<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _____________________
Commission File number: 0-028176
Marks Bros. Jewelers, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-1433610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 No. Wacker, Chicago, IL. 60606
(Address of principal executive offices)
312/782-6800
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes___ No___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of the Registrant's common stock $.001 par value per share,
outstanding as of August 26, 1996 was 8,372,250 and the number of the
Registrant's Class B common stock $1.00 par value as of such date was 90.715.
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<PAGE> 2
MARKS BROS. JEWELERS, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 1996
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three months and six months ended
July 31, 1996 and 1995 (unaudited)
Balance Sheets - July 31, 1996, January 31, 1996 and July 31, 1995
(unaudited)
Statements of Cash Flows for the six months ended July 31, 1996 and
1995 (unaudited)
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
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<PAGE> 3
PART 1 - FINANCIAL INFORMATION - Item 1. Financial Statements
Marks Bros. Jewelers, Inc.
Statements of Operations
for the three months and six months ended July 31, 1996 and 1995
(unaudited, in thousands, except for per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31, July 31, July 31,
1996 1995 1996 1995
------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $34,906 $28,398 $64,466 $52,074
Cost of sales (including buying
and occupancy) 20,692 17,163 38,626 31,959
------- ----------- ----------- -----------
Gross Profit 14,214 11,235 25,840 20,115
Selling, general and adminstrative
expenses 10,367 8,432 20,385 16,458
------- ----------- ----------- -----------
Income from operations 3,847 2,803 5,455 3,657
Interest expense 1,543 3,078 4,557 6,017
ESOP compensation expense --- 148 --- 295
------- ----------- ----------- -----------
Income (loss) before 2,304 (423) 898 (2,655)
income taxes
Income tax expense 898 --- 350 ---
------- ----------- ----------- -----------
Income (loss) before 1,406 (423) 548 (2,655)
extraordinary gain
Extraordinary gain on
extinguishment of debt,
net of taxes 11,164 --- 11,164 ---
------- ----------- ----------- -----------
Net income (loss) $12,570 $ (423) $11,712 $ (2,655)
======= =========== =========== ===========
Primary earnings per share:
Income (loss) before
extraordinary gain $.16 $ (.09) $.08 $(.58)
Extraordinary gain on
extinguishment of debt,
net of taxes 1.25 --- 1.53 ---
------- ----------- ----------- -----------
Net income (loss) $1.41 $ (.09) $1.61 $ (.58)
======= =========== =========== ===========
Weighted average common share
and common share equivalents 8,938 4,555 7,287 4,555
Fully diluted earnings per share:
Income (loss) before
extraordinary gain $.16 $ (.09) $.07 $ (.58)
Extraordinary gain on
extinguishment of debt,
net of taxes 1.25 --- 1.53 ---
------- ----------- ----------- -----------
Net income (loss) $1.41 $ (.09) $1.60 $ (.58)
======= =========== =========== ===========
Weighted average common share
and common share equivalents 8,938 4,555 7,321 4,555
</TABLE>
The accompanying noted are an integral part of the financial statements.
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<PAGE> 4
Marks Bros. Jewelers, Inc.
Balance Sheets
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
July 31, January 31, July 31,
1996 1996 1995
---------- ----------- ------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Accounts receivable, net $ 1,672 $ 1,169 $ 2,063
Layaway receivables, net 1,454 1,576 1,158
Merchandise inventories 46,542 55,401 52,959
Other current assets 366 714 570
Deferred income taxes, net 817 817 ---
Deferred financing costs 427 --- ---
------ ------- -------
Total current assets 51,278 59,677 56,750
Property and equipment, net 14,657 12,852 13,718
Deferred financing costs 1,978 --- ---
Deferred income taxes, net 7,387 14,874 ---
-------- -------- -------
Total assets $75,300 $87,403 $70,468
======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Outstanding checks, net $ 4,207 $ 7,991 $ 389
Revolver loans 8,782 2,119 10,205
Current portion of long-term debt 1,250 9,846 6,400
Accounts payable 13,535 9,037 12,490
Accrued payroll 1,630 2,324 1,535
Other accrued expenses 6,844 6,848 5,514
------- -------- -------
Total current liabilities 36,248 38,165 36,533
Total long-term debt, net of
current portion 33,500 95,926 101,586
Other long-term liabilities 1,157 1,170 1,293
-------- -------- --------
Total liabilities 70,905 135,261 139,412
Commitments and contingencies
Stockholders' equity (deficit):
Common stock 8 --- ---
Class B common stock --- 30 30
Class C common stock --- --- ---
Class D common stock --- --- ---
Additional paid-in capital 33,708 8,766 9,815
Accumulated deficit (29,321) (14,673) (34,300)
Treasury Stock --- (20,333) (20,276)
Deferred ESOP compensation --- (21,648) (24,213)
------- ------- -------
Total stockholders' equity
(deficit), net 4,395 (47,858) (68,944)
------ ------- -------
Total liabilities and
stockholders' equity (deficit) $75,300 $87,403 $70,468
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE> 5
Marks Bros. Jewelers, Inc.
Statements of Cash Flows
for the six months ended July 31, 1996 and 1995
(unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------------
July 31, July 31,
1996 1995
------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $11,712 $(2,655)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Gain on extinguishment of debt, net of taxes (11,164) ---
Depreciation and amortization 1,529 1,434
ESOP compensation expense --- 295
Interest on zero coupon notes 121 213
Interest on senior accreting notes 1,339 2,443
Interest on subordinated debt 790 1,329
Loss on disposition of assets (1) ---
Changes in assets and liabilities:
(Increase) in accounts receivable, net (503) (569)
Decrease in layaway receivables, net 122 248
(Increase) in merchandise inventories, net
of gold consignment (6,436) (6,905)
Decrease in other current assets 348 120
(Increase) in deferred financing costs (2,405) ---
Decrease in deferred taxes, net 349 ---
Increase in accounts payable 4,498 6,484
(Decrease) in accrued liabilities (711) (425)
---------- ----------
Net cash (used in) provided by
operating activities (412) 2,012
Cash flows from investing activities:
Capital expenditures (3,333) (3,284)
---------- ----------
Net cash used in investing activities (3,333) (3,284)
Cash flows from financing activities:
Borrowing on old revolver loan 38,078 58,545
Repayment of old revolver loan (40,197) (55,145)
Borrowing on new revolver loan 39,865 ---
Repayment of new revolver loan (31,083) ---
Repayment of term loan (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 20,000 ---
Proceeds from gold consignment 15,295 ---
Proceeds from stock issuance, net 40,416 ---
Proceeds from exercise of stock options 123 ---
Proceeds from exercise of warrants 2 ---
Repurchase of ESOP shares --- (6)
(Decrease) in outstanding checks, net (3,784) (2,122)
------- --------
Net cash provided by
financing activities 3,745 1,272
---------- ----------
Net change in cash and cash equivalents --- ---
Cash and cash equivalents at beginning of period --- ---
---------- ----------
Cash and cash equivalents at end of period $ --- $ ---
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE> 6
Marks Bros. Jewelers, Inc.
Notes to Financial Statements
1. Description of Operations
The financial statements of Marks Bros. Jewelers, Inc. (the "Company")
include the results of the Company's chain of specialty retail fine jewelry
stores. The Company operates exclusively in one business segment, specialty
retail jewelry. The Company has a national presence with 155 stores as of July
31, 1996, located in 24 states, operating in regional and super-regional
shopping malls.
2. Summary of Significant Accounting Policies
Basis for Presentation
The accompanying Balance Sheet as of January 31, 1996 was derived from the
audited financial statements for the year ended January 31, 1996. The
accompanying unaudited Balance Sheets as of July 31, 1996 and 1995 and the
Statements of Operations for the three months and six months ended July 31,
1996 and 1995 and the Statements of 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 interim
financial statements should be read in the context of the Financial Statements
and footnotes thereto included in the Marks Bros. Jewelers, Inc. Prospectus
dated May 2, 1996 for the fiscal year ended January 31, 1996. The Company
operates on a fiscal year which ends on January 31. References in the
following notes to years and quarters are references to fiscal years and fiscal
quarters.
Stock Based Compensation
The Company accounts for stock based compensation plans under the basis of
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees". The disclosure requirements of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" has been adopted
during the first quarter of the year ending January 31, 1997.
3. Equity Offering and Recapitalization
On May 7, 1996 the Company completed an initial public offering (the
"Offering"). The Company issued 3,269,500 shares of common stock after giving
effect to the stock split described below and received net proceeds of $40.4
million after deducting underwriting discounts and offering costs.
Contemporaneously, the outstanding warrants for 177,887 shares of common stock
were exercised.
Simultaneous with the completion of the Offering, the Company completed a
recapitalization (the "Recapitalization"). The Recapitalization consisted of:
(i) a $44.0 million secured credit facility, consisting of a $29.0
million revolving line of credit and a $15.0 million term loan;
(ii) $20.0 million of senior subordinated notes due 2004; and
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<PAGE> 7
(iii) the sale of $15.0 million of gold in its inventory
to a financial institution and consignment of such gold to
the Company under the terms of a Consignment Agreement.
The facility has an availability of up to $16.0 million.
There has been a subsequent sale of gold on July 8, 1996 of
774 ounces for approximately $300,000.
Approximately $87.0 million of the funds available from the
Recapitalization were used by the Company principally to repay all outstanding
bank borrowings under the Company's bank agreements, including:
(i) approximately $7.8 million outstanding under the
Company's revolving credit facility, which bore interest at
a floating rate (with an annual weighted average interest
rate of 10.6% in fiscal 1995), and which required a paydown
to a certain level on an annual basis and would have
otherwise been available through May 31, 1997;
(ii) $26.6 million outstanding under the Company's term
loan, which bore interest at a floating rate (with an
annual weighted average interest rate of approximately
10.6% in fiscal 1995), and of which $0.7 million would have
otherwise matured on September 15, 1996, $7.2 million would
have otherwise matured on January 31, 1997, and the balance
would have otherwise been due on May 31, 1997;
(iii) approximately $51.1 million of senior accreting
notes, which bore interest at a floating rate (with an
annual weighted average interest rate of approximately
11.0% during fiscal 1995), and of which $2.0 million would
have otherwise matured on September 15, 1996, and the
balance would have otherwise been due on May 31, 1997; and
(iv) approximately $6 million of zero coupon notes due May
31, 1997, which would have begun accruing interest on June
1, 1996 at a floating rate per annum (based on the lender's
base rate or certificate of deposit rate plus 1.8%).
In addition, the Company used approximately $10.6 million of the funds
available from the Recapitalization to repurchase the Company's subordinated
notes at a discount. As of May 7, 1996, one of these subordinated notes had a
principal amount outstanding of $23.5 million and bore interest at a rate per
annum of 12.5% and the other subordinated note had a principal amount
outstanding of $0.9 million and bore interest at a rate per annum of 13.75%.
The bank borrowing and subordinated debt repayments utilized a debt
discount due to the early repayment of the debt of approximately $18.3 million,
net of $7.1 million of taxes, resulting in a net of tax gain on extinguishment
of debt of $11.2 million.
The $18.3 million of debt discount consists of the following:
(i) $0.6 million on the Senior Accreting Notes.
(ii) 4.0 million on the Zero Coupon Note.
(iii) $13.7 million on the Senior Subordinated debt.
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<PAGE> 8
Simultaneous with completion of the Offering and the Recapitalization,
the Company restructured its Employee Stock Ownership Plan ("ESOP"). The
Company canceled the remaining unamortized portion of the ESOP debt owed to the
Company. In settlement of the debt, the trustee transferred to the Company
8,206 shares of Class B common stock held in suspense by the ESOP. The Company
transferred to the ESOP 216,263 shares of common stock in exchange for the
ESOP's cancellation of the accumulated dividend preference and other preferences
associated with the Class B common stock. The ESOP also exchanged the 17,719 of
allocated Class B shares for 627,624 shares of common stock of the Company.
Approximately 91 shares of Class B common stock, currently held by former
employees, remain outstanding. All Class B shares transferred to the Company and
the shares held in treasury were canceled. The restructuring resulted in an
elimination of the deferred ESOP compensation equity account, and eliminated the
future annual allocation of shares and the related compensation expense in the
Company's income statement in periods subsequent to January 31, 1996. The
Company expects that no compensation expense will be recognized in the year
ending January 31, 1997 as a result of this transaction.
The financial statements have been revised to give effect to a stock
split of the shares of common stock of approximately 35.4-for-1.
The Company has adopted a new Long-Term Equity Incentive Plan. Options
granted under this plan will have a term of not more than ten years and an
exercise price not less than the market price at the date of grant.
The Company has also:
(i) eliminated the 60,000 shares of Class D common stock
authorized and unissued at January 31, 1996; and
(ii) converted into 1,394,521 shares of common stock the
39,370 shares of Class C common stock authorized, issued
and outstanding at January 31, 1996.
In connection with the Recapitalization and the Offering, 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.
4. Accounts Receivable, Net
Accounts receivable are shown net of the allowance for doubtful accounts
of $686,000, $565,000 and $698,000 as of July 31, 1996, January 31, 1996 and
July 31, 1995, respectively.
-8-
<PAGE> 9
5. Inventory
As of July 31, 1996, January 31, 1996 and July 31, 1995, merchandising
inventories consist of:
<TABLE>
<CAPTION>
July 31, 1996 January 31, 1996 July 31, 1995
------------- ---------------- -------------
(in thousands)
--------------
<S> <C> <C> <C>
Raw Materials $2,401 $2,944 $3,495
Finished Goods 44,141 52,457 49,464
--------- --------- ----------
Inventory $46,542 $55,401 $52,959
========= ========= ==========
</TABLE>
Raw materials primarily consist of diamonds, precious gems, semi-precious
gems and gold. There was no work-in-progress at July 31, 1996, January 31,
1996 or July 31, 1995. Included within finished goods inventory are allowances
for inventory shrink, scrap, and miscellaneous costs of $1,225,000, $1,263,000
and $930,000 as of July 31, 1996, January 31, 1996 and July 31, 1995,
respectively. As of July 31, 1996, January 31, 1996 and July 31, 1995,
consignment inventories held by the Company that are not included in the
balance sheets total $28,713,000, (including $15,295,000 under the Gold
Facility), $15,940,000, and $15,902,000, respectively.
Gold Consignment
During the second quarter of 1996, the Company sold a total of 39,000 ounces of
gold for approximately $15,300,000 under the Gold Facility which provides for
the sale of a maximum 39,000 troy ounces or $16,000,000. Under the agreement,
the Company agreed to pay a consignment fee 250 basis points over the rate set
by the bank based on the London Interbank Bullion Rates payable monthly. A
commitment fee of .5% per annum on the unused portion of the Gold Facility is
payable monthly. The consignment fees total $136,000 for the quarter ending
July 31, 1996 at a weighted average rate of 3.8%.
6. Financing Arrangements
In conjunction with the Offering and Recapitalization, the Company
completed a restructuring of its outstanding indebtedness. Effective May 3,
1996 the Company entered into a Revolving Credit, Term Loan and Gold
Consignment agreement with a group of banks totaling $60,000,000 which expires
April 30, 2001. (See Note 2 Equity Offering and Recapitalization.)
Under this agreement, the banks have a security interest in all of the assets
of the Company. The Credit Agreement contains certain restrictions on capital
expenditures, payment of dividends and assumption of additional debt and
requires the Company to maintain specified minimum levels of certain financial
measures, including fixed charge ratio and certain balance sheet measures.
Revolver Loan
The 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%.
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<PAGE> 10
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>
<S> <C>
Fiscal Year Amount
----------- -----------
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 Offering 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 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>
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<PAGE> 11
7. STOCK INCENTIVE PLANS
In connection with the Offering, the Board of Directors and stockholders
of the Company approved the 1996 Long-Term Incentive Plan (the "1996 Plan").
Under the 1996 Plan, the Company may grant incentive stock options ("ISOs") or
nonqualified stock options. The 1996 Plan also provides for the grant of stock
appreciation rights ("SARs"), bonus stock awards which are vested upon grant,
stock awards which may be subject to a restriction period and specified
performance measures, and performance shares. Performance shares are rights,
contingent upon the attainment of performance measures within a specified
performance period, to receive one share of Common Stock, which may be
restricted, or the fair market value of such performance share in cash. A
total of 774,631 shares of Common Stock have been reserved for issuance under
the 1996 Plan. Grants may be made under the 1996 Plan during the ten years
after its effective date.
As of July 31, 1996, the Company has made grants under the 1996 Plan
totaling 727,216. Stock options generally become exercisable in cumulative
annual installments of 25% of the shares subject to option beginning on the
first anniversary of the date of the option grant. The stock options granted
and exercise price under the 1996 Plan are as follows:
<TABLE>
<S> <C>
Options Exercise Price
------- --------------
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.
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<PAGE> 12
8. Pro Forma Earnings Per Share
On a pro forma basis, to reflect the Offering and Recapitalization as
though it had occurred at the beginning of each of the periods ending July 31,
net income, earnings per shares and average shares outstanding would have been
as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31, July 31, July 31,
1996 1995 1996 1995
------- ------- ------- --------
<S> <C> <C> <C> <C>
(in thousands, except per share amounts)
Pro forma net income $1,473 $ 816 $ 1,602 $ 465
Pro forma earnings per
share $ .16 $ .09 $ .18 $.05
Average shares outstanding 9,146 8,896 9,009 8,899
</TABLE>
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<PAGE> 13
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations - For the three months ended July 31, 1996
Net sales for the second quarter of fiscal 1996 increased by $6.5 million
or 22.9% to $34.9 million. Comparable store sales increased $3.6 million or
13.0% in the second quarter of fiscal 1996. Sales from new stores contributed
$2.9 million to the overall sales increase. The average number of units sold
on a comparable store basis increased by approximately 5.9% in the second
quarter of fiscal 1996, while the average price per merchandise sale increased
to $267 in the fiscal 1996 quarter from $253 in fiscal 1995 quarter.
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 enviornment. The Company opened
five new stores and closed one store in the second quarter of fiscal 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 $3.0 million to $14.2 million in the second quarter
of fiscal 1996. The gross profit percentage increased to 40.7% in the second
quarter of fiscal 1996 from 39.6% for the same period in the prior year, due to
the spreading of certain buying and occupancy costs over the Company's
increased sales.
Selling, general and administrative expenses increased by $1.9 million or
22.9% to $10.4 million in the second quarter of fiscal 1996 from $8.4 million
in the prior year. New stores accounted for $0.9 million of this increase. As
a percentage of net sales, selling, general and administrative expenses
remained consistent at 29.7% in the second quarters of fiscal 1996 and 1995.
The dollar increase primarily related to higher payroll expenses of $1.2
million and $0.5 million in credit expense. Comparable store payroll costs
increased 9.8% in the second quarter of fiscal 1996, as compared to the second
quarter of fiscal 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 45.8% in the second quarter of fiscal 1996 from 36.8%
in the second quarter of fiscal 1995. These non-recourse credit sales carry
higher discount rates than bankcard sales, which resulted in higher credit
expense.
Interest expense decreased $1.5 million or 49.9% to $1.5 million in the
second quarter of fiscal 1996 from $3.1 million in the second quarter of fiscal
1995. This resulted from lower outstanding debt balances and lower average
interest rates on revolver and term borrowings.
No ESOP compensation expense has been recorded in fiscal 1996. The
compensation expenses recorded in the second quarter of fiscal 1995 was $0.1
million.
An income tax expense of $0.9 million was recorded in the second quarter
of fiscal 1996 reflecting an expected effective annual tax rate of 39%. No
income tax benefit was recorded in the second quarter of 1995 because at that
time utilization of the Company's net operating loss was not reasonably
assured.
Net income before extraordinary item increased by $1.8 million to $1.4
million in the second
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<PAGE> 14
quarter of fiscal 1995 as a result of the factors discussed above.
A gain on the extinguishment of debt was recorded for $11.2 million on a
net of tax basis as an extraordinary item. This reflects debt discounts on
senior accreting loans of $0.6 million, zero coupon notes of $4.0 million and
subordinated debt of $13.7 million.
Results of Operations - For the six months ended July 31, 1996
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.
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 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.
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 resulted from lower outstanding debt balances and lower average
interest rates on revolver and term borrowings.
No ESOP compensation expense has been recorded in fiscal 1996. The
compensation expense recorded in the six months ended July 31, 1995 was $.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.
-14-
<PAGE> 15
A gain on the extinguishment of debt was recorded for $11.2 million, net
of taxes, as an extraordinary item. This reflects debt discounts on senior
accreting loans of $0.6 million, zero coupon notes of $4.0 million and
subordinated debt of
$13.7 million.
Liquidity and Capital Resources
- -------------------------------
The Company's cash requirements consist principally of funding increases
in inventory at existing stores, capital expenditures and working capital
(primarily inventory) associated with the Company's new stores and amortizing
its debt. The Company's primary sources of liquidity have been cash flow from
operations and bank borrowings under the Company's revolver.
The Company's inventory levels and working capital requirements have
historically been highest in advance of the Christmas season. The Company has
funded these seasonal working capital needs through borrowings under the
Company's revolver and increases in trade payables and accrued expenses.
The Company's cash flow from operations changed from $2.0 million provided
by operations in the first six months of 1995 to cash flow used by operations
of $0.4 million in the first six months of 1996. Higher income from operations
together with increases in accounts payable were more than offset by increases
in merchandise inventories (before the effects of gold consignment) and
deferred financing costs. Cash generated from financing activities included
proceeds from the initial public offering of $40.4 million, $15.0 million from
proceeds of term loan, $15.3 million from proceeds from the gold consignment
and a $3.8 million dollar increase 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 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 1996.
Management expects that cash flows from operations and funds available
under its new revolver should be sufficient to support the Company's planned
new store expansion, debt service and seasonal working capital needs for the
foreseeable future.
Inflation
- ---------
Management believes that inflation generally has not had a material effect
on results of its operations.
-15-
<PAGE> 16
PART II - OTHER INFORMATION
Item 5 - Other Information
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
Certain statements in this filing, and elsewhere (such as in other filings by
the Company with the Securities and Exchange Commission, press releases,
presentations by the Company or its management and oral statements) constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve know
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, (i)
economic conditions, the retail sales environment and the Company's ability to
execute its business strategy and the related effects on comparable store sales
and other results, (ii) the Company's leverage and its limited stockholders'
equity, (iii) the extent and results of the Company's store expansion program,
(iv) the seasonality of the Company's business, (v) the extent to which the
Company is able to retain and attract key personnel, (vi) competition, (vii)
relationships with suppliers of merchandise and third party credit, (viii)
fluctuations in gem and gold prices, and (ix) regulation.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 -- Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement on Form
S-1 (Commission File No. 333-1794) (the "Common Stock Registration
Statement"))
3.2 -- Restated By-Laws of the Company (incorporated by reference to Exhibit
3.2 of the Common Stock Registration Statement)
4.1 -- Form of Stockholders Rights Plan (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on form S-1
(Commission file No. 333-04043) (the "Debt Registration Statement))
4.2 -- Certificate of Designations of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 4.2 of the Common
Stock Registration Statement)
4.3 -- Indenture dated as of April 15, 1996 (the "Indenture") between the
Company and Norwest Bank Minnesota, National Association, as Trustee,
governing the Company's Series A Senior Subordinated Notes Due 2004 (the
"Series A Notes") and Series B Senior Subordinated Notes Due 2004 (the
"Series B Notes") (incorporated by reference to Exhibit 4.3 of the Debt
Registration Statement)
4.4 -- Form of First Supplemental Indenture of the Indenture (incorporated
by reference to Exhibit 4.4 of the Debt Registration Statment)
4.5 -- Form of Series A Notes (included in Exhibit 4.3 to this Quarterly
Report on Form 10-Q)
-16-
<PAGE> 17
4.6 -- Form of Series B Notes (included in Exhibit 4.3 to this Quarterly
Report on Form 10-Q)
10.1 -- Form of Second Amended and Restated Registration Agreement among the
Company and certain of its stockholders (incorporated by reference to
Exhibit 10.1 of the Debt Registration Statement)
10.2 -- Amended and Restated Private Lable Revolving Credit Plan, dated May
31, 1996, between the Company and Bank One, Dayton, N.A. (incorporated
by reference to Exhibit 10.8 of the Debt Registration Statement)
10.3 -- Revolving Credit, Term Loan and Gold Consignment Agreement, dated as
of May 3, 1996, among the Company, the Banks (as defined therein), The
First National Bank of Boston and Rhode Island Hospital Trust National
Bank, as agents for the Banks (incorporated by reference to Exhibit
10.10 of the Debt Registration Statement)
10.4 -- Executive Severance Agreements, each dated May 7, 1996, between the
Company and each of Hugh M. Patinkin, John R. Desjardins, Matthew M.
Patinkin and Lynn D. Eisenheim (incorporated by reference to Exhibit
10.11 of the Debt Registration Statement)
Exhibit 11 Statement re Computation of Per Share Earnings (attached)
Exhibit 27 Financial Data Schedule (SEC/EDGAR only)
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARKS BROS. JEWELERS, INC.
(Registrant)
Date: August 27, 1996 By: /s/ John R. Desjardins
___________________________________
John R. Desjardins
Executive Vice President -
Finance and Administration
and Treasurer (principal
financial officer)
-17-
<PAGE> 1
Exhibit 11
Marks Bros. Jewelers, Inc.
Computation of Per Share Earnings
(unaudited, amounts in thousands, except per share earnings)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31, July 31, July 31,
1996 1995 1996 1995
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Primary earnings per share:
Income (loss) before
extraordinary gain $ 1,406 $(423) $ 548 $(2,655)
Extraordinary gain on
extinguishment of debt, net
of taxes 11,164 --- 11,164 ---
-------- -------- -------- ---------
Net income (loss) $12,570 $ (423) $ 11,712 $(2,655)
======== =========== ======== ========
Average shares
outstanding(1) 8,163,874 4,544,304 6,638,192 4,544,304
Additional shares assuming
conversion of Class B Shares 3,213 10,541 3,213 10,655
Common share equivalents
under the 1995 Option
Plan assuming the
treasury stock method 530,103 --- 570,939 ---
Common share equivalents
under the 1996 Option
Plan assuming the
treasury stock method 240,502 --- 74,416 ---
---------- ------------ -------- -----------
Averages number of common
shares and common share
equivalents outstanding 8,937,692 4,554,845 7,286,760 4,554,959
========== ========== ========= =========
Income (loss) before
extraordinary gain
per share $ .16 $ (.09) $ .08 (.58)
Extraordinary gain on
extinguishment of debt,
net of taxes per share 1.25 --- 1.53 ---
---------- ---------- ----------- ------------
Net income (loss) per share $ 1.41 $ (.09) $ 1.61 $ (.58)
========== ========== =========== ============
</TABLE>
(1) Included in the average number of shares outstanding is the effect of the
exercise of 126,700 option on April 10, 1996.
-18-
<PAGE> 2
Marks Bros. Jewelers, Inc.
Computation of Per Share Earnings
(unaudited, amounts in thousands, except per share earnings)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31, July 31, July 31,
1996 1995 1996 1995
------- ------- ------ -------
<S> <C> <C> <C> <C>
Fully diluted earnings per share:
Income (loss) before
extraordinary gain $ 1,406 $ (423) $ 548 $ (2,655)
Extraordinary gain on
extinguishment of debt, net
of taxes 11,164 --- 11,164 ---
---------- ---------- ---------- ---------
Net income (loss) $12,570 $ (423) $ 11,712 $ (2,655)
========== ========== ========== =========
Average shares outstanding(1) 8,163,874 4,544,304 6,638,192 4,544,304
Additional shares assuming
conversion of Class B Shares 3,213 10,541 3,213 10,655
Common share equivalents
under the 1995 Option
Plan assuming the
treasury stock method 530,103 --- 574,714 ---
Common share equivalents
under the 1996 Option
Plan assuming the
treasury stock method 240,502 --- 105,210 ---
---------- ---------- ---------- -----------
Averages number of common shares
and common share equivalents
outstanding 8,937,692 4,554,845 7,321,329 4,554,959
========== ========== ========== ==========
Income (loss) before
extraordinary gain
per share $ .16 $ (.09) $ .07 (.58)
Extraordinary gain on
extinguishment of debt, net
of taxes per share 1.25 --- 1.53 ---
---------- ---------- ----------- ---------
Net income (loss) per share $ 1.41 $ (.09) $ 1.60 $ (.58)
========== ========== =========== ===========
</TABLE>
(1) Included in the average number of shares outstanding is the effect of the
exercise of 126,700 option on April 10, 1996.
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JUL-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,126
<ALLOWANCES> 686
<INVENTORY> 46,542
<CURRENT-ASSETS> 51,278
<PP&E> 36,284
<DEPRECIATION> 21,627
<TOTAL-ASSETS> 75,300
<CURRENT-LIABILITIES> 36,248
<BONDS> 33,500
<COMMON> 8
0
0
<OTHER-SE> 4,387
<TOTAL-LIABILITY-AND-EQUITY> 4,395
<SALES> 64,466
<TOTAL-REVENUES> 64,466
<CGS> 38,626
<TOTAL-COSTS> 38,626
<OTHER-EXPENSES> 20,385
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,557
<INCOME-PRETAX> 898
<INCOME-TAX> 350
<INCOME-CONTINUING> 548
<DISCONTINUED> 0
<EXTRAORDINARY> 11,164
<CHANGES> 0
<NET-INCOME> 11,712
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.60
</TABLE>
