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PROSPECTUS
MARKS BROS. JEWELERS, INC.
EST. 1895
Offer to Exchange its
Series C Senior Subordinated Notes Due 2004
which have been registered under the Securities Act
for any and all of its outstanding
Series A Senior Subordinated Notes Due 2004 and
Series D Senior Subordinated Notes Due 2004
which have been registered under the Securities Act
for any and all of its outstanding
Series B Senior Subordinated Notes Due 2004
and Offer by Selling Noteholder
to sell Series A Senior Subordinated Notes due 2004
____________________
The Exchange Offer will expire at 5:00 p.m., New York
City time on September 5, 1996, unless extended. Marks Bros. Jewelers,
Inc., a Delaware corporation (the "Company"), hereby offers (the "Exchange
Offer"), upon the terms and subject to the conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange (i) $1,000 principal amount of its Series
C Senior Subordinated Notes Due 2004 (the "Series C Notes"), which will have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement of which this Prospectus is a part,
for each $1,000 principal amount of its outstanding Series A Senior
Subordinated Notes Due 2004 (the "Series A Notes"), of which $12,000,000
aggregate principal amount is outstanding, and (ii) $1,000 principal amount of
its Series D Senior Subordinated Notes Due 2004 (the "Series D Notes," and,
together with the Series C Notes, the "New Notes" or the "Securities"), which
will have been registered under the Securities Act, pursuant to a Registration
Statement of which this Prospectus is a part, for each $1,000 principal amount
of its outstanding Series B Senior Subordinated Notes Due 2004 (the "Series B
Notes," and, together with the Series A Notes, the "Old Notes") of which
$8,000,000 aggregate principal amount is outstanding. The form and terms of
the Series C Notes are the same as the form and terms of the Series A Notes,
and the form and terms of the Series D Notes are the same as the form and terms
of the Series B Notes, except that the Series C Notes and the Series D Notes
will have been registered under the Securities Act. The Series C Notes will
evidence the same debt as the Series A Notes (which they replace) and the
Series D Notes will evidence the same debt as the Series B Notes (which they
replace) and, in each case, will be issued under, and entitled to the benefits
of, the Indenture governing the Series A Notes and the Series B Notes dated as
of April 15, 1996, as supplemented or amended (the "Indenture"). All references
herein to the "Notes" shall be references to the Old Notes and/or the New Notes,
whichever was, is or will be outstanding in the particular context. See "The
Exchange Offer" and "The New Notes."
The Company will accept for exchange any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on September 5, 1996, unless extended by the Company in its sole
discretion (the "Expiration Date"). Tenders of Old Notes may be withdrawn at
any time prior to the Expiration Date. The Exchange Offer is subject to
certain customary conditions. See "The Exchange Offer." Old Notes may be
tendered only in integral multiples of $1,000 principal amount at maturity.
Interest on the Series C Notes is payable quarterly on
January 31, April 30, July 31 and October 31 in each year, commencing July 31,
1996, and will accrue at the rate of 12.15% per annum until maturity or earlier
redemption. The Series C Notes mature on October 31, 2004. Quarterly
installments of principal of the Series C Notes in the amount of $855,000 will
be mandatorily prepayable, commencing July 31, 2001, through operation of a
mandatory sinking fund. See "The New Notes--Mandatory Redemption." The Series
C Notes are redeemable, in whole or in part, at the option of the Company, for
cash at any time on or after July 31, 2001 at the redemption prices set forth
herein, plus accrued and unpaid interest to the date of redemption.
Interest on the Series D Notes is payable quarterly on
January 31, April 30, July 31 and October 31 in each year, commencing July 31,
1996, and will accrue at the rate of (a) 15% per annum, payable in cash, plus,
for subsequent periods commencing May 1, 1998, (b) 1% per annum (increasing in
1% increments per each subsequent year commencing May 1, 1999), payable, at the
option of the Company, in cash or by delivery of additional Series D Notes, in
each case until maturity or earlier redemption. The Series D Notes mature on
October 31, 2004. Quarterly installments of principal of the Series D Notes in
the amount of not less than $571,000 will be mandatorily prepayable, commencing
July 31, 2001, through operation of a mandatory sinking fund. See "The New
Notes -- Mandatory Redemption." The Series D Notes are redeemable, in whole or
in part, at the option of the Company, for cash at any time at the redemption
prices set forth herein, plus accrued and unpaid interest to the date of
redemption.
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The Series C Notes and the Series D Notes will be
unsecured general obligations of the Company and will be subordinated
to all existing and future Senior Indebtedness (as defined) of the Company. As
of April 30, 1996, on a pro forma basis after giving effect to the
Recapitalization (as defined), the Company had outstanding Senior Indebtedness
in the principal amount of approximately $19,519,000.
The New Notes will be issued in fully-registered
book-entry form. Ownership interests in the New Notes will be shown on, and
transfers thereof will be effected only through, records maintained by DTC (as
defined), and its participants. Purchases of the New Notes under the DTC
system must be made by or through DTC participants, which will receive a credit
for the New Notes on DTC's records. Owners of beneficial interests in the New
Notes will be entitled to physical delivery of the New Notes in certificated
form equal in principal amount to their respective beneficial interests only
under the circumstances described under the caption "The New Notes--Book-Entry
Only System."
There has not previously been any public market for the
Notes. The Company does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active market for the New Notes will
develop. See "Risk Factors--Lack of Public Market." The Company has agreed
to pay the expenses of the Exchange Offer.
Any broker or dealer participating in the Exchange Offer
will be required to acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of the New
Notes received by it in the Exchange Offer. Only brokers or dealers who hold
Old Notes that were acquired for their own accounts as a result of
market-making activities or other trading activities (other than Old Notes
acquired directly from the Company), may use this Prospectus to satisfy the
prospectus delivery requirements of the Securities Act. The delivery of this
Prospectus by such a broker or dealer shall not constitute an admission that
such a broker or dealer is an "underwriter" under the Securities Act. See
"Plan of Distribution."
This Prospectus also relates to $2,255,000 aggregate principal amount
of the Company's Series A Notes (the "Resale Series A Notes") to be sold
hereunder by a Selling Noteholder. The Resale Series A Notes to be sold by the
Selling Noteholder may be sold from time to time by the Selling Noteholder
directly to one or more purchasers, at prices and on terms then prevailing or
at prices related to the then-current market price or in negotiated
transactions, or through brokers and/or dealers engaged by the Selling
Noteholders. See "Information Concerning Selling Noteholder and Plan
of Distribution."
SEE "RISK FACTORS" AT PAGE 9 FOR A DESCRIPTION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER
AND AN INVESTMENT IN THE NEW NOTES 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.
The date of this Prospectus is August 7, 1996
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NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING
MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED
IN THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THE EXCHANGE
OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS FOR EXCHANGE
FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR
THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE
SKY LAWS OF SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
Until November 5, 1996 (90 days after commencement of
this offering), all dealers effecting transactions in the New Notes, whether or
not participating in this offering, may be required to deliver a Prospectus.
Except as provided below, the New Notes will be
available initially only in book-entry form. The Company expects that, except
as provided below, the New Notes sold pursuant hereto will be issued in the
form of one fully-registered Series C Note in the aggregate issuance amount and
one fully-registered Series D Note in the aggregate issuance amount (the
"Global Notes"). The Global Notes will be deposited with, or on behalf of, The
Depository Trust Company (the "Depository" or "DTC") and registered in its name
or in the name of Cede & Co., its nominee. Beneficial interests in the Global
Notes representing the New Notes will be shown on, and transfers thereof will
be effected only through, records maintained by DTC and its participants.
After the initial issuance of the Global Notes, New Notes in certificated form
will be issued in exchange for the Global Notes only as set forth in the
Indenture. See "The New Notes--Book-Entry Only System."
____________________
TABLE OF CONTENTS
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Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
The Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Price Range Of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Selected Historical Financial And Operating Data . . . . . . . . . . . . . . . . . . . . . . . 25
Pro Forma Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Management's Discussion And Analysis Of Financial Condition And Results Of Operations . . . . . 29
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
The Recapitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
The New Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Stock Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Exchange Offer Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Information Concerning Selling Noteholder and Plan Of Distribution . . . . . . . . . . . . . . 80
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Index To Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
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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. Certain terms used throughout this
Prospectus have the meanings set forth in "The New Notes--Certain Definitions."
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.
THE COMPANY
Marks Bros. Jewelers, Inc. (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 151 stores in 24 states at
April 30, 1996. Founded in 1895, the Company operates stores in regional and
super-regional shopping malls under the names Whitehall Co. Jewellers(R) (117
stores), Lundstrom Jewelers(R) (30 stores) and Marks Bros. Jewelers(TM) (4
stores)(in each case, as of April 30, 1996). 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%. Although the Company recorded income from
operations in each of the last five fiscal years, it recognized net losses in
fiscal 1991, 1992 and 1993, primarily due to high interest expense. In fiscal
1995, the Company s operating return on store investment for new stores opened
during the prior fiscal year was approximately 28%. Virtually all of the
Company's stores are profitable on a store operating basis, and almost all of
the Company's new stores are profitable on a store operating basis for their
first year of operation.
The Company believes it has significant opportunities to increase
sales and profitability through an increased number of planned store openings
(including 18 in fiscal 1996 and 23 in fiscal 1997), 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.
The cost of opening a new store on average is approximately $545,000, including
inventory, capital expenditures and pre-opening expenses.
The key elements of the Company's multi-faceted operating and growth
strategies are as follows:
OPERATING STRATEGIES
- 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 775 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
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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. Most non-sales activities are largely centralized.
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.
GROWTH STRATEGIES
- Accelerated New Store Openings. The Company has opened 42 new
stores (net of closings) since the beginning of fiscal 1991,
including 15 in fiscal 1995 and five during February,
March and April of fiscal 1996. The Company expects the
Recapitalization (defined below) and the Offering of Notes
made hereby to allow the Company to accelerate the pace of its
new store openings. The Company currently plans to open 18
new stores in fiscal 1996 (five of which had been opened as
of April 30, 1996) and 23 new stores in fiscal 1997. The
Company seeks to open additional stores in existing markets
where the Company believes it can obtain greater market
penetration and to enter new geographic markets where it can
"cluster" stores.
- Comparable Store Sales Increases. The Company has achieved
comparable store sales increases of 7.6% and 11.0% in fiscal
1994 and fiscal 1995, respectively. The Company seeks to
achieve comparable store sales increases by (i) expanding the
availability of non-recourse credit through its new "First
Time Buyers" program, (ii) continuing to increase merchandise
offerings in selected categories (especially higher priced
merchandise), (iii) continuing the implementation of its
return/exchange policy, (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.
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.
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange
Offer. The Old Notes were issued as part of the Company's recently completed
Recapitalization, which included a restructuring of its outstanding
indebtedness, intended to reduce the amount of the Company's debt and the
related interest expense and to provide the Company with greater financial
flexibility for operations and to support its store expansion strategy. The
Recapitalization was completed on May 7, 1996. The Company utilized the funds
generated by the Recapitalization principally to retire all of the Company's
senior and subordinated indebtedness then outstanding. See "Use of Proceeds"
and "The Recapitalization."
The Company will not receive any proceeds from the sale of the Resale
Series A Notes by the Selling Noteholder. See "Information Concerning Selling
Noteholder and Plan of Distribution."
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THE EXCHANGE OFFER
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Agreement to Exchange Securities. . The Placement Agent Agreement, dated May 2, 1996, between the
Company and William Blair & Company, L.L.C., as placement agent,
relating to the Series A Notes (the "Placement Agreement"), and the
Note Agreement, dated as of April 15, 1996, between the Company
and the Purchasers thereunder, relating to the Series B Notes (the
"Note Agreement"), grant the holders of Old Notes certain exchange
and registration rights. See "The Exchange Offer -- Termination of
Certain Rights." This Exchange Offer is intended to satisfy such
rights, which terminate upon the Consummation (as defined) of the
Exchange Offer. Therefore, the holders of New Notes are not
entitled to any exchange or registration rights with respect to the
New Notes.
The Exchange Offer . . . . . . . . $1,000 principal amount of Series C Notes in exchange for each
$1,000 principal amount of Series A Notes, and $1,000 principal
amount of Series D Notes in exchange for each $1,000 principal
amount of Series B Notes. As of the date hereof, $12,000,000
aggregate principal amount of Series A Notes are outstanding and
$8,000,000 aggregate principal amount of Series B Notes are
outstanding. The Company will issue the New Notes to holders on
the earliest practicable date following the Expiration Date.
Based on an interpretation by the staff of the Securities and
Exchange Commission (the "Commission") set forth in no-action
letters issued to third parties, the Company believes that New
Notes issued pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold and otherwise transferred
by any holder or beneficial owner thereof (other than any such
holder or beneficial owner which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act or a
"broker" or "dealer" registered under the Securities and Exchange
Act of 1934, as amended (the "Exchange Act") without compliance
with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the
ordinary course of such holder's or beneficial owner's business and
that such holder or beneficial owner has no arrangement or
understanding with any person to participate in the distribution of
such New Notes. See "The Exchange Offer -- Resales of the New
Notes."
Expiration Date . . . . . . . . . . 5:00 p.m., New York City time, on September 5, 1996, unless the
Exchange Offer is extended by the Company in its sole discretion,
in which case the term "Expiration Date" means the latest date and
time to which the Exchange Offer is extended.
Condition to the Exchange Offer . . The Exchange Offer is subject to certain customary conditions,
which may be waived by the Company. See "The Exchange Offer --
Conditions of the Exchange Offer."
Amendment to Indenture . . . . . . By executing the Letter of Transmittal, each holder of Old Notes
will consent to a supplemental indenture that will amend the
Indenture to provide, among other things, that the Series C Notes
and the Series D Notes will be issued under, and entitled to the
benefits of, the Indenture governing the Series A Notes and the
Series B Notes. See "Exchange Offer--Conditions of the Exchange
Offer."
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Procedures for Tendering Old Each holder of Old Notes wishing to accept the Exchange Offer must
Notes . . . . . . . . . . . . . . complete, sign and date the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of Transmittal,
or such facsimile, together with the Old Notes and any other
required documentation to the Exchange Agent (as defined) at the
address set forth herein. By executing the Letter of Transmittal,
each holder will represent to the Company that, among other things,
the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving
such New Notes, whether or not such person is the holder, that
neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of
such New Notes and that neither the holder nor any such other
person is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company. See "The Exchange Offer --
Procedures for Tendering."
Brokers or Dealers . . . . . . . . Any broker or dealer participating in the Exchange Offer will be
required to acknowledge that it will deliver a prospectus in
connection with any resales of the New Notes received by it in the
Exchange Offer. A broker or dealer registered under the Exchange
Act that acquired Old Notes for its own account pursuant to its
market-making or other trading activities (other than Old Notes
acquired directly from the Company) may participate in the Exchange
Offer but may be deemed an underwriter under the Securities Act
and, therefore, must deliver a prospectus relating to the New Notes
in connection with any resales by it of New Notes acquired by it
for its own account in the Exchange Offer; only such brokers or
dealers may use this Prospectus in connection with the resales of
the New Notes. See "Plan of Distribution."
Special Procedures for Any beneficial owner whose Old Notes are registered in the name of
Beneficial Owners . . . . . . . a broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact such registered holder
promptly and instruct such registered holder to tender on such
beneficial owner's behalf. See "The Exchange Offer -- Procedures
for Tendering."
Guaranteed Delivery Holders of Old Notes who wish to tender their Old Notes and whose
Procedures . . . . . . . . . . . Old Notes are not immediately available or who cannot deliver their
Old Notes, the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the Exchange Agent prior
to the Expiration Date, must tender their Old Notes according to
the guaranteed delivery procedures set forth herein. See "Exchange
Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights . . . . . . . . . Tenders may be withdrawn at any time prior to the Expiration Date.
Acceptance of Old Notes and The Company will accept for exchange any and all Old Notes which
Delivery of New Notes . . . . . . are properly tendered in the Exchange Offer prior to the Expiration
Date. The New Notes issued pursuant to the Exchange Offer will be
delivered on the earliest practicable date following the Expiration
Date. See "The Exchange Offer -- Terms of the Exchange Offer."
Certain Tax Considerations . . . . For a discussion of certain federal income tax consequences of the
exchange of Old Notes, see "Risk Factors--Certain Tax Consequences" and
"Certain Federal Income Tax Consequences."
Exchange Agent . . . . . . . . . . Norwest Bank Minnesota, National Association is serving as exchange agent
(the "Exchange Agent") in connection with the Exchange Offer.
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RESALE OF SERIES A NOTES
This Prospectus also relates to $2,255,000 aggregate principal amount
of the Company's Series A Notes (the "Resale Series A Notes") to be sold
hereunder by a Selling Noteholder. The Resale Series A Notes may be sold from
time to time by the Selling Noteholder directly to one or more
purchasers, at prices and on terms then prevailing or at prices related to the
then-current market price or in negotiated transactions, or through brokers
and/or dealers engaged by the Selling Noteholder. See "Information Concerning
Selling Noteholder and Plan of Distribution." Purchasers of the Resale Series A
Notes may exchange such Resale Series A Notes for Series C Notes pursuant to
the Exchange Offer made hereby, if tender of such Resale Series A Notes for
Series C Notes is made on or before the Expiration Date. See "The Exchange
Offer."
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SUMMARY OF TERMS OF THE NEW NOTES AND RESALE SERIES A NOTES
The Exchange Offer relates to $12,000,000 aggregate principal
amount of Series A Notes and $8,000,000 aggregate amount of Series B Notes.
This Prospectus also relates to $2,255,000 aggregate principal amount of the
Company's Series A Notes (the "Resale Series A Notes") to be sold hereunder by
a Selling Noteholder. The form and terms of the Series C Notes are the same in
all material respects as the Series A Notes and the form and terms of the
Series D Notes are the same in all material respects as the Series B Notes,
except that the Series C Notes and the Series D Notes will have been registered
under the Securities Act and will not bear legends restricting their transfer.
The Series C Notes will evidence the same debt as the Series A Notes (which
they replace) and the Series D Notes will evidence the same debt as the Series
B Notes (which they replace). The Series C Notes and the Series D Notes will
be issued under, and entitled to the benefits of, the Indenture
governing the Series A Notes and the Series B Notes. All references in this
summary to "Series C Notes" shall be deemed to also mean and include the
$2,255,000 aggregate principal amount of Resale Series A Notes offered hereby.
See "The Exchange Offer--Conditions of the Exchange Offer."
<TABLE>
<S> <C>
Maturity Date . . . . . . . . . . .
Series C Notes . . . . . . . . October 31, 2004
Series D Notes . . . . . . . . October 31, 2004
Interest Rate . . . . . . . . . . .
Series C Notes . . . . . . . . 12.15% per annum, payable in cash
Series D Notes . . . . . . . . 15% per annum, payable in cash, plus, for subsequent periods
commencing May 1, 1998, 1% per annum (increasing in 1% increments
per each subsequent year commencing May 1, 1999), payable, at the
option of the Company, in cash or by delivery of additional Series
D Notes.
Interest Payment Dates . . . . . . January 31, April 30, July 31 and October 31 of each year,
commencing July 31, 1996.
Mandatory Redemption . . . . . . .
Series C Notes . . . . . . . . Quarterly installments of principal of the Series C Notes in the
amount of $855,000 will be mandatorily prepayable, commencing July
31, 2001, through operation of a mandatory sinking fund. See "The
New Notes--Mandatory Redemption."
Series D Notes . . . . . . . . Quarterly installments of principal of the Series D Notes in the
amount of not less than $571,000 will be mandatorily prepayable,
commencing July 31, 2001, through operation of a mandatory sinking
fund. See "The New Notes--Mandatory Redemption."
Optional Redemption . . . . . . . .
Series C Notes . . . . . . . . The Series C Notes will be redeemable at the option of the Company,
in whole or in part, at any time on or after July 31, 2001 at the
redemption prices set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption. See "The New
Notes--Optional Redemption."
Series D Notes . . . . . . . . The Series D Notes will be redeemable at the option of the Company,
in whole or in part, at any time, at the redemption prices set
forth herein, plus accrued and unpaid interest, if any, to the date
of redemption. See "The New Notes--Optional Redemption."
</TABLE>
- 5 -
<PAGE> 9
<TABLE>
<S> <C>
Ranking . . . . . . . . . . . . . . The New Notes will be unsecured senior subordinated obligations of
the Company, subordinated to all existing and future Senior
Indebtedness, which includes borrowings under the Bank Credit
Agreement. The New Notes will rank pari passu with any existing
and future senior subordinated indebtedness of the Company and will
rank senior to all other Subordinated Indebtedness (as defined).
As of April 30, 1996, on a pro forma basis after giving effect
to the Recapitalization, the aggregate principal amount of Senior
Indebtedness outstanding of the Company was approximately
$19,519,000. See "The New Notes--Subordination."
Restrictive Covenants . . . . . . . The Indenture pursuant to which the New Notes will be issued
contains certain covenants, including, but not limited to,
covenants with respect to the following matters: (i) limitation on
indebtedness, (ii) limitation on dividends and other restricted
payments, (iii) limitation on redemption of capital stock of the
Company and of certain subordinated obligations of the Company,
(iv) limitation on liens, (v) restriction on transfer of assets,
(vi) certain financial covenants, (vii) limitation on issuance and
sale of capital stock by restricted subsidiaries, (viii) limitation
on transactions with affiliates, (ix) limitation on dividend and
other payment restrictions affecting restricted subsidiaries,
(x) limitation on guarantees by restricted subsidiaries,
(xi) limitation on certain other subordinated indebtedness and
(xii) restrictions on mergers, consolidation and the transfer of
all or substantially all of the assets of the Company to another
person. See "The New Notes--Certain Covenants."
</TABLE>
- 6 -
<PAGE> 10
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------------------------- PRO FORMA
1992 1993 1994 1995 1996 1996(1)
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 76,749 $ 88,141 $ 91,106 $106,683 $131,022 $ 131,022
Gross profit............................. 31,143 36,035 36,595 42,460 53,300 53,300
Income from operations................... 5,362 8,064 8,255 11,712 15,413 15,413
Interest expense......................... 9,397 7,821 8,920 10,594 12,314 5,798
ESOP compensation........................ -- 3,800 511 547 590 --
Income (loss) from continuing operations
before income tax...................... (17,157) (3,557) (1,176) 571 2,048 9,154
Net income (loss)(2)(3)(4)(5)............ $(24,454) $ (3,557) $ (7,002) $ 571 $ 16,972 $ 21,235
SUPPLEMENTAL PRO FORMA STATEMENT OF
OPERATIONS DATA(5)(6):
Net income............................... $ 5,492
Net income per share..................... $ 0.62
Weighted average number of common shares
and common share equivalents
outstanding(7)......................... 8,892,305
SELECTED OPERATING DATA:
Ratio of Earnings to Fixed Charges(8).... (.50) .64 .90 1.04 1.13 2.03
Stores open at end of period............. 111 113 122 131 146
Average net sales per store(9)........... $699,000 $784,000 $791,000 $836,000 $936,000
Average net sales per gross square
foot(10)............................... $ 883 $ 1,008 $ 1,013 $ 1,068 $ 1,187
Comparable store sales increase
(decrease)(11)......................... 0.4% 12.5% (0.5)% 7.6% 11.0%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED APRIL 30, 1996 (13) ENDED APRIL 30, 1996 (13)
PRO FORMA (1)
------------- ----------- --------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 29,560 $ 29,560
Gross profit............................. 11,626 11,626
Income from operations................... 1,608 1,608
Interest expense......................... 3,014 1,397
ESOP compensation........................ -- --
Income (loss) from continuing operations
before income tax...................... (1,406) 211
Net income (loss)(2)(3)(4)(5)............ $ (858) $ 129
Net (loss) earnings per share............ (0.17) 0.01
Total weighted common shares and common
share equivalents...................... 5,080,787 8,892,305
SUPPLEMENTAL PRO FORMA STATEMENT OF
OPERATIONS DATA(5)(6):
Net income...............................
Net income per share.....................
Weighted average number of common shares
and common share equivalents
outstanding(7).........................
SELECTED OPERATING DATA:
Ratio of Earnings to Fixed Charges(8).... 0.63 1.10
Stores open at end of period.............
Average net sales per store(9)...........
Average net sales per gross square
foot(10)...............................
Comparable store sales increase
(decrease)(11)......................... %
</TABLE>
<TABLE>
<CAPTION>
JANUARY APRIL 30, 1996
31, 1996 ---------------------------------
ACTUAL ACTUAL PRO FORMA (12)
-------- ---------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................... $ 21,512 $ 19,024 $18,101
Total assets.............................................................. 87,403 98,168 74,096
Total debt................................................................ 107,891 115,352 39,519
Stockholders' (deficit) equity............................................ (47,858) (48,592) 3,169
</TABLE>
- ------------------------------
(1) Pro forma to give effect to the Recapitalization (including the Offering,
the IPO, the Bank Facility, the Gold Consignment Facility and the
restructuring of the Company's ESOP (each as defined)), and the use of the
funds generated thereby, as if the Recapitalization had occurred on
February 1, 1995. See "The Recapitalization" and "Pro Forma Financial
Data."
(2) 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.
(3) 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.
(4) Net income and pro forma net income for the year ended January 31, 1996
reflect an income tax benefit of $14.9 million and $12.1 million,
respectively, resulting from the reversal of the Company's 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," "Pro Forma Financial Data" and Note 6 of Notes
to Financial Statements.
(5) In accordance with the accounting rules relating to pro forma financial
information, pro forma net income and supplemental pro forma net income and
net income per share do not reflect a one-time extraordinary gain of $17.4
million ($10.2 million net of tax) which will be recognized in the second
quarter of fiscal 1996 upon the early extinguishment of debt in connection
with the Recapitalization. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Background."
(6) Supplemental pro forma statement of operations data (i) reflect the
application of a tax provision (assuming a statutory rate of 40%) to
historical net income from continuing operations before income tax and (ii)
give effect to
- 7 -
<PAGE> 11
the Recapitalization and use of the funds generated thereby, as if it
occurred on February 1, 1995. See "Pro Forma Financial Data."
(7) The weighted average number of common shares and common share equivalents
outstanding consists of (i) 8,372,267 shares of Common Stock outstanding
(including 3,269,500 shares of Common Stock offered hereby); (ii) 3,588
common share equivalents relating to Class B Common Stock; and (iii)
516,449 common share equivalents relating to incentive stock options
granted within one year prior to the IPO.
(8) Represents income (loss) from continuing operations before fixed charges
and income taxes divided by fixed charges.
(9) 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.
(10) 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.
(11) A store becomes comparable after it has been open for 12 full months.
(12) Pro forma to give effect to the Recapitalization (including the Offering,
the IPO, the Bank Facility, the Gold Consignment Facility and the
restructuring of the ESOP) and the use of the funds generated thereby
(including realization of the benefits of approximately $18.3 million in a
debt discount (as of April 30, 1996)), as if the Recapitalization had
occurred on April 30, 1996. See Use of Proceeds, "The Recapitalization"
and "Pro Forma Financial Data."
(13) The financial data for the three months ended April 30, 1996 is derived
from unaudited consolidated financial statements of the Company and
reflects all adjustments (consisting only of normal recurring
accruals) that the Company considers necessary for a fair presentation of
the financial position and results of operations for this period.
- 8 -
<PAGE> 12
RISK FACTORS
In addition to the other information in this Prospectus, holders of
the Old Notes should carefully consider the following factors in this
Prospectus.
LEVERAGE
The Company is substantially leveraged. The Company's debt as of
April 30, 1996, calculated on a pro forma basis after giving effect to the
Recapitalization (and the use of the funds generated thereby), would have been
approximately $39,519,000, or 93% of its total capitalization,. The Company's
ratio of earnings to fixed charges (calculated based on income (loss) from
continuing operations before fixed charges and income tax divided by fixed
charges) on such pro forma basis for fiscal 1995 was approximately 2.03x.
The degree to which the Company is leveraged could have important
consequences to the holders of the New Notes, 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
will bear interest at fluctuating rates, and changes in interest rates 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." Furthermore, because the Bank
Facility is secured by substantially all of the Company's assets, the lenders
thereunder could look to the pledged assets to satisfy their claims.
SUBORDINATION AND UNSECURED NATURE OF THE NEW NOTES
The payment of the principal of, premium, if any, and interest on, and
any other amounts owing in respect of, the New Notes will be subordinated to
the prior payment in full of all existing and future Senior Indebtedness (as
defined). As of April 30, 1996, on a pro forma basis after giving effect to
the Recapitalization (and the use of the funds generated thereby) the aggregate
outstanding principal amount of Senior Indebtedness of the Company was
approximately $19,519,000. The amount of Senior Indebtedness outstanding will
fluctuate from time to time based upon, among other things, borrowings under
the New Revolver. In the event of the bankruptcy, liquidation, dissolution,
reorganization or winding up of the Company, the assets of the Company will be
available to pay obligations in respect of the New Notes only after all Senior
Indebtedness has been paid in full, and there may not be sufficient assets
remaining to pay amounts due on any or all of the New Notes. In addition, the
Company may not pay the principal of, premium, if any, or interest on, and any
other amounts owing in respect of, the New Notes, or purchase, redeem or
otherwise retire the New Notes, if a default in payment exists with respect to
Senior Indebtedness. Under certain circumstances, no payments may be made for
a specific period with respect to the principal of, premium, if any, or
interest on, and any other amounts owing in respect of, the New Notes if a
nonpayment default exists with respect to certain Senior Indebtedness,
including indebtedness to be outstanding under the Bank Facility. See "The New
Notes--Subordination."
The Company's borrowings under the Bank Facility are secured by
substantially all of the assets of the Company. The agreement governing the
Bank Facility contains restrictions on the Company's operations and requires
the Company to comply with certain financial covenants. If the Company fails
to comply with such restrictions or financial covenants relating to the Bank
Facility, the lenders thereof may accelerate the indebtedness and exercise
their remedies with respect to the assets securing the Bank Facility. In
addition, in the event of the Company's insolvency or liquidation, the claims
of the lenders under the Bank Facility would have to be satisfied out of such
collateral before any such assets would be available to pay claims of holders
of the New Notes. If the lenders under the Bank Facility should foreclose on
such collateral, it is possible that there would not be sufficient assets
available in the Company to pay amounts due on the New Notes. See "The
Recapitalization--Bank Facility."
- 9 -
<PAGE> 13
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 and the
Company's ability to execute its business strategy. The Company experienced an
11.0% comparable store sales increase in fiscal 1995. Although the Company has
recently implemented strategies designed to increase comparable store sales,
including its return/exchange program, its expanded non-recourse credit program
(including the "First Time Buyers" program) and its merchandising policies, the
Company does not expect comparable store sales to increase at as high a rate in
the future. The Company's ability to achieve comparable store sales increases
in the future will depend in large part on the successful implementation of
these programs. There can be no assurance that any of these programs will be
successful or that the Company will continue to achieve comparable store sales
gains. 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 net losses and
lower net sales in each of its first three fiscal quarters. The Company
expects this trend to continue for the foreseeable future and, in particular,
expects to experience a net loss in the first fiscal quarter of 1996. The
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."
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 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. 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
maintains "key executive" life insurance on the first three individuals, but
does not 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
- 10 -
<PAGE> 14
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."
SUPPLIERS; AVAILABILITY OF CONSIGNED MERCHANDISE
The Company does not manufacture its own merchandise but instead works
closely with a number of suppliers. In fiscal 1995, the Company's largest
supplier accounted for approximately 14% of the Company's total purchases, and
its largest five suppliers accounted for approximately 37% 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 and 1995 (based on the inventory
levels at the end of each fiscal quarter) was 24.8%, 25.8% and 27.1%,
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."
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., 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. See "Business--Credit."
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 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.
In connection with the Recapitalization, the Company entered into the
Gold Consignment Facility pursuant to which the Company accepts as consignee,
and will be responsible to return at some future date, a fixed number of ounces
of gold. The periodic charges to be paid by the Company will be 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 "The Recapitalization--Gold Consignment
Facility."
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<PAGE> 15
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.
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 $17.9 million of net operating
loss carryforwards. 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 "Code"), limits the use of net operating losses and net operating loss
carryforwards 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 restriction.
The Company believes that an "ownership change" did not occur with
respect to the Company as a result of the Company's recently completed IPO (as
defined). However, the Company's belief is based on certain assumptions,
including assumptions as to factual matters. 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. Furthermore, future transactions involving equity securities of
the Company could trigger an "ownership change" resulting in the imposition of
limitations on the Company's use of net operating loss carryforwards in periods
following such ownership change. See "Stock Ownership--Possible Limitation on
the Company's Use of Net Operating Loss Carryforwards."
EFFECTIVE CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The Company's four senior executive officers (Messrs. H. Patinkin,
Desjardins, M. Patinkin and Eisenheim) beneficially own approximately 17.4% of
the outstanding shares of Common Stock and, together with the directors and
certain other stockholders beneficially own approximately 42.3% of the
outstanding shares of Common Stock. By virtue of such holdings and if and to
the extent such stockholders act in concert, such stockholders will effectively
have the ability to control 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 "Stock
Ownership."
CERTAIN TAX CONSEQUENCES
An exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as a sale, exchange or other taxable event for federal
income tax purposes. A New Note received by a beneficial owner of an Old Note
should be treated as a continuation of the Old Note in the hands of such owner
for federal income tax purposes. The Series B Notes were issued with "original
issue discount" for federal income tax purposes. Because a Series D Note
received by a beneficial owner of a Series B Note should be treated as a
continuation of a Series B Note in the hands of such owner for federal income
tax purposes, the Series D Notes will be treated as being issued with original
issue discount equal to the original issue discount on the Series B Notes.
Holders of the Series D Notes therefore generally will be required to include
original issue
- 12 -
<PAGE> 16
discount in gross income for federal income tax purposes over the term of the
Series D Notes in advance of the receipt of the cash payments to which the
income is attributable. See "Certain Federal Income Tax Consequences."
LACK OF PUBLIC MARKET
Prior to this offering, there has been no market for the Company's
Notes. The Company does not intend to apply for the listing of the New Notes
on any national securities exchange or on the Nasdaq National Market. The
Company has been advised that William Blair & Company, L.L.C. intends to make
a market in the New Notes, but it is not obligated to do so and may discontinue
any such market making at any time without notice. Accordingly, there can be
no assurance that an active trading market will develop for, or as to the
liquidity of, the New Notes.
- 13 -
<PAGE> 17
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer.
The Old Notes were issued as part of the Company's recently completed
Recapitalization, including a restructuring of its outstanding indebtedness,
intended to reduce the amount of the Company's debt outstanding and the related
interest expense and to provide the Company with greater financial flexibility
for operations and to support its store expansion strategy.
The Recapitalization was completed on May 7, 1996 and consisted of (i)
the private placement of the Old Notes (the "Offering"); (ii) an initial public
offering of 3,269,500 shares of Common Stock resulting in net proceeds to the
Company of approximately $40.7 million (the "IPO"); (iii) a new $44
million five-year secured credit facility (the "Bank Facility"), consisting of
a $29 million senior secured revolving line of credit (the "New Revolver") and
a $15 million senior secured term loan (the "New Term Loan"), each of which
bears interest at fluctuating interest rates based upon the LIBOR Rate (as
herein defined) or a base rate, in each case plus an applicable spread; and
(iv) a bank gold consignment facility (the "Gold Consignment Facility") in an
amount of up to $16 million. The Company utilized the funds generated by the
Offering, the IPO, the Bank Facility and the Gold Consignment Facility
principally to retire all of the Company's senior and subordinated indebtedness
then outstanding, as described below. Simultaneously with the completion of
the Recapitalization, the Company completed a restructuring of its employee
stock ownership plan (the "ESOP"). See "The Recapitalization." The repayment
and redemption of outstanding debt with the funds generated by the Offering,
the Bank Facility and the Gold Consignment Facility, together with the IPO and
the restructuring of the Company's ESOP, is referred to herein as the
"Recapitalization."
Approximately $87.0 million of the funds generated by or 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 had
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 generated by or 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%.
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<PAGE> 18
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Pursuant to the Placement Agreement and the Note Agreement, the
Company agreed (i) to use its best efforts to cause to become effective a
registration statement under the Securities Act with the Commission with
respect to (a) a registered offer to exchange the Series A Notes for the Series
C Notes and (b) a registered offer to exchange the Series B Notes for the
Series D Notes, and (ii) upon the effectiveness of such registration statement,
(a) to offer the Series C Notes in return for surrender of the Series A Notes
and (b) to offer the Series D Notes in return for surrender of the Series B
Notes. This Registration Statement is intended to satisfy such obligations of
the Company under the Placement Agreement and the Note Agreement.
Following the Consummation (as defined) of the Exchange Offer, holders
of Old Notes not tendered will not have any further registration rights and the
Old Notes will continue to be subject to certain restrictions on transfer. See
"--Termination of Certain Rights" and "--Consequences of Failure to Exchange."
Accordingly, the liquidity of the market for the Old Notes could be adversely
affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company will accept any and
all Old Notes validly tendered and not withdrawn prior to the Expiration Date.
The Company will issue $1,000 principal amount of Series C Notes in exchange
for each $1,000 principal amount of outstanding Series A Notes accepted in the
Exchange Offer and will issue $1,000 principal amount of Series D Notes in
exchange for each $1,000 principal amount of outstanding Series B Notes
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only
in integral multiples of $1,000 principal amount at maturity.
The form and terms of the Series C Notes are the same in all material
respects as the form and terms of the Series A Notes and the form and terms of
the Series D Notes are the same in all material respects as the form and terms
of the Series B Notes, except that the New Notes will have been registered
under the Securities Act and hence will not bear legends
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<PAGE> 19
restricting their transfer pursuant to the Securities Act. The Series C Notes
will evidence the same debt as the Series A Notes (which they replace) and the
Series D Notes will evidence the same debt as the Series B Notes (which they
replace) and will be issued under, and be entitled to the benefits of, the
Indenture governing the Old Notes.
As of the date of this Prospectus, (i) $12,000,000 aggregate principal
amount of the Series A Notes were outstanding and registered in the name of
Cede & Co., as nominee for DTC, and there were approximately 107 beneficial
owners and (ii) $8,000,000 aggregate principal amount of the Series B Notes
were outstanding and registered in the name of Cede & Co., as nominee for DTC,
and there were approximately 3 beneficial owners. Solely for reasons of
administration (and for no other purpose) the Company has fixed the close of
business on July 30, 1996 as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially. Only a registered holder of Old Notes
(or such holder's legal representative or attorney-in-fact) as reflected on the
records of the Trustee under the Indenture may participate in the Exchange
Offer. There will be no fixed record date for determining registered holders
of Old Notes entitled to participate in the Exchange Offer.
Holders of Old Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation law or the Indenture in connection with
the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders of Old Notes for the purposes of receiving the New Notes from the
Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned (or,
in the case of Old Notes tendered by book-entry transfer through DTC, will be
credited to an account maintained with DTC), without expense, to the tendering
holder thereof as promptly as practicable after the Expiration Date. See
"--Procedures for Tendering."
Holders who tender Old Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Old Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time,
on September 5, 1996, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by oral or written notice and will make a
public announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under "Conditions to the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (iv)
to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by a public announcement thereof. If the Exchange Offer is amended
in a manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendments by means of a prospectus
supplement that will be distributed to the registered holders of Old Notes, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
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<PAGE> 20
Without limiting the manner in which the Company may choose to make
public announcement of any delay, extension, termination or amendment of the
Exchange Offer, the Company shall not have an obligation to publish, advertise,
or otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
PROCEDURES FOR TENDERING
Only a registered holder of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes and any other required documents, to the Exchange Agent at the
address set forth below under "Exchange Agent" for receipt prior to the
Expiration Date; provided, however, that in lieu of the foregoing, a holder may
either (i) tender the Old Notes pursuant to the procedure for book-entry tender
set forth below, or (ii) comply with the guaranteed delivery procedure set
forth below.
The tender by a holder will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS
MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTION FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instruction to Registered Holder from Beneficial Owner" included with the
Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, must be guaranteed by an Eligible Institution (as defined)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Delivery Instructions"
on the Letter of Transmittal, or (ii) for the account of an Eligible
Institution. In the event that signatures on a Letter of Transmittal or a
notice of withdrawal, as the case may be, are required to be guaranteed, such
guarantee must be by a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., a commercial bank
or trust company having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys- in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and evidence
satisfactory to the Company of their authority to so act must be submitted with
the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company, in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Old Notes. The Company's interpretation of the
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<PAGE> 21
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
must be cured within such time as the Company shall determine. Although the
Company intends to notify holders of defects or irregularities with respect to
tenders of Old Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not validly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
By tendering, each registered holder will represent to the Company
that, among other things, (i) the New Notes to be acquired by the holder and
any beneficial owner(s) of Old Notes ("Beneficial Owner(s)") in connection with
the Exchange Offer are being acquired by the holder and any Beneficial Owner(s)
in the ordinary course of business of the holder and any Beneficial Owner(s),
(ii) the holder and each Beneficial Owner are not participating, do not intend
to participate, and have no arrangement or understanding with any person to
participate, in the distribution of the New Notes, (iii) the holder and each
Beneficial Owner acknowledge and agree that any person participating in the
Exchange Offer for the purpose of distributing the New Notes must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction of the New Notes acquired by
such person and cannot rely on the position of the Staff of the Commission set
forth in no-action letters that are discussed herein under "--Resales of the
New Notes," (iv) the holder and each Beneficial Owner understands that a
secondary resale transaction described in clause (iii) above should be covered
by an effective registration statement containing the selling securityholder
information required by Item 507 of Regulation S-K of the Commission, and (v)
neither the holder nor any Beneficial Owner(s) is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company except as otherwise
disclosed to the Company in writing.
EXCHANGING BOOK-ENTRY OLD NOTES
The Exchange Agent and DTC have confirmed that any financial
institution that has an account with DTC (a "Participant") may utilize DTC's
Automated Tender Offer Program ("ATOP") to tender Old Notes.
The Exchange Agent will request that DTC establish an account with
respect to the Series A Notes and an account with respect to the Series B Notes
for purposes of the Exchange Offer within two business days after the date of
this Exchange Offer. Any Participant may make book-entry delivery of Old Notes
by causing DTC to transfer such Old Notes into such Exchange Agent's account in
accordance with DTC's ATOP procedures for transfer. However, the exchange for
the Old Notes so tendered will only be made after timely confirmation (a
"Book-Entry Confirmation") of such book-entry transfer of Old Notes into the
Exchange Agent's account, and timely receipt by the Exchange Agent of an
Agent's Message (as defined) and any other documents required by the Letter of
Transmittal. The term "Agent's Message" means a message, transmitted by DTC
and received by the Exchange Agent and forming part of a Book-Entry
Confirmation, which states that DTC has received an express acknowledgment from
a Participant tendering Old Notes which are the subject of such Book-Entry
Confirmation, that such Participant has received and agrees to be bound by the
terms of the Letter of Transmittal, and that the Company may enforce such
agreement against such Participant.
The method of delivery of Old Notes is at the option and risk of the
tendering holder and, except as otherwise provided in the Letter of
Transmittal, the delivery will be deemed to be made only when actually received
by the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are
not immediately available, or (ii) who cannot deliver their Old Notes, the
Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date or (iii) who cannot comply with the procedure for
book-entry tender on a timely basis, may effect a tender if:
(a) The tender is made through an Eligible Institution;
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<PAGE> 22
(b) Prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by facsimile transmission,
mail or hand delivery) setting forth the name and address of the
holder, the certificate number(s) of such Old Notes and the principal
amount of the Old Notes being tendered, stating that the tender is
being made thereby and guaranteeing that, within five business days
after the Expiration Date, the Letter of Transmittal (or facsimile
thereof) together with the certificate(s) representing the Old Notes
and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of
Transmittal (or facsimile thereof), as well as the certificate(s)
representing all tendered Old Notes in proper form for transfer and
all other documents required by the Letter of Transmittal, are
received by the Exchange Agent within five business days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery
will be sent to holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, a tender of Old Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to
be withdrawn (including the certificate number or numbers (except in the case
of book-entry tenders) and principal amount (regardless of the means of
tendering) of such Old Notes), (iii) be signed by the holder in the same manner
as the original signature on the Letter of Transmittal by which such Old Notes
were tendered (including any required signature guarantees) or be accompanied
by documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the Depositor
withdrawing the tender, and (iv) specify the name in which any such Old Notes
are to be registered, if different from that of the Depositor. If the Old
Notes have been tendered pursuant to the procedure for book-entry tender set
forth above under "Exchanging Book-Entry Old Notes," a notice of withdrawal
must specify, in lieu of certificate numbers, the name and account number at
DTC to be credited with the withdrawn Old Notes. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company in its sole discretion, which determination shall
be final and binding on all parties. Any Old Notes so withdrawn will be deemed
not to have been validly tendered for purposes of the Exchange Offer and no New
Notes will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Properly withdrawn Old Notes may be retendered by
following one of the procedures described above under "Procedures for
Tendering" at any time prior to the Expiration Date.
Any Old Notes which have been tendered but which are not accepted for
exchange due to rejection of tender or termination of the Exchange Offer, or
which have been validly withdrawn, will be returned as soon as practicable to
the holder thereof without cost to such holder.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company
shall not be required to accept for exchange, or exchange New Notes for, any
Old Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in
any court or by or before any governmental agency with respect to the
Exchange Offer which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the
Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company, or any material adverse development has
occurred in any existing action or proceeding with respect to the
Company or any of its subsidiaries; or
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<PAGE> 23
(b) any change, or any development involving a prospective
change, in the business or financial affairs of the Company or any of
its subsidiaries has occurred which, in the sole judgment of the
Company, might materially impair the ability of the Company to proceed
with the Exchange Offer or materially impair the contemplated benefits
of the Exchange Offer to the Company; or
(c) any law, statute, rule or regulation is proposed,
adopted or enacted, which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the
Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company;
(d) any governmental approval has not been obtained, which
approval the Company shall, in its sole discretion, deem necessary for
the consummation of the Exchange Offer as contemplated hereby; or
(e) the Company receives consents from an insufficient
number of holders of Old Notes to amend the Indenture as provided in
the Letter of Transmittal.
If the Company determines in its sole discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old
Notes and return (or, in the case of Old Notes tendered by book-entry transfer
through DTC, will promptly credit to an account maintained with DTC) all
tendered Old Notes to the tendering holders, (ii) extend the Exchange Offer and
retain all Old Notes tendered prior to the Expiration Date, subject, however,
to the rights of holders to withdraw such Old Notes (see "--Withdrawal of
Tenders") or (iii), waive such unsatisfied conditions (except with respect to
the condition identified in (e) above which may not be waived by the Company)
with respect to the Exchange Offer and accept all validly tendered Old Notes
which have not been withdrawn. If such waiver constitutes a material change to
the Exchange Offer, the Company will promptly disclose such waiver by means of
a prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
By executing the Letter of Transmittal, each holder of Old Notes will
consent to a supplemental indenture that will amend the Indenture to provide,
among other things, that the Series C Notes and the Series D Notes will be
issued under, and entitled to the benefits of, the Indenture governing the
Series A Notes and the Series B Notes. To the extent the Company does not
receive consents from a sufficient number of holders of Old Notes to amend the
Indenture as provided for in the Letter of Transmittal, the Company will not be
required to accept for exchange, or exchange New Notes for, any Old Notes, and
may terminate the Exchange Offer.
TERMINATION OF CERTAIN RIGHTS
Holders of the Old Notes to whom this Exchange Offer is made have
special rights under the Placement Agreement and the Notes Agreement that will
terminate upon the consummation of the Exchange Offer (the "Consummation").
Such special rights which will terminate include (a) the right to require the
Company to file with the Commission a registration statement under the
Securities Act with respect to the New Notes within 10 days after the
completion of the Recapitalization (the "Closing Date"), and (b) the right to
require the Company to use its best efforts to cause such registration
statement to become effective under the Securities Act within 45 days after
the Closing Date.
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as
Exchange Agent for the Exchange Offer. Questions and requests for assistance,
requests for additional copies of this Prospectus or the Letter of Transmittal
and requests for Notices of Guaranteed Delivery should be directed to the
Exchange Agent at (612) 667-9764 or addressed as follows:
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<PAGE> 24
<TABLE>
<S> <C>
By Overnight Courier: By Facsimile:
Norwest Bank Minnesota, (for Eligible Institutions only)
National Association Norwest Bank Minnesota,
Corporate Trust Operations National Association
Norwest Center Corporate Trust Operations
Sixth and Marquette (612) 667-4927
Minneapolis, MN 55479-0113
By Mail:
(registered or certified recommended)
Norwest Bank Minnesota,
National Association
Corporate Trust Operations
P.O. Box 1517
Minneapolis, MN 55480-1517
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitations are being made by mail; however, additional
solicitations may be made by telegraph, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer
will be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee (as defined), accounting and legal fees and printing
costs, among others.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes which are not exchanged for New Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) so long as the Old Notes are eligible for resale pursuant to Rule 144A
under the Securities Act to a person whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A, purchasing for
its own account or for the account of a qualified institutional buyer to whom
notice is given that the resale, pledge or other transfer is being made in
reliance on Rule 144A, (iii) in an offshore transaction in accordance with
Regulation S under the Securities Act, but only in the case of a transfer that
is effected by the delivery to the transferee of Old Notes registered in its
name (or its nominee's name) on the books maintained by the registrar of the
Old Notes, (iv) pursuant to an exemption from registration in accordance with
Rule 144 (if available) or Rule 145 under the Securities Act, (v) in reliance
on another exemption from the registration requirements of the Securities Act,
but only in the case of a transfer that is effected by the delivery to the
transferee of Old Notes registered in its name (or its nominee's name) on the
books maintained by the registrar of the Old Notes, and subject to the receipt
by the registrar or co-registrar of a certification of the transferor and an
opinion (satisfactory to the Company) of counsel (satisfactory to the Company)
to the effect that such transfer is in compliance with the Securities Act, or
(vi) pursuant to an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any state of
the United States. Following the Consummation of the Exchange Offer, holders
of Old Notes will have no further rights of registration or exchange under the
Placement Agreement or the Notes Agreement.
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<PAGE> 25
ACCOUNTING TREATMENT
The carrying value of the Old Notes is not expected to be materially
different from the fair value of the New Notes at the time of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the Exchange Offer will be amortized over the term of the New
Notes.
RESALES OF THE NEW NOTES
With respect to resales of New Notes, based on an interpretation by
the staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that any holder or beneficial owner (other than a
person that is an affiliate of the Company within the meaning of Rule 405 under
the Securities Act or a "broker" or "dealer" registered under the Exchange Act)
who exchanges Old Notes for New Notes in the ordinary course of business and
who is not participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in the
distribution of the New Notes, will be allowed to resell the New Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the New Notes a prospectus that satisfies the
requirements of Section 10 thereof. The Company has not entered into any
arrangement or understanding with any person to participate in the distribution
of the New Notes and, to management's knowledge, the persons participating in
the Exchange Offer are acquiring the New Notes in the ordinary course of
business and have not entered into any arrangement or understanding with any
person to participate in the distribution of the New Notes. However, if any
holder or beneficial owner acquires New Notes in the Exchange Offer for the
purpose of distributing or participating in a distribution of the New Notes,
such holder or beneficial owner cannot rely on the position of the staff of the
Commission enunciated in Exxon Capital Holdings Corporation (available April
13, 1988) or similar no-action letters or any similar interpretive letters and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction, unless an
exemption from registration is otherwise available.
A broker or dealer registered under the Exchange Act that acquired Old
Notes for its own account pursuant to its market-making or other trading
activities (other than Old Notes acquired directly from the Company) may
participate in the Exchange Offer but may be deemed to be an underwriter within
the meaning of the Securities Act and, therefore, must deliver a prospectus
relating to the New Notes in connection with any resales by it of New Notes
acquired for its own account in the Exchange Offer. The delivery of a
prospectus by a broker or dealer in connection with its resales of the New
Notes does not constitute an admission that such broker or dealer is an
"underwriter" under the Securities Act.
As contemplated by the above no-action letters, the Placement
Agreement and the Note Agreement, each holder participating in the Exchange
Offer is required by the Letter of Transmittal to represent that (i) the New
Notes are to be acquired by the holder and any beneficial owners in the
ordinary course of business, (ii) the holder and any beneficial owners are not
engaging and do not intend to engage in the distribution of the New Notes,
(iii) neither the holder nor any beneficial owner is an affiliate of the
Company within the meaning of Rule 405 under the Securities Act, and (iv) the
holder and each beneficial owner acknowledge that if such holder or beneficial
owner participates in the Exchange Offer for the purpose of distributing the
New Notes such holder or beneficial owner must comply with the registration and
prospectus delivery requirements of the Securities Act and cannot rely on the
above no-action letters. See "Plan of Distribution."
- 22 -
<PAGE> 26
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol MBJI. The Company's Common Stock was recently listed on the
Nasdaq National Market. The high and low bid quotations per share of the
Company's Common Stock as reported by the Nasdaq National Market for the period
beginning on May 2 (the initial date of listing) and ending on April 30, were
$23 and $22 respectively. Quotations represent prices between dealers, do not
reflect retail mark-ups, mark downs or commissions, and may not represent actual
transactions. On July 30, 1996, the closing bid price of the Company's Common
Stock as reported by the Nasdaq National Market was $21 per share.
As of July 31, 1996, there were 49 holders of record of the Company's
Common Stock. The Company believes that there are a significant number of
beneficial owners of its Common Stock whose shares are held in street name.
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. See "The Recapitalization." In addition, the Indenture governing
the Notes contains substantial restrictions on the Company's ability to pay
dividends. See "The New Notes."
- 23 -
<PAGE> 27
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company at April 30, 1996 (i) on an actual basis and (ii) on a pro forma
basis to give effect to the Recapitalization. See "The Recapitalization." This
table should be read in conjunction with the financial statements, including the
notes thereto, and the pro forma balance sheet of the Company appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
APRIL 30, 1996
----------------------
ACTUAL PRO FORMA
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of long-term debt:
Old revolver loan..................................................... $ 7,481 $ --
Senior accreting notes-current........................................ 1,956 --
Old term loan-current................................................. 7,938 --
New Revolver.......................................................... -- 4,519
Outstanding checks, net............................................... 4,686 4,686
------- -------
Total short-term debt.............................................. $22,061 $ 9,205
======= =======
Long-term debt:
Old term loan......................................................... $18,662 $ --
Senior accreting notes................................................ 49,014 --
Zero coupon notes..................................................... 5,962 --
Subordinated debt..................................................... 24,339 --
New Term Loan......................................................... -- 15,000
Subordinated Notes.................................................... -- 20,000
------- -------
Total long-term debt............................................... 97,977 35,000
Stockholders' equity:
Preferred stock....................................................... -- --
Common stock and additional paid-in capital(1)........................ 8,920 33,595
Accumulated deficit................................................... (15,531) (30,426)
Treasury stock........................................................ (20,333) --
Deferred ESOP compensation............................................ (21,648) --
------- -------
Total stockholders' (deficit) equity............................... (48,592) 3,169
------- -------
Total capitalization............................................. $49,385 $38,169
======= =======
</TABLE>
- ------------------------------
(1) Excludes (i) 553,770 shares of Common Stock reserved for issuance upon
exercise of options previously granted, (ii) 717,216 shares of Common Stock
reserved for issuance pursuant to stock options granted as of the
consummation of the IPO and (iii) 57,414 additional shares of Common Stock
reserved for issuance under the Company's 1996 Long-Term Incentive Plan. See
"Management--Stock Plans."
- 24 -
<PAGE> 28
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. Pro forma financial data for the
year ended January 31, 1996 and for the three months ended April 30, 1996 are
unaudited and are derived from condensed pro forma financial statements. See
"Pro Forma Financial Data". The selected statement of operations data and
balance sheet data as of and for the three months ended April 30, 1996 have
been derived from unaudited financial statements of the Company, which, in the
opinion of management include all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the information set forth
therein. The selected financial information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's audited financial statements as of
January 31, 1995 and 1996, and for the years ended January 31, 1994, 1995 and
1996, and the related notes and pro forma data appearing elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------------------------------- PRO FORMA(1)
1992 1993 1994 1995 1996 1996
-------- ------- ------- -------- -------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 76,749 $88,141 $91,106 $106,683 $131,022 $ 131,022
Cost of sales......................... 45,606 52,106 54,511 64,223 77,722 77,722
-------- ------- ------- -------- -------- --------
Gross profit........................ 31,143 36,035 36,595 42,460 53,300 53,300
Selling, general and administrative
expenses............................ 25,781 27,971 28,340 30,748 37,887 37,887
-------- ------- ------- -------- -------- --------
Income from operations.............. 5,362 8,064 8,255 11,712 15,413 15,413
Interest expense...................... 9,397 7,821 8,920 10,594 12,314 5,798
Stock award expense................... -- -- -- -- 461 461
ESOP compensation expense............. -- 3,800 511 547 590 --
Provision for store closings(2)....... 491 -- -- -- -- --
Refinancing costs(3).................. 12,631 -- -- -- -- --
-------- ------- ------- -------- -------- --------
Income (loss) from continuing
operations before income taxes.... (17,157) (3,557) (1,176) 571 2,048 9,154
Income tax benefit (expense) (4)...... -- -- -- -- 14,924 12,081
-------- ------- ------- -------- -------- --------
Income (loss) from continuing
operations........................ (17,157) (3,557) (1,176) 571 16,972 21,235
Gain (loss) on disposal of
discontinued operations(5).......... (7,297) -- 2,700 -- -- --
-------- ------- ------- -------- -------- --------
Net income (loss) before cumulative
effect of accounting change
for ESOP.......................... (24,454) (3,557) 1,524 571 16,972 21,235
Cumulative effect of accounting change
for ESOP(6)......................... -- -- (8,526) -- -- --
-------- ------- ------- -------- -------- --------
Net income (loss)................... $(24,454) $(3,557) $(7,002) $ 571 $ 16,972 $ 21,235
======== ======= ======= ======== ======== ========
SUPPLEMENTAL PRO FORMA STATEMENT OF
OPERATIONS DATA(7):
Net income............................ $ 5,492
Net income per share.................. $ 0.62
Weighted average number of common
shares and common share equivalents
outstanding(8)...................... 8,892,305
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
THREE MONTHS ENDED APRIL 30, 1996
APRIL 30, 1996 PRO FORMA
----------------- ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 29,560 $ 29,560
Cost of sales......................... 17,934 17,934
-------- ------
Gross profit........................ 11,626 11,626
Selling, general and administrative
expenses............................ 10,018 10,018
-------- ------
Income from operations.............. 1,608 1,608
Interest expense...................... 3,014 1,397
Stock award expense................... -- --
ESOP compensation expense............. -- --
Provision for store closings(2)....... -- --
Refinancing costs(3).................. -- --
-------- ------
Income (loss) from continuing
operations before income taxes.... (1,406) 211
Income tax benefit (expense) (4)...... 548 (82)
-------- -------
Income (loss) from continuing
operations........................ (858) 129
Gain (loss) on disposal of
discontinued operations(5).......... -- --
-------- --------
Net income (loss) before cumulative
effect of accounting change
for ESOP.......................... (858) 129
Cumulative effect of accounting change
for ESOP(6)......................... -- --
-------- --------
Net income (loss)................... $ (858) $ 129
======== ========
Net (loss) earnings per share....... (0.17) 0.01
Total weighted common share and
common share equivalents.......... 5,080,787 8,892,305
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Ratio of Earnings to Fixed Charges(9)......... (.50) .64 .90 1.04 1.13
Stores open at end of period.................. 111 113 122 131 146
Average net sales per store(10)............... $699,000 $784,000 $791,000 $836,000 $ 936,000
Average net sales per gross square foot(11)... $ 883 $ 1,008 $ 1,013 $ 1,068 $ 1,187
Comparable store sales increase
(decrease)(12).............................. 0.4% 12.5% (0.5)% 7.6% 11.0%
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital............................... $ 29,731 $ 15,123 $ 20,079 $ 20,460 $ 21,512
Total assets.................................. 59,376 59,174 51,677 61,512 87,403
Total debt.................................... 97,932 112,247 105,953 110,806 107,891
Stockholders' deficit......................... (69,877) (69,634) (67,659) (66,578) (47,858)
</TABLE>
- ------------------------------
(1) Pro forma to give effect to the Recapitalization (including the Offering,
the IPO, the Bank Facility, the Gold Consignment Facility and the
restructuring of the Company's ESOP) and the use of the funds generated
thereby, as if the Recapitalization had occurred on February 1, 1995. See
"The Recapitalization" and "Pro Forma Financial Data."
- 25 -
<PAGE> 29
(2) 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.
(3) 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Background."
(4) Income tax benefit in the year ended January 31, 1996 resulted from the
reversal of the Company's 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.
(5) 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.
(6) 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.
(7) Supplemental pro forma statement of operations data (i) reflect the
application of a tax provision (assuming a statutory rate of 40%) to
historical net income from continuing operations before income tax and (ii)
give effect to the Recapitalization and use of the funds generated thereby,
as if it had occurred on February 1, 1995. See "Pro Forma Financial Data."
(8) The weighted average number of common shares and common share equivalents
outstanding consists of (i) 8,372,267 shares of Common Stock outstanding
(including 3,269,500 shares of Common Stock offered hereby); (ii) 3,588
common share equivalents relating to Class B Common Stock; and (iii)
516,449 common share equivalents relating to incentive stock options
granted within one year prior to the IPO.
(9) Represents income (loss) from continuing operations before fixed charges
and income taxes divided by fixed charges.
(10) 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.
(11) 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.
(12) A store becomes comparable after it has been open for 12 full months.
- 26 -
<PAGE> 30
PRO FORMA FINANCIAL DATA
The following pro forma financial data of the Company present the
Company's unaudited pro forma condensed statement of operations for the year
ended January 31, 1996 and for the three months ended April 30, 1996 and the
unaudited pro forma condensed balance sheet as of January 31, 1996 and April
30, 1996. The pro forma financial data give effect to the Recapitalization
(including the Offering, the IPO, the Bank Facility and the Gold Consignment
Facility and utilization of approximately $17.4 million of a debt discount at
January 31, 1996 and of approximately $18.3 million of a debt discount at April
30, 1996) and (ii) the restructuring of the ESOP, as if each such transaction
had occurred as of April 30, 1996 with respect to the pro forma condensed
balance sheet and as of February 1, 1995 with respect to the pro forma
statement of operations for the year ended January 31, 1996 and for the three
months ended April 30, 1996. The pro forma financial data appearing herein do
not purport to represent what the Company's results of operations would have
been had such transactions in fact occurred on the dates or at the beginning of
the periods indicated or to project the results of operations of the Company
for the present year or for any future period or the Company's financial
condition on January 31, 1996 or on any other date.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1996
------------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net sales....................................................... $131,022 $ -- $131,022
Cost of sales................................................... 77,722 -- 77,722
-------- -------- ---------
Gross profit.................................................. 53,300 -- 53,300
Selling, general and administrative expenses.................... 37,887 -- 37,887
-------- -------- ---------
Income from operations........................................ 15,413 -- 15,413
Interest expense (income):
Old revolver loan; old term loan; senior accreting notes; zero
coupon notes; and subordinated debt......................... 12,358 12,358(1) --
New Revolver; New Term Loan; Subordinated Notes; and Gold
Consignment Facility........................................ -- 5,668(2) 5,668
Other......................................................... (44) 174(3) 130
Stock award expense............................................. 461 -- 461
ESOP compensation expense....................................... 590 (590)(4) --
-------- -------- ---------
Income before taxes........................................... (2,048) 7,106 9,154
Income tax benefit (provision).................................. 14,924 (2,843)(5) 12,081
-------- -------- ---------
Net income(6)................................................. $ 16,972 $ 4,263 $ 21,235
======== ======== =========
SUPPLEMENTAL PRO FORMA STATEMENT OF OPERATIONS DATA(7):
Net income.................................................... $ 5,492
Net income per share.......................................... $ 0.62
Weighted average number of common shares and common share
equivalents outstanding(8).................................. 8,892,305
</TABLE>
- ------------------------------
(1) To reflect the retirement of all of the Company's currently existing bank
indebtedness and subordinated debt as a result of the Recapitalization.
(2) To record the interest expense and related amortization of estimated debt
issuance costs related to the New Revolver, the New Term Loan and the Notes
and the fee related to the Gold Consignment Facility.
(3) To reflect the sale of the interest rate cap agreement.
(4) To reflect the elimination of deferred compensation expense as a result of
the restructuring of the ESOP.
(5) To record the tax effect of the pro forma adjustments, utilizing an assumed
40% statutory tax rate.
(6) The following gains and losses directly attributable to the Recapitalization
have been excluded from the pro forma statement of operations: (a) the $17.4
million gain ($10.2 million net of tax) resulting from the debt discount and
(b) a $7.2 million reversal of the tax-effected temporary difference related
to interest accruals on long term debt. These amounts have been reflected in
retained earnings (accumulated deficit) on the pro forma balance sheet.
(7) Supplemental pro forma statement of operations data (i) refect the
application of a tax provision (assuming a statutory rate of 40%) to
historical net income from continuing operations before income tax and (ii)
give effect to the Recaptilization and use of the funds generated thereby,
as if it had occurred on February 1, 1995.
(8) The weighted average number of common shares and common shares
equivalents outstanding consists of (i) 8,372,267 shares of Common Stock
outstanding (including 3,269,500 shares of Common Stock offered hereby);
(ii) 3,588 common share equivalents relating to Class B Common Stock; and
(iii) 516,449 common share equivalents relating to incentive stock options
granted within one year prior to the IPO.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30, 1996
------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net Sales......................................................... $ 29,560 $ -- $29,560
Cost of sales..................................................... 17,934 -- 17,934
------- ------- -------
Gross profit................................................... 11,626 -- 11,626
Selling, general and administrative expenses...................... 10,018 -- 10,018
------- ------- -------
Income from operations......................................... 1,608 -- 1,608
Interest expense (income):
Old revolver loan; old term loan; senior accreting notes, zero
coupon notes; and subordinated debt............................ 2,923 2,923(1) --
New Revolver; New Term Loan; Subordinated Notes; and Gold
Consignment Facility........................................... -- 1,306(2) 1,306
Other........................................................... 91 -- 91
Stock award expense............................................... -- -- --
ESOP compensation expense......................................... -- -- --
------- ------- -------
(Loss) Income before taxes........................................ (1,406) 1,617 211
Income tax benefit (provision).................................... 548 (630)(3) (82)
------- ------- -------
Net (Loss) income (4)............................................. $ (858) $ 987 $ 129
===== ===== =====
</TABLE>
- ----------------
(1) To reflect the retirement of all of the Company's currently existing bank
indebtedness and subordinated debt as a result of Recapitalization.
(2) To record the interest expense and related amortization of estimated
debt issuance costs related to the New Revolver, the New Term Loan and the
Notes and the fee related to the Gold Consignment Facility.
(3) To record the tax effect of the pro forma adjustments, utilizing an assumed
40% statutory tax rate.
(4) The following gains and losses directly attributable to the Recapitalization
have been excluded from the pro forma statement of operations: (a) the $17.4
million gain ($10.2 million net of tax) resulting from the debt discount and
(b) a $7.2 million reversal of the tax-effected temporary difference related
to interest accruals on long term debt. These amounts have been reflected in
retained earnings (accumulated deficit) on the pro forma balance sheet.
- 27 -
<PAGE> 31
PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
APRIL 30, 1996
---------------------------------------
PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS AS ADJUSTED
------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Accounts receivable, net................................... 1,607 $ -- $ 1,607
Layaway receivable, net.................................... 1,500 -- 1,500
Merchandise inventories.................................... 59,942 (15,000)(1) 44,942
Other current assets....................................... 456 -- 456
Deferred income taxes, net................................. 16,239 (7,172)(3) 9,067
Property and equipment, net................................ 14,067 -- 14,067
Deferred financing costs................................... 4,357 (1,900)(4) 2,457
------- -------- -------
Total assets.......................................... $98,168 $ (24,072) $ 74,096
======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Old revolver loan........................................ $ 7,481 $ (7,481)(5) $ --
Current portion of old term loan......................... 7,938 (7,938)(5) --
Long-term portion of old term loan....................... 18,662 (18,662)(5) --
Current portion of senior accreting notes................ 1,956 (1,956)(5) --
Long-term portion of senior accreting notes.............. 49,014 (49,014)(5) --
Zero coupon notes........................................ 5,962 (5,962)(5) --
Subordinated debt........................................ 24,339 (24,339)(5) --
Other long-term liabilities.............................. 1,161 -- 1,161
Outstanding checks....................................... 4,686 -- 4,686
Other current liabilities................................ 22,016 -- 22,016
Accrued financing cost................................... 3,545 -- 3,545
New Revolver............................................. -- 4,519(6) 4,519
New Term Loan............................................ -- 15,000(7) 15,000
Subordinated Notes....................................... -- 20,000(8) 20,000
------- -------- -------
Total liabilities..................................... 146,760 75,833 70,927
STOCKHOLDERS' EQUITY:
Common Stock and additional paid-in capital.............. 8,920 24,675(9) 33,595
Accumulated deficit...................................... (15,531) (14,895)(10) (30,426)
Treasury stock........................................... (20,333) 20,333(11) --
Deferred ESOP compensation............................... (21,648) 21,648(12) --
------- -------- -------
Total stockholders' (deficit) equity.................. (48,592) 51,761 3,169
------- -------- -------
Total liabilities and stockholders' (deficit)
equity.............................................. $98,168 $ (24,072) $ 74,096
======= ======== =======
</TABLE>
- ------------------------------
(1) To record the reduction in inventory pursuant to the Gold Consignment
Facility.
(3) To record the reversal of the tax-effected temporary difference related to
interest accruals for long-term debt.
(4) To record the equity issuance costs, previously deferred
(5) To record the retirement of debt with the proceeds from the
Recapitalization.
(6) To record borrowings under the New Revolver as part of the
Recapitalization.
(7) To record the New Term Loan component of the Recapitalization.
(8) To record the Notes component of the Recapitalization.
(9) To reflect (i) the net proceeds of $40.7 million from the IPO of 3,269,500
shares of Common Stock issued by the Company; and (ii) a charge of $16.1
million relating to the restructuring of the ESOP.
(10) To record the following accumulated deficit effects: (i) $25.7 million
relating to the restructuring of the ESOP; (ii) $7.2 million relating to
the reversal of the tax-effected temporary difference described in note 3
above; and (iii) the gain of $18.3 million resulting from the debt
discount.
(11) To reflect (i) $2.6 million relating to the surrendering of unallocated
ESOP shares to the Company in connection with the restructuring of the ESOP
and (ii) $22.9 million relating to the cancellation of the treasury stock
at the date of the Offering.
(12) To reflect the elimination of deferred compensation expense as a result of
the restructuring of the ESOP.
- 28 -
<PAGE> 32
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.
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 151 stores in 24 states at April 30, 1996. 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.
The capitalization of the Company prior to the Recapitalization is
primarily the result of transactions which occurred in the late 1980's and
early 1990's. In 1988, the Company incurred $70.0 million in indebtedness to
finance the purchase from stockholders of outstanding equity in the Company by
a newly-formed ESOP. The $70.0 million paid for the shares purchased by the
ESOP was recorded on the Company's balance sheet as deferred ESOP compensation,
and constituted a $70.0 million reduction in stockholders' equity. The Company
has incurred ongoing ESOP compensation expense since the establishment of the
ESOP. As a result of the restructuring of the ESOP, the Company does not
expect to incur ESOP compensation expense subsequent to January 31, 1996. See
"The Recapitalization--ESOP Restructuring." In addition, in 1991 due to the
sale of the Company's direct marketing business, and a recessionary
environment, the Company restructured its debt arrangements and incurred
one-time charges in connection therewith.
To strengthen its capital structure and provide greater financial
flexibility for new store openings, the Company restructured its outstanding
indebtedness to reduce the amount and cost of its outstanding debt. The
Recapitalization, which was completed on May 7, 1996, resulted in a one-time
extraordinary gain on early extinguishment of debt in an amount aggregating
approximately $18.3 million (approximately $11.2 million net of tax).
The Company anticipates opening 18 stores in fiscal 1996 (five of
which had been opened as of April 30, 1996) and 23 stores in fiscal 1997. 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'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 11.0% comparable store sales increases in
fiscal 1995. While the Company has a number of new programs in place to
enhance sales, there can be no assurance that the Company will achieve
comparable store sales increases in future reporting periods.
RECENT SALES RESULTS
For the first quarter of fiscal 1996, net sales increased $5.9 million,
or 24.9%, to $29.6 million from $23.7 million in the first quarter of fiscal
1995. Comparable store sales increased by 13.8% ($3.2 million) in the first
quarter of fiscal 1996, as compared to a 10.6% ($2.0 million) increase in the
first quarter of fiscal 1995.
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 and the percentage change in such
items compared to the amount for the prior fiscal year.
- 29 -
<PAGE> 33
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES PERCENTAGE OF NET
YEAR ENDED JANUARY 31, SALES FOR THE THREE
---------------------------------------- MONTHS ENDED
APRIL 30,
1994 1995 1996 1995 1996
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<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 62.5 60.7
------ ------ ------ ---- -----
Gross Profit . . . . . . . . . . . . . . . . . . 40.2 39.8 40.7 37.5 39.3
Selling, general and administrative expenses . . . . 31.1 28.8 28.9 33.9 33.9
----- ----- ----- ---- -----
Income from operations . . . . . . . . . . . . . 9.1 11.0 11.8 3.6 5.4
Interest expense, including deferred interest
of $5,467, $6,685, $8,171, $1,948 and $2,099,
respectively . . . . . . . . . . . . . . . . . . 9.8 9.9 9.4 12.4 10.2
Stock award expense . . . . . . . . . . . . . . . . . -- -- 0.4 -- --
ESOP compensation expense . . . . . . . . . . . . . . 0.6 0.5 0.5 0.6 --
----- ------ ------ ----- ------
Income (loss) from continuing
operations before income taxes . . . . . . . . . . (1.3) 0.5 1.6 (9.4) (4.8)
Income tax benefit . . . . . . . . . . . . . . . . . -- -- 11.4 -- 1.9
------ ----- -----
Gain on disposal of discontinued operations . . . . . 3.0 -- -- -- --
------ ----- ----- ------ ------
Income before cumulative effect or
change in accounting for ESOP . . . . . . . . 1.7 0.5 13.0 (9.4) (2.9)
Cumulative effect of change in accounting
for ESOP . . . . . . . . . . . . . . . . . . . . . (9.4) -- -- -- --
------ ---- ------ ---- ----
Net income (loss) . . . . . . . . . . . . . . . . (7.7)% 0.5% 13.0% (9.4) (2.9)
- -------------------- ====== ==== ====== ===== =====
</TABLE>
* Not meaningful
First Quarter Fiscal 1996 Compared to First Quarter Fiscal 1996
Net sales for the first quarter of fiscal 1996 increased by $5.9
million or 24.9% to $29.6 million. Comparable store sales increased $3.2
million or 13.8% in the first quarter of fiscal 1996. Sales from new stores
contributed $2.6 million to the overall sales increase. The average number of
units sold on a comparable store basis increased by approximately 9.6% in the
first quarter of fiscal 1996, while the average price per merchandise sale
increased to $257 in fiscal 1996 from $252 in fiscal 1995. Comparable store
sales increased in part due to increased use of non-recourse credit, the
implementation of new return/exchange policies and ongoing improvements in the
quality of the Company's sales force. The Company opened five new stores in the
first quarter of fiscal 1996 increasing the number of stores opened to 151 as
of April 30, 1996 compared to 137 as of April 30, 1995.
Gross profit increased $2.7 million to $11.6 million in first quarter
of fiscal 1996. Gross profit increased to 39.3% in the first quarter of fiscal
1996 from 37.5% in the first quarter of fiscal 1995. This increase was due
primarily to the spreading of certain buying and occupancy costs over the
Company's larger store base and to increased sales.
Selling, general and administrative expenses increased by $2.0 million
or 24.8% to $10.0 million in the first quarter of fiscal 1996 from $8.0
million. New stores accounted for $0.9 million of this increase. As a
percentage of net sales, selling, general and administrative expenses remained
consistent at 33.9% in the first quarters of fiscal 1996 and 1995. The dollar
increase primarily relates to higher payroll expenses of $1.2 million and $0.3
million in credit expense. Comparable store payroll costs increased 9.0% in
the first quarter of fiscal 1996 as compared to the first 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 43.3% in the first quarter of fiscal 1996 from 36.0% in the first quarter of
fiscal 1995. These non-recourse credit sales carry higher discount rates than
bankcard sales, which resulted in higher credit expense.
<TABLE>
<CAPTION>
PERCENTAGE
INCREASE
PERCENTAGE THREE MONTHS
INCREASE ENDED APRIL
--------------- 30, 1996 OVER
1995 1996 THREE MONTHS
OVER OVER ENDED APRIL
1994 1995 30, 1995
---- ---- ------------
<S> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . . . . . . 17.1% 22.8% 24.9
Cost of Sales (including buying and
occupancy expenses) . . . . . . . . . . . . . 17.8 21.0 21.2
Gross Profit . . . . . . . . . . . . . . . . 16.0 25.5 30.9
Selling, general and administrative expenses . . 8.5 23.2 24.8
Income from operations . . . . . . . . . . . 41.9 31.6 88.3
Interest expense . . . . . . . . . . . . . . . . 18.8 16.2 2.6
Stock award expense . . . . . . . . . . . . . . . * * *
ESOP compensation expense . . . . . . . . . . . . 7.0 7.9 *
Income (loss) from continuing
operations before income taxes . . . . . . . . * * *
Income tax benefit . . . . . . . . . . . . . . . * * *
Gain on disposal of discontinued operations . . . * * *
Income before cumulative effect or
change in accounting for ESOP . . . . . . * * *
Cumulative effect of change in accounting
for ESOP . . . . . . . . . . . . . . . . . . . * * *
Net income (loss). . . . . . . . . . . . . . . . . * * *
</TABLE>
- --------------------
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.
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
- 30 -
<PAGE> 34
(including its new "First Time Buyers" program). 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 l995 from 11.0% in fiscal l994.
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 on the Company's
senior accreting note and subordinated indebtedness. The Recapitalization and
Offering will substantially reduce the Company's debt levels in fiscal 1996.
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. After the Recapitalization, the Company expects to
record no 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 $17.9 million,
which begin expiring in 2006. While these carryforwards are expected to reduce
future income tax payments, the benefits of such carryforwards have already
been recognized in the Company's balance sheets and results of operations for
fiscal 1995. The Company expects to realize $7.2 million of the deferred tax
asset in 1996, concurrent with the recognition of the gain relating to the debt
forgiveness.
Giving pro forma effect to the Offering and the Recapitalization and
realization of a portion of the deferred tax asset in the amount of $7.2
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 and the Recapitalization) 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
- 31 -
<PAGE> 35
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 "Stock Ownership--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 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.
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 l994 from 9.1% in fiscal l993.
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 l994 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 net losses and lower net sales in each
of its first fiscal quarters. The Company expects this trend to continue.
The following table sets forth summary unaudited quarterly financial
information of the Company for each quarter in fiscal 1994 and fiscal 1995. In
the opinion of management, this quarterly information has been prepared on a
basis consistent with the Company's audited financial statements appearing
elsewhere in this Prospectus and reflects adjustments,
- 32 -
<PAGE> 36
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 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>
1994 QUARTERS ENDED 1995 QUARTERS ENDED
(in thousands) (in thousands) 1996
QUARTER
ENDED
(in thousands)
APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, April 30,
1994 1994 1994 1994 1995 1995 1995 1996 1996
---- ----- ---- ---- ---- ---- ---- ---- -------
<S> <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
Gross Profit . . . . . 6,968 8,494 8,326 18,672 8,880 11,235 10,724 22,461 11,626
Income from
operations . . . . . 370 1,424 1,079 8,839 854 2,803 1,800 9,956 1,608
</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 inventory levels and working capital requirements have
historically been highest in advance of the Christmas shopping season. The
Company has funded these seasonal working capital needs through borrowings
under the Company's revolver and increases in trade payables and accrued
experiences.
The Company's cash flow from operating activities decreased from
$3.5 million provided by operations in the first quarter of 1995 to a use
of cash for operations of $0.2 million in the first quarter of 1996. Higher
income from operations together with increases in accounts payable and accrued
expenses were more than offset by increases in merchandise inventories and
deferred financing costs incurred in connection with the initial public
offering and the new financing arrangements. In the first quarter of 1996, the
primary sources of the Company's liquidity included a $5.4 million net increase
in the amount outstanding under the Company's revolver less a decrease of $3.3
million in outstanding checks. The Company utilized cash in the first quarter
of 1996 primarily to fund capital expenditures of $2.0 million, primarily
related to the opening of five new stores in the first quarter of 1996 and new
stores scheduled to open early in the second quarter.
During May 1996, the Company completed (i) an IPO, (ii) a
restructuring of its loan agreements, and (iii) a restructuring of the
Company's ESOP. The proceeds of the IPO and the new financing arrangements
were primarily used to repay all outstanding bank borrowings and subordinated
debt.
The Company's cash flow from operating activities increased from $4.7
million in fiscal l994 to $9.6 million in fiscal l995, 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 l995 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, l995, the Company had consigned inventories from vendors in the
amount of $18.0 million.
The Company's cash flow from operating activities increased from a
cash flow deficit 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, l994,
the Company had consigned inventories from vendors in the amount of $16.6
million.
During fiscal 1996, the Company plans to open 18 stores, eight of which had
been opened as of July 25, 1996. In addition, as of July 25, 1996, the
Company has entered into leases for ten new stores and has reached
understandings with respect to 17 leases for additional stores. New stores on
average require inventory of approximately $300,000 and capital
- 33 -
<PAGE> 37
expenditures of approximately $225,000. Pre-opening expenses for new stores
average approximately $20,000. The Company has budgeted capital expenditures
in fiscal 1996 of $5.2 million, primarily for new stores and store remodeling.
At February 1, 1996, the Company had net operating loss tax
carryforwards in the amount of $17.9 million, which will reduce cash payments
for income taxes in future periods but which have already been recognized for
financial reporting purposes. The timing of the use of these carryforwards may
be deferred if the Company has an "ownership change," as defined in Section 382
of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code").
See "Stock Ownership--Possible Limitations on the Company's Use of Net
Operating Loss Carryforwards."
The Company utilized the funds generated by the Recapitalization
(including the Offering, the IPO, the Bank Facility and the Gold Consignment
Facility) principally to retire all of the Company's bank indebtedness and
subordinated debt outstanding. The Recapitalization, which was completed on
May 7, 1996, was intended to reduce the amount of the Company's debt and the
related interest expense and to provide the Company with greater financial
flexibility for operations and to support its store expansion strategy.
Interest expense on a pro forma basis giving effect to the Recapitalization for
fiscal 1995 would have been $5.8 million, as compared to historical interest
expense of $12.3 million for fiscal 1995. The Company believes that
approximately three-quarters of this reduction is attributable to a lower level
of obligations resulting from the Recapitalization with the remainder resulting
from lower average interest rates on the new financing arrangements. As part
of the Recapitalization, the Company's ESOP was restructured. See "The
Recapitalization--ESOP Restructuring."
The Company believes that its cash flow from operating activities
together with available borrowings under the New Revolver will be sufficient to
satisfy its cash requirements, including anticipated capital expenditures, for
the foreseeable future.
INFLATION
The Company believes that inflation generally has not had a material
effect on the results of its operations.
- 34 -
<PAGE> 38
BUSINESS
THE COMPANY
General. Marks Bros. Jewelers, Inc. (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 151 stores
in 24 states at April 30, 1996. Founded in 1895, the Company operates stores
in regional and super-regional shopping malls under the names Whitehall Co.
Jewellers(R) (117 stores), Lundstrom Jewelers(R) (30 stores) and Marks Bros.
Jewelers(TM) (4 stores) (in each case, as of April 30, 1996). 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%. Although the Company recorded income from
operations in each of the last five fiscal years, it recognized net losses in
fiscal 1991, 1992 and 1993, primarily due to high interest expense. In fiscal
1995, the Company s operating return on store investment (measured by store
operating profits divided by the sum of capital expenditures and gross
inventory) for new stores opened during the prior fiscal year was approximately
28%. Virtually all the Company's stores are profitable on a store operating
basis, and almost all of the Company's new stores are profitable on a store
operating basis for their first year of operation.
The Company believes it has significant opportunities to increase
sales and profitability through an increased number of planned store openings
(including 18 in fiscal 1996 and 23 in fiscal 1997), 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.
The cost of opening a new store on average is approximately $545,000, including
inventory, capital expenditures and pre-opening expenses.
Retailing Concepts. The Company's stores currently operate under the
names Whitehall Co. Jewellers(R) (117 stores), Lundstrom Jewelers(R) (30
stores) and Marks Bros. Jewelers(TM) (4 stores) (in each case, as of April 30,
1996). 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 30 malls,
- -- of which also have a Whitehall store. 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 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 1994 were
approximately $16.9 billion, and such sales grew between l989 and l994 at an
annual rate of approximately 3.3%, 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
- 35 -
<PAGE> 39
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.
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.
Although jewelry stores have declined as a distribution channel in
recent years, the Company believes that this decline is attributable primarily
to the disappearance of many independent jewelers from the retailing
environment and a consolidation within the industry among national and regional
jewelry chains. The Company believes that this consolidation resulted from 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 775 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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<PAGE> 40
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%.
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:
Accelerated New Store Openings. The Company has opened 26 stores
during the last two fiscal years. In recent years store expansion has been
somewhat constrained by the terms of the Company's credit facilities, and the
Recapitalization is expected to allow the Company to continue its new store
openings. The following table shows the Company's store expansion during its
last five fiscal years reflecting both store openings and closings for the
respective fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, Three months
--------------------------------------- ended
NUMBER OF STORES: 1992 1993 1994 1995 1996 April 30, 1996
---------------- ---- ---- ---- ---- ---- --------------
<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 5
Closed during period . . . . . . . . . . . (6) (2) (2) (2) -- --
--- --- --- --- ---- ---
Open at End of period . . . . . . . . . . . 111 113 122 131 146 151
=== === === === === ===
Net Increase 2 2 9 9 15 5
</TABLE>
The Company currently plans to open 18 new stores in fiscal 1996
(five of which had been opened as of April 30, 1996) and 23 new stores in
fiscal 1997. 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 and five stores in the St. Louis area with a fourth
store planned to be opened in Phoenix in fiscal 1997. The Company does not
plan to enter any new geographic markets in fiscal 1996.
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, of the Company's 30 Lundstrom stores, 27 are located in malls with
Whitehall stores.
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 is
currently considering
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<PAGE> 41
closing a limited number of such stores in fiscal l996 or fiscal l997 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% and 11.0% in fiscal 1994 and 1995, respectively.
The Company seeks to achieve comparable store sales increases by (i) expanding
the availability of non-recourse credit through its new "First Time Buyers"
program, (ii) continuing to increase merchandise offerings in selected
categories (especially higher priced items), (iii) continuing to implement its
return/exchange policy, (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 38% of
net sales in fiscal 1995. 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.
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).
The following table sets forth the Company's percentage of total
merchandise sales by category for the last five fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Diamonds . . . . . . . 46.5% 48.0% 51.0% 54.1% 55.1%
Gold . . . . . . . . . 23.9 25.5 26.6 25.0 25.2
Precious/Semi-Precious 19.6 16.8 15.0 15.1 14.6
Watches . . . . . . . . 3.2 3.0 2.7 2.4 2.1
Other . . . . . . . . . 6.8 6.7 4.7 3.4 3.0
------ ------ ------ ------ ------
Total . . 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
</TABLE>
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.
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<PAGE> 42
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 enables 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. 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 purchases. In addition, the Company
utilizes a check authorization company which guarantees payments on
transactions involving personal checks.
In an effort to sell to a greater percentage of younger customers
having little or no credit history (e.g., the recently engaged), in late 1995
the Company implemented its "First Time Buyers" program through a non-recourse
arrangement with Bank One. Bank One will grant credit to young customers with
little or no credit history. In return, the Company will pay Bank One a higher
fee than it pays under its standard program. Through this program, the Company
seeks to expand its sale of diamond engagement rings and other merchandise.
The Company has devoted considerable effort and sales training to
credit, and it anticipates that its non-recourse credit programs combined with
its new "First Time Buyers" program will continue to be a focus of its efforts.
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<PAGE> 43
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 20 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 focuses 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 has 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%.
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.
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.
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<PAGE> 44
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. An increasing percentage of the Company's
sales 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 fiscal 1995, the Company's largest and
five largest suppliers accounted for approximately 14% and 37%, 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
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.
In fiscal 1995, the Company's average net monthly investment in
inventory (i.e., the total cost of inventory owned and paid for) was 71% of the
total cost of the Company's on-hand merchandise. Approximately 30% of the
Company's merchandise is obtained on consignment. 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. 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.
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<PAGE> 45
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 and further upgrading is scheduled to
support the Company's continued growth.
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, 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 download 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.
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<PAGE> 46
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 151 stores in 24 states as of April 30, 1996.
All of these stores are leased and all but one of the stores 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 in fiscal 1997,
all but three 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(R) and Lundstrom Jewelers(R) 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.
EMPLOYEES
As of July 20, 1996, the Company had a total of 1,039 employees,
including 946 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.
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
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<PAGE> 47
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.
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<PAGE> 48
THE RECAPITALIZATION
As part of the Recapitalization, the Company obtained a $44 million
secured credit facility (the "Bank Facility") consisting of a $29 million
revolving senior secured line of credit (including a $5 million letter of
credit subfacility) (the "New Revolver") and a $15 million senior secured term
loan (the "New Term Loan"), and a bank gold consignment facility (the "Gold
Consignment Facility") in an amount of up to $16 million. The following
summary of the material terms of the Bank Facility and the Gold Consignment
Facility does not purport to be complete and is subject to, and qualified in
its entirety by, reference to the provisions of the agreement (the "Bank
Agreement") governing the Bank Facility and the Gold Consignment Facility.
BANK FACILITY
The Bank Facility consist of the New Revolver and the New Term Loan.
The New 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
New Revolver, in whole or in part, at any time, and reborrow monies up to the
Commitment Amount. Available borrowings under the New Revolver are subject to
a borrowing base determined based on levels of inventory and accounts
receivable. The Company may also repay the entire outstanding balance and
terminate the Bank Agreement at any time.
The principal amount of the New Term Loan is $15 million. The New
Term Loan will mature and the Revolver will terminate in 2001. The New Term
Loan is payable in quarterly installments during each of the following periods,
in aggregate annual amounts as set forth below:
<TABLE>
<CAPTION>
QUARTERLY PAYMENT DATES IN THE PERIOD ANNUAL PAYMENTS
<S> <C>
July 31, 1996 - April 30, 1997 . . . . . . . . . . . . $1,000,000
July 31, 1997 - April 30, 1998 . . . . . . . . . . . . 2,000,000
July 31, 1998 - April 30, 1999 . . . . . . . . . . . . 3,000,000
July 31, 1999 - April 30, 2000 . . . . . . . . . . . . 4,000,000
July 31, 2000 - April 30, 2001 . . . . . . . . . . . . 5,000,000
</TABLE>
At the Company's option, the New Revolver and the New Term Loan 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, the New Revolver and the New Term
Loan will bear interest, at the Company's option, at the Base Rate or LIBOR
plus, in each case, an applicable margin that will fluctuate depending on the
Company's leverage ratio. Interest is to be calculated on the average
outstanding principal balance and shall be 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 New Revolver and the New Term Loan are 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.
The Bank Agreement contains event of default provisions, including,
among other things, failure to pay principal or interest on the New Revolver or
New Term Loan when due; failure to purchase or pay for or redeliver consigned
gold when due; insolvency or other bankruptcy events of the Company or its
subsidiaries; the occurrence of a material adverse change with respect to the
Company's business; default in the performance of covenants or other
agreements; default in the payment of other indebtedness or performance with
respect thereto; and breach of representations and warranties contained in the
Bank Agreement and certain other documents.
- 45 -
<PAGE> 49
THE 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
(a) sell up to $16 million or 39,000 troy ounces of fine gold to one or more
financial institutions, which will, in turn, consign the gold to the Company or
(b) borrow revolving loans limited to an amount based upon the value of gold
owned by the Company. The Gold Consignment Facility is secured by the gold
owned by the Company and the gold being consigned. The Gold Consignment
Facility is governed by the Bank Agreement and is subject to the same
financial, affirmative and negative covenants and default provisions 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 is required to pay 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) LIBOR 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 shall be payable monthly in arrears and the consignment fee with
respect to Fixed Rate Amounts shall be payable on the last day of each interest
period applicable thereto.
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."
The ESOP Debt and the ESOP's equity interest in the Company were
restructured as part of the Recapitalization as follows: (i) the ESOP
transferred to the Company 8,319 shares of Class B Common Stock in exchange for
the elimination of the ESOP Debt totaling 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 220,282 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 are to be
allocated to each individual participant's accounts, (v) the Company was
relieved of any future obligation to make contributions to the ESOP, and (vi)
so long as the shares of Common Stock remain actively traded on a national
quotation service or a national stock exchange, the Company no longer has the
obligation to purchase shares of Common Stock distributed by the ESOP to
participants. The ESOP currently holds an aggregate of 843,887 shares of
Common Stock. Approximately 11,878 shares, 3,239 shares and 6,149 shares of
Common Stock are to be allocated to the ESOP accounts of John R. Desjardins,
Lynn D. Eisenheim and John J. Guarnaccia, respectively, who are the only
directors or executive officers who participate in the ESOP.
THE IPO
As part of the Recapitalization, the Company completed the IPO which generated
net proceeds to the Company of approximately $40.7 million.
- 46 -
<PAGE> 50
THE NEW NOTES AND RESALE SERIES A NOTES
The Series C Notes and Series D Notes will be issued under, and entitled
to the benefits of, the Indenture, dated as of April 15, 1996, between the
Company and Norwest Bank Minnesota, National Association, as trustee (the
"Trustee"), as amended or supplemented. See "The Exchange Offer--Conditions to
the Exchange Offer." The Old Notes were issued pursuant to the same Indenture.
The form and terms of the Series C Notes are the same in all material respects
as the form and terms of the Series A Notes and the form and terms of the
Series D Notes are the same in all material respects as the form and terms of
the Series B Notes, except that the New Notes will have been registered under
the Securities Act and hence will not bear legends restricting their transfer
pursuant to the Securities Act. The Series C Notes will evidence the same debt
as the Series A Notes (which they replace) and the Series D Notes will evidence
the same debt as the Series D Notes (which they replace). The following
summary of the material provisions of the Indenture does not purport to be
complete and is subject to, and qualified in its entirety by, reference to the
provisions of the Indenture, including the definitions of certain terms
contained therein and those terms made part of the Indenture by reference to
the Trust Indenture Act of 1939, as amended, as in effect on the date of the
Indenture. The definitions of certain capitalized terms used in the following
summary are set forth below under "--Certain Definitions." As used in this
Section, references to "Series C Notes" shall also mean and include the Resale
Series A Notes offered hereby, and "Notes" shall mean the New Notes (including
the Resale Series A Notes).
GENERAL
The Notes will be unsecured senior subordinated obligations of the
Company. The Notes will be issued only in registered form without coupons, in
denominations of $1,000 and integral multiples thereof. (Section 302)
Principal of, premium, if any, and interest on the Notes will be payable, and
the Notes will be transferable, at the corporate trust office or agency of the
Trustee in the City of Minneapolis, Minnesota maintained for such purposes
initially at Sixth and Marquette, Minneapolis, Minnesota 55479-0069. (Section
301) In addition, interest may be paid at the option of the Company by check
mailed to the person entitled thereto as shown on the security register.
(Section 307) No service charge will be made for any transfer, exchange or
redemption of Notes, except in certain circumstances for any tax or other
governmental charge that may be imposed in connection therewith. (Section 305)
MATURITY AND INTEREST
Series C Notes. The Series C Notes will mature on October 31, 2004.
Interest on the Series C Notes will accrue at the rate of 12.15% per annum and
will be payable quarterly on January 31, April 30, July 31 and October 31 in
each year, commencing July 31, 1996, to the holders of record of the Series C
Notes at the close of business on the January 15, April 15, July 15 or October
15 immediately preceding such interest payment date. Interest on the Series C
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the original date of issuance (the "Issue
Date"). Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
Series D Notes. The Series D Notes will mature on October 31, 2004.
Interest on the Series D Notes is payable quarterly on January 31, April 30,
July 31 and October 31 in each year, commencing July 31, 1996, to the holders
of record of the Series D Notes at the close of business on the January 15,
April 15, July 15 or October 15 immediately preceding such interest payment
date. Interest will accrue on the Series D Notes at the rate of (a) 15% per
annum, payable in cash plus, for subsequent periods commencing May 1, 1998, (b)
1% per annum (increasing in 1% increments per each subsequent year commencing
May 1, 1999), payable, at the option of the Company, in cash or by delivery of
additional Series D Notes. Interest on the Series D Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from the original date of issuance (the "Issue Date"). Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
MANDATORY REDEMPTION
Series C Notes. Quarterly installments of principal of the Series C
Notes in the amount of $855,000 will be mandatorily prepayable, commencing
July 31, 2001, through operation of a mandatory sinking fund.
Series D Notes. Quarterly installments of principal of the Series D
Notes in the amount of the Sinking Fund Dollar Amount (as defined) will be
mandatorily prepayable, commencing July 31, 2001, through operation of a
mandatory sinking fund. The "Sinking Fund Dollar Amount" means the quotient
obtained by dividing (a) the principal amount of Series D
- 47 -
<PAGE> 51
Notes Outstanding at July 31, 2001 by (b) 14. Assuming no interest payments on
Series D Notes are made by delivery of additional Series D Notes as described
above under "Maturity and Interest," the Company will be required to redeem
quarterly $571,000 principal amount of Series D Notes, commencing July 31,
2001, through operation of the mandatory sinking fund.
OPTIONAL REDEMPTION
Series C Notes. The Series C Notes will not be redeemable at the option
of the Company until July 31, 2001. The Series C Notes will be redeemable at
the option of the Company, in whole or in part, at any time on and after July
31, 2001 at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest, if any, to the
redemption date, if redeemed during the period indicated below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
-------- -------------
<S> <C>
July 31, 2001 - July 30, 2002 . . . . . . . . . . . . 106.00%
July 31, 2002 - July 30, 2003 . . . . . . . . . . . . 105.00%
July 31, 2003 - July 30, 2004 . . . . . . . . . . . . 104.00%
July 31, 2004 and thereafter . . . . . . . . . . . . . 100.00%
</TABLE>
Series D Notes. The Series D Notes will be redeemable at the option
of the Company, in whole or in part, at any time at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued
and unpaid interest, if any, to the redemption date, if redeemed during the
period indicated below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
-------- -------------
<S> <C>
July 31, 1996 - July 30, 1997 . . . . . . . . . . . . 112.00%
July 31, 1997 - July 30, 1998 . . . . . . . . . . . . 112.00%
July 31, 1998 - July 30, 1999 . . . . . . . . . . . . 110.00%
July 31, 1999 - July 30, 2000 . . . . . . . . . . . . 110.00%
July 31, 2000 - July 30, 2001 . . . . . . . . . . . . 109.00%
July 31, 2001 - July 30, 2002 . . . . . . . . . . . . 108.00%
July 31, 2002 - July 30, 2003 . . . . . . . . . . . . 107.00%
July 31, 2003 - July 30, 2004 . . . . . . . . . . . . 106.00%
July 31, 2004 and thereafter . . . . . . . . . . . . . 105.00%
</TABLE>
Selection and Notice. In the event that less than all of the Notes
are to be redeemed at any time, selection of such Notes for redemption will be
made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if the
Notes are not then listed on a national securities exchange, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate,
provided, however, that no Notes of a principal amount of $1,000 or less shall
be redeemed in part. Notice of redemption shall be mailed by first class mail
at least 30 but not more than 60 days before the redemption date to each holder
of Notes to be redeemed at its registered address. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note
in a principal amount equal to the unredeemed portion thereof will be issued in
the name of the holder thereof upon surrender for cancellation of the original
Note. On and after the redemption date, interest will cease to accrue on Notes
or portions thereof called for redemption unless the Company defaults in the
payment of the redemption price. (Sections 1105, 1106, 1108 and 1109)
- 48 -
<PAGE> 52
SUBORDINATION
The payment of the principal of, premium, if any, and interest on the
Notes will be subordinated, to the extent set forth in the Indenture, in right
of payment to the prior payment in full in cash, Cash Equivalents or other form
of payment acceptable to the holders of all existing and future Senior
Indebtedness of the Company, which includes, without limitation, all
obligations under the Bank Credit Agreement. The Notes will be unsecured
senior subordinated indebtedness of the Company, ranking pari passu with all
other existing and future senior subordinated indebtedness of the Company and
senior to all future Subordinated Indebtedness of the Company. (Section 1401)
The Indenture provides that in the event of (a) any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding in connection therewith, relating to the
Company or its assets, or (b) any liquidation, dissolution or other winding-up
of the Company, whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or
other marshalling of assets or liabilities of the Company, whether voluntary or
involuntary and whether or not involving insolvency or bankruptcy (except a
distribution in connection with a consolidation of the Company with, or the
merger of the Company into, another corporation or the liquidation or
dissolution of the Company following conveyance, transfer or lease of its
properties and assets substantially as an entirety to another corporation upon
the terms and conditions described below under "--Merger, Sale of Assets,
Etc."), holders of all Senior Indebtedness of the Company shall be entitled to
receive payment in full in cash, Cash Equivalents or other form of payment
acceptable to the holders of Senior Indebtedness of all amounts due on or in
respect of all Senior Indebtedness, before the holders of the Notes are
entitled to receive any payment or distribution (except for certain permitted
equity or subordinated debt securities (the "Permitted Junior Securities") or
payments made pursuant to the provisions described under "--Defeasance or
Covenant Defeasance of Indenture") on account of the principal of, premium, if
any, and interest on the Notes. In the event that, notwithstanding the
foregoing, after an event described in clause (a), (b) or (c), the Trustee or
any holder of the Notes shall have received any payment or distribution of
assets of the Company of any kind or character (excluding Permitted Junior
Securities or payments made pursuant to the provisions described under
"--Defeasance or Covenant Defeasance of Indenture"), before all Senior
Indebtedness is paid in full or payment thereof provided for in cash, Cash
Equivalents or other form of payment acceptable to the holders of the Senior
Indebtedness, then such payment or distribution will be paid over or delivered
to the agent or agents for the Banks under the Bank Credit Agreement for the
benefit of holders of Senior Indebtedness for application to the payment of all
Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior
Indebtedness in full in cash, Cash Equivalents or other form of payment
acceptable to the holders of the Senior Indebtedness. (Section 1402)
During the continuance of any default in the payment of principal of,
premium, if any, or interest on any Designated Senior Indebtedness when due
(whether at final maturity, upon scheduled installment, acceleration or
otherwise) (a "Payment Default"), no payment or distribution of any assets of
the Company of any kind or character (other than Permitted Junior securities or
payments made pursuant to he provisions described under "--Defeasance or
Covenant Defeasance of Indenture") shall be made on account of the principal
of, premium, if any, and interest on the Notes unless and until such Payment
Default has been cured or waived or has ceased to exist or such Designated
Senior Indebtedness shall have been discharged or paid in full in cash, Cash
Equivalents or other form of payment acceptable to the holders of the Senior
Indebtedness. (Section 1403)
In addition, during the continuance of any other default with respect
to any Designated Senior Indebtedness pursuant to which the maturity thereof
may be accelerated (a "Non-payment Default"), after receipt by the Trustee from
a representative of holders of such Designated Senior Indebtedness of a written
notice of such Non-payment Default, no payment or distribution of any assets of
the Company of any kind or character (other than Permitted Junior Securities or
payments made pursuant to the provisions described under "--Defeasance or
Covenant Defeasance of Indenture") may be made by the Company on account of the
principal of, premium, if any, and interest on the Notes, including for the
redemption, purchase or other acquisition of Notes for the period specified
below (the "Payment Blockage Period").
The Payment Blockage Period shall commence upon the receipt of notice
of a Non-payment Default by the Trustee from a representative of holders of
Designated Senior Indebtedness stating that such notice is a payment blockage
notice pursuant to the Indenture and shall end on the earliest to occur of the
following events: (i) more than 179 days shall have elapsed since the receipt
of such notice (provided such Designated Senior Indebtedness as to which notice
was given shall not theretofore have been accelerated), (ii) the date on which
such default is cured or waived or ceases to exist (provided that no other
Non-payment Default has occurred and is then continuing after giving effect to
such cure or waiver), (iii) the
- 49 -
<PAGE> 53
date on which such Designated Senior Indebtedness is discharged or paid in full
in cash, Cash Equivalents or other form of payment acceptable to holders of the
Designated Senior Indebtedness or (iv) the date on which such Payment Blockage
Period shall have been terminated by written notice to the Company or the
Trustee from the representative of holders or Designated Senior Indebtedness
initiating such Payment Blockage Period, after which, in the case of clause
(i), (ii), (iii) or (iv), whichever was earlier, the Company shall promptly
resume making any and all required payments in respect of the Notes, including
any missed payments unless a Payment Default has occurred or the provisions of
Section 1402 of the Indenture are applicable. Only one Payment Blockage Period
with respect to the Notes may be commenced within any 360 consecutive day
period. No Non-payment Default that existed or was continuing on the date of
the commencement of any Payment Blockage Period with respect to the Designated
Senior Indebtedness initiating such Payment Blockage Period will be, or can be,
made the basis for the commencement of a subsequent Payment Blockage Period,
whether or not within a period of 360 consecutive days, unless such default has
been cured or waived for a period of not less than 90 consecutive days. In no
event will a Payment Blockage Period extend beyond 179 days from the date of
the receipt by the Trustee of the notice and there must be at least a 181
consecutive day period in any 360-day period during which no Payment Blockage
Period is in effect. (Section 1403)
If the Company fails to make any payment on the Notes when due or
within any applicable grace period, whether or not on account of the payment
blockage provisions referred to above, such failure would constitute an Event
of Default under the Indenture and would enable the holders of the Notes to
accelerate the maturity thereof. See "--Events of Default."
By reason of such subordination, in the event of liquidation,
receivership, reorganization or insolvency, creditors of the Company who are
holders of Senior Indebtedness may recover more, ratably, than the holders of
the Notes, and funds which would be otherwise payable to the holders of the
Notes will be paid to the holders of the Senior Indebtedness to the extent
necessary to pay the Senior Indebtedness in full, and the Company may be unable
to meet its obligations in full with respect to the Notes.
As of April 30, 1996, on a pro forma basis, after giving effect to
the transactions comprising the Recapitalization and the application of the
funds generated thereby, the amount of outstanding Senior Indebtedness of the
Company would have been approximately $19,519,000. See "The Recapitalization."
The amount of Senior Indebtedness outstanding will fluctuate from time to time
based upon, among other things, borrowings under the New Revolver. The
Indenture limits, but does not prohibit, the incurrence by the Company of
additional Indebtedness which is senior or pari passu in right of payment to
the Notes and prohibits the incurrence by the Company of Indebtedness which is
contractually subordinated in right of payment to any Senior Indebtedness of
the Company and senior in right of payment to the Notes.
CERTAIN COVENANTS
The Indenture contains the following covenants, among others:
Limitation on Consolidated Funded Debt. The Company will not permit,
as of the last day of any fiscal quarter, the ratio of (a) Consolidated Funded
Debt for such fiscal quarter to (b) Consolidated EBITDA for the four
consecutive fiscal quarters ending on such date to exceed the ratio set forth
opposite such date in the table below:
- 50 -
<PAGE> 54
<TABLE>
<CAPTION>
Fiscal Quarter Ending Ratio
--------------------- -----
<S> <C>
1/31/97 . . . . . . . . . . . . . . 5.28:1.0
4/30/97 . . . . . . . . . . . . . . 5.28:1.0
7/31/97 . . . . . . . . . . . . . . 5.16:1.0
10/31/97 . . . . . . . . . . . . . 5.04:1.0
1/31/98 . . . . . . . . . . . . . . 4.80:1.0
4/30/98 . . . . . . . . . . . . . . 4.56:1.0
7/31/98 . . . . . . . . . . . . . . 4.32:1.0
10/31/98 . . . . . . . . . . . . . 4.20:1.0
1/31/99 . . . . . . . . . . . . . . 3.84:1.0
4/30/99 . . . . . . . . . . . . . . 3.84:1.0
7/31/99 . . . . . . . . . . . . . . 3.72:1.0
10/31/99 and for each fiscal
quarter thereafter . . . . . . 3.60:1.0
</TABLE>
(Section 1010)
Limitation on Restricted Payments. The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly: (i)
declare or pay any dividend or make any other distribution or payment on or in
respect of Capital Stock of the Company or any payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
(other than dividends or distributions payable solely in Capital Stock (other
than Redeemable Capital Stock) or rights to purchase Capital Stock of the
Company (other than Redeemable Capital Stock)); (ii) purchase, redeem, defease
or otherwise acquire or retire for value, directly or indirectly, any Capital
Stock of the Company or any Affiliate of the Company (other than any such
Capital Stock of any Wholly Owned Restricted Subsidiary of the Company); (iii)
make any principal payment on, or purchase, defease, repurchase, redeem or
otherwise acquire or retire for value, prior to any scheduled maturity (unless
within one year of maturity), scheduled repayment, scheduled sinking fund
payment or other Stated Maturity, any Subordinated Indebtedness; (iv) make any
Investment (other than any Permitted Investment) in any person, including any
Unrestricted Subsidiary (other than in the Company, a Wholly Owned Restricted
Subsidiary of the Company or a person that becomes a Wholly Owned Restricted
Subsidiary as a result of such Investment); or (v) declare or pay any dividend
or make any other distribution on or in respect of any Capital Stock of any
Subsidiary to the direct or indirect holders (in their capacities as such) of
Capital Stock of the Subsidiary (other than with respect to Capital Stock held
by the Company or any of its Wholly Owned Restricted Subsidiaries) or any
purchase, redemption or other acquisition or retirement for value, of any
Capital Stock of any Subsidiary (other than any such Capital Stock held by the
Company or any Wholly Owned Restricted Subsidiary) (such payments, dividends,
distributions, purchases, defeasances, repurchases, redemptions, acquisitions,
retirements or Investments described in the preceding clauses (i) through (v)
are collectively referred to as "Restricted Payments"), (a) at any time during
the period ending April 30, 1998, and (b) thereafter only unless, at the time
of and after giving effect to the proposed Restricted Payment (the amount of
any such Restricted Payment, if other than in cash, being as determined by the
Board of Directors of the Company, whose determination shall be conclusive and
evidenced by a Board Resolution), (A) no Default or Event of Default shall have
occurred and be continuing and (B) the aggregate amount of all Restricted
Payments declared or made from and after May 1, 1998 would not exceed the sum
of (1) 10% of the aggregate Consolidated Net Income of the Company accrued on a
cumulative basis during the period (treated as one accounting period) beginning
on May 1, 1998 and ending on the last day of the fiscal quarter of the Company
immediately preceding the date of such proposed Restricted Payment (or, if such
aggregate cumulative Consolidated Net Income of the Company for such period
shall be a deficit, minus such deficit) plus (2) the aggregate net cash
proceeds received by the Company after the Issue Date from the issuance or sale
(other than to any of its Restricted Subsidiaries) of Capital Stock (excluding
Redeemable Capital Stock but including Capital Stock issued upon the conversion
of convertible Indebtedness or in exchange for outstanding Indebtedness (to the
extent such Indebtedness is originally sold for cash) or from the exercise of
options, warrants or rights to purchase Capital Stock (other than Redeemable
Capital Stock)) of the Company to any person (other than to a Restricted
Subsidiary of the Company) (except, in each case, to the extent such proceeds
are used to purchase, redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as set forth below), plus (3) in the case of the disposition or
repayment of any Investment constituting a Restricted Payment made after the
Issue Date, an amount equal to the lesser of the return of capital with respect
to such Investment and the cost of such Investment. For purposes of the
preceding clause (B)(2), the value of the aggregate net proceeds received by
the Company upon the issuance of Capital Stock, either upon the conversion of
convertible Indebtedness or in exchange for outstanding Indebtedness or upon
- 51 -
<PAGE> 55
the exercise of options, warrants or rights will be the net cash proceeds
received upon the issuance of such Indebtedness, options, warrants or rights
plus the incremental amount received by the Company upon the conversion,
exchange or exercise thereof.
None of the foregoing provisions will prohibit: (i) the payment of any
dividend within 90 days after the date of its declaration, if at the date of
declaration such payment would be permitted by the foregoing paragraph (a);
(ii) the redemption, repurchase or other acquisition or retirement of any
shares of any class of Capital Stock of the Company or any Restricted
Subsidiary of the Company in exchange for (including any such exchange pursuant
to a conversion right or privilege in connection with which cash is paid in
lieu of fractional shares or scrip), or out of the net cash proceeds of, a
substantially concurrent issue and sale of other shares of Capital Stock (other
than Redeemable Capital Stock) of the Company to any person (other than to a
Restricted Subsidiary of the Company); provided, however, that such net cash
proceeds are excluded from clause (B)(2) of the preceding paragraph (a); or
(iii) so long as no Default or Event of Default shall have occurred and be
continuing, the making of a Restricted Payment in an aggregate amount not to
exceed $150,000 solely to redeem shares of the Company's Class B Common Stock.
(Section 1011)
Limitation on Liens. The Company will not and will not permit any
Restricted Subsidiary to create, incur, assume or suffer to exist any Lien of
any kind upon any of its property or assets, now owned or hereafter acquired,
to secure any Pari Passu Indebtedness or Subordinated Indebtedness unless prior
to or contemporaneously therewith the Notes are secured equally and ratably;
provided that (1) if such secured Indebtedness is Pari Passu Indebtedness, the
Lien securing such Pari Passu Indebtedness shall rank equally and ratably with
the Lien securing the Notes and (2) if such secured Indebtedness is
Subordinated Indebtedness, the Lien securing such Subordinated Indebtedness
shall be subordinate and junior to the Lien securing the Notes at least to the
same extent as such Subordinated Indebtedness is subordinated to the Notes.
(Section 1012)
Restriction on Transfer of Assets. The Company will not sell, convey,
transfer or otherwise dispose of its assets or property to any of its
Subsidiaries, except for (a) transactions pursuant to clause (ix), (xi) or
(xii) of the definition of "Permitted Investments"; (b) sales, conveyances,
transfers or other dispositions made in the ordinary course of business; and
(c) sales, conveyances, transfers or other dispositions of assets or property
made on and after the Issue Date not expressly included in subparagraph (a) or
(b) above; provided, however, that, after giving effect to any such sale,
conveyance, transfer or disposition made pursuant to this clause (c) the
aggregate book value of all assets or property sold, conveyed, transferred or
disposed of pursuant to this clause (c) during the period beginning on the
Issue Date and ending on the date of such sale, conveyance, transfer or
disposition shall not exceed $1,000,000. (Section 1016)
Financial Covenants. The Company will not permit Consolidated
Tangible Net Worth at any time during any fiscal year set forth in the table
below to be less than the amount set forth opposite such fiscal year in such
table:
<TABLE>
<CAPTION>
Fiscal Year Beginning February 1, Amount
--------------------------------- ------
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . ($7,000,000)
1997 . . . . . . . . . . . . . . . . . . . ($2,000,000)
1998 . . . . . . . . . . . . . . . . . . . $6,000,000
1999 . . . . . . . . . . . . . . . . . . . $12,000,000
2000 and fiscal years thereafter . . . . . $18,000,000
</TABLE>
The Company will not permit, for any period of four consecutive
quarters ending on any date set forth in the table below, the ratio of (a) the
sum of (i) Consolidated EBITDA for such period plus (ii) Consolidated Minimum
Store Rent for such fiscal year to (b) the sum of (i) Consolidated Minimum
Store Rent for such period plus (ii) Consolidated Cash Interest Expense for
such period, to be less than the ratio set forth opposite such period in such
table:
<TABLE>
<CAPTION>
Date Ratio
---- -----
<S> <C>
1/31/97 . . . . . . . . . . . . . . 1.15:1.0
4/30/97 . . . . . . . . . . . . . . 1.15:1.0
7/31/97 . . . . . . . . . . . . . . 1.15:1.0
</TABLE>
- 52 -
<PAGE> 56
<TABLE>
<S> <C>
10/31/97 . . . . . . . . . . . . . 1.15:1.0
1/31/98 . . . . . . . . . . . . . . 1.30:1.0
4/30/98 . . . . . . . . . . . . . . 1.30:1.0
7/31/98 . . . . . . . . . . . . . . 1.30:1.0
10/31/98 . . . . . . . . . . . . . 1.30:1.0
1/31/99 . . . . . . . . . . . . . . 1.50:1.0
4/30/99 . . . . . . . . . . . . . . 1.50:1.0
7/31/99 . . . . . . . . . . . . . . 1.50:1.0
10/31/99 . . . . . . . . . . . . . 1.50:1.0
1/31/2000 and thereafter . . . . . 1.60:1.0
</TABLE>
(Sections 1019 and 1020)
Limitation on Issuance and Sale of Capital Stock by Restricted
Subsidiaries. The Company (i) will not permit any of its Restricted
Subsidiaries to issue any Capital Stock (other than to the Company or a Wholly
Owned Restricted Subsidiary of the Company) and (ii) will not permit any person
(other than the Company or a Wholly Owned Restricted Subsidiary of the Company)
to own any Capital Stock of any Restricted Subsidiary of the Company.
Limitation on Transactions with Affiliates. The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
conduct any transactions among themselves or with any Affiliates of the
Company, other than transactions in the ordinary course of the Company's or
such Restricted Subsidiary's business, consistent with past practices, and upon
terms not materially less favorable to the Company or such Restricted
Subsidiary than the Company or such Restricted Subsidiary could have obtained
in a comparable arm's-length transaction with a party other than the Company,
such Restricted Subsidiary or such Affiliate. This covenant will not restrict
the Company from transactions provided for under agreements in existence on the
date of the Indenture and listed on a schedule thereto. (Section 1014)
Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries. The Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends, in
cash or otherwise, or make any other distributions on or in respect of its
Capital Stock or any other interest or participation in, or measured by, its
profits, (b) pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary of the Company, (c) make loans or advances to
the Company or any other Restricted Subsidiary of the Company, (d) transfer any
of its properties or assets to the Company or any other Restricted Subsidiary
of the Company, or (e) guarantee any Indebtedness of the Company or any other
Restricted Subsidiary of the Company, except for such encumbrances or
restrictions existing under or by reason of (i) any agreement or other
instrument of a person acquired by the Company or any Restricted Subsidiary of
the Company in existence at the time of such acquisition (but not created in
contemplation thereof), which encumbrance or restriction is not applicable to
any person, or the properties or assets of any person, other than the person,
or the property or assets of the person, so acquired, (ii) any encumbrance or
restriction in the Bank Credit Agreement or any other agreement as in effect on
the date of the Indenture and listed on a schedule thereto, and (iii) any
encumbrance or restriction pursuant to any agreement that extends, refinances,
renews or replaces any agreement described in clause (i) and (ii) above, which
is not materially more restrictive or less favorable to the holders of Notes
than those existing under the agreement being extended, refinanced, renewed or
replaced. (Section 1015)
Limitation on Certain Other Subordinated Indebtedness. The Company
will not issue, directly or indirectly, any Indebtedness which is subordinated
or junior in ranking in any respect to Senior Indebtedness unless such
Indebtedness is expressly pari passu with or subordinated in right of payment
to the Notes. (Section 1017)
Reporting Requirements. The Company will file, to the extent
permitted under the Exchange Act, with the Commission the annual reports,
quarterly reports and other documents required to be filed with the Commission
pursuant to Sections 13 and 15 of the Exchange Act, whether or not the Company
has a class of securities registered under the Exchange Act. The Company will
file with the Trustee and provide to each holder of Notes copies of such
reports and documents within 15 days after it files them with the Commission
or, if filing such documents by the Company with the Commission is not
permitted under the Exchange Act, within 15 days after it would otherwise have
been required to file such reports and documents if permitted, in each case at
the Company's cost. (Section 703)
- 53 -
<PAGE> 57
MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Company will not, in any transaction
or series of transactions, merge or consolidate with or into, or sell, assign,
convey, transfer, lease or otherwise dispose of all or substantially all of its
properties and assets as an entirety to, any person or persons, and that the
Company will not permit any of its Restricted Subsidiaries to enter into any
such transaction or series of transactions if such transaction or series of
transactions, in the aggregate, would result in a sale, assignment, conveyance,
transfer, lease or other disposition of all or substantially all of the
properties and assets of the Company or of the Company and its Restricted
Subsidiaries, taken as a whole, to any other person or persons, unless at the
time and after giving effect thereto (i) either (A) (1) if the transaction or
transactions is a merger or consolidation involving the Company, the Company
shall be the surviving person of such merger or consolidation or (2) if the
transaction or transactions is a merger or consolidation involving a Restricted
Subsidiary of the Company, such Restricted Subsidiary shall be the surviving
person and such surviving person shall be a Restricted Subsidiary of the
Company or (B) (1) the person formed by such consolidation or into which the
Company or such Restricted Subsidiary is merged or to which the properties and
assets of the Company or such Restricted Subsidiary, as the case may be,
substantially as an entirety, are transferred (any such surviving person or
transferee person being the "Surviving Entity") shall be a corporation
organized and existing under the laws of the United States of America, any
state thereof or the District of Columbia and (2) in case of a transaction
involving the Company, the Surviving Entity shall expressly assume by a
supplemental indenture executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the Notes
and the Indenture, and the Indenture shall remain in full force and effect;
(ii) immediately before and immediately after giving effect to such transaction
or series of transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), no Default or Event
of Default shall have occurred and be continuing; and (iii) immediately after
giving effect to such transaction, the Surviving Entity shall have a
Consolidated Net Worth in an amount which is not less than the Consolidated Net
Worth of the Company or such Restricted Subsidiary, as the case may be,
immediately prior to such transaction; provided that a Wholly Owned Restricted
Subsidiary may consolidate with, or merge with or into, or convey, transfer or
lease all or substantially all its assets to, the Company or another Wholly
Owned Restricted Subsidiary. (Section 801)
In connection with any consolidation, merger, transfer, lease or other
disposition contemplated hereby, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance satisfactory to the Trustee,
an officers' certificate and an opinion of counsel, each stating that such
consolidation, merger, transfer, lease or other disposition and the
supplemental indenture, if any, in respect thereof comply with the requirements
under the Indenture. (Section 801)
Upon any consolidation or merger or any transfer of all or
substantially all of the assets of the Company in accordance with the
foregoing, in which the Company is not the continuing corporation, the
successor corporation formed by such a consolidation or into which the Company
is merged or to which such transfer is made, shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if such successor corporation had been
named as the Company therein. (Section 802)
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture with respect
to Notes of any series:
(i) default in the payment of the principal of, or premium, if
any, when due and payable, on any of the Notes (at its Stated Maturity, upon
optional redemption, required purchase or otherwise) of such series, and such
default continues for a period of one day;
(ii) default in the payment of an installment of interest on any of
the Notes of such series, when due and payable, and such default continues for
a period of five days;
(iii) failure by the Company or any Restricted Subsidiary to comply
with its obligations under "--Merger, Sale of Assets, Etc." above;
(iv) failure by the Company to perform or observe any other term,
covenant or agreement contained in the Notes or the Indenture (other than a
default specified in clause (i), (ii) or (iii) above) for a period of 20 days
after written
- 54 -
<PAGE> 58
notice of such failure requiring the Company to remedy the same shall have been
given (x) to the Company by the Trustee or (y) to the Company and the Trustee
by the holders of 25% in aggregate principal amount of all Notes then
outstanding;
(v) (A) default or defaults under one or more agreements,
instruments, mortgages, bonds, debentures or other evidences of Indebtedness
under which the Company or any Restricted Subsidiary of the Company then has
outstanding indebtedness in excess of $1,500,000, individually or in the
aggregate, and either (i) such Indebtedness is already due and payable in full
at maturity or (ii) such default or defaults have resulted in the acceleration
of the maturity of such Indebtedness and/or foreclosure on or liquidation of
any collateral securing payment of such Indebtedness;
(vi) one or more judgments, orders or decrees of any court or
regulatory or administrative agency of competent jurisdiction for the payment
of money in excess of $1,500,000, individually or in the aggregate, shall be
entered against the Company or any Restricted Subsidiary of the Company or any
of their respective properties and shall not have been discharged or fully
bonded, and either (1) any creditor shall have commenced an enforcement
proceeding upon such judgment (other than a judgment that is stayed by pending
appeal or otherwise) or (2) there shall have been a period of 60 days after the
date on which any period for appeal has expired and during which a stay of
enforcement of such judgment, order or decree, shall not be in effect;
(vii) certain events of bankruptcy, insolvency or reorganization
with respect to the Company or any Significant Subsidiary of the Company or one
or more Subsidiaries of the Company which, in the aggregate, would constitute a
Significant Subsidiary shall have occurred; or
(viii) any representation or warranty of the Company in the Indenture
or in any agreement pursuant to which a Holder of Notes shall have purchased
Notes on the Issue Date shall have proved to have been false in any material
respect upon the date when made or deemed to have been made. (Section 501)
If an Event of Default (other than as specified in clause (vii) above
with respect to the Company or any Significant Subsidiary (or one or more
Subsidiaries which, in the aggregate, would constitute a Significant
Subsidiary)) with respect to any series of Notes shall occur and be continuing,
the Trustee, by notice to the Company, or the holders of at least 25% in
aggregate principal amount of any series of Notes affected then outstanding, by
notice to the Trustee and the Company, may declare the principal of, premium,
if any, and accrued and unpaid interest, if any, on all of the outstanding
Notes of such series affected thereby due and payable immediately, upon which
declaration all amounts payable in respect of such Notes of such series shall
be immediately due and payable. If an Event of Default specified in clause
(vii) above with respect to the Company or any Significant Subsidiary (or one
or more Subsidiaries which, in the aggregate, would constitute a Significant
Subsidiary) occurs and is continuing, then the principal of, premium, if any,
and accrued and unpaid interest, if any, on all of the outstanding Notes shall
ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holder of Notes. (Section 502)
After a declaration of acceleration under the Indenture with respect
to any series of Notes (or both series of Notes, as the case may be), but
before a judgment or decree for payment of money due has been obtained by the
Trustee, the holders of greater than 75% in aggregate principal amount of the
outstanding Notes of such series (or all of the Notes, as the case may be), by
written notice to the Company and the Trustee, may rescind such declaration and
its consequences if: (a) the Company has paid or deposited with the Trustee a
sum sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements, and
advances of the Trustee, its agents and counsel, (ii) all overdue interest on
the Notes of such series then outstanding (or on all of the Notes, as the case
may be), (iii) the principal of and premium, if any, on any Notes outstanding
of such series (or of all Notes, as the case may be) which have become due
otherwise than by such declaration of acceleration and interest thereon at the
rate borne by the Notes of such series, and (iv) to the extent that payment of
such interest is lawful, interest upon overdue interest and overdue principal
at the rate borne by the Notes of such series which have become due otherwise
than by such declaration of acceleration; (b) the rescission would not conflict
with any judgment or decree of a court of competent jurisdiction; and (c) all
Events of Default, other than the non-payment of principal of, premium, if any,
and interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived. (Section 502)
The holders of not less than a majority in principal amount of the
outstanding Notes of each series affected (voting, in the event of both series
of Notes being affected substantially identically, as one class, in which case
such majority shall include the Holder of the Institutional Series B Notes),
may on behalf of the holders of all the Notes of such series waive any
- 55 -
<PAGE> 59
past defaults under the Indenture, except a default in the payment of the
principal of, premium, if any, or interest on any Note, or in respect of a
covenant or provision which under the Indenture cannot be modified or amended
without the consent of the holder of each Note affected. (Section 513)
No holder of any Notes of any series has any right to institute any
proceeding with respect to the Indenture or any remedy thereunder, unless the
holders of at least 25% in aggregate principal amount of the outstanding Notes
or such series have made written request, and offered reasonable indemnity, to
the Trustee to institute such proceeding within 30 days after receipt of such
notice and the Trustee, within such 30- day period, has not received directions
inconsistent with such written request by holders of a majority in aggregate
principal amount of the outstanding Notes of such series. Such limitations do
not apply, however, to a suit instituted by a holder of a Note for the
enforcement of the payment of the principal of, premium, if any, or interest
on, such Note on or after the respective due dates expressed in such Note.
(Sections 507 and 508)
During the existence of an Event of Default, the Trustee is required
to exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, whether or not an Event of Default shall occur and be continuing, the
Trustee under the Indenture is not under any obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
holders of the Notes unless such holders shall have offered to the Trustee
reasonable security or indemnity. Subject to certain provisions concerning the
rights of the Trustee, the holders of a majority in principal amount of the
outstanding Notes of any or both series affected, as the case may be (voting,
in the event of both series of Notes being affected substantially identically,
as one class, in which case such majority shall include the Holder or Holders
of the Institutional Series B Notes), have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee,
or exercising any trust or power conferred on the Trustee under the Indenture.
(Sections 602 and 512)
If a Default or an Event of Default occurs and is continuing and is
known to the Trustee, the Trustee shall mail to each holder of the Notes notice
of the Default or Event of Default within 10 days after such occurrence.
Except in the case of a Default or an Event of Default in payment of principal
of, premium, if any, or interest on any Notes, the Trustee may withhold the
notice to the holders of such Notes if a committee of its trust officers in
good faith determines that withholding the notice is in the interest of the
holders of the Notes. (Section 601)
The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company of its obligations under the
Indenture and as to any default in such performance. The Company is also
required to notify the Trustee within ten days of any event which is, or after
notice or lapse of time or both would become, an Event of Default. (Sections
1008 and 1009)
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the
obligations of the Company with respect to the outstanding Notes
("defeasance"). Such defeasance means that the Company shall be deemed to have
paid and discharged the entire Indebtedness represented by the then outstanding
Notes, except for (i) the rights of holders of outstanding Notes to receive
payment in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due, (ii) the Company's obligations to issue
temporary Notes, register the transfer or exchange of any Notes, replace
mutilated, destroyed, lost or stolen Notes and maintain an office or agency for
receipt of payments in respect of the Notes, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and (iv) the defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect
to terminate its obligations with respect to certain covenants that are set
forth in the Indenture, some of which are described under "--Certain Covenants"
above, and any subsequent failure to comply with such obligations shall not
constitute a Default or an Event of Default with respect to the Notes
("covenant defeasance"). (Sections 1301, 1302 and 1303)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust for the benefit of
the holders of the Notes, cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay the principal of, premium, if any,
and interest on the outstanding Notes to redemption or maturity, (ii) the
Company shall have delivered to the Trustee an opinion of counsel to the effect
that the holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of
- 56 -
<PAGE> 60
such defeasance or covenant defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as would have
been the case if such defeasance or covenant defeasance had not occurred (in
the case of defeasance, such opinion must refer to and be based upon a ruling
of the Internal Revenue Service or a change in applicable federal income tax
laws), (iii) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or, insofar as clause (ix) under the
first paragraph under "Events of Default" is concerned, at any time during the
period ending on the 91st day after the date of deposit, (iv) such defeasance
or covenant defeasance shall not cause the Trustee to have a conflicting
interest with respect to any of the Notes, (v) such defeasance or covenant
defeasance shall not result in a breach or violation of, or constitute a
default under, the Indenture or any material agreement or instrument to which
the Company or any Guarantor is a party or by which the Company or any
Guarantor is bound, (vi) the Company shall have delivered to the Trustee an
opinion of counsel to the effect that (A) the trust funds will not be subject
to any rights of holders of Senior Indebtedness, including, without
limitations, those arising under the Indenture and (B) after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (vii) the Company shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating that
all conditions precedent under the Indenture to either defeasance or covenant
defeasance, as the case may be, have been complied with and that no violations
under agreements governing any other outstanding Indebtedness would result,
(viii) the Company shall have delivered to the Trustee an officers' certificate
stating that the deposit was not made by the Company with intent of preferring
the holders of the Notes over the other creditors of the Company with the
intent of defeating, hindering or delaying or defrauding creditors of the
Company or others, (ix) if the Bank Credit Agreement is in effect, the Company
shall have delivered to the Trustee any required consent of the lenders under
the Bank Credit Agreement to such defeasance or covenant defeasance, as the
case may be, and (x) no event or condition shall exist that would prevent the
Company from making payments of the principal of (and premium, if any) or
interest on the Notes on the date of such deposit or at any time during the
period ending on the 91st day after the date of such deposit (it being
understood that this condition shall not be deemed satisfied until the
expiration of such period). (Section 1304)
SATISFACTION AND DISCHARGE
The Indenture will upon Company Request (as defined in the Indenture)
be discharged and will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when (i) either (a)
all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes which have been replaced or paid and Notes for which payment
has theretofore been deposited in trust or segregated and held in trust by the
Company and thereafter repaid to the Company or discharged from such trust)
have been delivered to the Trustee for cancellation or (b) all Notes not
theretofore delivered to the Trustee for cancellation have become due and
payable, and the Company has irrevocably deposited or caused to be deposited
with the Trustee funds in trust solely for the benefit of holders in an amount
in U.S. dollars sufficient to pay and discharge the entire Indebtedness on the
Notes not theretofore delivered to the Trustee for cancellation, for principal
of, premium, if any, and interest on the Notes to the date of deposit together
with irrevocable instructions from the Company directing the Trustee to apply
such funds to the payment thereof at maturity or redemption, as the case may
be, (ii) the making of such Company Request does not constitute a default under
the Indenture or any other material agreement to which the Company is a party
or by which it is bound, (iii) the Company has paid all other sums payable
under the Indenture by the Company, and (iv) the Company has delivered to the
Trustee an officers' certificate and an opinion of counsel stating that all
conditions precedent under the Indenture relating to the satisfaction and
discharge of the Indenture have been complied with. (Section 401)
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<PAGE> 61
AMENDMENTS AND WAIVERS
From time to time, the Company, when authorized by a resolution of its
Board of Directors, and the Trustee may, without the consent of the holders of
any outstanding Notes, amend, waive or supplement the Indenture or the Notes
for certain specified purposes, including, among other things, curing
ambiguities, defects or inconsistencies, complying with the Trust Indentures
Act of 1939, adding any Subsidiary of the Company as a Guarantor or making any
change that does not adversely affect the rights of any holder; provided,
however, that the Company has delivered to the Trustee an opinion of counsel
stating that such change does not adversely affect the rights of any holder of
the Notes. Other amendments and modifications of the Indenture or the Notes
may be made by the Company and the Trustee with the consent of the holders of
not less than a majority of the principal amount of the outstanding Notes of
any or all series which are affected by the modification or amendment, as the
case may be (voting in the case of both series of Notes being affected
substantially identically, as one class, in which case such majority shall
include the Holder or Holders of the Institutional Series B Notes); provided,
however, that no such modification or amendment may, without the consent of the
holder of each outstanding Note affected thereby, (i) reduce the principal
amount of, extend the fixed maturity of or alter the redemption provisions of,
the Notes, (ii) change the currency in which the Notes or any premium or the
interest thereon is payable, (iii) reduce the percentage in principal amount of
outstanding Notes that must consent to an amendment, supplement or waiver or
consent to take any action under the Indenture, the Notes or any Guarantee,
(iv) impair the right to institute suit for the enforcement of any payment on
or with respect to the Notes, (v) waive a default in payment with respect to
the Notes, (vi) reduce or change the rate or time for payment of interest on
the Notes, or (vii) modify or change any provision of the Indenture affecting
the subordination of the Notes in a manner adverse to the holders of the Notes.
(Sections 901 and 902)
THE TRUSTEE
Norwest Bank Minnesota, National Association has been designated as
the Trustee under the Indenture and has been appointed by the Company as
Registrar and Paying Agent with regard to the Notes.
GOVERNING LAW
The Indenture and the Notes are governed by the laws of the State of
Illinois, without regard to the principles of conflicts of law. (Section 112)
CERTAIN DEFINITIONS
"Affiliate" means, with respect to any specified person, any other
person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person. For purposes of this
definition, "control" when used with respect to any person means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"Average Life to Stated Maturity" means, with respect to any
Indebtedness, as at any date of determination, the quotient obtained by
dividing (a) the sum of the products of (i) the number of years from such date
to the date or dates of each successive scheduled principal payment (including,
without limitation, any sinking fund requirements) of such Indebtedness
multiplied by (ii) the amount of each such principal payment by (b) the sum of
all such principal payments.
"Bank Credit Agreement" means (a) the Revolving Credit, Term Loan and
Gold Consignment Agreement among the Company, the Banks and The First National
Bank of Boston and Rhode Island Hospital Trust National Bank, as agents for the
Banks, as in effect on the Issue Date and as such agreement may be amended,
restated, supplemented or otherwise modified from time to time, and (b) any
credit agreement, loan agreement, note purchase agreement, indenture or other
agreement, document or instrument refinancing, refunding or otherwise replacing
such Agreement or any other agreement deemed a Bank Credit Agreement under
clause (a) or (b) hereof.
"Banks" means the lenders from time to time who are parties to the
Bank Credit Agreement.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in or other equivalents or interests in
(however designated) such person's capital stock or other equity interests or
participations,
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including general and limited partnership interests, and any rights (other than
debt securities convertible into capital stock), warrants or options
exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or
other amounts under a lease of (or other agreement conveying the right to use)
any property (whether real, personal or mixed) that is required to be
classified and accounted for as a capital lease obligation under GAAP; and, for
the purpose of the Indenture, the amount of such obligation at any date shall
be the capitalized amount thereof on the balance sheet at such date, determined
in accordance with GAAP consistently applied.
"Cash Equivalents" means, at any time : (i) any evidence of
Indebtedness with a maturity of 180 days or less issued, or directly and fully
guaranteed or insured, by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof); (ii) certificates of deposit,
time deposits and bankers' acceptances with a maturity of 180 days or less of
any financial institution that is a member of the Federal Reserve System having
combined capital and surplus and undivided profits of not less than
$500,000,000 and a Keefe Bank Watch Rating of B or better; (iii) commercial
paper with a maturity of 90 days or less issued by a corporation that is not an
Affiliate of the Company or a Subsidiary organized under the laws of any state
of the United States or the District of Columbia and rated at least A-1 by S&P
or at least P-1 by Moody's or at least an equivalent rating category of another
nationally recognized securities rating agency; and (iv) any money market or
other deposit accounts issued or offered by any domestic institution in the
business of accepting money market accounts or any commercial banking
institution described in clause (ii) above.
"Common Stock" means, with respect to any person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of, such person's common stock, whether
outstanding at the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common stock.
"Consignment Fees" means consignment fees on consigned precious metal
at the rates set forth in Section 5.2 of the Bank Credit Agreement.
"Consolidated Cash Interest Expense" means, with respect to the
Company and its Restricted Subsidiaries and for any particular fiscal period,
the amount of Consolidated Total Interest Expense which is paid or due to be
paid in cash during such period.
"Consolidated EBITDA" means, with respect to the Company and its
Restricted Subsidiaries and for any particular fiscal period, the consolidated
earnings (or loss) from operations of the Company and its Restricted
Subsidiaries for such period, after eliminating therefrom all extraordinary
nonrecurring items of income (including gains on the sale of assets and
earnings from the sale of discontinued business lines), and after all expenses
and other proper charges but before payment or provision for (a) any income
taxes, interest expenses or Consignment Fees for such period, (b) depreciation
for such period, (c) amortization for such period, and (d) all other noncash
charges for such period, all determined in accordance with generally accepted
accounting principles.
"Consolidated Funded Debt" shall mean, with respect to the Company and
its Restricted Subsidiaries and for any period, the average aggregate principal
amount outstanding during such period in respect of all Indebtedness of the
Company and its Restricted Subsidiaries pursuant to any agreement or instrument
to which the Company or any Restricted Subsidiary is a party relating to the
borrowing of money or the obtaining of credit (including, without limitation,
amounts outstanding under the Bank Credit Agreement, Indebtedness in respect of
the Notes and Indebtedness in respect of Capitalized Lease Obligations).
"Consolidated Minimum Store Rent" means, with respect to any fiscal
period, the aggregate amount of obligations of the Company and its Restricted
Subsidiaries during such period to make direct or indirect payment, whether as
rent or otherwise, for fixed or minimum rentals in respect of any leased retail
store locations.
"Consolidated Net Income" means, with respect to the Company and its
Restricted Subsidiaries and for any particular fiscal period, the consolidated
net income (or loss) of the Company and its Restricted Subsidiaries for such
period as determined in accordance with generally accepted accounting
principles consistently applied adjusted, to the extent
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included in calculating such net income, by excluding, without duplication (i)
all extraordinary gains or losses (net of fees and expenses relating to the
transaction giving rise thereto) and the non-recurring cumulative effect of
accounting changes, (ii) the portion of net income (or loss) of the Company and
its Restricted Subsidiaries allocable to minority interests and unconsolidated
Persons to the extent that cash dividends or distributions have not actually
been received by the Company or one of the Company's Restricted Subsidiaries,
(iii) net income (or loss) of any Person combined with the Company or one of
its Restricted Subsidiaries on a "pooling of interest" basis attributable to
any period prior to the date of combination, (iv) the net income of any
Restricted Subsidiary of the Company to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary of
that income is not at the time permitted, directly or indirectly, by operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulations applicable to such Restricted
Subsidiary or its stockholders.
"Consolidated Tangible Net Worth" means, the difference of (a)
Consolidated Total Assets minus (b) Consolidated Total Liabilities, and less
(c) the sum of:
(i) the total book value of all assets of the Company and
its Restricted Subsidiaries properly classified as intangible assets
under generally accepted accounting principles, including such items
as goodwill, the purchase price of acquired assets in excess of the
fair market value thereof, trademarks, trade names, service marks,
brand names, copyrights, patents and licenses, and rights with respect
to the foregoing, but excluding, whether or not so classified as
intangible assets, up to $4,000,000 in the aggregate of unamortized
transaction costs incurred by the Company and its Restricted
Subsidiaries in connection with the Indenture and the transactions
contemplated thereby to the extent included in Consolidated Total
Assets; plus
(ii) all amounts representing any write-up in the book
value of any assets of the Company or its Restricted Subsidiaries
resulting from a revaluation thereof subsequent to January 31, 1996;
plus
(iii) to the extent otherwise includable in the computation
of Consolidated Tangible Net Worth, any subscriptions receivable.
"Consolidated Total Assets" means, as of any date, all assets of the
Company and its Restricted Subsidiaries determined on a consolidated basis as
of such date in accordance with generally accepted accounting principles.
"Consolidated Total Interest Expense" means, for any fiscal period,
the aggregate amount of interest required to be paid or accrued by the Company
and its Restricted Subsidiaries during such period on all Indebtedness of the
Company and its Restricted Subsidiaries outstanding during all or any part of
such period, whether such interest was or is required to be reflected as an
item of expense or capitalized, including payments consisting of interest in
respect of Capitalized Lease Obligations and including commitment fees, agency
fees, facility fees, Consignment Fees, balance deficiency fees and similar fees
or expenses in connection with the borrowing of money.
"Consolidated Total Liabilities" means, as of any date, all
liabilities of the Company and its Restricted Subsidiaries determined on a
consolidated basis as of such date in accordance with generally accepted
accounting principles and all Indebtedness of the Company and its Restricted
Subsidiaries, whether or not so classified.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) all Senior Indebtedness
under the Bank Credit Agreement and (ii) any other Senior Indebtedness which,
at the time of determination, has an aggregate principal amount outstanding,
together with any commitments to lend additional amounts, of at least
$5,000,000 and is specifically designated by the Company, with the consent of
the agent for the Banks under the Bank Credit Agreement, in its sole
discretion, if such agreement is then in effect, in the instrument evidencing
such Senior Indebtedness or the agreement under which such Senior Indebtedness
arises as "Designated Senior Indebtedness."
"Event of Default" has the meaning set forth under "--Events of
Default" herein.
"GAAP" or "generally accepted accounting principles" means (i) when
used in Section 1010 (Limitation on Consolidated Funded Debt) and Sections 1019
and 1020 of the Indenture (Financial Covenants), whether directly or
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indirectly through reference to a capitalized term used therein, (A) principles
that are consistent with the principles promulgated or adopted by the Financial
Accounting Standards Board and its predecessors, in effect for the Company's
fiscal year ended on January 31, 1996, and (B) to the extent consistent with
such principles, the accounting practice of the Company reflected in its
financial statements for the year ended on January 31, 1996; provided, however,
that if any change in such principles promulgated by the Financial Accounting
Standards Board and its predecessors following January 31, 1996 would affect
(or would result in a change in the method of calculation of) any of the
covenants set forth in Sections 1010, 1019 and 1020 of the Indenture, or any
definition related thereto, then the Company and the holders of the Notes will
negotiate in good faith to amend all such covenants and definitions as would be
affected by such changes in such principles to the extent necessary to maintain
the economic terms of such covenants as in effect under the Indenture
immediately prior to giving effect to such changes in such principles, provided
further that, until the amendment of such covenants and definitions shall have
been agreed upon by the Company and the Trustee on behalf of the holders of the
Notes, the covenants and definitions in effect immediately prior to such
amendment shall remain in effect and any determination of compliance with any
covenant set forth in Sections 1010, 1019 and 1020 of the Indenture shall be
construed in accordance with generally accepted accounting principles as in
effect immediately prior to such amendment consistently applied, and (ii) when
used in general, other than as provided above, principles that are (A)
consistent with the principles promulgated or adopted by the Financial
Accounting Standards Board and its predecessors, as in effect from time to
time, and (B) consistently applied with past financial statements of the
Company adopting the same principles, provided that in each case referred to in
this definition of "GAAP" or "generally accepted accounting principles" a
certified public accountant would, insofar as the use of such accounting
principles is pertinent, be in a position to deliver an unqualified opinion
(other than a qualification regarding changes in generally accepted accounting
principles) as to financial statements in which such principles have been
properly applied.
"guarantee" means, as applied to any obligation, (i) a guarantee
(other than by endorsement of negotiable instruments for collection in the
ordinary course of business), direct or indirect, in any manner, of any part or
all of such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"Indebtedness" means all obligations, contingent and otherwise, that
in accordance with generally accepted accounting principles should be
classified upon the obligor's balance sheet as liabilities, or to which
reference should be made by footnotes thereto, including in any event and
whether or not so classified: (i) all debt and similar monetary obligations,
whether direct or indirect; (ii) all liabilities secured by any mortgage,
pledge, security interest, lien, charge or other encumbrance existing on
property owned or acquired subject thereto, whether or not the liability
secured thereby shall have been assumed; and (iii) all guarantees, endorsements
and other contingent obligations whether direct or indirect in respect of
indebtedness of others, including any obligation to supply funds to or in any
manner to invest in, directly or indirectly, the debtor, to purchase
indebtedness, or to assure the owner of indebtedness against loss, through an
agreement to purchase goods, supplied, or services for the purpose of enabling
the debtor to make payment of the indebtedness held by such owner or otherwise,
and the obligations to reimburse the issuer in respect of any letters of
credit.
"Institutional Series B Notes" shall mean the Series B Notes
authenticated and delivered to the initial Holder or Holders thereof (including
any Series B Notes authenticated and delivered in exchange for such Series B
Notes so authenticated and delivered), and such Series B Notes (and any Series
B Notes so authenticated and delivered in exchange therefor) shall constitute
Institutional Series B Notes if and only for so long as the initial Holder or
Holders of such Series B Notes (or any Series B Notes so authenticated and
delivered in exchange therefor) hold in the aggregate not less than 87.5% of
the aggregate outstanding principal amount of Series B Notes.
"Investment" means all expenditures made and all liabilities incurred
(contingently or otherwise) for the acquisition of stock or Indebtedness of, or
for loans, advances, capital contributions or transfers of property to, or in
respect of any guaranties (or other commitments as described under
Indebtedness), or obligations of, any Person. In determining the aggregate
amount of Investments outstanding at any particular date: (i) the amount of
any Investment represented by a guaranty shall be taken at not less than the
principal amount of the obligations guaranteed and still outstanding: (ii)
there shall be included as an Investment all interest accrued with respect to
Indebtedness constituting an Investment unless and until such interest is paid;
(iii) there shall be deducted in respect of each such Investment any amount
received as a return of capital (but only by repurchase, redemption,
retirement, repayment, liquidating dividend or liquidating distribution); (iv)
there shall not be deducted in respect of any Investment any amounts received
as earnings on such Investment, whether as
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dividends, interest or otherwise, except that accrued interest included as
provided in the foregoing clause (ii) may be deducted when paid; and (v) there
shall not be deducted from the aggregate amount of Investments any decrease in
the value thereof.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind. A person shall be deemed to own subject to a Lien any property which
such person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Pari Passu Indebtedness" means any Indebtedness of the Company that
is pari passu in right of payment to the Notes.
"Permitted Investment" means any of the following: (i) Investments by
the Company or any Wholly Owned Restricted Subsidiary of the Company in another
person, if as a result of such Investment such other person is merged or
consolidated with or into, or transfer or conveys all or substantially all of
its assets to the Company or such Wholly Owned Restricted Subsidiary; (ii)
Investments in short-term obligations of, or fully guaranteed by, the United
States of America; (iii) Investments in commercial paper rated "P-1" or better
by Moody's or "A-1" or better by S&P; (iv) Investments in certificates of
deposit issued by and time deposits with commercial banks (whether domestic or
foreign) having capital and surplus in excess of $100,000,000; (v) Investments
in any mutual fund organized under the Investment Company Act of 1940 or money
market fund organized under the laws of the United States of America or any
state thereof which invests only in instruments described in clause (ii), (iii)
or (iv) below; (vi) Investments representing Capital Stock or obligations
issued to the Company or any of its Restricted Subsidiaries in settlement of
claims against any other person by reason of a composition or readjustment of
debt or a reorganization of any debtor of the Company or of such Restricted
Subsidiary; (vii) Investments in Cash Equivalents; (viii) loans and advances to
employees and officers of the Company and its Restricted Subsidiaries made in
compliance with clause (ii) of the second sentence under the covenant
"--Limitations on Transactions with Affiliates" described above; (ix)
Investments by the Company or a Wholly Owned Restricted Subsidiary in the
Capital Stock of a Wholly Owned Restricted Subsidiary; (x) Investments in any
of the Notes; (xi) receivables owing to the Company or any Restricted
Subsidiary created in the ordinary course of business; and (xii) Investments in
any person in addition to that described in clauses (i) through (xi) of this
definition of "Permitted Investments" not to exceed $3,000,000 in the aggregate
at any time outstanding.
"person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any person, any and all
shares, interests, participations or other equivalents (however designated) of
such person's preferred or preference stock whether now outstanding or issued
after the Issue Date, and including, without limitation, all classes and series
of preferred or preference stock of such person.
"Redeemable Capital Stock" means any class or series of Capital Stock
that, either by its terms, by the terms of any security into which it is
convertible or exchangeable or by contract or otherwise, is, or upon the
happening of an event or passage of time would be, required to be redeemed
prior to any Stated Maturity of the Notes or is redeemable at the option of the
holder thereof at any time prior to any Stated Maturity of the Notes, or, at
the option of the holder thereof, is convertible into or exchangeable for debt
securities at any time prior to any Stated Maturity of the Notes.
"Restricted Payment" has the meaning set forth under "--Limitation on
Restricted Payments" covenant above.
"Restricted Subsidiary" means any Subsidiary of the Company other
than an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Corporation and its successors.
"Senior Indebtedness" means the principal of, premium, if any, and
interest on any Indebtedness of the Company, whether outstanding on the Issue
Date or thereafter created, incurred or assumed, unless, in the case of any
particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides
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that such Indebtedness shall not be senior in right of payment to the Notes.
Without limiting the generality of the foregoing, "Senior Indebtedness" shall
also include all obligations of the Company, whether outstanding on the Issue
Date or thereafter created, incurred or assumed, under or in respect of the
Bank Credit Agreement, whether for principal, interest (including interest
accruing after the filing of a petition initiating any proceeding under any
state, federal or foreign bankruptcy laws whether or not allowable in such
proceeding), reimbursement of amounts drawn under letters of credit issued or
arranged for pursuant thereto, obligations owed to the Banks with respect to
Interest Rate Protection Obligations incurred to satisfy the requirements of
the Bank Credit Agreement or otherwise and reimbursement of other amounts,
guarantees in respect thereof, and all charges, fees, indemnifications,
damages, penalties, expenses (including any post-petition expenses in any
state, federal or foreign bankruptcy proceeding) and other amounts or
liabilities payable by the Company or its Restricted Subsidiaries under the
Bank Credit Agreement. Notwithstanding the foregoing, "Senior Indebtedness"
shall not include (a) Indebtedness evidenced by the Notes, (b) Indebtedness
that is expressly subordinate or junior in right of payment to any Indebtedness
of the Company, (c) Indebtedness which, when incurred and without respect to
any election under Section I 1 1 1 (b) of Title 11, United States Code, is by
its terms without recourse to the Company, (d) any repurchase, redemption or
other obligation in respect of Redeemable Capital Stock, (e) to the extent it
might constitute Indebtedness, amounts owing for goods, materials or services
purchased in the ordinary course of business or consisting of trade payables or
other current liabilities (other than any current liabilities owing under the
Bank Credit Agreement or the current portion of any long-term Indebtedness
which would constitute Senior Indebtedness but for the operation of this clause
(e)), (f) to the extent it might constitute Indebtedness, amounts owed by the
Company for compensation to employees or for services rendered to the Company,
(g) to the extent it might constitute Indebtedness, any liability for federal,
state, local or other taxes owed or owing by the Company, (h) Indebtedness of
the Company to a Subsidiary of the Company or any other Affiliate of the
Company or any of such Affiliate's Subsidiaries and (i) that portion of any
Indebtedness which at the time of issuance is issued in violation of the
Indenture.
"series of Notes" or "Notes of any series" shall mean and refer to
Series A Notes and/or Series B Notes and/or Series C Notes and/or Series D
Notes.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which any principal of such Note or such installment of interest is due
and payable, and when used with respect to any other Indebtedness or any
installments of interest thereon, means any date specified in the instrument
governing such Indebtedness as the fixed date on which the principal of such
Indebtedness, or such installment of interest thereon, is due and payable.
"Subordinated Indebtedness" means, with respect to the Company,
Indebtedness of the Company which is expressly subordinated in right of payment
to the Notes pursuant to subordination provisions described in
"--Subordination," as appropriately modified to include the Notes as "Senior
Indebtedness" thereunder.
"Subsidiary" means, with respect to any person, (i) a corporation a
majority of whose Voting Stock is at the time, directly or indirectly, owned by
such person, by one or more Subsidiaries of such person or by such person and
one or more Subsidiaries of such person and (ii) any other person (other than a
corporation), including, without limitation, a joint venture or partnership, in
which such person, one or more Subsidiaries of such person or such person and
one or more Subsidiaries of such person, directly or indirectly, at the date of
determination thereof, has at least a majority ownership interest entitled to
vote in the election of directors, managers or trustees thereof (or other
person performing similar functions). For purposes of this definition, any
directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a
Subsidiary.
"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such by the Company (a) no portion of the Indebtedness or any
other obligation (contingent or otherwise) of which (i) is guaranteed by the
Company or any other Subsidiary of the Company, (ii) is recourse to or
obligates the Company or any other Subsidiary of the Company in any way or
(iii) subjects any property or asset of the Company or any other Subsidiary of
the Company, directly or indirectly, contingently or otherwise, to the
satisfaction thereof, (b) which has no Indebtedness or any other obligation
that, if in default in any respect (including a nonpayment default), would
Permit (upon notice, lapse of time or both) any holder of any other
Indebtedness of the Company or any Restricted Subsidiary to declare a default
on such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity, (c) with which the Company or any other
Subsidiary of the Company has no contract, agreement, arrangement,
understanding or is subject to an obligation of any kind, whether written or
oral, other than a transaction on terms no less favorable to the Company or any
other Subsidiary of the
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Company than those which might be obtained at the time from persons at arm's
length who are not Affiliates of the Company, and (d) with which neither the
Company nor any other Subsidiary of the Company has any obligation (other than
by the terms of the Indenture) (i) to subscribe for additional shares of
Capital Stock or other equity interest therein or (ii) to maintain or preserve
such Subsidiary's financial condition or to cause such Subsidiary to achieve
certain levels of operating results. The Company may designate an Unrestricted
Subsidiary as a Restricted Subsidiary by written notice to the Trustee under
the Indenture; provided however, that the Company shall not be permitted to
designate any Unrestricted Subsidiary as a Restricted Subsidiary unless, after
giving effect to such designation, no Default or Event of Default would have
then occurred or be continuing. A designation of an Unrestricted Subsidiary as
a Restricted Subsidiary may not thereafter be rescinded.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any person (irrespective of whether or not, at the time, stock
of any other class or classes shall have, or might have, voting power by reason
of the happening of any contingency).
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary
of the Company of which 100% of the outstanding Capital Stock is owned by the
Company or another Wholly Owned Restricted Subsidiary of the Company. For
purposes of this definition, any directors' qualifying shares or investments by
foreign nationals mandated by applicable law shall be disregarded in
determining the ownership of a Restricted Subsidiary.
BOOK-ENTRY ONLY SYSTEM
The following information has been furnished by DTC for use in this
Prospectus. The Company does not take any responsibility for its accuracy or
completeness.
DTC will act as securities depository for the Notes. The Notes will
be registered in the name of Cede & Co. (DTC's partnership nominee). One
fully-registered Series C Note and Series D Note will be issued in the
aggregate issuance amount and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds
securities that its participants ("Participants") deposit with DTC. DTC also
facilitates the settlement among Participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities Notes. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations. DTC is owned by a number of its
Direct Participants and by the New York Stock Exchange, Inc., the American
Stock Exchange, Inc., and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others such as securities brokers
and dealers, banks, and trust companies that clear through or maintain a
custodial relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The Rules applicable to DTC and its Participants
are on file with the Commission.
Purchases of the Notes under the DTC system must be made by or through
Direct Participants, which will receive a credit for the Notes on DTC's
records. The ownership interest of each actual purchaser of each Note
("Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Direct or Indirect Participant through
which the Beneficial Owner entered into the transaction. Transfers of
ownership interests in the Notes are to be accomplished by entries made on the
books of Participants acting on behalf of Beneficial Owners. Except as
otherwise provided herein, Beneficial Owners will not receive Notes
representing their ownership interests in the Notes, except in the event that
use of the book-entry system for the Notes is discontinued.
To facilitate subsequent transfers, all Notes deposited by
Participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of the Notes with DTC and their registration in the
name of Cede & Co. effect no change in beneficial ownership. DTC has no
knowledge of the actual Beneficial Owners of the Notes; DTC's records reflect
only the identity of the Direct Participants to whose accounts such Notes are
credited, which may or may not be the Beneficial Owners. The Participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
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Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the
Notes. Under its usual procedures, DTC mails an Omnibus Proxy to the Trustee
as soon as possible after the record date. The Omnibus Proxy assigns Cede &
Co.'s consenting or voting rights to those Direct Participants to whose
accounts the Notes are credited on the record date (identified in a listing
attached to the Omnibus Proxy).
Payments with respect to the Notes will be made to DTC. DTC's
practice is to credit Direct Participants' accounts on payable date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on payable date. Payments
by Participants to Beneficial Owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts
of customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of DTC, the Trustee, or the Trust,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of note payments to DTC is the responsibility of the
Trustee, disbursement of such payments to Direct Participants shall be the
responsibility of DTC, and disbursement of such payments to the Beneficial
Owners shall be the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository
with respect to the Notes at any time by giving reasonable notice to the
Company or the Trustee. Under such circumstances, if a successor securities
depository is not obtained, Note certificates are required to be printed and
delivered.
The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository). In that event,
certificates representing the Notes will be printed and delivered.
THE COMPANY AND THE TRUSTEE WILL NOT HAVE ANY RESPONSIBILITY OR
OBLIGATION TO PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH
RESPECT TO THE ACCURACY OF THE RECORDS OF DTC, ITS NOMINEE OR ANY PARTICIPANT
WITH RESPECT TO ANY OWNERSHIP INTEREST IN THE NOTES, OR PAYMENTS TO OR THE
PROVIDING OF NOTICE FOR PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL
OWNERS.
As part of the Recapitalization, the Company completed a restructuring
of its outstanding indebtedness by utilizing the proceeds generated by: (i)
the Bank Facility; (ii) the IPO; (iii) the Gold Consignment Facility; and (iv)
the Offering. The Company used the funds generated by the Recapitalization
principally to repay in full all of the Company's outstanding indebtedness. In
addition, as part of the Recapitalization, the Company completed a
restructuring of its ESOP, as more fully described below. The following
summaries of the material terms of the Bank Facility, the Gold Consignment
Facility and the IPO do not purport to be complete and are subject to all of
the provisions of the respective governing agreements relating thereto.
- 65 -
<PAGE> 69
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of
the Company's executive officers, certain significant employees and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
---- --- ----------------------------
<S> <C> <C>
Hugh M. Patinkin(1)(2) 45 Chairman, President and Chief Executive Officer and Director
John R. Desjardins(1) 45 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) 44 Executive Vice President, Merchandising
John J. Guarnaccia 41 Senior Vice President, Operations
Vicky Lau 44 Senior Vice President, Merchandise
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.
- 66 -
<PAGE> 70
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.
Senior Vice President, Operations of the Company since 1989. Mr. Guarnaccia
served as director of the Company from 1990 until July of 1996.
Ms. Vicky Lau has served as Senior Vice President, Merchandise since
1989. She previously served as its Vice President, Merchandise after joining
the Company in 1978 as its Merchandise Manager.
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 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, a national sporting goods chain and publicly traded
company, 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 Boards of Directors of various privately-held companies.
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. Rodney L. Goldstein, Samuel B. Guren and Norman
J. Patinkin. The Compensation Committee, which consists of Rodney L.
Goldstein, Samuel B. Guren and Norman J. 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.
- 67 -
<PAGE> 71
COMPENSATION OF DIRECTORS
Non-employee directors receive compensation of $6,250 per fiscal
quarter (with no separate fee per meeting of the Board of
Directors) 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 recently adopted the 1996 Long-Term Incentive Plan. See
"Management--Stock Plans." Pursuant to this plan, on the date of the closing
of the IPO (or, if later, on the date on which a person is first elected or
begins to serve as a non-employee director) each non-employee director (other
than Messrs. Goldstein, Blumenthal and Guren) will be granted a nonqualified
option to purchase 10,000 shares of Common Stock (a "Directors Option") which
will vest one-third each on the first, second and third anniversaries thereof.
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. Mr. Norman
Patinkin was granted a Directors Option on May 7, 1996, the date of the closing
of the IPO.
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
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------------------------
SECURITIES
RESTRICTED STOCK UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS AWARDS (1) OPTIONS
--------------------------- ----------- ------ ----- ---------- -------
<S> <C> <C> <C> <C> <C>
Hugh M. Patinkin 1995 $255,000 $191,250 $223,576 228,337
President and Chief
Executive Officer
John R. Desjardins 1995 234,000 175,500 128,001 154,603
Executive Vice
President,
Finance and
Administration,
Treasurer and Secretary
Matthew M. Patinkin 1995 200,000 150,000 102,401 124,634
Executive Vice
President,
Store Operations
Lynn D. Eisenheim 1995 160,000 120,000 -- 69,040
Executive Vice
President,
Merchandising
- -------------------------------
</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.
- 68 -
<PAGE> 72
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 and are currently fully vested.
(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.
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
JANUARY 31, 1996 JANUARY 31, 1996 (2)
------------------------- --------------------
UNEXERCISABLE(1)
----------------
<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 initial public offering price of the
Company's Common Stock in the IPO ($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 which was anticipated to be realized
upon consummation of 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.
- 69 -
<PAGE> 73
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 Internal Revenue Code of
1986, as amended (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
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 1995 Options granted
under the 1995 Plans 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 will be fully exercisable upon
consummation of the Offering. Options for 103,856 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 IPO) 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 Internal Revenue Code
of 1986, as amended (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 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
- 70 -
<PAGE> 74
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 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 commencement of the 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 initial public offering 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. See "Management-- Compensation of
Directors." Additional grants of incentive stock options covering a total of
80,091 shares of Common Stock may be made to other employees or directors (of
which 22,676 options have been granted to employees as of August 1, 1996).
The Company intends to file a registration statement under the
Securities Act to register all shares of Common Stock issuable pursuant to the
1995 Options and the Company's 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,
- 71 -
<PAGE> 75
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 would constitute an "excess parachute payment" under Section
280G(b)(1) of the Internal Revenue Code of 1986, 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 Recapitalization, 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.
- 72 -
<PAGE> 76
CERTAIN TRANSACTIONS
REGISTRATION RIGHTS
Pursuant to the Second Amended and Restated Registration Agreement
(the "Registration Agreement"), dated as of May 7, 1996, the Company granted to
Frontenac Venture V Limited Partnership, Frontenac Diversified III Limited
Partnership, Continental Illinois Venture Corp., and William Blair Venture
Partners III Limited Partnership, 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. 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, the
ESOP has the right to demand one registration with respect to the shares of
Common Stock it holds.
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
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.,
including any of its affiliates ("Double P"), an owner and operator of
primarily mall-based snack food stores, 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. 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. The terms of any such leases are approved by a majority of the
Company's outside directors, effective as of the consummation of the IPO.
See "The Recapitalization--ESOP Restructuring" for a description of
the restructuring of the Company's ESOP.
- 73 -
<PAGE> 77
STOCK OWNERSHIP
The following table sets forth, as of the date hereof, the number and
percentage of outstanding shares of Common Stock beneficially owned by (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the executive officers named in the Summary Compensation Table and (iv)
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
OF COMMON STOCK(1)
NAME NUMBER PERCENT
---- ------ -------
<S> <C> <C>
Frontenac Venture V Limited Partnership(2)
135 S. LaSalle Street
Chicago, IL 60603 . . . . . . . . . . . . . . 712,247 8.5%
Frontenac Diversified III Limited Partnership(3)
135 S. LaSalle Street
Chicago, IL 60603 . . . . . . . . . . . . . . 325,425 3.9
Continental Illinois Venture Corp.
231 S. LaSalle Street
Chicago, IL 60697 . . . . . . . . . . . . . . 611,336 7.3
William Blair Venture Partners III
Limited Partnership(4)
222 West Adams
Chicago, IL 60606 . . . . . . . . . . . . . . 464,437 5.5
Hugh M. Patinkin*(5) . . . . . . . . . . . . . 714,591 8.4
Matthew M. Patinkin*(6) . . . . . . . . . . . . 450,853 5.3
John R. Desjardins*(7) . . . . . . . . . . . . 332,549 3.9
Lynn D. Eisenheim*(8) . . . . . . . . . . . . . 72,279 **
Rodney L. Goldstein+(2)(3) . . . . . . . . . . 1,037,672 12.4
Samuel B. Guren+(4) . . . . . . . . . . . . . . 464,437 5.5
Norman J. Patinkin(9) . . . . . . . . . . . . . 69,726 **
Jack A. Smith. . . . . . . . . . . . . . . . . -- --
U.S. Trust Fiduciary Services,
as trustee for the ESOP,
1300 Eye Street, N.W., Suite 1080 East
Washington, D.C. 20005(10) . . . . . . . . . . 843,887 10.1
All executive officers and directors
as a group (10 persons) . . . . . . . . . . 3,105,655 35.2
</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, 227 W. Monroe Street, Suite 2100, Chicago,
IL 60606.
** Less than 1%.
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(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.
(2) 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.
(3) Frontenac Company is the general partner, and the Teachers' Retirement
System of the State of Illinois is the 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.
(4) 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, 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.
(5) Includes 155,537 shares of Common Stock issuable pursuant to presently
exercisable stock options. Includes 206,035 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
23,378 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 11,122 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 36,452 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.
(6) Includes 92,734 shares of Common Stock issuable pursuant to presently
exercisable stock options. 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 16,648 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 8,855 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 36,452 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.
(7) Includes 142,603 shares of Common Stock issuable pursuant to presently
exercisable stock options. Includes 22,283 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 (approximately 11,878 shares) as to which he has voting
power.
(8) Includes 59,040 shares of Common Stock issuable pursuant to presently
exercisable stock options. Shares beneficially owned by Mr. Eisenheim include
shares allocated to his account in the ESOP (approximately 3,239) as to which
he has voting power.
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(9) Norman J. Patinkin's three children own an aggregate of 69,726 shares,
and accordingly, Norman J. Patinkin may be attributed beneficial ownership of
these shares. Mr. Patinkin disclaims beneficial ownership of all such 69,726
shares.
(10) The participants in the ESOP will have voting power with respect to
the shares held by the ESOP.
POSSIBLE LIMITATIONS ON THE COMPANY'S USE OF NET OPERATING LOSS CARRYFORWARDS
At February 1, 1996, the Company had $17.9 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.
As a result of the foregoing rules, changes in the direct or indirect
ownership of the stock of the Company as a result of the IPO are considered in
determining whether an ownership change occurred within the meaning of Section
382 on the date of the IPO. Although there can be no assurances as to any
position taken by the Internal Revenue Service in the future, the Company does
not believe that the IPO resulted in an ownership change of the Company. The
Company believes that immediately following the IPO the percentage point
increase of Five-Percent Stockholders was approximately 47%. 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.
It is possible that future transactions involving the stock of the
Company (or rights to acquire such stock), when combined with the IPO and prior
transactions in such stock, could cause an ownership change under Section 382
resulting in restrictions on the Company's ability to utilize the NOLs during
the taxable years ending after the date of such ownership change.
The restrictions under Section 382, if applicable as a result of the
IPO or future transactions, would impose an annual limitation on the use of the
NOLs in any taxable year ending after the ownership change equal to the product
of the "long-term tax-exempt rate" announced by the Internal Revenue Service
from time to time (5.68% for May 1996) and the value of the stock of the Company
immediately before the ownership change, subject to certain adjustments. To
the extent the annual limitation exceeded the Company's taxable income in any
year, such excess could be carried forward to future years, subject to the
normal expiration date of the NOLs. The NOLs begin expiring in 2006.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the principal United States federal
income tax consequences of acquiring, holding and disposing of Notes to
beneficial owners thereof ("holders"). This summary is based on the Internal
Revenue Code of 1986, as amended (the "Code"), legislative history,
administrative pronouncements, judicial decisions and final, temporary and
proposed Treasury Regulations, now in effect, all of which are subject to
change (possibly on a retroactive basis).
This summary discusses only the principal United States federal income
tax consequences to those holders holding Notes as capital assets within the
meaning of Section 1221 of the Code. It does not address all of the tax
consequences that may be relevant to a holder in light of the holder's
particular circumstances, to a holder subject to special rules, or to a holder
purchasing a Note in the secondary market.
This summary does not discuss any tax consequences to any holder who
is not, for United States federal income tax purposes, (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof or (iii) an estate or trust the income of which
is subject to United States federal income taxation regardless of its source.
Prospective investors are urged to consult their tax advisors with
regard to the application of United States federal income tax laws to their
particular situations as well as any tax consequences to them arising under the
laws of any state, local or foreign taxing jurisdiction. State, local and
foreign tax laws may differ substantially from the corresponding federal income
tax laws, and this discussion does not purport to describe any aspect of the
tax laws of any state, local or foreign jurisdiction.
THE EXCHANGE
An exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as a sale, exchange or other taxable event for federal
income tax purposes because the New Notes should not be considered to differ
materially in kind or extent from the Old Notes. As a result, no material
federal income tax consequences should result from an exchange of Old Notes for
New Notes pursuant to the Exchange Offer.
For federal income tax purposes, a New Note received by a beneficial
owner of an Old Note should be treated as a continuation of the Old Note in the
hands of such owner. For purposes of this discussion, references to a "Note"
shall mean, collectively, a New Note and the Old Note exchanged therefor
pursuant to the Exchange Offer, references to a "Series C Note" shall mean,
collectively, a Series A Note and the Series C Note exchanged therefor pursuant
to the Exchange Offer, and references to a "Series D Note" shall mean,
collectively, a Series B Note and the Series D Note exchanged therefor pursuant
to the Exchange Offer.
TREATMENT OF ADDITIONAL SERIES D NOTES
In general, interest on the Series D Notes will accrue at the rate of
(a) 15% per annum, payable in cash, plus (b) for certain subsequent periods 1%
per annum (increasing in 1% increments for each subsequent year) payable, at
the option of the Company, in cash or by delivery of additional Series D Notes
(such additional Notes, hereinafter "Additional Series D Notes"). See "The New
Notes -- Maturity and Interest," above. For federal income tax purposes, the
delivery of an Additional Series D Note in satisfaction of an obligation of the
Company to pay interest is not considered as payment on the Series D Note with
respect to which it was delivered, and each such Additional Series D Note is
aggregated with, and treated as part of, the original Series D Note. For
purposes of this discussion, a reference to a Series D Note generally means a
single Series D Note consisting of a holder's original Series D Note and all
Additional Series D Notes delivered with respect thereto. Any disposition
(including redemption) of some or all of such original Series D Note or
Additional Series D Notes should be treated as a disposition of a proportionate
amount of such single Series D Note (i.e, a proportionate amount of each
original Series D Note and Additional Series D Note) with the following rules
applied accordingly. Thus, for example, such treatment will apply to determine
gain or loss with respect to the portion disposed of or redeemed and, with
respect to the remaining portion, to determine the adjusted issue price
(described below), and tax basis. For this purpose, a payment of cash in
lieu of the delivery of an Additional Series D Note might
under certain circumstances be treated as a partial redemption of a
proportionate amount of such single Series D Note. See "--Certain Interest
on Series D Notes", below.
STATED INTEREST
Interest on the Notes that qualifies as "qualified stated interest", as
defined in Treasury Regulations, is includible in a holder's income as ordinary
interest income when actually or constructively received (if such holder uses
the cash method of accounting for federal income tax purposes) or when accrued
(if such holder uses an accrual method of accounting for federal income tax
purposes). All stated interest on the Series C Notes will constitute qualified
stated interest. Interest on the Series D Notes will constitute qualified
stated interest to the extent it is payable in cash at a rate of 15% per annum,
except to the extent such interest is payable on Additional Series D Notes
(hereinafter, "15% Cash Interest"). Other interest on the Series D Notes will
be taxable under the rules discussed below under "--Certain Interest on
Series D Notes". Solely for purposes of determining the extent to which cash
interest at a rate of 15% per annum is received on Additional Series D Notes
rather than on an original Series D Note, payments of principal on all Series D
Notes held by a holder will likely be treated as applied first to repay
Additional Series D Notes and thereafter to repay an original Series D Note
(with the result that cash interest at a 15% rate on Series D Notes will be
treated first as received on the amount of the original Series D Notes).
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CERTAIN INTEREST ON SERIES D NOTES
Interest on the Series D Notes other than 15% Cash Interest (i.e.,
interest payable at the option of the Company in cash or in Additional Series D
Notes and interest payable in cash at a rate of 15% per annum on Additional
Series D Notes) (hereinafter, "Nonqualifying Interest") must be taken into
income by holders on a constant yield basis under rules governing the accrual
of "original issue discount," summarized below.
The amount of Nonqualifying Interest required to be taken into income
by a holder is determined as follows. First, the "yield to maturity" of the
Series D Note is determined. In general, and subject to the special rule
described below, the yield to maturity is the discount rate that, when used in
computing the present value of all interest and principal payments to be made
under the Series D Note through its date of maturity (including payments of 15%
Cash Interest) produces an amount equal to the issue price of the Series D
Note.
Second, the term of the Series D Note is divided into "accrual
periods." Accrual periods may be of any length and may vary in length over the
term of the Series D Note, provided that each accrual period is no longer than
one year and that each scheduled payment of principal or interest occurs either
on the final day of an accrual period or on the first day of an accrual period.
Third, the total amount of Nonqualifying Interest is allocated among
accrual periods. In general, the Nonqualifying Interest allocable to an
accrual period equals the product of the "adjusted issue price" of the Series D
Note at the beginning of the accrual period and the yield to maturity of the
Series D Note, less the amount of any 15% Cash Interest (i.e., qualified stated
interest) allocable to the accrual period. The adjusted issue price of a Series
D Note at the beginning of the first accrual period is its original principal
amount. Thereafter, the adjusted issue price of a Series D Note is generally
its original principal amount, increased by the amount of Nonqualifying
Interest previously includible in the gross income of any holder, and decreased
by the amount of any payment of cash previously made on the Series D Note other
than a payment of 15% Cash Interest (including cash payments of Nonqualifying
Interest and principal payments).
Fourth, the "daily portions" of Nonqualifying Interest are determined
by allocating to each day in an accrual period its ratable portion of the
Nonqualifying Interest allocable to the accrual period.
For purposes of the foregoing rules, the yield to maturity will be
determined on the issue date by assuming that, for all future periods, the
Company will exercise its option to pay interest in cash or by delivery of
Additional Series D Notes and its option to redeem the Series D Notes in a
manner that minimizes the yield to maturity on the Series D Notes. If at any
time the Company exercises its options contrary to such assumption, the yield
to maturity of the Series D Notes is redetermined at that time (treating the
adjusted issue price at that time as the issue price) by likewise assuming
that, for all future periods, the Company will exercise its options in a manner
that minimizes the yield to maturity of the Series D Notes. If, for purposes of
the foregoing, it is assumed that the Company will choose to deliver Additional
Series D Notes rather than making a cash payment of interest, and contrary to
such assumption the Company makes a cash payment of interest, such cash
payment generally will be treated as a redemption of a pro rata portion of the
single Series D Note deemed held by the holder. See "--Treatment of Additional
Series D Notes", above.
A holder includes in income in any taxable year the daily portions of
Nonqualifying Interest for each day during the taxable year that such holder
held the Series D Note. Under the constant yield method described above,
holders will be required to include Nonqualifying Interest in income in advance
of the receipt of cash attributable thereto (even to the extent the Company
does not exercise its option to pay interest by delivery of Additional Series D
Notes) and holders generally will be required to include in income increasingly
greater amounts of Nonqualifying Interest in successive accrual periods.
The Company will provide annual information statements to certain
holders of the Series D Notes and to the Internal Revenue Service stating the
amount of any Nonqualifying Interest (i.e. original issue discount)
attributable to such Series D Notes for each calendar year. The amount of any
Nonqualifying Interest set forth in such statement may not be accurate
as to a subsequent holder of a Series D Note (because, for example, of the
application of the rules discussed below relating to market discount and
premium) who will be required to make its own determination of whether it must
report in income a different amount of Nonqualifying Interest.
MARKET DISCOUNT
If a subsequent holder acquires a Note and has a tax basis in the Note
that is, in the case of a Series C Note, less than its principal amount or, in
the case of a Series D Note, less than its adjusted issue price (as defined
above), the amount of such difference is treated as "market discount" for
federal income tax purposes, unless such difference is less than a specified de
minimis amount.
Under the market discount rules of the Code, a holder is required to
treat any payment on a Note treated for tax purposes as a payment of
principal, or any gain on the sale, exchange, retirement or other disposition
of a Note, as ordinary income to the extent of the accrued market discount that
has not previously been included in income. In general, the amount of market
discount that has accrued is determined on a ratable basis. A holder may,
however, elect to determine the amount
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of accrued market discount on a constant-yield-to-maturity basis. This
election is made on a bond-by-bond basis and is irrevocable. With respect to
Notes with market discount, a holder may not be allowed to deduct immediately a
portion of the interest expense on any indebtedness incurred or continued to
purchase or to carry such Notes. A holder may elect to include market discount
in income currently as it accrues, in which case the interest deferral rule set
forth in the preceding sentence will not apply. Such an election will apply to
all bonds acquired by the holder on or after the first day of the first taxable
year to which such election applies and is irrevocable without the consent of
the Internal Revenue Service. A holder's tax basis in a Note will be increased
by the amount of market discount included in such holder's income under such an
election.
PREMIUM AND ACQUISITION PREMIUM
A holder will be treated as having purchased a Note at a "premium" (or
"amortizable bond premium") if the holder's adjusted basis in the Note,
immediately after its purchase by such holder, exceeds its "stated redemption
price at maturity," which is generally all amounts payable on a Note other than
"qualified stated interest" (as described above). A holder may elect to
amortize such premium as an offset to qualified stated interest on the Note.
Because the stated redemption price at maturity of the Series D Notes depends
on whether certain interest is paid in cash or Additional Series D Notes, and
therefore is uncertain, the application of the foregoing rule is unclear in the
case of the Series D Notes.
To the extent a Note may be called by the Company prior to maturity and
after the holder has acquired it, the amount of amortizable bond premium is
determined with reference to either the amount payable at maturity or, if it
results in a smaller premium attributable to the period through the earlier
call date, with reference to the amount payable on the earlier call date. If
an election to amortize premium is made with respect to any Note, it will also
apply to certain other debt instruments of the holder. If the call does not
occur, a holder may elect to amortize the premium over the remaining term of
the Note or the portion thereof through the next call date.
If a holder purchases a Series D Note at a price greater than the
Series D Note's adjusted issue price (as described above) but not at a premium
under the rules described above (i.e., at an "acquisition premium"), the amount
of Nonqualifying Interest that the holder includes in gross income is reduced to
reflect the acquisition premium under rules set out in the Code and Treasury
Regulations thereunder.
SALE, EXCHANGE OR REDEMPTION OF NOTES
A holder generally recognizes gain or loss upon the sale, exchange or
redemption of a Note (or portion thereof) equal to the difference between the
amount realized upon such sale, exchange or redemption and the holder's
adjusted basis in the Note (or in the portion thereof sold, exchanged or
redeemed). Adjusted basis in a Note generally equals the holder's cost of the
Note, increased by Additional Interest (in the case of a Series D Note),
discount or market discount previously included in income with respect to a
Note, and reduced (but not below zero) by any payments of cash on the Note
other than payments of "qualified stated interest" (as described above), and by
any amortizable bond premium that the holder has taken into account. To the
extent attributable to accrued but unpaid qualified stated interest, the amount
realized by a holder is treated as a payment of interest. Any gain or loss is
capital gain or loss if the Note is held as a capital asset, except as provided
under "Market Discount" above. The excess of net long-term capital gains over
net short-term capital losses is taxed at a lower rate than ordinary income for
certain non-corporate taxpayers. The distinction between capital gain or loss
and ordinary income or loss is also relevant for purposes of, among other
things, limitations on the deductibility of capital losses.
BACKUP WITHHOLDING
A holder may be subject to backup withholding at a rate of 31% with
respect to interest paid on the Notes, unless such holder (a) is a corporation
or comes within certain other exempt categories and, when required,
demonstrates this fact or (b) provides a correct taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding
rules. A holder who does not provide the Company with the holder's correct
taxpayer identification number may be subject to penalties imposed by the
Internal Revenue Service. Any amount paid as backup withholding will be
creditable against the holder's tax liability.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS
NOT TAX ADVICE. ACCORDINGLY, EACH PERSON CONSIDERING THE ACQUISITION OF NEW
NOTES SHOULD CONSULT HIS, HER OR ITS OWN ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES TO HIM, HER OR IT OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
THE NEW NOTES INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND
FOREIGN TAX LAWS AND CHANGES IN APPLICABLE TAX LAWS.
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EXCHANGE OFFER DISTRIBUTION
With respect to resales of the New Notes, based on an interpretation
by the staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that any holder or beneficial owner (other than a
person that is an affiliate of the Company within the meaning of Rule 405 under
the Securities Act or a "broker" or "dealer" registered under the Exchange Act)
who exchanges Old Notes for New Notes in the ordinary course of business and
who is not participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in the
distribution of the New Notes, will be allowed to resell the New Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of New Notes a prospectus that satisfies the
requirements of Section 10 thereof. However, if any holder or beneficial owner
acquires New Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of New Notes, such holder or beneficial owner
cannot rely on the position of the staff of the Commission enunciated in Exxon
Capital Holdings Corporation (available April 13, 1988) or similar no-action
letters or any similar interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available.
As contemplated by the above no-action letters and the Placement
Agreement and the Note Agreement, each holder accepting the Exchange Offer is
required to represent to the Company in the Letter of Transmittal that (i) the
New Notes are to be acquired by the holder and any beneficial owners in the
ordinary course of business, (ii) the holder and any beneficial owners are not
engaging and do not intend to engage in the distribution of the New Notes,
(iii) neither the holder nor any beneficial owner is an affiliate of the
Company within the meaning of Rule 405 under the Securities Act, and (iv) the
holder and each beneficial owner acknowledge that if such holder or beneficial
owner participates in the Exchange Offer for the purpose of distributing the
New Notes, such holder or beneficial owner must comply with the registration
and prospectus delivery requirements of the Securities Act and cannot rely on
the above no-action letters.
Any broker or dealer registered under the Exchange Act (each a
"Broker-Dealer") who holds Old Notes that were acquired for its own account as
a result of market-making activities or other trading activities (other than
Old Notes acquired directly from the Company), may exchange such Old Notes for
New Notes pursuant to the Exchange Offer; however, such Broker-Dealer may be
deemed an underwriter within the meaning of the Securities Act and, therefore,
must deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of the New Notes received by it in the Exchange
Offer, which prospectus delivery requirement may be satisfied by the delivery
by such Broker-Dealer of this Prospectus. Any Broker-Dealer participating in
the Exchange Offer will be required to acknowledge that it will deliver a
prospectus in connection with any resales of New Notes received by it in the
Exchange Offer. However only Broker-Dealers who exchange Old Notes that were
acquired for their own account as a result of market-making activities or other
trading activities (other than Old Notes acquired directly from the Company),
may use this Prospectus to satisfy the prospectus delivery requirements of the
Securities Act. The delivery by a Broker-Dealer of a prospectus in connection
with resales of the New Notes shall not be deemed to be an admission by such
Broker-Dealer that it is an underwriter within the meaning of the Securities
Act.
INFORMATION CONCERNING SELLING NOTEHOLDER
AND PLAN OF DISTRIBUTION
The Registration Statement of which this Prospectus is a part also
covers $2,255,000 aggregate principal amount of the Company's Series A Notes
(the "Resale Series A Notes") to be sold hereunder by William Blair & Company,
L.L.C. (the "Selling Noteholder"). The Resale Series A Notes were acquired
from the Company by the Selling Noteholder in connection with the closing of
the Recapitalization on May 7, 1996. The Resale Series A Notes may be sold
from time to time by the Selling Noteholder directly to one or more purchasers,
at prices and at terms then prevailing or at prices related to the then current
market price or in negotiated transactions. The Selling Noteholder may also
engage other brokers or dealers to sell all or a portion of the Resale Series A
Notes, which broker/dealer may act as principal or as agent in such transaction
pursuant to this Prospectus. Brokers and dealers so engaged will receive
commissions or discounts from the Selling Noteholder in amounts to be
negotiated immediately prior to the sale. The Selling Noteholder and any
participating broker or dealer may be deemed to be an "underwriter" within the
meaning of the Securities Act of 1933, as amended, in connection with such
sales.
Purchasers of the Resale Series A Notes may exchange such Resale Series
A Notes for Series C Notes pursuant to the Exchange Offer made hereby, if
tender of such Resale Series A Notes for Series C Notes is made on or before
the Expiration Date.
The Selling Noteholder is a registered "broker" and "dealer" under the
Securities Exchange Act of 1934. The Selling Noteholder acted as the Company's
placement agent in connection with the Notes Offering, the Bank Facility and
the Gold Consignment Facility and was paid a fee by the Company in
consideration therefor. The Selling Noteholder also acted as a managing
underwriter in the Company's IPO, for which it received underwriting
compensation. See "The Recapitalization."
William Blair & Company, L.L.C. is affiliated with William Blair
Venture Partners III Limited Partnership, the holder of approximately 5.5% of
the outstanding shares of Common Stock of the Company. See "Stock Ownership."
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for
the Company by Sidley & Austin, 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.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act for the registration of the New Notes offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are contained in exhibits and
schedules to the Registration Statement as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the securities offered hereby, reference is made to the
Registration Statement, including the exhibits thereto, and financial
statements and notes filed as a part thereof. Statements made in this
Prospectus concerning the contents of any document referred to herein are not
necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
The Company is subject to the periodic reporting and other
informational requirements of the Exchange Act. The Registration Statement and
the exhibits thereto as well as the periodic reports, proxy statements and other
information filed by the Company with the Commission may be inspected at the
public reference facilities maintained by the Commission at Room 204, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New
York 10048, or on the Web site maintained by the Commission, which contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, the address of which
is http://www.sec.gov. Copies of such material can be obtained from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20459, at prescribed rates. As long as the Company is subject to such periodic
reporting and informational requirements, it will furnish all reports and other
information required thereby to the Commission, and will furnish copies of such
reports and other information to the Trustee. In the event the Company ceases to
be required to file periodic reports and other information with the Commission,
the Company is required under the Indenture, so long as the New Notes remain
outstanding, to file with the Commission and distribute to holders of New Notes
copies of the financial information that would have been contained in such
annual reports and quarterly reports that the Company would have been required
to file with the Commission pursuant to the Exchange Act. Such financial
information shall include annual reports containing financial statements and
notes thereto, together with an opinion thereon expressed by an independent
public accounting firm, management's discussion and analysis of financial
condition and results of operations as well as quarterly reports containing
unaudited financial statements for the first three quarters of each fiscal year.
- 81 -
<PAGE> 85
MARKS BROS. JEWELERS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Balance Sheets of the Company as of January 31, 1995 and 1996 . . . . . . . . . . . . . . . F-3
Statements of Operations of the Company for the years ended
January 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Stockholders' Equity (Deficit) of the Company
for the years ended January 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows of the Company for the years ended
January 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE> 86
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 May 7, 1996
F-2
<PAGE> 87
MARKS BROS. JEWELERS, INC.
BALANCE SHEETS
AS OF JANUARY 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
-------- --------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, net.......................................... $ 1,494 $ 1,169
Layaway receivables, net.......................................... 1,406 1,576
Merchandise inventories........................................... 46,054 55,401
Other current assets.............................................. 690 714
Deferred income taxes, net........................................ -- 817
-------- --------------
Total current assets.......................................... 49,644 59,677
Property and equipment, net......................................... 11,868 12,852
Deferred income taxes, net.......................................... -- 14,874
-------- --------------
Total assets.................................................. $ 61,512 $ 87,403
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Outstanding checks, net........................................... $ 2,511 $ 7,991
Revolver loan..................................................... 6,805 2,119
Current portion of term loan...................................... 6,400 7,938
Current portion of senior accreting notes......................... -- 1,908
Accounts payable.................................................. 6,006 9,037
Accrued payroll................................................... 1,988 2,324
Other accrued expenses............................................ 5,474 6,848
-------- --------------
Total current liabilities..................................... 29,184 38,165
Term loan, net of current portion................................... 26,600 18,662
Senior accreting notes, net of current portion...................... 44,733 47,819
Zero coupon notes................................................... 5,413 5,847
Subordinated Debt................................................... 20,855 23,598
Other long-term liabilities......................................... 1,305 1,170
-------- --------------
Total liabilities............................................. 128,090 135,261
-------- --------------
<CAPTION>
PRO FORMA
FOR
CONVERSION
(NOTE 2)
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Commitments and contingencies
Stockholders' equity (deficit):
Common stock , $.001 par value; 8,855,210 shares authorized;
2,053,629 shares and 2,559,793 shares issued and outstanding,
respectively (4,798,181 shares issued and outstanding on a pro
forma, for conversion basis, Note 2).......................... -- -- 5
Class B common stock $1.00 par value; 29,567 shares authorized;
26,229 and 26,026 shares issued and outstanding respectively
(101 shares issued and outstanding on a pro forma, for
conversion basis, Note 2)..................................... 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 (no shares issued and outstanding on a pro forma,
for conversion basis, Note 2)................................. -- -- --
Class D common stock $.001 par value; 60,000 shares authorized;
no shares issued and outstanding; convertible 1 for 1 into
common stock (no shares outstanding on a pro forma, for
conversion basis, Note 2)..................................... -- -- --
Additional paid-in capital...................................... 11,855 8,766 --
Accumulated deficit............................................. (31,645) (14,673) (24,934)
Treasury stock, (1,400,123 and 1,400,326 shares at cost,
respectively) (1,408,645 shares at cost, on a pro forma, for
conversion basis, Note 2)..................................... (20,270) (20,333) (22,929)
Deferred ESOP compensation...................................... (26,548) (21,648) --
-------- -------------- -----------
Total stockholders' equity (deficit), net................... (66,578) (47,858) $ (47,858)
-------- --------------
===========
Total liabilities and stockholders' equity (deficit)........ $ 61,512 $ 87,403
========= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 88
MARKS BROS. JEWELERS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales...................................................... $91,106 $106,683 $131,022
Cost of sales (including buying and occupancy expenses)........ 54,511 64,223 77,722
------- -------- --------
Gross profit.............................................. 36,595 42,460 53,300
Selling, general and administrative expenses................... 28,340 30,748 37,887
------- -------- --------
Income from operations.................................... 8,255 11,712 15,413
Interest expense, including deferred interest of $5,467, $6,685
and $8,171, respectively..................................... 8,920 10,594 12,314
Stock award expense............................................ -- -- 461
ESOP compensation expense...................................... 511 547 590
------- -------- --------
Income (loss) from continuing operations before income
taxes................................................... (1,176) 571 2,048
Income tax benefit............................................. -- -- 14,924
------- -------- --------
Income (loss) from continuing operations.................. (1,176) 571 16,972
Gain on disposal of discontinued operations.................... 2,700 -- --
------- -------- --------
Income before cumulative effect of change in accounting
for ESOP................................................ 1,524 571 16,972
Cumulative effect of change in accounting for ESOP............. (8,526) -- --
------- -------- --------
Net income (loss)......................................... $(7,002) $ 571 $ 16,972
======= ======== ========
Pro forma earnings per share (unaudited)....................... $ 3.02
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 89
MARKS BROS. JEWELERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JANUARY 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
CLASS
B ADDITIONAL DEFERRED
COMMON PAID-IN ACCUMULATED TREASURY ESOP
STOCK CAPITAL DEFICIT STOCK COMPENSATION
------ ---------- ----------- -------- ------------
(IN THOUSANDS)
<S> <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)
=== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 90
MARKS BROS. JEWELERS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (7002) $ 571 $ 16,972
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) -- --
Depreciation and amortization.......................... 2,879 2,815 2,948
Stock award expense non-cash portion................... -- -- 454
ESOP compensation expense.............................. 511 547 590
Income tax benefit..................................... -- -- (14,924)
Interest on zero coupon notes.......................... 372 402 434
Interest on senior accreting notes..................... 2,985 3,860 4,994
Interest on subordinated debt.......................... 2,110 2,423 2,743
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net...... (405) 509 325
Decrease (increase) in layaway receivables, net...... 1,438 (112) (170)
(Increase) in merchandise inventories................ (9,337) (9,460) (9,347)
(Increase) decrease in other assets.................. (279) 239 (24)
(Decrease) increase in accounts payable.............. (529) 2,903 3,031
(Decrease) increase in accrued liabilities........... (3,226) (26) 1,575
--------- -------- ---------
Net cash (used in) provided by operating
activities...................................... (4,657) 4,671 9,601
--------- -------- ---------
Cash flows from investing activities:
Capital expenditures...................................... (3,466) (3,974) (3,932)
Proceeds from assets sold................................. -- 30 --
Proceeds from disposal of discontinued operations......... 2,910 -- --
--------- -------- ---------
Net cash used in investing activities............. (556) (3,944) (3,932)
--------- -------- ---------
Cash flows from financing activities:
Borrowings on revolver loan............................... 99,766 99,159 127,109
Repayment of revolver loan................................ (108,127) (98,993) (131,795)
Repayment of term loan.................................... (4,500) (2,500) (6,400)
Proceeds from subordinated debt borrowings................ 600 -- --
Repurchase of ESOP shares................................. (60) (37) (63)
Increase in outstanding checks, net....................... 867 1,644 5,480
--------- -------- ---------
Net cash used in financing activities............. (11,454) (727) (5,669)
--------- -------- ---------
Net decrease in cash and cash equivalents................... (16,667) -- --
Cash and cash equivalents at beginning of year.............. 16,667 -- --
--------- -------- ---------
Cash and cash equivalents at end of year.................... $ -- $ -- $ --
========= ======== =========
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> 91
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 146 stores located in
24 states operating in regional or super-regional shopping malls.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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.
F-7
<PAGE> 92
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Pro Forma, For Conversion, Balance Sheet
The amounts shown in the pro forma, for conversion, stockholders' equity
(deficit) information as of January 31, 1996 reflect (i) the restructuring of
the Company's ESOP as discussed in the Recapitalization within the Registration
Statement, (ii) the conversion of all of the shares of Class C Common Stock into
shares of Common Stock, and (iii) the elimination of the Company's shares of
Class D Common Stock (all of which are authorized and unissued).
Pro Forma Earnings Per Share
The Company has disclosed a pro forma earnings per share in the Statements
of Operations. This has been calculated as net income for the year ending
January 31, 1996 divided by the weighted average number of shares outstanding
after the Conversion (5,610,738).
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
F-8
<PAGE> 93
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of shares allocated prior to February 1, 1993 in excess of expense recognized
under the Company's historical method.
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.
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.
F-9
<PAGE> 94
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. FINANCING ARRANGEMENTS (CONTINUED)
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 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
F-10
<PAGE> 95
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. FINANCING ARRANGEMENTS (CONTINUED)
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.
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
F-11
<PAGE> 96
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. FINANCING ARRANGEMENTS (CONTINUED)
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.
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
F-12
<PAGE> 97
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. COMMON STOCK (CONTINUED)
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.
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-13
<PAGE> 98
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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-14
<PAGE> 99
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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
As of January 31, merchandise inventories consist of:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials..................................................... $ 2,572 $ 2,944
Finished goods inventory.......................................... 43,482 52,457
------- -------
$46,054 $55,401
======= =======
</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.
Included within finished goods inventory are allowances for inventory shrink,
scrap, and miscellaneous costs of $1,564,000 and $1,263,000 for the years ending
January 31, 1995 and 1996, respectively. As of January 31, 1995 and 1996,
consignment inventories held by the Company that are not included in its balance
sheets are $14,219,000 and $15,940,000, respectively.
F-15
<PAGE> 100
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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.
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
F-16
<PAGE> 101
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. DISCONTINUED OPERATIONS AND RELATED PARTY TRANSACTIONS (CONTINUED)
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 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.
F-17
<PAGE> 102
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. STOCK PLANS (CONTINUED)
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
The Company completed an initial public offering (the "Offering") on May 7,
1996. The Company issued 3,269,500 shares of Common Stock giving effect to the
stock split described below. In connection with the Offering, all of the
outstanding shares of Class C Common Stock were converted into an equal number
of shares of Common Stock on a share for share basis. In addition, 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 million secured revolving credit facility, consisting of a
$29 million revolving line of credit and a $15 million term loan;
F-18
<PAGE> 103
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
14. SUBSEQUENT EVENTS (CONTINUED)
(ii) approximately $20 million of senior subordinated notes due 2004;
and
(iii) the sale of $15 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
million.
The Company used the proceeds of the Offering together with the funds
generated by the Recapitalization, including the Gold Consignment, to repay all
of the Company's bank indebtedness and subordinated debt outstanding as of
January 31, 1996, and for general corporate purposes. The repayment utilized a
debt discount of approximately $17.4 million based on the January 31, 1996
balances of outstanding debt.
The $17.4 million of debt discount consists of the following:
(i) $0.6 million on the Senior Accreting Notes, which expires on May 31,
1996;
(ii) $3.8 million on the Zero Coupon Note, which expires on May 31,
1996; and
(iii) $13 million on the Senior Subordinated debt.
Pursuant to an agreement with the Marks Bros. Inc. Employee Stock Ownership
Trust, the Company restructured its Employee Stock Ownership Plan ("ESOP")
simultaneous with the completion of the Offering and the Recapitalization. The
Company canceled the remaining unamortized portion of the ESOP debt owed to the
Company. In the settlement of the debt, the trustee transferred to the Company
8,319 shares of Class B Common Stock that were being held in suspense by the
ESOP. The Company transferred to the ESOP 220,282 shares of Common Stock in
exchange for the ESOP's cancellation of the accumulated dividend preference and
other preferences associated with the shares of Class B Common Stock. The ESOP
exchanged the 17,607 of allocated Class B shares for 623,619 shares of Common
Stock of the Company. Approximately 100 shares of Class B Common Stock,
currently held by former employees, remain outstanding. All shares of Class B
Common Stock transferred to the Company and the shares held in treasury were
subsequently canceled. The restructuring will result in an elimination of the
deferred ESOP compensation equity account, and eliminate the future annual
allocation of shares and the related compensation expense in the Company income
statement in years subsequent to January 31, 1996. It is expected 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 shares of Class B
Common Stock have not been affected by the split.
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.
Concurrent with the Offering, the Company: (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.
F-19
