchandise inventories (before the effects of
the Gold Consignment Facility) and deferred financing costs. Cash generated from
financing activities included proceeds from the IPO of $40.4 million, $15.0
million from proceeds of the Term Loan, $15.3 million from proceeds from the
Gold Consignment Facility less a $3.8 million dollar decrease in the net amount
of outstanding checks. The Company utilized cash in the first six months of 1996
primarily to repay outstanding bank borrowings of $7.8 million on revolving
loans, $26.6 million on the term loans, $50.5 million on senior accreting loans
and $2.0 million on zero coupon notes and to repay subordinated debt of $10.6
million in addition to funding capital expenditures of $3.3 million, primarily
related to the opening of ten new stores in the first six months of fiscal 1996.
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 were primarily related to the opening of the Company's 15
new stores in fiscal 1995. The peak outstanding borrowings under the Company's
revolver during fiscal 1995 was $10.7 million. In addition, at November 30,
1995, the Company had consigned inventories from vendors in the amount of $18.0
million.
The Company's cash flows from operating activities increased from a cash
flow shortfall of $4.7 million in fiscal 1993 to a positive cash flow of $4.7
million in fiscal 1994, primarily due to higher income from operations. In
fiscal 1994, the sources of the Company's liquidity included cash flow from
operating activities, together with a $1.8 million increase in borrowings under
the Company's revolver and outstanding checks. The Company utilized cash during
fiscal 1994 primarily to (i) increase inventories, net of corresponding payables
($6.6 million), (ii) repay the Company's term loan ($2.5 million), and (iii)
fund capital expenditures ($3.9 million). The increase in inventories and
capital expenditures were primarily related to the opening of 11 new stores in
fiscal 1994. The peak outstanding borrowings under the Company's revolver loan
during fiscal 1994 was $9.4 million. In addition, at November 30, 1994, the
Company had consigned inventories from vendors in the amount of $16.6 million.
At February 1, 1996, the Company had net operating loss tax carryforwards
in the amount of $18.4 million, which will reduce cash payments for income taxes
in future periods but which have already been
23
<PAGE> 26
recognized for financial reporting purposes. The timing of the use of these
carryforwards is expected to be deferred under Section 382 of the Code. See
"Principal and Selling Stockholders -- Limitations on the Company's Use of Net
Operating Loss Carryforwards."
The Company has a $43.75 million Bank Facility, consisting of a $29.0
million Revolver and a $14.75 million Term Loan. Borrowings outstanding under
the Revolver and Term Loan bear interest at fluctuating rates determined by
reference to a bank base rate or LIBOR, plus in each case an applicable margin.
The Revolver is a five-year revolving line of credit, with borrowings thereunder
limited to a borrowing base determined based on levels of inventory and accounts
receivable. At September 30, 1996, the borrowing base under the Revolver was
$28.3 million, and borrowings outstanding under the Revolver were $9.7 million.
The Term Loan has a final maturity in May 2001, with quarterly amortization of
principal which commenced in July 1996 as described under "Summary of Debt
Instruments -- Bank Facility." Upon consummation of the Offering, the Term Loan
will be repaid and the Bank Facility will be converted into a $43.75 million
reducing revolver, with the borrowings thereunder limited to the borrowing base
and with the Commitment Amount reducing over five years to $29 million. See
"Summary of Debt Instruments -- Bank Facility."
See "Summary of Debt Instruments" for a description of the Company's Gold
Consignment Facility and Series C and Series D Senior Subordinated Notes. The
Company intends to utilize a portion of the proceeds from the Offering to retire
$8.0 million in principal amount of the Series D Notes at their applicable
redemption price of $8.96 million plus accrued interest, and the Company may in
the future use available borrowings under the Bank Facility to repurchase a
portion of the Series C Notes from time to time.
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 amortizing
its debt. The Company's primary sources of liquidity have been cash flow from
operations and bank borrowings.
During fiscal 1996, the Company plans to open 19 stores, 18 of which had
been opened as of the date of this Prospectus. New stores on average require
inventory of approximately $300,000 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
new stores average approximately $20,000. The Company has budgeted capital
expenditures in fiscal 1996 of $5.6 million for new store openings and other
assets being placed in service during fiscal 1996. The Company anticipates
capital expenditures of approximately $8.0 million for new store openings and
other assets being placed in service during fiscal 1997, a portion of which
expenditures will be made late in fiscal 1996.
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 Bank Facility, together with the funds from the Offering,
should be sufficient to support the Company's accelerated new store expansion
program and to meet debt service requirements 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.
24
<PAGE> 27
BUSINESS
THE COMPANY
General. Marks Bros. Jewelers, Inc. (the "Company") is a leading, national
specialty retailer of fine jewelry (based on number of stores), operating 163
stores in 24 states. Founded in 1895, the Company operates stores in regional
and super-regional shopping malls under the names Whitehall Co. Jewellers(R)
(123 stores), Lundstrom Jewelers(R) (35 stores) and Marks Bros. Jewelers(TM) (5
stores). The Company offers at competitive prices an in-depth selection of fine
jewelry in the following key categories: diamond, gold, precious and
semi-precious jewelry. The Company's target customers are middle to upper middle
income women over 25 years old. Central to the Company's growth in operating
profits and its high store productivity are its small but flexible store format,
the absence of recourse credit risk, its strong sales culture and its operating
efficiencies at both the store and corporate levels.
From fiscal 1991 to fiscal 1995, the Company's net sales grew at a compound
annual rate of 14.3% from $76.7 million to $131.0 million, while income from
operations grew at a compound annual rate of 30.2%, from $5.4 million to $15.4
million. The Company's growth during this period is attributable to (i) new
store openings, which resulted in an increase in the number of stores from 111
to 146 stores, (ii) higher store productivity, as average annual sales per store
increased from $699,000 to $936,000, and (iii) improved operating efficiencies
resulting in an increase in the Company's operating margin from 7.0% to 11.8%.
For the six months ended July 31, 1996, the Company's net sales increased by
23.8% as compared to net sales in the first six months of fiscal 1995, and
operating margin improved from 7.0% to 8.5%.
The Company believes it has significant opportunities to increase sales and
profitability through an increased number of planned store openings, the
implementation of several new sales and merchandising programs designed to
continue comparable store sales growth, and continued adherence to its strict
operating standards regarding performance of sales personnel, store
profitability and cost control.
Retailing Concepts. The Company's stores currently operate under the names
Whitehall Co. Jewellers(R) (123 stores), Lundstrom Jewelers(R) (35 stores) and
Marks Bros. Jewelers(TM) (5 stores). Each store concept is designed around an
open, brightly-lit and inviting layout which encourages browsing by mall
shoppers. The Company's multiple name format allows the Company to open
additional stores in malls where it already has profitable locations. Whitehall
Co. Jewellers is the Company's primary trademark and is positioned to be
somewhat more upscale than the average mall-based jewelry store. Lundstrom
Jewelers operates in 35 malls. The Company operates two stores in 30 malls and
three stores in one mall. In most cases a Lundstrom store is added to a mall
only after the Company has operated a successful Whitehall store in the same
center. Generally, Lundstrom is positioned slightly more upscale than Whitehall,
with greater emphasis on more expensive diamond and gold merchandise. The
Company is testing a new concept that will be closer to a "guild" jewelry
retailer. This concept is in the implementation stage, with the first store
having opened in May 1996 in a mall in which the Company already operates a
Whitehall and a Lundstrom store.
INDUSTRY
Total retail sales by jewelry stores in the United States in 1995 were
approximately $19.4 billion, and such sales grew between 1990 and 1995 at an
annual rate of approximately 5.0%, according to the U.S. Department of Commerce.
The jewelry market is generally divided into three segments: fine jewelry,
costume jewelry, and guild jewelry. The broad "fine" jewelry market segment
represents a majority of the jewelry market in terms of revenue, and it includes
jewelry made from precious metals and gemstones, as well as finer watches. Fine
jewelry is sold at a range of price points from middle to upper end, with the
upper end consisting of luxury items such as unique design jewelry items and
expensive time pieces. Except for a few designer label offerings, fine jewelry
is generally not marketed under brand names. Costume jewelry consists of jewelry
made of non-precious stones and rhinestones, as well as inexpensive watches. The
"guild" market represents a small percentage of the total market.
25
<PAGE> 28
Jewelry is mainly distributed through jewelry stores (both independent
stores and chains), general merchandise and discount stores, department stores,
mail order and catalogs, apparel and accessories stores, and televised home
shopping networks. General merchandisers, discount stores, and apparel and
accessories stores generally sell costume jewelry and lower-priced "fine"
jewelry. Mail order and home shopping distributors generally offer costume
jewelry and fine jewelry at low to middle price points. Department stores
generally offer a wider assortment of merchandise including a selection of
costume, fine and some "guild" jewelry.
Jewelry stores, including independent stores and jewelry chains, represent
the largest distribution channel based on industry sales. Most jewelry stores
cater to the broad fine jewelry market offering a variety of items at a range of
price points. As of December 31, 1995, there were over 28,000 retail jewelry
stores nationwide accounting for almost one-half of all jewelry sales. The
retail jewelry industry is highly fragmented with no single chain accounting for
a significant percentage of the fine jewelry market.
The Company believes that the retail jewelry industry is consolidating due
to a variety of factors, including (i) bad debt exposure, which impacted jewelry
stores that extended recourse credit to customers, (ii) overexpansion of stores
and the failure to close unprofitable stores, and (iii) financial risk of high
leverage. The Company believes that industry consolidation will continue as
independent jewelers find it increasingly difficult to achieve economies of
scale in merchandise purchasing and real estate site selection.
OPERATING STRATEGIES
The Company believes that its success is attributable in large measure to
its business strategy which emphasizes adherence to the Company's strict
operating standards regarding real estate selection, credit policies,
performance of sales personnel, store profitability and cost control. The
principal elements of the Company's operating strategies are as follows:
Small, Flexible Store Format in Regional Malls. The Company believes
it has a competitive advantage in obtaining high traffic, "center court"
locations in desirable regional and super-regional malls due principally to
(i) its small average store size of approximately 790 square feet, which,
while considerably smaller than the average store size of most of the
Company's competitors, generates comparable sales volumes, (ii) its ability
to adapt its store design to various sizes and configurations, and (iii)
its high average sales per square foot (approximately $1,200 in fiscal
1995). Over two-thirds of the Company's stores are located in high traffic,
"center court" locations. The stores' small flexible format (which lowers
the Company's fixed occupancy costs) and high productivity are desirable to
mall owners. The stores' open, attractive design appeals to customers,
while facilitating foot traffic and enhancing sales opportunities for the
Company.
Absence of Recourse Credit Risk. The Company operates based upon a "no
credit risk" policy. When purchasing on credit, customers must use their
personal credit cards, the Company's private label credit card (which is
available through a third party and is non-recourse to the Company), or
other non-recourse third party credit arrangements. The Company's strict
policy eliminates its credit risk associated with the customer's failure to
pay. This policy also distinguishes the Company from most of its
competitors, which not only bear such credit risk, but also rely on finance
income in addition to merchandise sales.
Motivated, Sales-Oriented Store Personnel. The primary responsibility
of store sales personnel is selling to customers. To assist them in their
selling efforts, store personnel are authorized to discount prices within
certain limits and to choose from a variety of return/exchange options to
offer the customer. Most non-sale activities are largely centralized. In
addition, the absence of internal credit operations reduces the need for
sales personnel to focus on many in-store credit activities. Compensation
and bonus programs reinforce sales and margin goals on a daily, weekly and
monthly basis. The Company continually seeks to enhance the selling skills
of its sales associates through recruitment of experienced sales personnel
and extensive, ongoing training programs.
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Differentiated Merchandising. The Company offers an in-depth selection
of merchandise in several key categories of fine jewelry: diamond, gold,
precious and semi-precious jewelry. This "key category" focus is oriented
to the Company's target customer, the middle to upper middle income woman.
Unlike many of its competitors, the Company carries only a limited
selection of watches and virtually no costume jewelry or gift merchandise.
During the past four fiscal years the Company has increased its average
store inventory at an annual rate of approximately 12.6% in an effort to
expand the upper price points and add more depth to the merchandise mix.
Strict Operating Controls. The Company emphasizes high performance
standards, backed by strong incentive programs. Adherence to these
standards in the areas of store site selection, sales targets, store
profitability and cost control is fundamental to the Company's success. For
example, the Company reduced central overhead from $7.5 million (9.8% of
net sales) in fiscal 1991 to $7.3 million (5.6% of net sales) in fiscal
1995. During this same period, the Company's net sales increased by over
70% and the number of its stores increased by 32.0%. For the six months
ended July 31, 1996, the Company's central overhead represented 5.5% of net
sales as compared to 6.1% of net sales for the first six months of fiscal
1995.
GROWTH STRATEGIES
The Company believes that it has significant opportunities to increase
sales and profits through continued execution of its store expansion strategy
and continued comparable store sales gains. The key elements of the Company's
growth strategies are as follows:
Further Acceleration of New Store Openings. The Offering is expected to
enable the Company to accelerate its new store expansion program from 23 to 28
new stores in fiscal 1997. The Company anticipates opening a total of
approximately 60 new stores in fiscal 1997 and 1998 combined. The Company plans
to open a total of 19 new stores in fiscal 1996 (including the 18 stores opened
as of the date of this Prospectus). The following table shows the Company's
store expansion during the periods presented reflecting both store openings and
closings for the respective periods:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, YEAR ENDING
------------------------------------ JANUARY 31, 1997
NUMBER OF STORES: 1992 1993 1994 1995 1996 (EXPECTED)(1)
------------------------------------------ ---- ---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C> <C>
Open at beginning of period............... 109 111 113 122 131 146
Opened during period...................... 8 4 11 11 15 19
Closed during period...................... (6) (2) (2) (2) -- (2)
--- --- --- --- --- ---
Open at end of period..................... 111 113 122 131 146 163
=== === === === === ===
Net increase............................ 2 2 9 9 15 17
</TABLE>
- ------------------------------
(1) As of the date of the Prospectus, 18 stores have been opened during fiscal
1996.
To reduce the Company's risk associated with entering new malls, the
Company prefers to expand in established malls. In addition, the Company seeks
to open additional stores in its existing markets where the Company believes it
can obtain greater market penetration. The Company also seeks to identify new
geographic markets where it can cluster stores for ease of supervision and
increased name recognition. The two most recent examples of the Company's
entrance into new geographic markets are St. Louis and Phoenix, both of which
the Company entered in fiscal 1994. The Company now has three stores in the
Phoenix area, with a fourth store planned to open in fiscal 1997, and five
stores in the St. Louis area, with a sixth store planned to open in fiscal 1996.
The Company plans to enter the San Diego market in fiscal 1997 with three
stores.
The Company seeks to open new stores in key locations in regional and
super-regional malls. The Company's national presence permits it to focus its
new store openings on desirable malls throughout the country and often to obtain
high traffic, "center court" locations in those malls to maximize exposure to
mall shoppers. The Company uses its multiple name format to open additional
stores in malls where it already has profitable locations. For example, the
Company operates two stores in 29 malls and three stores in one mall.
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<PAGE> 30
The Company continuously evaluates the performance of its stores and closes
certain stores from time to time that do not continue to meet its strategic
location profile or its performance requirements. The Company has closed one
store, and plans to close an additional store, in fiscal 1996. The Company is
currently considering closing a limited number of such stores in fiscal 1997 and
currently expects that the number of such closings will not vary substantially
from historical experience.
Comparable Store Sales Increases. The Company has achieved comparable store
sales increases of 7.6%, 11.0% and 13.4% in fiscal 1994 and 1995 and in the
first six months of fiscal 1996, respectively. The Company seeks to achieve
comparable store sales increases by (i) continuing to increase merchandise
offerings in selected categories (especially higher priced items), (ii)
continuing to implement its return/exchange policy, (iii) continuing to expand
the use of its non-recourse credit programs, (iv) using enhanced information
systems to better monitor merchandise selection and provide important data on
key customers, and (v) expanding its "customer friendly" merchandise displays to
enhance the shopping experience and to create a more comfortable environment in
which to encourage impulse purchases.
MERCHANDISING
The Company believes that an important element of its success is a focused
merchandising strategy that reflects its upscale customer orientation and small
store format. The Company seeks to provide a deep assortment of items across a
broad range of price points in its key product categories: diamonds (such as
diamond jewelry, diamond solitaires and bridal), gold, and precious and
semi-precious jewelry. Unlike many of its competitors, the Company carries only
a limited selection of watches and virtually no costume jewelry or gift
merchandise.
Each store offers approximately 2,500 individual items, including
approximately 500 core jewelry items, which accounted for approximately 40% of
net sales during the twelve months ended July 31, 1996. In addition, the Company
increasingly seeks to expand its merchandise assortment in higher price points.
The Company's average price per merchandise sale has increased from $210 in
fiscal 1993 to $229 in fiscal 1994 and $245 in fiscal 1995 and from $253 in the
first six months of fiscal 1995 to $262 in the first six months of fiscal 1996.
In recent years, the Company has increased the average number of items
available in its stores to broaden the appeal of its merchandise assortment and
expand its product breadth in selected product categories, particularly bridal
and other diamond jewelry. For example, store merchandise per store (including
consigned items) has grown at a compound annual rate of approximately 12.6% over
the past four fiscal years (as measured by the inventory and consigned items on
hand at fiscal year end). During the first six months of fiscal 1996, the
Company placed a significantly expanded selection of higher priced merchandise
in over 30 stores on a test basis. Based on the initial success of this program,
the Company plans to expand this program to a number of additional stores.
The following table sets forth the Company's percentage of total
merchandise sales by category for the following periods:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 12 MONTHS
----------------------------------------- ENDED
1992 1993 1994 1995 1996 JULY 31, 1996
----- ----- ----- ----- ----- -------------
<S> <C> <C> <C> <C> <C> <C>
Diamonds.............................. 50.4% 51.4% 54.0% 56.8% 57.6% 57.5%
Gold.................................. 23.9 25.5 26.6 25.0 25.2 25.3
Precious/Semi-Precious................ 19.6 16.8 15.0 15.1 14.6 14.6
Watches............................... 3.2 3.0 2.7 2.4 2.1 2.2
Other................................. 2.9 3.3 1.7 0.7 0.5 0.4
----- ----- ----- ----- ----- -----
Total............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
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All stores carry the Company's core items. The Company also customizes the
merchandising of its stores based upon each store's sales volume, individual
market preferences and historical selling patterns. The Company continually
tests new items in its stores and monitors their sales performance to identify
additional sales opportunities.
Along with its broad product assortment, the Company also provides jewelry
repair services to its customers (sales from which represented approximately
four percent of fiscal 1995 net sales). Actual repair work is performed by
jewelers under independent contract. Approximately 80 of the Company's stores
have jewelers located in the store to provide on-site repair services to the
customer. To enhance customer service, the Company plans to continue to expand
the number of stores with on-site jewelry repair.
Pricing Strategy. For purposes of pricing, the Company classifies its
merchandise into several broad categories. Consistent with many fine jewelry
retailers, a substantial portion of the Company's sales are made at prices
discounted from listed reference prices. Sales associates are authorized to
discount most merchandise prices within certain limits. Store managers,
supervisors, and executive officers of the Company have the ability to further
discount merchandise to increase sales. The Company believes that this
flexibility and responsiveness enable it to increase sales.
CREDIT
The Company operates based upon a "no credit risk" policy. When purchasing
on credit, customers must use their personal credit cards (e.g., Visa,
MasterCard, American Express and others), the Company's private label credit
cards, which are available through a third party and are non-recourse to the
Company, or other non-recourse third party credit arrangements. Because the
Company's credit programs are non-recourse to the Company, the Company has no
customer credit risk for non-payment by the customer associated with the sale.
At the same time, the Company believes that its ability to offer credit through
its "private label" credit cards and other non-recourse arrangements is
attractive to many customers, including those who prefer not to have their
jewelry purchases count towards their credit limits on their personal third
party credit cards. The Company encourages sales on the Company's private label
credit card or other non-recourse third-party credit arrangements because
customer purchases on this type of credit tend to generate higher average sales.
In fiscal 1995, the Company's average credit sale was approximately $600, versus
approximately $100 for a purchase paid for with cash or by check. The Company
believes that its success in building its non-recourse credit sales has been a
significant factor in its improvement in comparable store sales.
The Company's credit strategy and its focus on a more upscale clientele are
interrelated. A substantial portion of the users of private label credit offered
by most jewelers tend to be customers with more limited financial resources or a
weaker credit history. In contrast, the Company's adherence to a "no credit
risk" policy limits the Company's sales to such individuals. Thus, the Company
has historically oriented its merchandising programs to appeal to a more
affluent, less credit-reliant consumer.
The Company has established its private label program through Bank One (and
other non-recourse credit purveyors), whereby customers may apply for instant
credit on merchandise purchases. Under these credit programs, the credit
purveyors have no recourse against the Company based on the customer's failure
to pay; recourse against the Company is restricted to those limited cases where
the receivable itself is defective (such as incorrectly completed documentation
or certain situations involving customer fraud). The Company's expense related
to these limited cases was approximately 0.5% of sales during fiscal 1995. The
Company's credit card discount expense for fiscal 1995 and fiscal 1994
represented 2.6% and 1.9%, respectively, of credit sales for those years. Such
discount expense for the six months ended July 31, 1996 represented 3.2% of
credit sales for that period, compared to 2.5% for the first six months of 1995.
In general, the Company's credit card discount expense is higher for its private
label programs than for personal credit cards, such as Visa and MasterCard.
Pursuant to the Company's relationship with Bank One, the bank provides credit
to the Company's customers using its own credit criteria and policies. The
Company pays a fee to Bank One based primarily upon the volume of credit so
extended. The Company has similar non-recourse arrangements with other credit
providers, which it uses in addition to the Bank One program to assist customers
in financing their
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<PAGE> 32
purchases. In addition, the Company utilizes a check authorization company which
guarantees payments on transactions involving personal checks.
In late fiscal 1995 and fiscal 1996 the Company has experimented with a
"First Time Buyers" program through a non-recourse arrangement with Bank One.
Under this program, Bank One grants credit to young customers with little or no
credit history, for which the Company pays Bank One a significantly higher fee
than it pays under its standard program. Based on the costs and results of the
program, the Company and Bank One have determined either to eliminate or
substantially modify the "First Time Buyers" program.
The Company has devoted considerable effort and sales training to credit,
and it anticipates that its non-recourse credit programs will continue to be a
focus of its efforts.
STORE OPERATIONS
Store Layout. Over two-thirds of the Company's stores are located in high
traffic, "center court" locations. Nearly all of the stores have an open
entrance rather than the more traditional single-doorway entrance. Stores
generally have at least 60 lineal feet of display cases, are brightly-lit and
are designed to have display cases situated along the lease line. By formatting
the stores in this "customer-friendly" manner and without a formal entryway, a
casual mall shopper comes in very close contact with the store's merchandise and
personnel without the natural apprehension many have upon "entering" a fine
jewelry store. In addition, by utilizing very colorful window or counter signage
featuring simple and straightforward messages, the Company has found that
shoppers are more apt to browse its product offerings, thereby greatly
increasing the possibility of a sale.
Store Management. Each of the Company's stores is operated under the
direction of a store manager who is responsible for management of all
store-level operations, including sales and personnel matters. Most non-sales
related administrative functions are performed at the Company's corporate office
in Chicago. A significant portion of the compensation of store managers is based
on incentives which focus on sales productivity. The store managers are assisted
by a staff that usually includes an assistant manager and four to eight sales
associates, depending upon store operating hours and anticipated sales volume.
Matthew M. Patinkin, the Company's Executive Vice President, Store Operations,
supervises a total of 23 supervisors who concentrate their efforts on
store-focused sales strategies. Each supervisor is based in one store, but
spends most of his or her time visiting other stores. The Company's four
executive officers spend a substantial percentage of their time visiting stores
to reinforce the close communication between senior executives and store
personnel. The vast majority of stores were visited at least three times by one
of those senior executives in fiscal 1995, and all but one of the Company's
stores was visited at least once during that period.
Operating Cost Controls. The Company's store operations are designed to
maintain low operating costs at the store level. The Company's small average
store size reduces fixed costs, and the lack of recourse credit eliminates the
need for most overhead expenses normally associated with credit operations. The
Company also seeks to reduce store-level operating costs through efficient sales
staff utilization. To assist store personnel in their selling efforts, many of
the administrative functions normally performed at the store level are performed
at the corporate level. The Company also has focused on reducing expenses at its
central office. Due to computerization, more efficient use of personnel, and the
elimination of certain non-essential functions, the Company reduced central
overhead from $7.5 million in fiscal 1991 (9.8% of net sales) to $7.3 million in
fiscal 1995 (5.6% of net sales). During that period, the Company's sales
increased by over 70% and the number of stores increased by 32.0%. Central
overhead expenses as a percentage of net sales decreased from 6.1% during the
first six months of fiscal 1995 to 5.5% during the comparable period in fiscal
1996.
Store Employee Compensation. The Company seeks to hire experienced sales
personnel and motivate its store employees by linking a substantial percentage
of employee compensation to individual and store sales performance, as well as
by offering opportunities for promotion within the Company. Employee incentives
include bonus opportunities and recognition programs on a daily, weekly and
monthly basis. In order to earn a bonus, it is generally necessary for the store
to achieve store sales goals and for the individual sales associate or manager
to produce personal sales.
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<PAGE> 33
Employee Training. The Company believes that providing knowledgeable and
responsive customer service is critical to the Company's success and,
accordingly, has developed and implemented extensive employee training programs.
In addition to training during the first four weeks of employment and continuous
on-the-job training provided by management, the Company has recently produced
several training videos to supplement its written training materials for sales
associates. Store managers complete a manager training and development program.
ADVERTISING AND PROMOTIONS; CUSTOMER SATISFACTION
The Company uses in-store and point-of-sale promotional activities as the
main elements of its advertising strategy. The bulk of the Company's advertising
and promotional budget is dedicated to in-store signage, flyers, special
merchandise displays and targeted mailings. Frequent special promotions such as
diamond remount events, clearance sales, "Vice President's Day Events," and
similar promotions are designed to increase traffic through the Company's stores
and generate an urgency for customers to make purchases. These events vary from
year to year and among stores. Publicized events are an important part of the
Company's marketing efforts, and the Company generates a significant portion of
its revenues during such events.
Policies which promote customer satisfaction and repeat business include
the following:
Return/Exchange Policy. The Company permits store personnel to choose
from a variety of return or exchange options to offer the customer,
including a 90-day return policy or a 90-day exchange policy. Store
personnel are authorized to use their discretion within certain parameters
in setting return or exchange policies on individual transactions, and
store managers and supervisors are authorized to accept certain returns or
exchanges outside these parameters at their discretion. The vast majority
of the Company's sales in fiscal 1996 have been made on a 90-day exchange
or similar basis, which the Company believes has favorably affected sales.
Diamond Warranties. The Company offers diamond warranties in
connection with purchases of diamond jewelry. Under its guarantee, the
Company agrees to replace any diamond lost from its mounting due to a
design defect in the item purchased. To keep a warranty in force, the
customer must return to the store once every four months to have the
mounting checked by Company personnel.
Diamond Trade-In/Trade-Up Policy. The Company's trade-in policy allows
customers to trade-in diamond and certain gemstone merchandise that was
purchased at a Company store and receive a credit of 100% of the original
cost of the merchandise towards a trade-in for any item of greater value.
Customers who do not have written verification but are trading in
identifiable Company-sold merchandise may be afforded a similar right. With
respect to trade-ins of non-Company merchandise, customers may receive a
credit equal to a negotiated amount.
Layaway Policy. Customers are allowed to put merchandise in layaway
for up to one year by making a small deposit (usually 10% to 20% of the
purchase price) and by making certain minimum, non-interest bearing
payments monthly to the Company. If the customer does not make the required
minimum payments, the item is returned to display. Layaway items may not be
taken out of the store by the customer until the item is fully paid for.
PURCHASING
The Company does not manufacture its merchandise. The Company purchases
substantially all of its inventory, including loose gems, directly from prime
suppliers located in the United States and abroad. The Company utilizes
approximately 100 vendors, primarily in the United States, Israel, Italy and the
Far East, who supply various jewelry products under U.S. dollar-denominated
agreements. During the twelve months ended July 31, 1996, the Company's largest
and five largest suppliers accounted for approximately 19% and 39%,
respectively, of the merchandise purchased by the Company. The Company also has
certain subcontracting arrangements with jewelry finishers to set loose diamonds
and gemstones into rings and other jewelry, using styles established by the
Company. Management believes that the relationships the Company has
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<PAGE> 34
established with its suppliers and subcontractors are good. The Company has not
experienced any difficulty in obtaining satisfactory sources of supply and
believes that adequate alternative sources of supply exist for substantially all
types of merchandise sold in its stores.
The Company maintains a strict quality assurance program, with almost all
shipments from suppliers being counted or weighed and visually inspected upon
receipt at the Company's headquarters in Chicago, Illinois. On a regular basis,
the Company sends randomly-picked merchandise to independent smelters to be
assayed for gold content to assure that the merchandise is of the karat
represented by the vendor.
For the twelve months ended July 31, 1996, the Company's average net
monthly investment in inventory (i.e., the total cost of inventory owned and
paid for) was 66% of the total cost of the Company's on-hand merchandise. The
amount of consignment merchandise has increased in recent years. For example,
the average amount of consignment merchandise per store has increased from
$93,000 on January 31, 1994 to $109,000 on January 31, 1996 and increased from
$80,000 on July 31, 1994 to $90,000 on July 31, 1996. The Company is also
generally granted favorable exchange privileges which permit it to return or
exchange certain unsold merchandise for new products at any time. Those
arrangements permit the Company to structure its relationships with vendors to
encourage their participation in, and responsibility for, merchandise turnover
and profitability. These arrangements permit the Company to have more
merchandise available for sale in stores and reduce somewhat the Company's
exposure to changes in fashion trends and inventory obsolescence.
MANAGEMENT INFORMATION SYSTEMS
The Company utilizes customized management information systems throughout
its business to facilitate the design and implementation of selling strategies
and as an integral part of its financial and other operational controls. In
fiscal 1993, the Company completed the installation of its current management
information system, an IBM AS400-based system. The system incorporates
point-of-sale computers in its stores with a merchandise management and purchase
order management system and utilizes software specifically designed for the
jewelry industry, which the Company has customized extensively to meet its
needs. The information system has been upgraded to support the Company's needs.
The Company uses the management information system to track each individual
item of merchandise from receipt to ultimate sale or return to the vendor. As a
result, management can closely monitor inventory by location, sales, gross
margin, inventory levels and turnover statistics, reallocating inventory among
stores when beneficial. This system also enables management to review each
store's and each employee's productivity and performance. Based on the sales
data, the Company tailors each store's inventory composition and plans the
Company's purchasing requirements accordingly. The system enables the Company to
manage its inventory at the store level, including the automatic replenishment
of merchandise no less frequently than twice a week.
The system also automatically provides a daily reconciliation of each
store's transactions for prompt investigation of discrepancies. The
point-of-sale computers are polled nightly by the headquarters system and
updated data is available at the beginning of the following day for use by
central office and store supervisory personnel, and for transfer into the
Company's accounting, merchandising, and other management information systems.
The Company's computer systems permit merchandisers to identify sales
trends at various levels of detail ranging from major category to the specific
stock keeping unit ("SKU"). The Company's best selling items are monitored
weekly (and more frequently during peak seasons) to assure that stores are
stocked with those items. The merchandising system permits replenishment of
items sold or transferred from a store on a next day basis. The Company
distributes merchandise from its central warehouse to stores at least twice per
week and during peak selling seasons, and the Company replenishes stores daily
to insure in-stock conditions. The merchandising system also identifies
overstock conditions of higher value SKU's to permit the prompt stock balancing
of those more expensive items to stores in which they have the highest
probability of selling.
The Company is now in the process of implementing, through its
point-of-sale system, the ability to capture and retain selected customer data
from each sale (name, address, phone, birthday, anniversaries,
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<PAGE> 35
historical purchases, etc.). The data is intended to be used by Company store
managers and sales associates in their efforts to contact customers and
anticipate and facilitate future add-on purchases by its customers. For example,
a husband who buys a diamond necklace for his wife's birthday may receive a
mailing approximately a year later suggesting a matching set of diamond
earrings. The Company believes that additional sales volume can be achieved by
utilizing such programming initiatives.
The Company recently introduced laptop computers to its supervisors in the
field who can now obtain up-to-date financial information on their stores and
down-load it on an as-needed basis from the Company's central computer system.
The information available via laptop includes, among other items, store sales,
gross profit, personnel costs, and sales associates' productivity information.
Inventory Loss Prevention and Insurance. The Company undertakes substantial
efforts to safeguard its jewelry inventory from loss and theft, including the
use of security alarm systems and safes at each store and the taking of daily
inventory of higher value items. In addition, the Company's inventory management
and control system, which tracks each item in the Company's inventory, provides
a further check against loss or theft. During fiscal 1995, in-store inventory
shrinkage amounted to less than 1.0% of sales. The Company has a full-time
manager who directs the Company's loss prevention efforts. The Company maintains
insurance (subject to certain deductibles) covering the risk of loss of
merchandise in transit and at store premises (whether owned or on consignment)
in amounts that the Company believes are reasonable and adequate for the types
and amounts of merchandise carried by the Company.
COMPETITION
The jewelry business is fragmented and highly competitive. The Company
competes with national and regional jewelry chains and local independently owned
jewelry stores, especially those that operate in malls, as well as with
department stores, catalog showrooms, discounters, direct mail suppliers and
televised home shopping networks. Certain of the Company's competitors are
substantially larger and have greater financial resources than the Company. The
Company also believes that it competes for consumers' discretionary spending
dollars with retailers that offer merchandise other than jewelry.
Management believes that the primary competitive factors affecting its
operations are store location and atmosphere, quality of sales personnel and
service, breadth and depth of merchandise offered, pricing, credit and
reputation. The Company emphasizes its merchandise selection, sales personnel,
store location and design and pricing in competing in its target market, which
is relatively less credit sensitive.
PROPERTIES
The Company operates 163 stores in 24 states. All of these stores are
leased and are located in regional or super-regional malls. The Company's
typical mall lease has an initial term of 10 years plus the first partial lease
year. Terms generally include a minimum base rent, a percentage rent based on
store sales and certain other occupancy charges. All store leases that are
subject to renewal in fiscal 1996 have been renewed and of those subject to
renewal before Christmas of 1997, all but one have been negotiated. The average
remaining life of the leases for the Company's stores is approximately six
years. While there can be no assurance, the Company expects to be generally able
to renew these leases as they expire.
The Company also leases approximately 16,700 square feet of office and
administrative space in Chicago, Illinois in an office building housing its
corporate headquarters, distribution functions and quality assurance operations.
This lease expires on May 13, 2002.
TRADEMARKS
Whitehall Co. Jewellers(@) and Lundstrom Jewelers(@) are registered
trademarks in the United States. The Company has filed an application to
register Marks Bros. Jewelers(TM) as a trademark in the United States.
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EMPLOYEES
As of July 31, 1996, the Company had a total of 1,046 employees, including
953 store level employees and 93 corporate level merchandising, marketing and
administrative employees. The Company usually hires a limited number of
temporary employees during each Christmas selling season. None of the Company's
employees are represented by a union. The Company believes that its relations
with its employees are good.
REGULATION
The Company's operations are affected by numerous federal and state laws
that impose disclosure and other requirements upon the origination, servicing
and enforcement of credit accounts, and limitations on the maximum amount of
finance charges that may be charged by a credit provider. Although credit to the
Company's customers is provided by third parties without recourse to the Company
based upon a customer's failure to pay, any restrictive change in the regulation
of credit, including the imposition of, or changes in, interest rate ceilings,
could adversely affect the cost or availability of credit to the Company's
customers and, consequently, the Company's results of operations or financial
condition.
The Company's operations are also affected by federal and state laws
relating to marketing practices in the retail jewelry industry. In marketing to
its customers, the Company compares many of its prices to "reference prices."
The Company's literature indicates to customers that its reference price for an
item is either the manufacturer's suggested retail price or the Company's
determination of the non-discounted price at which comparable merchandise of
like grade or quality is advertised or offered for sale by competitive retailers
and is not the Company's current selling price or the price at which it formerly
sold such item. Although the Company believes that pricing comparisons are
common in the jewelry business and that the Company's practice is in compliance
with applicable laws relating to trade practices, there can be no assurance that
this position would be upheld.
LEGAL PROCEEDINGS
The Company is involved in certain legal actions from time to time arising
in the ordinary course of business, but management believes that none of these
actions, either individually or in the aggregate, will have a material adverse
effect on the Company's results of operations or financial condition.
34
<PAGE> 37
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Company's
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Hugh M. Patinkin(1)(2).................... 46 Chairman, President and Chief Executive
Officer and Director
John R. Desjardins(1)..................... 46 Executive Vice President, Finance and
Administration, Treasurer and Secretary
and Director
Matthew M. Patinkin(1)(2)................. 38 Executive Vice President, Store Operations
and Director
Lynn D. Eisenheim(1)...................... 45 Executive Vice President, Merchandising
Rodney L. Goldstein....................... 44 Director
Samuel B. Guren........................... 49 Director
Norman J. Patinkin(2)..................... 70 Director
Jack A. Smith............................. 61 Director
</TABLE>
- ------------------------------
(1) Executive officer.
(2) Messrs. Hugh and Matthew Patinkin are brothers. Norman J. Patinkin is a
first cousin, once removed, of Messrs. Hugh and Matthew Patinkin.
Mr. Hugh M. Patinkin has served as President and Chief Executive Officer of
the Company since 1989 and was elected its Chairman in February 1996. He has
served as a director from 1979 to 1988 and from 1989 to the present. He joined
the Company as its Assistant Secretary in 1979. Prior thereto he practiced law
with the firm of Sidley & Austin. For information concerning Mr. Patinkin's
services to Double P Corp., see "Certain Transactions -- Other."
Mr. John R. Desjardins joined the Company in 1979 and has served as
Executive Vice President, Finance and Administration, Treasurer and Secretary
and as a director of the Company since 1989. Previously, he worked as a
certified public accountant with Deloitte & Touche L.L.P.
Mr. Matthew M. Patinkin joined the Company in 1979 and has served as
Executive Vice President, Store Operations and as a director of the Company
since 1989.
Mr. Lynn D. Eisenheim joined the Company in 1991 as its Executive Vice
President, Merchandising. He has 22 years of experience in the jewelry business,
having served with Zale Corporation (where he served as Executive Vice
President, Merchandising immediately prior to joining the Company) and Service
Merchandise Co.
Mr. Rodney L. Goldstein has served as a director of the Company since 1989
and served as Chairman from 1989 to February of 1996. Mr. Goldstein is the
Managing Partner of Frontenac Company ("Frontenac"), a private equity investment
management partnership which he joined in 1981. Mr. Goldstein serves on the
Boards of Directors of Eagle River Interactive Inc. and Platinum Entertainment,
Inc., as well as a number of privately-held companies.
Mr. Samuel B. Guren has served as a director of the Company since 1989. Mr.
Guren is the Managing Partner of William Blair Venture Management Company and a
Managing Director of Robert W. Baird & Co. Incorporated. Mr. Guren served as a
Principal of William Blair & Company, L.L.C. from 1983 to February of 1996. Mr.
Guren serves on the Boards of Directors of a number of privately-held companies.
Mr. Norman J. Patinkin has served as a director of the Company since 1989.
He is the Chief Executive Officer of each of MC Club Services, Inc. (since
1972), which primarily operates telemarketing service clubs
35
<PAGE> 38
for corporations, S&S Marketing Corp. (since 1979), which operates motor clubs
for corporations, and Continental Associates, Inc. (since 1979), which operates
travel clubs for corporations.
Mr. Jack A. Smith has served as director of the Company since July 1996.
Mr. Smith is Chairman of the Board and Chief Executive Officer of The Sports
Authority, Inc., a national sporting goods chain, which he founded in 1987.
Prior to founding The Sports Authority, Mr. Smith served as Chief Operating
Officer of Herman's Sporting Goods and held various executive management
positions with major national retailers, including Sears & Roebuck, Montgomery
Ward and Jefferson Stores. Mr. Smith serves on the Board of Directors of Darden
Restaurants, Inc.
BOARD OF DIRECTORS
The business of the Company is managed under the direction of the Company's
Board of Directors. The Board of Directors is presently composed of seven
directors. The directors are divided into three classes. Messrs. H. Patinkin,
Guren and N. Patinkin comprise Class I, which class will stand for election at
the annual meeting of stockholders to be held in 1997. Messrs. Desjardins and
Smith comprise Class II, which class will stand for election at the annual
meeting of stockholders to be held in 1998. Messrs. M. Patinkin and Goldstein
comprise Class III, which class will stand for election at the annual meeting of
stockholders to be held in 1999.
The Company's Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee recommends the firm to be appointed
as independent accountants to audit financial statements and to perform services
related to the audit, reviews the scope and results of the audit with the
independent accountants, reviews with management and the independent accountants
the Company's year-end operating results and considers the adequacy of the
internal accounting procedures. The Audit Committee consists of Messrs.
Goldstein, Guren and N. Patinkin. The Compensation Committee, which also
consists of Messrs. Goldstein, Guren and N. Patinkin, reviews and recommends the
compensation arrangements for all officers, approves such arrangements for other
senior level employees and administers, and takes such other action as may be
required in connection with certain compensation and incentive plans of the
Company (including the grant of stock options). The Company's Restated By-Laws
provide that the Compensation Committee shall be comprised of directors who are
not employees of the Company.
COMPENSATION OF DIRECTORS
Non-employee directors receive compensation of $6,250 per fiscal quarter
and $500 per meeting of a committee thereof. Directors who are officers or
employees of the Company receive no compensation for serving as directors. All
directors are reimbursed for out-of-pocket expenses incurred in connection with
attendance at meetings of the Board of Directors and meetings of committees of
the Board of Directors.
The Company has adopted the 1996 Long-Term Incentive Plan. See "Management
- -- Stock Plans." Pursuant to this plan, each non-employee director (other than
Messrs. Goldstein and Guren) is granted a nonqualified option to purchase 10,000
shares of Common Stock (a "Directors Option") which vests one-third each on the
first, second and third anniversaries of grant. The per share exercise price of
such options will be equal to the fair market value of the Common Stock on the
date of grant of such option. Messrs. N. Patinkin and Smith were granted
Directors Options on May 7, 1996 (the date of the closing of the IPO) and July
12, 1996, respectively, at exercise prices of $14.00 and $23.50, respectively,
per share.
36
<PAGE> 39
EXECUTIVE COMPENSATION
Summary Compensation. The following summary compensation table sets forth
certain information concerning compensation for services rendered in all
capacities awarded to, earned by or paid to the Company's Chief Executive
Officer and the other named executive officers during the year ended January 31,
1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
FISCAL --------------------- STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS(1) OPTIONS
- ---------------------------------------- ------ -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Hugh M. Patinkin
President and Chief Executive
Officer............................... 1995 $255,000 $191,250 $ 223,576 228,337
John R. Desjardins
Executive Vice President, Finance
and Administration, Treasurer and
Secretary............................. 1995 234,000 175,500 128,001 154,603
Matthew M. Patinkin
Executive Vice President,
Store Operations...................... 1995 200,000 150,000 102,401 124,634
Lynn D. Eisenheim
Executive Vice President,
Merchandising......................... 1995 160,000 120,000 -- 69,040
</TABLE>
- ------------------------------
(1) Represents restricted stock awards (which are the only restricted shares
held by such executive officers) which became no longer subject to
forfeiture upon the consummation of the IPO. The value is calculated by
multiplying an assumed fair market value at January 31, 1996, based upon an
independent appraisal at September 28, 1995 (the date of award) by the
number of restricted shares awarded. Dividends will be payable on the shares
if and to the extent paid on shares of Common Stock generally.
General Information Regarding Options. The following tables show
information regarding stock options held by the executive officers named in the
Summary Compensation Table.
OPTION GRANTS IN YEAR ENDED JANUARY 31, 1996
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
UNDERLYING OPTIONS GRANT DATE
OPTIONS GRANTED TO EXERCISE EXPIRATION PRESENT
GRANTED(1) EMPLOYEES PRICE DATE VALUE $(2)
---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Hugh M. Patinkin.......................... 228,337 33.6% $ 0.99 9/28/2000 $136,277
John R. Desjardins........................ 154,603 22.7 0.90 5/31/2001 98,993
Matthew M. Patinkin....................... 124,634 18.3 0.99 9/28/2000 74,384
Lynn D. Eisenheim......................... 69,040 10.1 0.90 5/31/2001 44,206
</TABLE>
- ------------------------------
(1) These options became no longer subject to forfeiture upon the consummation
of the IPO.
(2) Option values computed using the Black-Scholes pricing formula. See Note 12
of Notes to Financial Statements for a description of the assumptions used.
37
<PAGE> 40
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF
OPTIONS AT UNEXERCISED
JANUARY 31, 1996 IN-THE-MONEY
---------------------- OPTIONS AT
UNEXERCISABLE(1) JANUARY 31, 1996(2)
---------------------- -------------------
<S> <C> <C>
Hugh M. Patinkin................................ 228,337 $ 1,372,305
John R. Desjardins.............................. 154,603 943,078
Matthew M. Patinkin............................. 124,634 749,050
Lynn D. Eisenheim............................... 69,040 421,144
</TABLE>
- ------------------------------
(1) All such options became exercisable upon consummation of the IPO.
(2) Represents the aggregate dollar value of in-the-money, unexercised options
held at the end of the fiscal year, based on the difference between the
exercise price and $7.00. There was no quoted trading price for the Common
Stock as of January 31, 1996. The amount of $7.00 was used in measuring
option value, which amount represents the IPO price of $14.00 per share,
reduced by (i) a 35% discount for lack of marketability as of such date and
(ii) a reduction of $2.10 (being the amount of debt discount realized upon
consummation of the IPO and the Recapitalization, divided by the weighted
average number of common shares and common share equivalents to be
outstanding upon such consummation).
MANAGEMENT BONUS PLAN
The Chief Executive Officer and each of the other executive officers named
in the Summary Compensation Table above are eligible to participate in the
Company's Management Bonus Plan. Under this bonus program each executive officer
is entitled to receive a bonus (not to exceed 100% of base salary for fiscal
1996) based on the achievement by the Company of specified levels of earnings
before interest and taxes. Awards are determined by the Compensation Committee.
STOCK PLANS
1995 Options and Restricted Stock Grants. In fiscal 1995 the Board of
Directors and stockholders of the Company approved the 1995 Executive Incentive
Stock Option Plan and the 1995 Incentive Stock Option Plan (the "1995 Plans").
Under the 1995 Plans, the Company may grant incentive stock options (the "1995
Options") within the meaning of Section 422 of the Code to its executive
officers and key employees. A total of 693,098 shares of Common Stock may be
issued under the 1995 Plans, subject to adjustment in the event of a stock
split, stock dividend or other changes in capital structure. No grants may be
made under the 1995 Plans after ten years after the effective dates of the 1995
Plans.
The purposes of the 1995 Plans are to align the interests of the Company's
stockholders and the recipients of grants under the 1995 Plans by increasing the
proprietary interest of such recipients in the Company's growth and success and
to advance the interests of the Company by attracting and retaining officers and
other key employees.
The 1995 Executive Incentive Stock Option Plan is administered by the
Compensation Committee. The 1995 Incentive Stock Option Plan is administered by
the President of the Company, who is authorized to select eligible officers and
other key employees for participation in that plan.
In the case of options granted under the 1995 Plans, the purchase price of
shares of Common Stock may not be less than 100% of the fair market value of
such shares of Common Stock on the date of grant. The aggregate fair market
value (determined as of the date the option is granted) of the stock with
respect to which 1995 Options are exercisable for the first time by the optionee
in any calendar year (under the 1995 Plans and any other incentive stock option
plan of the Company) may not exceed $100,000. Options granted under the 1995
Plans may not be exercised after ten years from the date of grant. In the case
of any eligible employee who owns or is deemed to own stock possessing more than
10% of the total combined voting power of all classes of stock of the Company,
the exercise price of any 1995 Options granted under the 1995 Plans
38
<PAGE> 41
may not be less than 110% of the fair market value of the Common Stock on the
date of grant, and the exercise period may not exceed five years from the date
of grant.
The number of shares currently subject to 1995 Options granted to the
executive officers of the Company are as follows: Mr. H. Patinkin (155,537
shares), Mr. Desjardins (142,603 shares), Mr. M. Patinkin (92,734 shares) and
Mr. Eisenheim (59,040 shares) and all executive officers as a group (449,914
shares). Such options may be exercised until the expiration date, which, in the
case of Messrs. H. Patinkin and M. Patinkin is September 28, 2000, and in the
case of Messrs. Desjardins and Eisenheim is May 31, 2001. All options granted to
these four executive officers are fully exercisable. In connection with the
Offering, the four executive officers will exercise options for 132,000 shares
(146,250 shares if the Underwriters' over-allotment option is exercised in
full). Options for 103,846 additional shares granted to other employees are
currently outstanding.
In fiscal 1995, the Company also made restricted stock grants, which become
no longer subject to forfeiture only upon the happening of the events referred
to above (including the consummation of the Offering) to the following executive
officers: Mr. H. Patinkin (249,268 shares), Mr. Desjardins (142,711 shares) and
Mr. M. Patinkin (114,169 shares).
1996 Plan. 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") within the meaning of Section 422 of the Code, 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, subject to adjustment
in the event of a stock split, stock dividend or other changes in capital
structure. No grants may be made under the 1996 Plan after ten years after its
effective date. The 1996 Plan also provides for the automatic grants of stock
options to non-employee directors described above under the heading "--
Compensation of Directors." The total number of options that may be granted
under the 1996 Plan together with the total number of 1995 Options will
represent 15% of the Common Stock of the Company outstanding immediately after
the consummation of the Offering (assuming the exercise of all such options).
Therefore, the amounts of options may vary depending upon whether the
Underwriters' over-allotment option is exercised.
The purposes of the 1996 Plan are to align the interests of the Company's
stockholders and the recipients of grants under the 1996 Plan by increasing the
proprietary interest of such recipients in the Company's growth and success and
to advance the interests of the Company by attracting and retaining officers and
other key employees and well-qualified independent directors.
The 1996 Plan is administered by the Compensation Committee. Subject to the
terms of the 1996 Plan, the Compensation Committee is authorized to select
eligible officers and other key employees for participation in the 1996 Plan and
to determine the number of shares of Common Stock subject to the awards granted
thereunder, the exercise price, if any, the time and conditions of exercise, and
all other terms and conditions of such award.
The Compensation Committee may delegate some or all of its power and
authority under the 1996 Plan, to the Chief Executive Officer or other executive
officer of the Company as it deems appropriate; provided, however, that the
Compensation Committee may not delegate its power and authority with regard to
the selection for participation in the 1996 Plan of an officer or other person
subject to Section 16 of the Exchange Act or decisions concerning the timing,
pricing or amount of an option grant to such an officer or other person.
In the case of options granted under the 1996 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. The aggregate fair market value
(determined as of the date the option is granted) of the stock with respect to
which ISOs are exercisable for
39
<PAGE> 42
the first time by the optionee in any calendar year (under the 1996 Plan and any
other incentive stock option plan of the Company) may not exceed $100,000.
Options granted under the 1996 Plan may not be exercised after ten years from
the date of grants. In the case of any eligible employee who owns or is deemed
to own stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company, the exercise price of any ISOs granted under
the 1996 Plan may not be less than 110% of the fair market value of the Common
Stock on the date of grant, and the exercise period may not exceed five years
from the date of grant. All stock options will become immediately exercisable
upon certain changes of control of the Company or, in the case of the four
executive officers, certain other events for which they would receive payments
under their severance agreements described below.
The Compensation Committee made grants under the 1996 Plan, effective upon
the completion of IPO, of options to purchase Common Stock to executive officers
named in the Summary Compensation Table as follows: Mr. H. Patinkin (312,835
shares), Mr. Desjardins (169,766 shares), Mr. M. Patinkin (169,766 shares) and
Mr. Eisenheim (32,173 shares). Each such stock option has a per share exercise
price equal to $14.00 (the IPO price), will become exercisable in cumulative
annual installments of 25% of the shares subject to option beginning on the
first anniversary of the date of grant, and will expire ten years after the
commencement date of the IPO (i.e. May 7, 2006). The options granted to Mr. H.
Patinkin and Mr. M. Patinkin are non-qualified stock options. Of the options
granted to Mr. Desjardins, 28,550 are incentive stock options, and 141,216 are
nonqualified stock options. Substantially all of the options granted to Mr.
Eisenheim are incentive stock options. A grant was made under the 1996 Plan,
effective upon the commencement of the IPO, of nonqualified options to purchase
10,000 shares of Common Stock with the same exercise price to Mr. N. Patinkin, a
non-employee director. A grant was made on July 12, 1996 under the 1996 Plan of
nonqualified options to purchase 10,000 shares of Common Stock to Mr. Smith at
an exercise price of $23.50 per share. See "Management -- Compensation of
Directors." As of October 10, 1996, additional grants of incentive stock options
covering a total of 32,915 shares of Common Stock may be made to other employees
or directors.
The Company has registered under the Securities Act all shares of Common
Stock issued or issuable pursuant to the 1995 Options and the 1996 Plan.
SEVERANCE AGREEMENTS
The Company has entered into severance agreements with its four executive
officers and 14 of its other management employees which provide for certain
payments after a "change of control." A "change of control" is defined under
these agreements to include (i) an acquisition by a third party (excluding
certain affiliates of the Company) of beneficial ownership of at least 25% of
the outstanding shares of Common Stock, (ii) a change in a majority of the
incumbent Board of Directors and (iii) merger, consolidation or sale of
substantially all of the Company's assets if the Company's shareholders do not
continue to own at least 60% of the equity of the surviving or resulting entity.
Pursuant to these agreements such employees will receive certain payments and
benefits if they terminate employment voluntarily six months after a "change of
control," or earlier if they terminate for "good reason," as defined in such
agreements (such as certain changes in duties, titles, compensation, benefits or
work locations) or if they are terminated by the Company after a change of
control, other than for "cause," as so defined. The severance agreements for the
four executive officers also provide for certain payments absent a change of
control if they terminate employment for "good reason" or if they are terminated
by the Company, other than for "cause". In the case of the four executive
officers, their payment will equal 2.5 times (1.5 times if a change of control
has not occurred) their highest salary plus bonus over the five years preceding
the change of control, together with continuation of health and other insurance
benefits for 30 months (18 months if a change of control has not occurred). In
the case of the other employees, such payments will equal their highest salary
plus bonus over the five years preceding the change of control with continuation
of health and other insurance benefits for one year. The severance agreements
also provide for payment of bonus for any partial year worked at termination of
employment equal to the higher of (x) the employee's average bonus for the
immediately preceding two years and (y) 50% of the maximum bonus the employee
could have earned in the year employment terminates, pro rated for the portion
of the year completed. To the extent any payments to any of the four senior
executives under these agreements
40
<PAGE> 43
would constitute an "excess parachute payment" under Section 280G(b)(1) of the
Code, such payments will be "grossed up" for any excise tax payable under such
section, so that the amount retained after paying all federal income taxes due
would be the same as such person would have retained if such section had not
been applicable.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the IPO, Mr. Hugh M. Patinkin served as a member of the
Compensation Committee of the Board of Directors. Mr. Patinkin has not
participated in decisions regarding his own compensation and he did not
participate in decisions relating to the approval of the 1995 Plan. See "Certain
Transactions -- Other" for a discussion of transactions involving Mr. H.
Patinkin and relatives of Mr. N. Patinkin.
CERTAIN TRANSACTIONS
REGISTRATION RIGHTS
Pursuant to the Second Amended and Restated Registration Agreement (the
"Registration Agreement") effective as of May 7, 1996, the Company granted to
Frontenac Venture V Limited Partnership, Frontenac Diversified III Limited
Partnership, Continental Illinois Venture Corporation, and William Blair Venture
Partners III Limited Partnership, and Hugh M. Patinkin, Matthew M. Patinkin and
John R. Desjardins (executive officers of the Company) and certain related
persons (the "Purchasers"), certain rights to require the Company to take action
to register under the Securities Act the sale of shares of Common Stock (the
"Registrable Shares") held by them. The number of such registrations which the
Company is obligated to effect is limited to four. The Registration Agreement
also provides that, in the event the Company proposes to register any of its
securities under the Securities Act at any time or times, subject to certain
limitations, the Company will use its best efforts to include the Registrable
Shares in such registration upon the request of the Purchasers. Pursuant to the
Registration Agreement, shares offered hereby by the Selling Stockholders and
shares that may be sold by the Selling Stockholders upon the exercise of the
Underwriters' over-allotment option are being included in the registration
statement of which this Prospectus is a part. The Company is generally required
to bear the expenses of all such registrations, except underwriting discounts
and commissions. The Company also has agreed to indemnify the Purchasers and
their controlling persons against certain liabilities, including liabilities
under the Securities Act. In addition, pursuant to the Registration Agreement
effective as of May 7, 1996 between the Company and the ESOP Trust (the "ESOP
Registration Agreement"), the ESOP has the right to demand one registration with
respect to the shares of Common Stock it holds. After this Offering, holders of
3,638,890 shares of Common Stock not sold in the IPO or the Offering (and an
additional 278,874 shares of Common Stock subject to currently exercisable
options) will have registration rights under one of the Registration Agreements
described above.
OTHER
The Company has from time to time purchased some jewelry merchandise from
MBM Co., an entity which as of January 31, 1996 was owned by a brother of
Messrs. Hugh and Matthew Patinkin and the children of Mr. Norman Patinkin. The
children of Mr. Norman Patinkin no longer have any ownership interest in MBM Co.
The amounts purchased by the Company from MBM Co. in fiscal 1993, 1994 and 1995
were $34,000, $161,000 and $80,000, respectively. The Company believes that the
prices paid in these purchases were as favorable to the Company as those
generally available from third parties.
The Company provides certain office services to Double P Corp. ("Double P")
and Clark Foods Corp., which own and operate primarily mall-based snack food
stores, and in which Messrs. H. Patinkin, Desjardins and M. Patinkin own a
majority equity interest. For these services, Double P pays the Company $300 per
month. Mr. H. Patinkin spends a limited amount of time providing services to
Double P and Clark Foods Corp. In two cases the Company and Double P have
negotiated jointly with a landlord with respect to spaces offered by a landlord
and then divided and separately leased portions of the space offered. Following
the IPO, the Company's policy has required that the terms of any such leases
must be approved by a majority of the Company's outside directors.
41
<PAGE> 44
ESOP RESTRUCTURING
In 1988, the Company established the ESOP to acquire from certain
stockholders shares of the Company's Class B Common Stock for the benefit of
employees. The ESOP subsequently borrowed $70 million (the "ESOP Debt") from the
Company for the purpose of acquiring 27,000 shares of Class B Common Stock (the
"Class B Shares") from such stockholders. The group of stockholders from whom
the ESOP acquired shares included Hugh M. Patinkin and Matthew M. Patinkin, who
are affiliates of the Company. The vast majority of the proceeds from such sale
were paid to persons who are not currently affiliates of the Company. See
"Management."
Concurrently with the consummation of the IPO and the Recapitalization in
May 1996, (i) the ESOP transferred to the Company 8,206 shares of Class B Common
Stock in exchange for the elimination of the ESOP Debt totalling approximately
$33 million at January 31, 1996, (ii) the ESOP consented to the cancellation of
the dividend preference ($17.1 million) with respect to the shares of Class B
Common Stock allocated to the accounts of ESOP participants in exchange for the
transfer from the Company of 216,263 shares of Common Stock, (iii) each share of
Class B Common Stock owned by the ESOP was exchanged for approximately 35.4
shares of Common Stock, (iv) all shares of Common Stock held by the ESOP were
allocated to each individual participant's accounts, (v) the Company obligations
to make contributions to the ESOP were eliminated, and (vi) the Company's
obligation to purchase shares of Common Stock distributed by the ESOP to
participants was eliminated for so long as the shares of Common Stock remain
actively traded on a national quotation service or a national stock exchange.
After giving effect to the restructuring of the ESOP, 12,053 shares and 3,246
shares of Common Stock were allocated to the ESOP accounts of John R. Desjardins
and Lynn D. Eisenheim, respectively, who are the only directors or executive
officers who participate in the ESOP.
42
<PAGE> 45
SUMMARY OF DEBT INSTRUMENTS
As part of the Recapitalization in May 1996, the Company completed a
restructuring of its outstanding indebtedness to consist of (i) the Subordinated
Notes, (ii) the Bank Facility and (iii) the Gold Consignment Facility. The
Company used the net proceeds of the IPO, together with the funds generated by
the Notes Offering, the Bank Facility and the Gold Consignment Facility, to
repay in full all of the Company's bank indebtedness and subordinated debt
currently outstanding and for working capital and other general corporate
purposes. In addition, simultaneously with the completion of the Offering, the
Company completed a restructuring of its ESOP, as more fully described under
"Certain Transactions -- ESOP Restructuring." The following summaries of the
material terms of the Subordinated Notes, the Bank Facility and the Gold
Consignment Facility do not purport to be complete and are subject to all of the
provisions of the respective governing agreements relating thereto, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
BANK FACILITY
The Company's $43.75 million secured credit facility (the "Bank Facility")
consists of a $29 million revolving senior secured line of credit (including a
$5 million letter of credit subfacility) (the "Revolver") and a $14.75 million
senior secured term loan (the "Term Loan") which is payable in quarterly
installments over five years. The Revolver is a five-year, revolving line of
credit, providing for up to $29 million in borrowings (the "Commitment Amount").
The Company may repay the Revolver, in whole or in part, at any time, and re-
borrow monies up to the Commitment Amount. Available borrowings under the
Revolver are subject to a borrowing base determined based on levels of inventory
and accounts receivable (which borrowing base was $28.3 million as of September
30, 1996). The Company may also repay the entire outstanding balance and
terminate the agreement governing the Bank Facility (the "Bank Agreement") at
any time. At September 30, 1996, $9.7 million was outstanding under the
Revolver.
Upon consummation of the Offering, the Term Loan will be repaid and the
Bank Facility will be converted into a $43.75 million reducing revolver, with
the borrowings thereunder limited to the borrowing base and with the Commitment
Amount reducing over five years to $29.0 million.
At the Company's option, borrowings under the Bank Facility bear interest
during the first two years at a rate per annum equal to (i) the base rate as
established and charged by the lender from time to time (the "Base Rate") plus
0.5% or (ii) the reserve adjusted Eurodollar interbank offered rate (the "LIBOR
Rate") plus 2.5%. Thereafter, borrowings under the Bank Facility will bear
interest, at the Company's option, at the Base Rate or the LIBOR Rate plus, in
each case, an applicable margin that will fluctuate depending on the Company's
leverage ratio. Interest is calculated on the average outstanding principal
balance and is payable monthly (if based on the Base Rate) or payable on the
last day of each 1, 2 or 3 month interest period applicable thereto or at
maturity (if based on the LIBOR Rate). The Bank Facility is secured by a first
priority lien on all of the assets of the Company.
The Bank Agreement contains affirmative and negative covenants, including
restrictions on the Company's ability to (i) merge or consolidate, (ii) divest
or sell any guarantor entity, (iii) create liens on the Company's assets, (iv)
create or guaranty additional indebtedness, (v) pay dividends, (vi) conduct
business with related entities, (vii) make certain investments, (viii) make
acquisitions of entities or (ix) sell assets. In addition, the Company is
required to maintain a non-recourse credit program similar to its current
arrangement with Bank One. The Bank Agreement also includes various financial
covenants based on levels of funded debt, capital expenditures and earnings
before interest, taxes, depreciation and amortization and contains customary
events of default provisions.
GOLD CONSIGNMENT FACILITY
The Gold Consignment Facility has a five-year initial commitment period.
Pursuant to the Gold Consignment Facility, the Company has the option either to
sell up to $16 million of fine gold to one or more financial institutions, which
will, in turn, consign the gold to the Company or to borrow revolving loans
limited to an amount based upon the value of gold owned by the Company. The Gold
Consignment Facility is secured
43
<PAGE> 46
by the gold owned by the Company and the gold consigned and is subject to
financial, affirmative and negative covenants and default provisions that are
substantially similar to those applicable to the Bank Facility. The Company
bears the risk of physical loss, damage or destruction of gold consigned to it.
Under the Gold Consignment Facility, the Company pays a consignment fee
equal to either the Consignment Base Rate or the Consignment Fixed Rate
multiplied by the Fair Market Value of consigned gold outstanding. "Consignment
Base Rate" means a rate per annum determined by the bank from time to time plus
2.5%. "Consignment Fixed Rate" means the rate per annum equal to (a) the greater
of (i) the LIBOR Rate minus the average of rates quoted to the bank as the
London Interbank Bullion Rates and (ii) zero, plus (b) 2.5%. "Fair Market Value"
means the Second London Fix. The consignment fee with respect to Base Rate
Amounts is payable monthly in arrears and the consignment fee with respect to
Fixed Rate Amounts is payable on the last day of each interest period applicable
thereto. During the second quarter, the Company sold 39,000 troy ounces of gold
for approximately $15.3 million pursuant to the Gold Consignment Facility, which
gold had a Fair Market Value of $14.8 million as of September 30, 1996. As of
October 10, 1996, the weighted average consignment fee rate being paid by the
Company was 4.0%.
SUBORDINATED NOTES
As part of the Recapitalization, the Company issued (a) $12.0 million
aggregate principal amount of Senior Subordinated Notes Due 2004 (the "Series C
Notes") and (b) $8.0 million aggregate principal amount of Senior Subordinated
Notes Due 2004 (the "Series D Notes"). The Series C Notes and the Series D Notes
(collectively, the "Subordinated Notes") are unsecured general obligations of
the Company and are subordinated to all existing and future senior indebtedness
of the Company, including all amounts to be outstanding under the Bank Facility.
The Series C Notes bear interest at 12.15% per annum and mature in October
2004. Quarterly installments of principal on the Series C Notes in the amount of
$855,000 are mandatorily prepayable, commencing July 2001 through operation of a
mandatory sinking fund. The Company may prepay the Series C Notes at any time on
or after July 2001, at declining redemption prices, together with interest
accrued thereon to the date set for redemption.
The Series D Notes bear interest at the rate of (a) 15% per annum, payable
in cash, plus (b) for subsequent periods commencing May 1, 1998, 1% per annum
(increasing in 1% increments per each subsequent year commencing May 1, 1999)
("Additional Interest"), which Additional Interest is payable, at the option of
the Company, in cash or by delivery of additional Series B Notes. The Series B
Notes mature in October 2004. Quarterly installments of principal of the Series
B Notes in the amount of 1/14th of the outstanding principal balance of the
Series B Notes on July 31, 2001 are mandatorily prepayable, commencing July
2001, through operation of a mandatory sinking fund. The Company may prepay the
Series D Notes at declining redemption prices (currently 112%, or $8,960,000),
together with accrued and unpaid interest to the date of redemption.
The indenture governing the terms of the Subordinated Notes (the
"Indenture") contains a number of financial, affirmative and negative covenants.
The Indenture includes affirmative covenants relating to, among other things,
the delivery of certain financial information and maintenance of properties and
insurance. The Indenture contains certain negative covenants, including, among
other things, limitations on indebtedness, restricted payments (including the
payment of dividends), liens, sales and leases of property, mergers, investments
and transactions with affiliates. The Indenture also includes financial
covenants requiring the Company to maintain (a) minimum fixed charge coverage
ratios (varying over time); (b) minimum levels (varying over time) of
consolidated tangible net worth; and (c) maximum ratios (varying over time) of
funded debt to earnings before interest, taxes, depreciation and amortization.
The Company intends to use a portion of the proceeds of the Offering to
prepay in full the Series D Notes in fiscal 1996. In addition, the Company may
use a portion of such proceeds to purchase a portion of the Series C Notes.
44
<PAGE> 47
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of the date of this Prospectus and as adjusted to
reflect the sale of shares of Common Stock by the Company and by the Selling
Stockholders being offered hereby, by (i) each person (or group of affiliated
persons) who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each Selling Stockholder, (iii) each
director of the Company, (iv) each of the executive officers named in the
Summary Compensation Table and (v) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE AFTER THE
OFFERING(1)(2) SHARES OFFERING(1)(2)
----------------------- BEING ----------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------------------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Frontenac Venture V Limited
Partnership(3)
135 S. LaSalle Street
Chicago, IL 60603..................... 712,247 8.5% -- 712,247 7.4%
Frontenac Diversified III
Limited Partnership(4)
135 S. LaSalle Street
Chicago, IL 60603..................... 325,425 3.9 325,425 -- --
Continental Illinois Venture Corporation
231 S. LaSalle Street
Chicago, IL 60697..................... 611,335 7.3 152,834 458,501 4.8
William Blair Venture Partners III
Limited Partnership(5)
222 West Adams
Chicago, IL 60606..................... 464,437 5.5 232,219 232,218 2.4
Hugh M. Patinkin*(6).................... 714,586 8.4 12,000 702,586 7.2
Matthew M. Patinkin*(7)................. 450,848 5.3 25,000 425,848 4.4
John R. Desjardins*(8).................. 332,723 3.9 75,000 257,723 2.7
Lynn D. Eisenheim*(9)................... 72,286 ** 20,000 52,286 **
Rodney L. Goldstein+(3)(4).............. 1,037,672 12.4 325,425 712,247 7.4
Samuel B. Guren+(5)..................... 464,437 5.5 232,219 232,218 2.4
Jack A. Smith........................... -- -- -- -- --
Norman J. Patinkin(10).................. 69,726 ** -- 69,726 **
Avy H. Stein............................ 26,365 ** 26,365 -- --
John R. Willis.......................... 21,421 ** 21,421 -- --
U.S. Trust Company of California, N.A.,
as trustee for the ESOP Trust,
1300 Eye Street, N.W., Suite 280 East
Washington, D.C. 20005(11)............ 828,025 9.9 211,736 616,289 6.4
All executive officers and directors as
a group (8 persons)................... 3,105,827 35.2 689,644 2,416,183 24.4
</TABLE>
- ------------------------------
* The mailing address of each of these individuals is c/o the Company, 155
North Wacker Drive, Suite 500, Chicago, Illinois 60606.
+ The mailing address for Mr. Goldstein is c/o Frontenac Company, 135 S.
LaSalle Street, Chicago, IL 60603. The mailing address for Mr. Guren is c/o
Baird Capital Partners, 135 S. LaSalle Street Suite 2610, Chicago, IL
60603.
** Less than 1%.
(1) Except as set forth in the footnotes to this table, the persons named in
the table above have sole voting and investment power with respect to all
shares shown as beneficially owned by them. The Company and certain Selling
Stockholders have granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
aggregate of 330,300 shares of Common Stock, solely to cover
over-allotments, if any, as follows: the Company, 165,000 shares;
Continental Illinois Venture Corporation, 22,925 shares; William Blair
Venture Partners III Limited Partnership, 34,833 shares; John R.
Desjardins, 11,250 shares; Lynn D. Eisenheim, 3,000 shares; and U.S. Trust
Fiduciary Services, as trustee for the ESOP, 93,292 shares.
45
<PAGE> 48
(2) Without giving effect to the Underwriters' over-allotment option. Where
indicated in the footnotes to this table, includes Common Stock issuable
pursuant to stock options exercisable within 60 days of the Offering.
(3) Rodney L. Goldstein is a general partner of Frontenac Company, which is the
general partner of Frontenac Venture V Limited Partnership, and
accordingly, may be attributed beneficial ownership of the shares owned by
Frontenac Venture V Limited Partnership. Mr. Goldstein disclaims beneficial
ownership of such shares beyond his ownership interests in Frontenac
Company. Mr. Goldstein serves as Director of the Company as nominee of
Frontenac Venture V Limited Partnership.
(4) Frontenac Company is the general partner, and the Teachers' Retirement
System of the State of Illinois is the sole limited partner, of Frontenac
Diversified III Limited Partnership. Rodney L. Goldstein is a general
partner of Frontenac Company and, accordingly, may be attributed beneficial
ownership of the shares owned by Frontenac Diversified III Limited
Partnership. Mr. Goldstein disclaims beneficial ownership of such shares
beyond his ownership interests in Frontenac Company.
(5) Samuel B. Guren is the general partner of William Blair Venture Management
Company, which is the general partner of William Blair Venture Partners III
Limited Partnership, and, accordingly, Mr. Guren may be attributed
beneficial ownership of the shares owned by William Blair Venture Partners
III Limited Partnership. Mr. Guren disclaims beneficial ownership of such
shares beyond his ownership interest in William Blair Venture Partners III
Limited Partnership. Mr. Guren serves as a Director of the Company as
nominee of William Blair Venture Partners III Limited Partnership. None of
these entities have any other relationship with the Company.
(6) Includes 155,537 shares of Common Stock issuable pursuant to presently
exercisable stock options, of which options for 12,000 shares will be
exercised in connection with the Offering. Includes 206,035 shares
beneficially owned by Hugh M. Patinkin, which shares are held by Sheila C.
Patinkin and Robert Bergman, as Trustees of the Hugh M. Patinkin 1994
Family Trust U/A/D 11/18/94. Includes 23,376 shares held by Hugh M.
Patinkin and Sheila C. Patinkin, as Trustees of various trusts for the
benefit of their children, all of which such shares are subject to shared
voting power by Hugh M. Patinkin and Sheila C. Patinkin. Includes 11,120
shares held by Hugh M. Patinkin, Sheila C. Patinkin and Harold Patinkin, as
Trustees of various trusts for the benefit of the children of Hugh M.
Patinkin and Sheila C. Patinkin, all of which such shares are subject to
shared voting power by Hugh M. Patinkin, Sheila C. Patinkin and Harold
Patinkin. Includes 36,451 shares held by Hugh M. Patinkin, Mark A. Patinkin
and Matthew M. Patinkin, as Trustees of the Patinkin 1994 Grandchildren's
Trust U/A/D 11/18/94, with respect to which shares Hugh M. Patinkin, Mark
A. Patinkin and Matthew M. Patinkin share voting power.
(7) Includes 92,734 shares of Common Stock issuable pursuant to presently
exercisable stock options, of which options for 25,000 shares will be
exercised in connection with the Offering. Includes 114,235 shares
beneficially owned by Matthew M. Patinkin, which shares are held by Robin
J. Patinkin and Debra Soffer, as Trustees of the Matthew M. Patinkin 1994
Family Trust U/A/D/ 12/19/94. Includes 16,646 shares held by Matthew M.
Patinkin and Robin J. Patinkin, as Trustees of various trusts for the
benefit of their children, all of which such shares are subject to shared
voting power by Matthew M. Patinkin and Robin J. Patinkin. Includes 8,854
shares held by Robin J. Patinkin, as Trustee of various trusts for the
benefit of the children of Matthew M. Patinkin and Robin J. Patinkin, with
respect to which shares Matthew M. Patinkin disclaims beneficial ownership.
Includes 36,451 shares held by Matthew M. Patinkin, Hugh M. Patinkin and
Mark A. Patinkin, as Trustees of the Patinkin 1994 Grandchildren's Trust
U/A/D 11/18/94, with respect to which shares Matthew M. Patinkin, Hugh M.
Patinkin and Mark A. Patinkin share voting power.
(8) Includes 142,603 shares of Common Stock issuable pursuant to presently
exercisable stock options, of which options for 75,000 shares (86,250
shares if the Underwriters' over-allotment option is exercised in full)
will be exercised in connection with the Offering. Includes 22,282 shares
beneficially owned by John R. Desjardins, which shares are held by Cheryl
Desjardins and Stephen Kendig, as Trustees of the John R. Desjardins 1995
Family Trust U/A/D 12/28/95. Shares beneficially owned by Mr. Desjardins
include shares allocated to his account in the ESOP 12,053 shares), as to
which he has voting power.
(9) Includes 59,040 shares of Common Stock issuable pursuant to presently
exercisable stock options, of which options for 20,000 shares (23,000
shares if the Underwriters' over-allotment option is exercised in full)
will be exercised in connection with the Offering. Shares beneficially
owned by Mr. Eisenheim include shares allocated to his account in the ESOP
(3,246 shares), as to which he has voting power.
(10) Norman J. Patinkin's three children own an aggregate of 69,726 shares, and,
accordingly, Norman J. Patinkin may be attributed beneficial ownership of
those shares. Mr. Patinkin disclaims beneficial ownership of all such
69,726 shares.
(11) The participants in the ESOP have voting power with respect to the shares
held by the ESOP.
46
<PAGE> 49
LIMITATIONS ON THE COMPANY'S USE OF NET OPERATING LOSS CARRYFORWARDS
At February 1, 1996, the Company had $18.4 million of net operating loss
carryforwards for federal income tax purposes (the "NOLs"). See Note 6 of Notes
to Financial Statements. 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.
Section 382 of the Code limits the use of net operating losses and net
operating loss carryforwards following an "ownership change" which, in general,
is an increase by more than 50 percentage points of the percentage of stock of a
corporation owned, directly or indirectly, by those persons or groups of persons
each of which owns or is treated as owning at least five percent of that
corporation's stock ("Five-Percent Stockholders") over the lowest percentage of
stock of such corporation previously owned by each such Five-Percent Stockholder
at any time during a specified period of not more than three years (without, in
general, reducing an increase of any Five-Percent Stockholder for decreases of
other Five-Percent Stockholders). Subject to special rules, all stockholders
who, directly or indirectly, own less than 5% of the stock of a corporation
generally are treated as a single Five-Percent Stockholder for this purpose.
Under the foregoing rules, if changes in the direct and indirect ownership
of the stock of the Company result in an ownership change of the Company at the
time of such transactions, the utilization of the NOLs in taxable years ending
after such ownership change will be subject to an annual limitation determined
under Section 382 of the Code. Such annual limitation is based on the value of
the stock of the Company at the time of the ownership change, determined under
special rules. Although there can be no assurances as to any position taken by
the Internal Revenue Service in the future, the Company believes that
immediately following the IPO, the percentage point increase of Five-Percent
Stockholders was approximately 47% and therefore that the IPO did not result in
an ownership change of the Company. The Company's beliefs are based on certain
assumptions, including assumptions as to factual matters, as well as
interpretations of law which the Internal Revenue Service might challenge.
The Company expects that the Offering will result in an ownership change of
the Company under Section 382 of the Code. As a result, the Company's use of the
NOLs in taxable years ending after the Offering is expected to be subject to an
annual limitation (the "Section 382 Limitation") determined by multiplying the
applicable long-term tax-exempt rate (5.80% as of October 1996) by the value of
the stock of the Company immediately before the Offering, determined under
special rules. Although the matter is not free from doubt, the Company expects
that it will be required to compute such value by reference to the market
capitalization of the Company immediately before the Offering, reduced by the
proceeds of the IPO, which, after such reduction, would be approximately $152
million. To the extent the Section 382 Limitation exceeds the Company's taxable
income in any year, such excess can be carried forward to increase the NOLs that
can be utilized in future years, subject to the normal expiration date of the
NOLs. The NOLs begin expiring in 2006.
Special rules govern the application of the Section 382 Limitation to the
Company's taxable year ending January 31, 1997, the taxable year that includes
the date of the ownership change. First, the Section 382 Limitation does not
apply to taxable income earned by the Company before the ownership change. The
NOLs can be used to offset such income without restriction. Second, the
remainder of the taxable income for such year is subject to a limitation
determined by multiplying the Section 382 Limitation by a fraction, the
numerator of which is the number of days in such year after the date of the
ownership change and the denominator of which is the total number of days in
such year. For these purposes, the taxable income allocable to periods before
and after the ownership change is generally determined by allocating the
Company's total taxable income for the taxable year ending January 31, 1997
ratably to each day in such year.
Because the Offering is expected to result in an ownership change, the
Company expects that its ability to use the NOLs to offset future income will be
somewhat restricted as described above and the Company will likely have to pay a
limited amount of taxes earlier than would be the case if the NOLs were
available to reduce federal income taxes without restriction.
47
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 2,000,000 shares of
Preferred Stock, par value $.001 per share, issuable in series (none of which is
outstanding), 30,000,000 shares of Common Stock, par value $.001 per share (of
which 8,372,250 shares are outstanding), and 26,026 shares of Class B Common
Stock, par value $1.00 per share (of which 90.715 shares are outstanding).
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of holders of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are, and
the shares offered by the Company in this Offering will be, when issued and paid
for, fully paid and nonassessable.
Holders of Class B Common Stock are entitled to vote together with the
holders of Common Stock, but with each share of Class B Common Stock having
approximately 35.4 votes. Class B Common Stock carries (i) a $130 per annum per
share cumulative dividend preference over all other classes of Common Stock
(accruing through March 4, 1995) and (ii) a liquidation preference over all
other classes of Common Stock for accumulated and unpaid dividends. Class B
Common Stock participates in dividends and liquidation payments to be made with
respect to the Common Stock on the basis that one share of Class B Common Stock
is equivalent to approximately 35.4 shares of Common Stock.
The Company's Restated Certificate of Incorporation (the "Charter")
provides that the Board of Directors is authorized, subject to certain
limitations prescribed by law, without further stockholder approval, to issue
from time to time up to an aggregate of 1,000,000 shares of Preferred Stock in
one or more series and to fix or alter the designations, preferences, rights and
any qualifications, limitations or restrictions of the shares of each such
series thereof, including the dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. The Company has no present plans
to issue any shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the Board of Directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder which is not shared pro rata with the other stockholders
of the Company. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within the past
three years did own, 15% or more of the corporation's voting stock.
48
<PAGE> 51
The Charter provides for the division of the Board of Directors into three
classes as nearly equal in size as possible with staggered three-year terms. See
"Management -- Board of Directors." Any director may be removed only with cause
and then only by the vote of a majority of the shares entitled to vote for the
election of directors.
The Charter empowers the Board of Directors, when considering a tender
offer or merger or acquisition proposal, to take into account factors in
addition to potential economic benefits to stockholders. Such factors may
include (i) the comparison of the proposed consideration to be received by
stockholders in relation to the then current market price of the Company's
capital stock, the estimated current value of the Company in a freely negotiated
transaction and the estimated future value of the Company as an independent
entity, (ii) the impact of such a transaction on the employees, suppliers and
customers of the Company and its effect on the communities in which the Company
operates and (iii) the ability of the Company to fulfill its objectives under
applicable statutes and regulations.
The Charter provides that any action required or permitted to be taken by
the stockholders of the Company may be taken only at a duly called annual or
special meeting of the stockholders and that special meetings may be called only
by the President or a majority of the Board of Directors of the Company. These
provisions could have the effect of delaying until the next annual stockholders
meeting, stockholder actions which are favored by the holders of the outstanding
voting securities of the Company. These provisions may also discourage another
person or entity from making a tender offer for the Company's Common Stock,
because such person or entity, even if it acquired all or a majority of the
outstanding voting securities of the Company, would be able to take action as a
stockholder (such as electing new directors or approving a merger) only at a
duly called stockholders meeting, and not by written consent.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or by-laws, unless a corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage. The
Charter requires the affirmative vote of the holders of at least 75% of the
outstanding voting stock of the Company to amend or repeal any of the foregoing
Charter provisions, and to reduce the number of authorized shares of Common
Stock and Preferred Stock. A 75% vote is required to amend or repeal the
Company's Restated By-Laws (the "By-Laws"). The By-Laws may also be amended or
repealed by a majority vote of the Board of Directors. Such stockholder vote
would be in addition to any separate class vote that might in the future be
required pursuant to the terms of any Preferred Stock that might be outstanding
at the time any such amendments are submitted to stockholders.
The By-Laws provide that for nominations for the Board of Directors or for
other business to be properly brought by a stockholder before an annual meeting
of stockholders, the stockholder must first have given timely notice thereof in
writing to the Secretary of the Company. To be timely, a stockholder's notice
generally must be delivered not later than 90 days in advance of the anniversary
date of the release of the Company's proxy statement to stockholders in
connection with the prior year's annual meeting of stockholders. The notice must
contain, among other things, certain information about the stockholder
delivering the notice and, as applicable, background information about each
nominee or a description of the proposed business to be brought before the
meeting. The Company's By-Laws also provide that special meetings of
stockholders may be called only by the President or a majority of the Board of
Directors. Business transacted at a special meeting is limited to the purposes
for which the meeting is called.
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or discouraging a third party from attempting to
acquire, control of the Company.
The Charter contains certain provisions permitted under the DGCL relating
to the liability of directors. These provisions eliminate a director's liability
for monetary damages for a breach of fiduciary duty, except in certain
circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. The Charter and By-Laws also contain
provisions indemnifying the directors and officers of the Company to the fullest
extent permitted by the DGCL. The Company believes that these provisions will
assist the Company in attracting and retaining qualified individuals to serve as
directors.
49
<PAGE> 52
RIGHTS
Under the Company's stockholders rights plan, each share of Common Stock
has associated with it one preferred share purchase right (a "Right"). The terms
of the Rights are set forth in a Rights Agreement between the Company and The
First National Bank of Boston. Under certain circumstances described below, each
right entitles the holders thereof to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock for a price of $52.00 per one
one-hundredth of a share. The Rights are not presently exercisable and are
transferable only with the related shares of Common Stock. The Rights will not
become exercisable or be evidenced by separate certificates or traded separately
from the Common Stock prior to the occurrence of certain triggering events
described below. In such an event, separate Rights certificates would be issued
and distributed representing one right for each share of Common Stock. There is
no present market for the Rights separate from the Common Stock and the Company
cannot predict whether a trading market would develop with respect to the Rights
if the Rights ever become exercisable.
The Rights would become exercisable at the specified exercise price upon
the earliest to occur of (i) 10 Business Days after the first public
announcement that any person or group (other than an Exempt Person) has acquired
(an "Acquiring Person") Beneficial Ownership of 15% or more of the Company's
outstanding shares of Common Stock and (ii) 10 Business Days (unless delayed by
the Board of Directors) after any person or group (other than an Exempt Person)
has commenced, or announced the intention to commence, a tender or exchange
offer which would, upon its consummation, result in such person or group being
the Beneficial Owner of 15% or more of the Company's outstanding shares of
Common Stock (each a "Triggering Event"). Rights may not be exercised following
the occurrence of an event described below under the caption "Flip-In" prior to
the expiration of the Company's right to redeem the Rights. Rights certificates
will be distributed when the Rights become exercisable. An "Exempt Person"
includes the Company, Mr. Hugh M. Patinkin, Mr. John R. Desjardins and Mr.
Matthew M. Patinkin and certain related persons.
Flip-In. After the Rights become exercisable (unless the Triggering Event
is the commencement or the announcement of a tender or exchange offer as
described in (ii) in the immediately preceding paragraph), the holders of the
Rights (other than an Acquiring Person and certain transferees therefrom) would
be entitled to purchase shares of Common Stock of the Company at a 50% discount.
After the occurrence of a Flip-In event, the Rights of an Acquiring Person and
such transferees become void.
Flip-Over. In the event that, on or after the date on which an Acquiring
Person has become such: (i) the Company merges into or consolidates with an
Interested Stockholder or, unless all holders of the outstanding shares of
Common Stock of the Company are treated the same, any other person (with limited
designated exceptions), (ii) an Interested Stockholder or, unless all holders of
the outstanding shares of Common Stock of the Company are treated the same, any
other person (with limited designated exceptions) merges into the Company or
(iii) the Company sells or transfers 50% or more of its consolidated assets or
earning power to an Interested Stockholder or, unless all holders of the
outstanding shares of Common Stock of the Company are treated the same, any
other person (with limited designated exceptions), the holders of the Rights
(other than Rights which have become void) would be entitled to purchase common
shares of the acquiror (or a person affiliated therewith) at a 50% discount. In
general, an Interested Stockholder is an Acquiring Person and certain persons
affiliated, associated or acting on behalf of or in concert therewith.
Redemption of Rights. The Rights may be redeemed, as a whole, at a
redemption price of $.01 per Right, subject to adjustment, at the direction of
the Board of Directors, at any time prior to the earliest of (i) 10 Business
Days after the first public announcement that any person (other than the Company
and certain related entities) has become an Acquiring Person, (ii) the
occurrence of any transaction described under the caption "Flip-Over" and (iii)
the date of final expiration of the Rights, which is ten years after the date of
the Offering. Under certain circumstances set forth in the proposed Rights
Agreement, the decision to redeem the Rights requires the concurrence of at
least a majority of the disinterested directors, after the occurrence of an
event described under the caption "Flip-In" and prior to the occurrence of a
transaction described under the caption "Flip-Over," to redeem the Rights in
whole, but not in part, at the Redemption Price, but only (i) if the person who
is the Acquiring Person shall have reduced its Beneficial Ownership of the then
outstanding shares Common Stock of the Company to less than 10% or (ii) in
connection with the
50
<PAGE> 53
transaction described under the caption "Flip-Over" which does not involve an
Interested Stockholder and in which all holders of the Common Stock of the
Company are treated the same.
Exchange of Shares for Rights. At any time after any person or group shall
have become an Acquiring Person and before any person (other than an Exempt
Person), together with its affiliates and associates, shall have become the
Beneficial Owner of 50% or more of the outstanding shares of the Common Stock of
the Company, the Board of Directors may direct the exchange of shares of Common
Stock (or Preferred Shares) for all or any part of the Rights (other than Rights
which have become void) at the exchange rate of one share of Common Stock (or
one one-hundredth of a Preferred Share) per Right, subject to adjustment.
TERMS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
The Series A Junior Participating Preferred Stock (the "Preferred Shares")
which would be issuable upon exercise of the Rights (should the rights become
exercisable) would not be redeemable. Each Preferred Share would entitle the
holder thereof to receive a preferential quarterly dividend equal to 100 times
the aggregate per share amount of all cash dividends, plus 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends and other
distributions (other than in shares of Common Stock), declared on the Common
Stock during such quarter, adjusted to give effect to any dividend on the Common
Stock payable in shares of Common Stock or any subdivision, combination or
reclassification of the Common Stock (a "Dilution Event"). Each Preferred Share
would entitle the holder thereof to 100 votes on all matters submitted to a vote
of the stockholders of the Company, voting together as a single class with the
holders of the Common Stock and the holders of any other class of capital stock
having general voting rights, adjusted to give effect to any Dilution Event. In
the event of liquidation of the Company, the holder of each Preferred Share
would be entitled to receive a preferential liquidation payment equal to 100
times the aggregate per share amount to be distributed to the holders of the
Common Stock, adjusted to give effect to any Dilution Event, plus an amount
equal to accrued and unpaid dividends and distributions on such Preferred Share,
whether or not declared, to the date of such payment. In the event of any
merger, consolidation or other transaction in which the outstanding shares of
Common Stock of the Company are exchanged for or converted into other capital
stock, securities, cash and/or other property, each Preferred Share would be
similarly exchanged or converted into 100 times the per share amount applicable
to the Common Stock, adjusted to give effect to any Dilution Event.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston.
51
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 9,604,250 shares of
Common Stock outstanding. Of these shares, the 3,737,500 shares sold in the IPO
are freely tradeable and the 2,202,000 shares sold in this Offering will be
freely tradeable without restriction or further registration under the
Securities Act, except that any shares purchased by "affiliates" of the Company,
as that term is defined in Rule 144 ("Rule 144") under the Securities Act
("Affiliates"), generally may be sold only in compliance with the limitations of
Rule 144 described below.
SALE OF RESTRICTED SHARES
The remaining 3,664,750 shares of Common Stock are deemed "Restricted
Shares" under Rule 144 because they were originally issued and sold by the
Company in private transactions in reliance upon exemptions from the Securities
Act. These remaining Restricted Shares are eligible for resale and may be resold
in the public market only in compliance with the registration requirements of
the Securities Act or pursuant to a valid exemption therefrom. Approximately
949,630 of the Restricted Shares may be sold in accordance with Rule 144(k)
without regard to Rule 144's volume or manner of sale restrictions.
Approximately 458,501 of such shares are subject to Lock-up Agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least two years is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (96,042 shares
immediately after the Offering) or (ii) the average weekly trading volume in the
Common Stock in the over-the-counter market during the four calendar weeks
preceding the date on which notice of such sale is filed. In addition, under
Rule 144(k), a person who is not an Affiliate and has not been an Affiliate for
at least three months prior to the sale and who has beneficially owned
Restricted Shares for at least three years may resell such shares without
compliance with the foregoing requirements. In meeting the two and three-year
holding periods described above, a holder of Restricted Shares can include the
holding periods of a prior owner who was not an Affiliate. The holding period
will include the period during which the person held convertible securities of
the Company or stock of the Company.
LOCK-UP AGREEMENTS
Holders of 3,157,760 of the Restricted Shares (and substantially all shares
of Common Stock subject to currently exercisable options), including all
executive officers, directors and certain stockholders of the Company who will
hold shares of Common Stock after the Offering, have agreed, pursuant to Lock-up
Agreements, that they will not, without the prior written consent of Montgomery
Securities, offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock beneficially owned by them for a period of 90 days after the date
of this Prospectus, except pursuant to bona fide gifts to persons who agree in
writing to be bound by the provisions of the Lock-up Agreements.
STOCK OPTIONS
The Company has registered under the Securities Act all shares of Common
Stock issued or issuable pursuant to the 1995 Options and the 1996 Plan.
Accordingly, as the 1995 Options and awards under the 1996 Plan vest, shares
issued pursuant thereto will be freely tradeable, except such shares as may be
acquired by an "affiliate" of the Company or as may be held by persons subject
to the Lock-up Agreements described above.
REGISTRATION RIGHTS
Pursuant to the Registration Agreement, the Company has granted certain
stockholders the right to require the Company to register their stock under the
Securities Act. See "Certain Transactions."
52
<PAGE> 55
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms
and conditions in the Underwriting Agreement, to purchase from the Company and
the Selling Stockholders the number of shares of Common Stock indicated below
opposite their respective names at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all the shares of Common Stock, if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
-------------------------------------------------------------- ---------
<S> <C>
Montgomery Securities......................................... 1,101,000
William Blair & Company, L.L.C. .............................. 1,101,000
---------
Total.................................................... 2,202,000
=========
</TABLE>
The Underwriters have advised the Company and the Selling Stockholders that
the Underwriters propose initially to offer the Common Stock to the public on
the terms set forth on the cover page of this Prospectus. The Underwriters may
allow selected dealers a concession of not more than $0.66 per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $0.10 per share to certain other dealers. After the public offering, the
public offering price and other selling terms may be changed by the
Underwriters. The Common Stock is offered subject to receipt and acceptance by
the Underwriters, and to certain other conditions, including the right to reject
orders in whole or in part.
The Company and certain of the Selling Stockholders have granted an option
to the Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of an aggregate of 330,300 additional
shares of Common Stock to cover over-allotments, if any, at the same price per
share as the shares initially to be purchased by the Underwriters. See
"Principal and Selling Stockholders." To the extent that the Underwriters
exercise this option, the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with the Offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Company and its executive officers and directors and the Selling
Stockholders and certain other stockholders have agreed that, for a period of 90
days after the date of this Prospectus, they will not offer, sell or dispose of
any shares of Common Stock without the prior written consent of Montgomery
Securities.
Samuel B. Guren, a director of the Company, is a general partner of the
general partner of William Blair Venture Partners III Limited Partnership,
another general partner of which is William Blair & Company, L.L.C.
The Underwriters and certain selling group members, or their respective
affiliates, that currently act as market makers for the Common Stock may engage
in "passive market making" in the Common Stock on the Nasdaq National Market in
accordance with Rule 10b-6A under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"). Rule 10b-6A permits, upon the satisfaction of
certain conditions, underwriters and selling group members participating in a
distribution that are also Nasdaq market makers in the security being
distributed to engage in limited market making transactions during the period
when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity.
Rule 10b-6A prohibits underwriters and selling group members engaged in passive
market making generally from entering a bid or effecting a purchase at a price
that exceeds the highest bid for those securities displayed on Nasdaq by a
market maker that is not participating in the distribution. Under Rule 10b-6A,
each underwriter or selling group member engaged in passive market making is
subject to a daily net purchase limitation equal to 30% of such entity's average
daily trading volume during the two full consecutive calendar months immediately
preceding the date of the filing of
53
<PAGE> 56
the registration statement under the Securities Act pertaining to the security
to be distributed. Passive market making may stabilize the market price of the
Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Prospectus, constitute "forward looking
statements" within the meaning of the Reform Act. 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 others, those described under "Risk Factors" and the following: (i) the
extent and results of the Company's store expansion program, (ii) the
seasonality of the Company's business, (iii) the Company's leverage, (iv)
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, (v) the extent to which the Company is able to retain and
attract key personnel, (vi) competition, (vii) the availability and cost of
consumer credit, (viii) relationships with suppliers, (ix) fluctuations in gem
and gold prices, and (x) regulation.
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby will be
passed upon for the Company and the Selling Stockholders by Sidley & Austin,
Chicago, Illinois. Certain legal matters in connection with this Offering will
be passed upon for the Underwriters by Gardner, Carton & Douglas, Chicago,
Illinois.
EXPERTS
The financial statements and financial statement schedule of the Company as
of January 31, 1995 and 1996 and for each of the three years in the period ended
January 31, 1996, appearing in this Prospectus and in the Registration Statement
mentioned below have been audited by Coopers & Lybrand L.L.P., independent
public accountants, as set forth in their reports thereon appearing elsewhere in
this Prospectus and in the Registration Statement, and are included in reliance
upon such reports given upon the authority of such firm as experts in auditing
and accounting.
54
<PAGE> 57
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Avenue, N.W., Washington, D.C. 20549 or at
its Regional Offices located at Room 1400, 500 West Madison Street, Chicago,
Illinois 60661 and Seven World Trade Center, New York, New York 10048, and
copies of such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Additionally, copies of reports, proxy statements and other information
filed with the Commission electronically by the Company may be inspected by
accessing the Commission's Internet site at http://www.sec.gov. The Company's
Common Stock is listed for quotation on the Nasdaq National Market, and such
reports, proxy statements and other information can also be inspected at the
office of Nasdaq Operation, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules filed therewith. For
further information with respect to the Company and the Common Stock offered
hereby, reference is hereby made to such Registration Statement and to the
financial statements, and exhibits filed therewith. Except as provided below,
statements contained in this Prospectus regarding the contents of any contract
or other documents referred to are not necessarily complete and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. This Prospectus contains a description of all
provisions of the documents filed as exhibits to the Registration Statement that
are material to investors.
55
<PAGE> 58
MARKS BROS. JEWELERS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Balance Sheets of the Company as of January 31, 1995 and 1996 and as of July 31, 1995
(unaudited) and 1996 (unaudited).................................................... F-3
Statements of Operations of the Company for the years ended January 31, 1994, 1995 and
1996 and for the six months ended July 31, 1995 (unaudited) and 1996 (unaudited).... F-4
Statements of Stockholders' Equity (Deficit) of the Company for the years ended
January 31, 1994, 1995 and 1996 and for the six months ended July 31, 1996
(unaudited)......................................................................... F-5
Statements of Cash Flows of the Company for the years ended January 31, 1994, 1995 and
1996 and for the six months ended July 31, 1995 (unaudited) and 1996 (unaudited).... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 59
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, 1995 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, 1996. 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, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended January 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, effective February 1,
1993, the Company changed its method of accounting for compensation expense
related to the Employee Stock Ownership Plan.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 27, 1996, except as to Note 14
which is as of August 22, 1996
F-2
<PAGE> 60
MARKS BROS. JEWELERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, 1995 JANUARY 31, 1996 JULY 31, 1995 JULY 31, 1996
---------------- ---------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable, net............... $ 1,494 $ 1,169 $ 2,063 $ 1,672
Layaway receivables, net............... 1,406 1,576 1,158 1,454
Merchandise inventories................ 46,054 55,401 52,959 46,542
Other current assets................... 690 714 570 366
Deferred income taxes, net............. -- 817 -- 817
Deferred financing costs............... -- -- -- 427
-------- -------- --------- ---------
Total current assets............... 49,644 59,677 56,750 51,278
Property and equipment, net.............. 11,868 12,852 13,718 14,657
Deferred income taxes, net............... -- 14,874 -- 7,387
Deferred financing costs................. -- -- -- 1,978
-------- -------- --------- ---------
Total assets....................... $ 61,512 $ 87,403 $ 70,468 $ 75,300
======== ======== ========= =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C> <C>
Current liabilities:
Outstanding checks, net................ $ 2,511 $ 7,991 $ 389 $ 4,207
Revolver loan.......................... 6,805 2,119 10,205 8,782
Current portion of term loan........... 6,400 7,938 6,400 1,250
Current portion of senior accreting
notes................................ -- 1,908 -- --
Accounts payable....................... 6,006 9,037 12,490 13,535
Accrued payroll........................ 1,988 2,324 1,535 1,630
Other accrued expenses................. 5,474 6,848 5,514 6,844
-------- -------- --------- ---------
Total current liabilities.......... 29,184 38,165 36,533 36,248
Term loan, net of current portion........ 26,600 18,662 26,600 13,500
Senior accreting notes, net of current
portion................................ 44,733 47,819 47,176 --
Zero coupon notes........................ 5,413 5,847 5,626 --
Subordinated Debt........................ 20,855 23,598 22,184 20,000
Other long-term liabilities.............. 1,305 1,170 1,293 1,157
-------- -------- --------- ---------
Total liabilities.................. 128,090 135,261 139,412 70,905
-------- -------- --------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock , $.001 par value;
8,855,210 shares authorized;
2,053,629 shares, 2,559,793 shares,
2,559,793 shares, and 8,372,250
shares issued and outstanding,
respectively......................... -- -- -- 8
Class B common stock $1.00 par value;
29,567 shares authorized; 26,229,
26,026 shares, 26,206 shares, and 91
shares issued and outstanding,
respectively......................... 30 30 30 --
Class C common stock $.001 par value;
39,371 shares authorized; 39,370
shares issued and outstanding;
convertible 1 for 1 into common
stock................................ -- -- -- --
Class D common stock $.001 par value;
60,000 shares authorized; no shares
issued and outstanding; convertible 1
for 1 into common stock.............. -- -- -- --
Additional paid-in capital............. 11,855 8,766 9,815 33,708
Accumulated deficit.................... (31,645) (14,673) (34,300) (29,321)
Treasury stock, (1,400,123, 1,400,326,
1,400,086, and 0 shares at cost,
respectively)........................ (20,270) (20,333) (20,276) --
Deferred ESOP compensation............. (26,548) (21,648) (24,213) --
-------- -------- --------- ---------
Total stockholders' equity
(deficit),
net............................. (66,578) (47,858) (68,944) 4,395
-------- -------- --------- ---------
Total liabilities and stockholders'
equity (deficit)................ $ 61,512 $ 87,403 $ 70,468 $ 75,300
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 61
MARKS BROS. JEWELERS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, SIX MONTHS ENDED
------------------------------ JULY 31,
1994 1995 1996 -------------------------
------- -------- --------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales................................... $91,106 $106,683 $ 131,022 $ 52,074 $ 64,466
Cost of sales (including buying and
occupancy expenses)....................... 54,511 64,223 77,722 31,959 38,626
------- -------- --------- --------- ---------
Gross profit........................... 36,595 42,460 53,300 20,115 25,840
Selling, general and administrative
expenses.................................. 28,340 30,748 37,887 16,458 20,385
------- -------- --------- --------- ---------
Income from operations................. 8,255 11,712 15,413 3,657 5,455
Interest expense, including deferred
interest of $5,467, $6,685, $8,171, $3,985
and $2,250, respectively.................. 8,920 10,594 12,314 6,017 4,557
Stock award expense......................... -- -- 461 -- --
ESOP compensation expense................... 511 547 590 295 --
------- -------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes....... (1,176) 571 2,048 (2,655) 898
Income tax benefit (provision).............. -- -- 14,924 (350)
------- -------- --------- --------- ---------
Income (loss) from continuing
operations........................... (1,176) 571 16,972 (2,655) 548
Gain on disposal of discontinued
operations................................ 2,700 -- -- -- --
------- -------- --------- --------- ---------
Income before cumulative effect of
change in accounting for ESOP and
extraordinary gain................... 1,524 571 16,972 (2,655) 548
Cumulative effect of change in accounting
for ESOP.................................. (8,526) -- -- -- --
Extraordinary gain on extinguishment of
debt, net of taxes........................ -- -- -- -- 11,164
------- -------- --------- --------- ---------
Net income (loss)...................... $(7,002) $ 571 $ 16,972 $ (2,655) $ 11,712
======= ======== ========= ========= =========
Primary EPS:
Income (loss) per share before
extraordinary gain..................... $ 3.02 $ (0.58) $ 0.08
Income per share on extraordinary gain.... $ -- $ -- $ 1.53
Income (loss) per share after
extraordinary.......................... $ 3.02 $ (0.58) $ 1.61
Fully diluted EPS:
Income (loss) per share before
extraordinary gain..................... $ 3.02 $ (0.58) $ 0.07
Income per share on extraordinary gain.... $ -- $ -- $ 1.53
Income (loss) per share after
extraordinary gain..................... $ 3.02 $ (0.58) $ 1.60
Primary weighted average shares
outstanding............................ 5,614,437 4,554,459 7,286,960
========= ========= =========
Fully diluted weighted average shares
outstanding............................ 5,614,437 4,554,959 7,321,329
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 62
MARKS BROS. JEWELERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS
B ADDITIONAL DEFERRED
COMMON PAID-IN ACCUMULATED TREASURY ESOP COMMON
STOCK CAPITAL DEFICIT STOCK COMPENSATION STOCK
------ ---------- ----------- -------- ------------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1993....... $ 30 $19,923 $(25,214) $(20,173) $(44,200) $--
Net loss.......................... -- -- (7,002) -- -- --
Repurchase of ESOP shares......... -- -- -- (60) -- --
ESOP amortization................. -- (3,952) -- -- 4,463 --
Cumulative effect of change in
accounting for ESOP............. -- -- -- -- 8,526 --
---- ------- -------- -------- -------- ----
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 for the six months
(unaudited)..................... 11,712
To record the effect of the
initial public offering
(unaudited)..................... (30) 24,942 (26,360) 20,333 21,648 8
---- ------- -------- -------- -------- ----
Balance at July 31, 1996
(unaudited)..................... $ 0 $33,708 $(29,321) $ -- $ -- $ 8
==== ======= ======== ======== ======== ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 63
MARKS BROS. JEWELERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
JANUARY 31, JULY 31,
----------------------------------- --------------------------
1994 1995 1996 1995 1996
--------- --------- --------- ----------- -----------
(IN THOUSANDS)(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ (7002) $ 571 $ 16,972 $ (2,655) $ 11,712
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Cumulative effect of change in accounting for ESOP.... 8,526 -- -- -- --
Gain on disposal of discontinued operations........... (2,700) -- -- -- --
Gain on extinguishment of debt, net of taxes.......... -- -- -- -- (11,164)
Depreciation and amortization......................... 2,879 2,815 2,948 1,434 1,529
Stock award expense non-cash portion.................. -- -- 454 -- --
ESOP compensation expense............................. 511 547 590 295 --
Income tax benefit.................................... -- -- (14,924) -- --
Interest on zero coupon notes......................... 372 402 434 213 121
Interest on senior accreting notes.................... 2,985 3,860 4,994 2,443 1,339
Interest on subordinated debt......................... 2,110 2,423 2,743 1,329 790
Loss on disposition of assets......................... -- -- -- -- (1)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net..... (405) 509 325 (569) (503)
Decrease (increase) in layaway receivables, net..... 1,438 (112) (170) 248 122
(Increase) in merchandise inventories, net of gold
consignment....................................... (9,337) (9,460) (9,347) (6,905) (6,436)
(Increase) decrease in other assets................. (279) 239 (24) 120 348
(Increase) in deferred financing costs.............. -- -- -- -- (2,405)
Decrease in deferred taxes, net..................... -- -- -- -- 349
(Decrease) increase in accounts payable............. (529) 2,903 3,031 6,484 4,498
(Decrease) increase in accrued liabilities.......... (3,226) (26) 1,575 (425) (711)
--------- -------- --------- --------- ---------
Net cash (used in) provided by operating
activities...................................... (4,657) 4,671 9,601 2,012 (412)
--------- -------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures.................................... (3,466) (3,974) (3,932) (3,284) (3,333)
Proceeds from assets sold............................... -- 30 -- -- --
Proceeds from disposal of discontinued operations....... 2,910 -- -- -- --
--------- -------- --------- --------- ---------
Net cash used in investing activities............. (556) (3,944) (3,932) (3,284) (3,333)
--------- -------- --------- --------- ---------
Cash flows from financing activities:
Borrowing on old revolver loan.......................... 99,766 99,159 127,109 58,545 38,078
Repayment of old revolver loan.......................... (108,127) (98,993) (131,795) (55,145) (40,197)
Borrowing on new revolver loan.......................... -- -- -- -- 39,865
Repayment of new revolver loan.......................... -- -- -- -- (31,083)
Repayment of term loan.................................. (4,500) (2,500) (6,400) -- (250)
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......................... 600 -- -- -- 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............................... (60) (37) (63) (6) --
(Decrease) increase in outstanding checks, net.......... 867 1,644 5,480 (2,122) (3,784)
--------- -------- --------- --------- ---------
Net cash (used in) provided by financing
activities...................................... (11,454) (727) (5,669) 1,272 3,745
--------- -------- --------- --------- ---------
Net decrease in cash and cash equivalents................. (16,667) -- -- -- --
Cash and cash equivalents at beginning of period.......... 16,667 -- -- -- --
--------- -------- --------- --------- ---------
Cash and cash equivalents at end of period................ $ -- $ -- $ -- $ -- $ --
========= ======== ========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid during the year........................... $ 4,484 $ 3,814 $ 3,891
Income taxes paid during the year....................... -- 347 64
Non-cash financing activity:
Tax effect of compensation expense...................... $ -- $ -- $ 767
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 64
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
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 155 stores, as of July
31, 1996, located in 24 states operating in regional or super-regional shopping
malls.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis for Presentation
The accompanying unaudited Balance Sheets as of July 31, 1996 and 1995 and
the Statements of Operations and Cash Flows for the six months ended July 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 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.
Management Estimates
The preparation of financial statements in conformity 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, 1994 and 1995 were
reclassified to conform to the current year presentation.
Accounts Receivable
Accounts receivable is shown net of the allowance for doubtful accounts of
$505,000 and $565,000 as of January 31, 1995 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.
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
F-7
<PAGE> 65
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company records the purchase liability in accounts payable and the related cost
of merchandise in cost of sales.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets 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.
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 term 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
Effective February 1, 1995 the Company adopted Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long Lived Assets
and for Long Lived Asset to be Disposed Of."
When facts and circumstances indicate potential impairment, the Company
evaluates 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.
Outstanding Checks
Outstanding checks are stated net of store cash balances, of which cash
balances were approximately $940,000 and $639,000, as of January 31, 1995 and
1996, respectively.
Interest Rate Cap Agreements
The Company entered into interest rate cap agreements which required
prepayments by the Company. The Company is amortizing the cost of these caps
over the contracted period on a straight-line basis as interest expense.
Employee Stock Ownership Plan
The Company adopted the American Institute of Certified Public Accountants
Statement of Position (SOP) No. 93-6 "Employers' Accounting for Employee Stock
Ownership Plans," as of February 1, 1993. The cumulative effect of this change
in accounting for compensation expense related to the ESOP as calculated under
the transition rules of the SOP, for years prior to the year ending January 31,
1994, was $8,526,000 as reflected in the Statement of Operations for the year
ended January 31, 1994. This amount represents the cost of shares allocated
prior to February 1, 1993 in excess of expense recognized under the Company's
historical method.
F-8
<PAGE> 66
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective February 1, 1993, the Company recognizes compensation expense
related to the ESOP based on the estimated fair value of the shares committed to
be released to the ESOP participants' accounts for the year then ending with the
difference between fair value and original cost of the ESOP shares recorded as a
reduction of additional paid-in-capital.
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.
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" will be adopted during the first quarter of the
year ending January 31, 1997.
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.
3. FINANCING ARRANGEMENTS
Revolver Loan
The Revolver Credit Facility is available through May 31, 1997 up to a
maximum of $15,000,000, of which $13,974,000 is available for general corporate
purposes and is limited by a borrowing base computed based on the value of the
Company's inventory and layaway receivables. The remaining $1,026,000 is
available for certain specific purposes as defined in the agreement. Each year,
between December 10 and February 28, the Revolver Loan balance must be paid down
for 30 consecutive days to a scheduled limit, (the Clean Down Limit), as defined
in the Credit Agreement. The Company met the clean down requirement of
$7,000,000 during the 30-day period commencing on December 10, 1995. A
commitment fee of 0.5% per annum on the unused portion of the commitment is
payable quarterly.
Interest expense on revolver borrowings, payable quarterly, was $361,000,
$488,000, and $701,000 with weighted average interest rates of 7.8%, 9.1% and
10.6%, in the years ending January 31, 1994, 1995 and 1996, respectively.
F-9
<PAGE> 67
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
3. FINANCING ARRANGEMENTS (CONTINUED)
Term Loan
Interest expense on Term Loan borrowings, payable quarterly, before
considering the interest hedge agreements described below, was $2,987,000,
$3,279,000 and $3,485,000, with weighted average interest rates of approximately
7.8%, 9.1% and 10.6% in the years ending January 31, 1994, 1995 and 1996,
respectively.
Senior Accreting Notes
The Company may elect to add the quarterly interest accruals to the
principal of the Senior Accreting Notes in lieu of making cash interest
payments. Principal payment of the Senior Accreting Notes in the amount of
$1,908,000 is due on September 15, 1996. The payment due on September 15, 1996
must be paid with the proceeds of Externally Raised Capital (as defined in the
Credit Agreement), unless the Company has, by that date, used $10,000,000 of
Externally Raised Capital to prepay the Senior Accreting Notes. The balance of
the principal along with any accreted interest is due on May 31, 1997. Subject
to the Company's ability to refinance the entire amount of senior debt or to
obtain Externally Raised Capital, the amount due under the Senior Accreting
Notes could be reduced by up to $564,000.
Mandatory repayments of the Senior Accreting Notes will be required as a
result of the sale of assets outside of the ordinary course of business or from
Externally Raised Capital. On April 30 and December 15 of each year, mandatory
prepayments are required out of excess cash flow, if any, as defined in the
Credit Agreement. No repayments were required as of January 31, 1994, 1995 and
1996.
Interest expense on the Senior Accreting Notes, which was added to the
existing principal balance during the years ending January 31, 1994, 1995 and
1996, was $2,985,000, $3,860,000 and $4,994,000, respectively, with a weighted
average interest rate of approximately 7.8%, 9.1% and 11.0%, respectively.
Interest on the Revolver Loan, Term Loan and Senior Accreting Notes are
payable at a base rate (the higher of Citibank's publicly announced base rate or
certificate of deposit rate) plus 1.75%. The base rate at January 31, 1994, 1995
and 1996 was 6.0%, 8.5% and 8.5%, respectively.
Zero Coupon Notes
As part of the compensation to the Bank Group for the refinancing of the
Company's debt, the Company issued $6,000,000 of Zero Coupon Notes due May 31,
1997. The balance sheets as of January 31, 1995 and 1996, reflect the net
carrying value of the Notes of $5,413,000 and $5,847,000, respectively. The
original issue discount of $1,707,000 is being amortized as interest expense
recognizing a 7.8% yield to maturity on June 1, 1996. Interest will begin
accruing on the $6,000,000 principal on June 1, 1996, at base rate plus 1.75%.
Interest expense on the note was $372,000, $402,000 and $434,000 during fiscal
1994, 1995 and 1996, respectively.
The Company may, at its option, redeem the Zero Coupon Notes at redemption
prices determined based on the amount and timing of repayments or refinancing of
the Company's other obligations to the Bank Group. In the event the Zero Coupon
Notes have not been redeemed in cash or canceled prior to May 31, 1997, or if
there has been an event of default, as defined by the Revolving Credit and Term
Loan Agreement, then the Bank Group may elect to accelerate the maturity of the
Notes or exchange the Notes for 20% of the fully diluted Common equity of the
Company by converting their Notes into shares of the Company's Class D common
stock.
Subordinated Debt
In the year ending January 31, 1990, the Company assumed a $10,000,000
subordinated note. The holder of the subordinated note received warrants that
entitled the holder to purchase 177,887 shares of Common Stock reserved for
issuance at a price of $.001 per share. The warrants can be exercised at the
option of the
F-10
<PAGE> 68
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
3. FINANCING ARRANGEMENTS (CONTINUED)
holder until their expiration on November 6, 1999. The subordinated debt is
reduced by the unamortized discount related to these warrants.
Subsequent to the refinancing of the Company's debt, all principal and
interest payments of the subordinated debt will be due on May 31, 2002. The
interest rate on the debt is 12.5%. If, prior to May 31, 1997, the Company is
sold in a public or private offering at or above a defined price per share, then
a fee equivalent to 1.3% per annum of the subordinated debt from February 1,
1993 to the date of the sale of the Company will be added to the subordinated
debt. In addition, the interest rate on the debt will be increased, under
certain circumstances, to 13.75% as of the date of the sale.
The holder of the subordinated note also provided a facility with up to
$3.5 million of additional subordinated debt available to the Company on
substantially the same terms as the subordinated note. As of January 31, 1996,
the Company has borrowed $600,000 under this credit facility. Interest accrues
on any outstanding principal amount at the rate of 13.75%. The obligation to
make term loans to the Company under the agreement terminates on the earliest of
December 31, 1996 or the occurrence of certain events as set forth in the
agreement. Borrowings under this subordinated debt facility may be used to repay
the long-term obligations due on September 15, 1996 under the Credit Agreement
as Externally Raised Capital.
Interest payments on the subordinated debt are deferred by adding the
interest to the outstanding principal balance. Interest expense on the
subordinated debt was $2,110,000, $2,423,000 and $2,743,000 in the years ending
January 31, 1994, 1995 and 1996, respectively.
The owner of the subordinated debt also owns 134,351 shares of Common Stock
and 2,362 shares of Class C Common Stock.
The Company and the owner of the subordinated debt reached an agreement
whereby the Company has the option to repurchase all notes, including all
interest thereon, at any time before May 1, 1996 at the face value of
$10,600,000. If the repurchase is made after May 1, 1996 and before May 31,
1997, the repurchase price is $10,600,000 plus an interest charge of 12.5% (per
annum). In consideration for this discount the Company has relinquished its
ability to borrow under the above credit facility.
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 shall not exceed 9.75% through
December 31, 1996. To the extent the variable interest rate exceeds 9.75% on
this amount of debt, the banks will remit the difference to the Company
quarterly.
Interest income recognized on these agreements was approximately $31,000
and $343,000 in the years ending January 31, 1995 and 1996. There was no
interest income recognized in the year ending January 31, 1994.
F-11
<PAGE> 69
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
3. FINANCING ARRANGEMENTS (CONTINUED)
Maturities of Credit Agreement Obligations
Future payments under the Credit Agreement, excluding the Revolver Loan,
for amounts in current and non-current liabilities in the balance sheet as of
January 31, 1996, are as follows:
<TABLE>
<CAPTION>
SENIOR
SUBORDINATED TERM ACCRETING ZERO
DEBT LOAN NOTES COUPON TOTAL
------------ ------- --------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
September 15, 1996................... $ -- $ 738 $ 1,908 $ -- $ 2,646
January 31, 1997..................... -- 7,200 -- -- 7,200
May 31, 1997......................... -- 18,662 47,819 5,847 72,328
May 31, 2002......................... 23,598 23,598
------------ ------- --------- ------ --------
Total........................... $ 23,598 $26,600 $ 49,727 $5,847 $105,772
========= ======= ======= ====== ========
</TABLE>
The $738,000 and $1,908,000 amounts due on September 15, 1996, must be paid
with the proceeds of Externally Raised Capital.
Under the Credit Agreement, the Bank Group has a collateral interest in all
cash and cash equivalents, accounts receivable, inventories, certain property
and equipment, and the ESOP loan. 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 interest coverage ratio, fixed charge
ratio and certain balance sheet measures. The Credit Agreement also provides
that a material adverse change in the operations of the Company constitutes an
event of default.
The September 15, 1996 maturities must be paid with the proceeds of
Externally Raised Capital. The Company must either refinance the debt, and/or
recapitalize the Company, to meet its scheduled debt repayment, although there
is no assurance that it can do so. The Company's current refinancing plans and
equity offering are discussed in the Subsequent Events note.
F-12
<PAGE> 70
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
4. COMMON STOCK
Following are the number of shares authorized, issued and outstanding for
each of the Company's classes of common stock as of January 31:
<TABLE>
<CAPTION>
ISSUED AND
AUTHORIZED ISSUED TREASURY OUTSTANDING
---------- --------- --------- -----------
<S> <C> <C> <C> <C>
Common stock (par value $.001):
January 31, 1994......................... 8,855,210 3,450,415 1,396,785 2,053,629
--------- --------- --------- ---------
January 31, 1995......................... 8,855,210 3,450,415 1,396,785 2,053,629
Issuance of stock awards................. -- 506,164 -- 506,164
--------- --------- --------- ---------
January 31, 1996......................... 8,855,210 3,956,578 1,396,785 2,559,793
========= ========= ========= =========
Class B (par value $1.00):
January 31, 1994......................... 29,567 29,567 3,218 26,349
Repurchase of ESOP shares................ -- -- 120 (120)
--------- --------- --------- ---------
January 31, 1995......................... 29,567 29,567 3,338 26,229
--------- --------- --------- ---------
Repurchase of ESOP shares................ -- -- 203 (203)
--------- --------- --------- ---------
January 31, 1996......................... 29,567 29,567 3,541 26,026
========= ========= ========= =========
Class C (par value $.001):
January 31, 1994......................... 39,371 39,370 -- 39,370
========= ========= ========= =========
January 31, 1995......................... 39,371 39,370 -- 39,370
========= ========= ========= =========
January 31, 1996......................... 39,371 39,370 -- 39,370
========= ========= ========= =========
Class D (par value $.001):
January 31, 1994......................... 60,000 -- -- --
========= ========= ========= =========
January 31, 1995......................... 60,000 -- -- --
========= ========= ========= =========
January 31, 1996......................... 60,000 -- -- --
========= ========= ========= =========
</TABLE>
Each share of Class B Common Stock has a cumulative dividend preference of
$130 per share for an eight year period that began on March 4, 1988. As of
January 31, 1996 and 1995, dividends in arrears on Class B Common Stock total
$17,124,000 and $13,740,000 respectively, none of which had been declared or
accrued as of that date. Class B shares have a liquidation preference for any
unpaid cumulative dividends. The cumulative dividend provisions of the Class B
Common Stock provide that as of any date, the maximum aggregate unpaid
cumulative dividends payable by the Company on Class B Common Stock will not
exceed the then outstanding principal balance of the ESOP loans.
Class C Common Stock is convertible on a one for one basis at the option of
the shareholder into shares of Common Stock. Class C shares have a liquidation
preference, after payment of the Class B cumulative dividend preference, in the
amount of $254 per share plus any dividends declared but unpaid on the Class C
shares. As of January 31, 1995 and 1996, the total liquidation preference on
Class C shares is approximately $10,000,000.
The Company has authorized 60,000 shares of Class D Common Stock, none of
which has been issued. Each share is entitled to one vote and is convertible
into an equivalent number of shares of Common Stock at the option of the holder.
Each share of Common Stock and Class B Common Stock is entitled to one
vote, each share of Class C Common Stock is entitled to the number of votes
equal to the number of shares of Common Stock into which it is convertible.
F-13
<PAGE> 71
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
5. 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 1988, the ESOP
borrowed $70,000,000 from the Company on substantially the same terms as the
Company's borrowings of the same amount from the Bank Group. The ESOP purchased
27,000 shares of Class B Common Stock from existing stockholders for
$70,000,000.
The Company is required to make contributions to the ESOP up to the maximum
permitted by Internal Revenue Service regulation as determined based on eligible
participants' salaries. This contribution is an integral factor in the
calculation of shares committed to be released each period by the ESOP. The ESOP
is required to make mandatory repayments of its debt to the Company from the
proceeds of any permitted additional amounts the ESOP receives from the Company
as contributions or dividend payments.
During the years ending January 31, 1994, 1995 and 1996, the Company
recognized $511,000, $547,000 and $590,000, respectively, in compensation
expense based on the estimated fair value of shares committed to be released for
the year then ending. The excess of the cost of the ESOP shares allocated to
participants over estimated fair value of $3,952,000, $4,116,000 and $4,310,000,
during the years ending January 31, 1994, 1995 and 1996, respectively, has been
recorded as a reduction of additional paid-in capital. As of January 31, 1996,
16,791 shares have been released to the ESOP participants, 1,890 are committed
to be released, and 8,319 shares are held in suspense for the benefit of the
ESOP participants. The estimated fair value of the unearned ESOP shares, as of
January 31, 1996, was approximately $2,596,000. The number of shares allocated
to each participant is based on the participant's compensation in relation to
that of all 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. Shares of Class B Common Stock distributed from
the ESOP to participants may be offered to the Company at the then fair market
value. However, substantially all shares allocated to terminated participants'
accounts cannot be distributed until the term loan has been fully repaid. During
the years ending January 31, 1995 and 1996, the Company repurchased shares from
the ESOP participants at a total purchase price of approximately $37,000 and
$63,000, respectively.
F-14
<PAGE> 72
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
6. 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 ending January 31:
<TABLE>
<CAPTION>
1995 1996
--------------------- --------------------
TEMPORARY TAX TEMPORARY TAX
DIFFERENCE EFFECT DIFFERENCE EFFECT
--------- -------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Merchandise inventories.............................. $ 544 $ 201 $ 809 $ 299
Property and equipment, net.......................... 374 138 410 152
Accrued rent......................................... 1,125 416 1,173 434
Long term debt....................................... 18,436 6,821 19,384 7,172
Other................................................ 2,498 924 1,996 739
Net operating loss carryforwards..................... 17,700 6,549 17,883 6,617
AMT credit carryforward.............................. 552 552 552 552
--------- -------- --------- -------
41,229 15,601 42,207 15,965
Valuation allowance.................................. (39,883) (15,104) -- --
--------- -------- --------- -------
Total deferred tax asset........................ 1,346 497 42,207 15,965
--------- -------- --------- -------
Layaway receivable................................... 1,346 497 597 221
Other liability...................................... -- -- 142 53
--------- -------- --------- -------
Total deferred tax liability.................... (1,346) (497) (739) (274)
--------- -------- --------- -------
Net deferred tax asset/liability................ $ -- $ -- $41,468 $15,691
======== ======== ======== =======
</TABLE>
The net current and non-current components of deferred income taxes
recognized in the balance sheet at January 31, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
Net current assets......................................................... $ 817
Net non-current assets..................................................... 14,874
-------
$15,691
=======
</TABLE>
Net operating loss carryforwards of $17,700,000 and $17,883,000 in the
years ending January 31, 1995 and 1996, respectively, begin expiring in 2006.
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.
Effective January 31, 1996, the Company has 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.
F-15
<PAGE> 73
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
6. INCOME TAXES (CONTINUED)
The income tax expense (benefit) for the years ending January 31, consists
of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current expense................................................ -- -- --
Deferred tax benefit........................................... -- -- $(14,924)
---- ---- --------
Total income tax expense (benefit)............................. $(14,924)
-- --
==== ==== ========
</TABLE>
Of the $15,691,000 income tax benefit recognized in the year ending January
31, 1996, approximately $14,924,000 has been credited to the income statement as
an income tax benefit. The remaining $767,000 has been credited to additional
paid in capital, as it relates to the tax effect of the difference between the
average fair market value and the cost of the released shares.
The provision for income taxes on income differs from the statutory tax
expense computed by applying the federal corporate tax rate of 34% as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ------- --------
<S> <C> <C> <C>
Taxes (benefit) computed at statutory rate............... $(400) $ 194 $ 696
Deferred tax asset valuation allowance................... 400 860 (15,104)
ESOP tax benefit......................................... -- (1,083) (602)
Deferred state tax expense............................... -- 18 47
Other.................................................... -- 11 39
------ ------- -----
$-- $ -- $(14,924)
====== ======= ========
</TABLE>
7. INVENTORY
Merchandise inventory consists of:
<TABLE>
<CAPTION>
JULY 31,
1996
JANUARY 31, JANUARY 31, -----------
1995 1996
----------- ----------- (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials....................................... $ 2,572 $ 2,944 $ 2,401
Finished goods inventory............................ 43,482 52,457 44,141
------- ------- -------
$46,054 $55,401 $46,542
======= ======= =======
</TABLE>
Raw materials primarily consist of diamonds, precious gems, semi-precious
gems and gold. There was no work-in-progress at January 31, 1995 and 1996 or
July 31, 1996. Included within finished goods inventory are allowances for
inventory shrink, scrap, and miscellaneous costs of $1,564,000, $1,263,000 and
$1,225,000 as of January 31, 1995 and 1996 and July 31, 1996 (unaudited),
respectively. As of January 31, 1995 and 1996 and July 31, 1996 (unaudited),
consignment inventories held by the Company that are not included in its balance
sheets are $14,219,000, $15,940,000 and $28,713,000, (including $15,295,000
under the Gold Facility), respectively.
F-16
<PAGE> 74
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
8. PROPERTY AND EQUIPMENT
Property and equipment includes the following as of January 31:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures............................................ $21,462 $23,261
Leasehold improvements............................................ 8,435 9,894
------- -------
Property and equipment............................................ 29,897 33,155
Less: Accumulated depreciation and amortization................... 18,029 20,303
------- -------
Property and equipment, net....................................... $11,868 $12,852
======= =======
</TABLE>
9. 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, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JANUARY 31
----------- AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
1997................................................................... $ 7,174
1998................................................................... 6,848
1999................................................................... 6,232
2000................................................................... 5,392
Thereafter............................................................. 19,501
--------
....................................................................... $ 45,147
========
</TABLE>
Total rental expense for all operating leases is as follows, for the years
ending January 31:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Rental expense:
Minimum................................................... $6,400 $6,951 $8,044
Rentals based on sales.................................... 579 760 1,135
------ ------ ------
$6,979 $7,711 $9,179
====== ====== ======
</TABLE>
10. DISCONTINUED OPERATIONS AND RELATED PARTY TRANSACTIONS
On January 31, 1992, the Company entered into an agreement with MBM
Company, Inc., an entity affiliated with two of the Company's directors at that
time, to oversee the winding up and liquidation of the Company's Direct
Marketing Division.
During fiscal 1994, the Company received additional proceeds related to the
sale of MBM Company, Inc. of approximately $2,910,000, of which $2,700,000 was
recorded as a gain on disposal of discontinued operations in the prior fiscal
year. The Company purchased $34,000, $161,000 and $80,000 of inventory from MBM
during the years ending January 31, 1994, 1995 and 1996, respectively.
F-17
<PAGE> 75
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
10. DISCONTINUED OPERATIONS AND RELATED PARTY TRANSACTIONS (CONTINUED)
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 $2,000, $4,000 and $4,000 during the years ending January 31,
1994, 1995 and 1996, respectively.
11. LONG-TERM LIABILITIES
Included in long-term liabilities at January 31, 1995 and 1996 are
$1,080,000 and $1,002,000, respectively, of deferred lease costs.
12. STOCK PLANS
On September 8, 1993, the Company authorized an Incentive Stock
Compensation Award (Plan) for certain members of the Company's management
("Management"). The Award, if completely earned, would result in the issuance of
the equivalent of up to 1,141,684 shares of the Company's Common Stock. The
number of shares issued to Management is governed by the fully diluted market
value of the Company's shares. Under the Plan, awards occur if the Company
publicly offers its shares, is liquidated, or is sold, among other things.
Concurrent with the adoption the Incentive Stock Compensation Award, the Company
terminated the Incentive Stock Compensation Plan which was originally effective
on November 6, 1989. No expense has been recorded in connection with either Plan
as no shares were issued. The 1993 plan was terminated on September 28, 1995.
On September 28, 1995, the Company authorized 693,098 Incentive Stock
Options to be granted to certain members of the Company's management. Options
for 688,228 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 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.
Both the Incentive Stock Option plan and the Restricted Stock plan include
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. In particular, forfeitures may result if employment
is terminated prior to certain Triggering Events. Triggering Events are defined
in the respective plan agreements.
The Company has employed an independent third party to value the Incentive
Stock Options using the Black-Scholes pricing formula. The risk free interest
rate used was 6.1%, and the present value of the underlying asset was $0.90 per
share, being the fair market value of the stock at the date of the grant. The
volatility of a stock is a measure of the uncertainty of the returns provided by
the stock. As a general rule, the higher the stock price volatility, the greater
the value of the options to purchase the underlying stock. Volatility is
measured by computing the standard deviation of the annualized continuously
compounded rate of return of the stock. In the case of the Company, which does
not have publicly traded common stock, it was not possible to compute stock
price volatility based on historic rates. Instead, it was necessary to examine
the volatility of historic returns of comparable publicly traded companies.
Historic returns were used as an approximation for expected returns. The
volatility calculations for the comparable publicly traded companies
F-18
<PAGE> 76
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
12. STOCK PLANS (CONTINUED)
were then adjusted to arrive at a volatility figure for the Company. These
modifications included adjustments for company specific characteristics such as
financial leverage, operating leverage, the overall size of the business,
working capital, and other financial and qualitative characteristics.
Changes in options under the Plan during the year ended January 31, 1996,
the first year such options were granted, were as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE EXERCISE
OPTIONS PRICE OF OPTIONS
--------- -------------------------
<S> <C> <C>
Options outstanding at January 31, 1995....... -- --
Options outstanding at January 31, 1996....... 680,470 $ 0.94
Options exercisable at January 31, 1996....... 680,470 $ 0.94
Options granted during the current year....... 688,228 $ 0.94
Options exercised during the current year..... -- --
Options forfeited during the current year..... 7,758 $ 0.90
Options expired during the current year....... -- --
</TABLE>
Note: For the options outstanding at January 31, 1996, the exercise prices
range from $0.90 to $0.99. The weighted-average remaining contractual life of
these options at January 31, 1996 is 5 years.
The following compares the weighted average fair value of options at their
grant date with the weighted average exercise price of these options. The
options are classified between those which were issued at an exercise price
equal to the market price and those for which the exercise price was greater
than the market price. There were no options issued at an exercise price lower
than the market price. There were no options outstanding prior to February 1,
1995.
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
FAIR-VALUE OF EXERCISE PRICE OF GRANT
OPTIONS AT GRANT DATE OPTIONS AT GRANT DATE DATE
--------------------- --------------------- -------
<S> <C> <C> <C>
Exercise price = market price at grant date... $0.64 $0.90 9/28/95
Exercise price > market price at grant date..... $0.60 $0.99 9/28/95
</TABLE>
13. EMPLOYMENT AGREEMENTS
On September 8, 1993, the Company entered into amended employment
agreements with certain members of senior management. The employment agreements
as amended provide for, among other things, a term of employment through January
31, 1996 with automatic one year renewals, salary, bonus plan and other benefits
and an Incentive Stock Compensation Plan.
14. SUBSEQUENT EVENTS (UNAUDITED)
On May 7, 1996, the Company completed an initial public offering (the
"IPO"). The Company issued 3,269,500 shares of common stock and received net
proceeds of $40.4 million after deducting underwriting discounts and offering
costs. Contemporaneously with the IPO, the outstanding warrants for 177,887
shares of common stock were exercised.
F-19
<PAGE> 77
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
14. SUBSEQUENT EVENTS (CONTINUED)
Simultaneously 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
(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 gold consignment agreement. The facility has an
availability of up to $16.0 million. On July 8, 1996 the Company
sold, and received on consignment, an additional 774 troy ounces
of gold for approximately $300,000.
Approximately $87.0 million of the funds available from the
Recapitalization were used by the Company to repay all outstanding bank
borrowings under the Company's then existing bank agreement, 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 then outstanding
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 note 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 consisted 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 subordinated notes.
F-20
<PAGE> 78
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
14. SUBSEQUENT EVENTS (CONTINUED)
Simultaneously with the 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 35.4-for-1
common stock split effected in connection with the IPO.
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 July 31, 1996, the deferred financing costs
totaling $2,405,000, of which $427,000 are classified as current, will be
amortized over the term of the loan agreements as interest expense.
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.
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.
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.
F-21
<PAGE> 79
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
14. SUBSEQUENT EVENTS (CONTINUED)
As of July 31, 1996, the Company has granted options for 727,216 shares
under the 1996 Plan. These 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:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
- ------- --------------
<S> <C>
702,216 $14.00
15,000 $21.00
10,000 $23.50
727,216
</TABLE>
The weighted average exercise price of outstanding options under the 1996
Plan is $14.28.
Revolver Loan
The Dollar Facility Revolving Credit 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 July 31, 1996 was $123,000
reflecting a weighted average interest rate of 8.2%.
Term Loan
Outstanding term loan borrowings as of July 31, 1996 were $14,750,000 of
which $1,250,000 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 July 31, 1996 was $286,000 reflecting a
weighted average interest rate of 8.1%.
Scheduled maturities under the term loan borrowings are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
-----------
<S> <C>
1996........................................................... $ 500,000
1997........................................................... 1,750,000
1998........................................................... 2,750,000
1999........................................................... 3,750,000
2000........................................................... 4,750,000
Thereafter..................................................... 1,250,000
-----------
$14,750,000
===========
</TABLE>
Subordinated Notes
In conjunction with the completion of the IPO and Recapitalization, the
Company issued Senior Subordinated Notes totaling $20,000,000 due in 2004.
Series A Notes totaling $12,000,000 bear interest at 12.15% per annum payable in
cash, with interest payments due quarterly. Series B Notes totaling $8,000,000
F-22
<PAGE> 80
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
14. SUBSEQUENT EVENTS (CONTINUED)
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
$613,000 for the quarter ended July 31, 1996.
As of July 31, 1996, January 31, 1996 and July 31, 1995, respectively, the
current portion and noncurrent portion of long term debt consisted of the
following:
<TABLE>
<CAPTION>
JULY 31, 1996 JANUARY 31, 1996 JULY 31, 1995
------------- ---------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt
Term loan, old...................................... $-- $ 7,938 $ 6,400
Senior accreting notes.............................. 1,908 --
Term debt........................................... 1,250 -- --
------- ------- --------
Total............................................ $ 1,250 $ 9,846 $ 6,400
======= ======= ========
Long-term debt, net of current portion
Term loan, old...................................... $-- $ 18,662 $ 26,600
Senior accreting notes.............................. -- 47,819 47,176
Zero coupon notes................................... -- 5,847 5,626
Term loan........................................... 13,500 -- --
Subordinated debt, old.............................. -- 23,598 22,184
Subordinated debt................................... 20,000 -- --
------- ------- --------
Total............................................ $33,500 $ 95,926 $ 101,586
======= ======= ========
</TABLE>
Gold Consignment
During the second quarter of 1996, the Company sold a total of 39,000 troy
ounces of gold for approximately $15,300,000 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 generally of 250
basis points over the rate set by the bank based on the London Interbank Bullion
Rates payable monthly. A commitment fee of .5% per annum on the unused portion
of the gold consignment facility is payable monthly. The consignment fees total
$136,000 for the quarter ended July 31, 1996 at a weighted average rate of 3.8%.
F-23
<PAGE> 81
(4 PHOTOS)
<TABLE>
<S> <C>
1st Photo Jewelry 2nd Photo Whitehall Store
with customer viewing Jewelry
3rd Photo Rings 4th Photo
Necklaces & Rings
</TABLE>
<PAGE> 82
======================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company, the Selling
Stockholders or the Underwriters. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, to any person in any jurisdiction
in which such offer to sell or solicitation is not authorized, or in which the
person making such offer or solicitation is not qualified to do so, or to any
person to whom it is unlawful to make such offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 13
Use of Proceeds....................... 14
Dividend Policy....................... 14
Price Range of Common Stock........... 14
Capitalization........................ 15
Selected Historical Financial and
Operating Data...................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 25
Management............................ 35
Certain Transactions.................. 41
Summary of Debt Instruments........... 43
Principal and Selling Stockholders.... 45
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 52
Underwriting.......................... 53
Special Note Regarding Forward-Looking
Statements.......................... 54
Legal Matters......................... 54
Experts............................... 54
Additional Information................ 55
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
2,202,000 SHARES
MARKS BROS. JEWELERS LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
WILLIAM BLAIR & COMPANY
November 1, 1996
======================================================
