<PAGE> 1
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-028176
MARKS BROS. JEWELERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-1433610
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
155 N. WACKER DR., STE. 500, CHICAGO, IL 60606
(Address of principal executive offices, including zip code)
(312) 782-6800
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE, INCLUDING
ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of April 24, 1998 was $171,103,355, based on the closing price of
$19.50 of the registrant's common stock on the NASDAQ Stock Market. This
calculation does not reflect a determination that persons are affiliates for
any other purposes.
Number of shares of Common Stock outstanding as of April 24, 1998: 10,172,638
Number of shares of Class B Common Stock outstanding as of April 24, 1998:
101.298
Documents Incorporated by Reference:
Part II - Portions of the registrant's annual report to stockholders for the
registrant's fiscal year ended January 31, 1998 (the "1997 Annual Report"), as
indicated herein.
Part III - Portions of the registrant's definitive proxy statement to be
distributed in conjunction with registrant's annual stockholders' meeting to be
held in 1998 (the "Proxy Statement"), as indicated herein.
==============================================================================
<PAGE> 2
PART I
All statements, trend analysis and other information contained in this
report relative to markets for the Company's products and trends in the
Company's operations or financial results, as well as other statements
including words such as "anticipate," "believe," "plan," "estimate," "expect,"
"intend" and other similar expressions, constitute forward-looking statements
under the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to known and unknown risks,
uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements. Such
factors include, among other things: (1) the extent and results of the
Company's store expansion strategy; (2) the seasonality of the Company's
business; (3) economic conditions, the retail sales environment and the
Company's ability to execute its business strategy and the related effects on
comparable store sales and other results; (4) the success of the Company's
marketing and promotional programs; (5) the extent to which the Company is able
to retain and attract key personnel; (6) competition; (7) the availability and
cost of consumer credit; (8) relationships with suppliers; (9) the Company's
leverage; (10) fluctuations in gem and gold prices; (10) regulation; (12)
timely "Year 2000" compliance by the Company and third party suppliers and
service providers; and (13) the risk factors listed from time to time in the
Company's filings with the Securities and Exchange Commission.
ITEM 1. BUSINESS
THE COMPANY
General. Marks Bros. Jewelers, Inc. (the "Company") is a leading,
national specialty retailer of fine jewelry (based on number of stores),
operating 198 stores in 24 states as of April 15, 1998. Founded in 1895, the
Company operates stores in regional and super-regional shopping malls under the
names Whitehall Co. Jewellers(R) (146 stores), Lundstrom Jewelers(R) (47
stores) and Marks Bros. Jewelers(TM) (5 stores). The Company offers at
competitive prices an in-depth selection of fine jewelry in the following key
categories: diamond, gold, precious and semi-precious jewelry. The Company's
target customers are middle to upper middle income women over 25 years old.
Central to the Company's growth in operating profits and its high store
productivity are its small but flexible store format, the absence of recourse
credit risk, its strong sales culture and its operating efficiencies at both
the store and corporate levels.
The Company operates on a fiscal year ending January 31. The year ended
January 31, 1998 is referred to herein as fiscal 1997. From fiscal 1993 to
fiscal 1997, the Company's net sales grew at a compound annual rate of 20.0% to
$188.9 million, while income from operations grew at a compound annual rate of
28.1% to $22.2 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 113 to 191 stores, (ii) higher store productivity, as
average annual sales per store increased from $791,000 to $1,045,000, and (iii)
improved operating efficiencies resulting in an increase in the Company's
operating margin from 9.1% to 11.8%.
The Company believes it has significant opportunities to increase sales
and profitability through an increased number of planned store openings, the
implementation of new sales, marketing and merchandising programs designed to
continue comparable store sales growth, and continued adherence to its strict
standards regarding operating performance.
Retailing Concepts. As of April 15, 1998, the Company's stores operated
under the names Whitehall Co. Jewellers(R) (146 stores), Lundstrom Jewelers(R)
(47 stores) and Marks Bros. Jewelers(TM) (5 stores). Each store concept is
designed around an open, brightly-lit and inviting layout which encourages
browsing by mall shoppers. The Company's multiple name format allows the
Company to open additional stores in malls where it already has profitable
locations. Whitehall Co. Jewellers is the Company's primary trademark and is
positioned to be somewhat more upscale than the average mall-based jewelry
store. As of April 15, 1998, the Company operated two stores in 40 malls and
three stores in one mall. In most cases a Lundstrom store is added to a mall
only after the Company has
<PAGE> 3
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.
INDUSTRY
Total retail sales by jewelry stores in the United States in 1997 were
approximately $19.5 billion, and such sales grew between 1992 and 1997 at an
annual rate of approximately 5.0%, according to the U.S. Department of
Commerce.
The jewelry market is generally divided into three segments: fine jewelry,
costume jewelry, and guild jewelry. The broad "fine" jewelry market segment
represents a majority of the jewelry market in terms of revenue, and it
includes jewelry made from precious metals and gemstones, as well as finer
watches. Fine jewelry is sold at a range of price points from middle to upper
end, with the upper end consisting of luxury items such as unique design
jewelry items and expensive time pieces. Except for a few designer label
offerings, fine jewelry is generally not marketed under brand names. Costume
jewelry consists of jewelry made of non-precious stones and rhinestones, as
well as inexpensive watches. The "guild" market represents a small percentage
of the total market.
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 1995, there were over 28,000 retail jewelry stores
nationwide accounting for almost one-half of all jewelry sales. The retail
jewelry industry is highly fragmented with no single chain accounting for a
significant percentage of the fine jewelry market.
The Company believes that the retail jewelry industry is consolidating due
to a variety of factors, including (i) bad debt exposure, which has impacted
jewelry stores that extend recourse credit to customers, (ii) over-expansion 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 800 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 $1,325 in fiscal 1997). Over two-thirds of the
Company's stores are located in high traffic, "center court" locations. The
stores' small flexible format
- 2 -
<PAGE> 4
(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 cards (which are
available through a third party and are 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.
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
five fiscal years the Company has increased its average store inventory at an
annual rate of approximately 16% 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 as a percentage of net sales from 6.6% ($6.0 million)
in fiscal 1993 to 5.0% ($9.4 million) in fiscal 1997 while continuing to build
infrastructure to handle new store growth. During this same period, the
Company's net sales increased by over 169% and the number of its stores
increased by 69%.
- 3 -
<PAGE> 5
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 opened 50 stores during the
last two fiscal years, and plans to open 35 stores in calendar 1998. The
Company anticipates opening a similar number of stores in 1999. The following
table shows the Company's store expansion during the periods presented
reflecting both store openings and closings for the respective periods:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------------
NUMBER OF STORES: 1994 1995 1996 1997 1998
--------------------- -------- -------- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Open at beginning
of period 113 122 131 146 164
Opened during period 11 11 15 20 30
Closed during period (2) (2) -- (2) (3)
-------- -------- -------- ---- ----
Open at end of period 122 131 146 164 191
======== ======== ======== ==== ====
Net increase 9 9 15 18 27
</TABLE>
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 Company entered the St. Louis and Phoenix
markets in fiscal 1994 and now has five stores in the Phoenix area and plans to
open one in fiscal 1998, and six stores in the St. Louis area. The Company
entered the San Diego market in fiscal 1997 with four stores. The Company
entered the greater Los Angeles market in fiscal 1997 by opening two stores,
and plans to open three stores in fiscal 1998. The Company plans to enter the
Portland, Oregon, market with one store opening and the Philadelphia market
with two store openings in fiscal 1998.
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, as of April 15, 1998, the Company operated two stores in 40 malls and
three stores in one mall.
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.
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 600 core jewelry items, which accounted for approximately 38% of
net sales in fiscal 1997. In addition, the
- 4 -
<PAGE> 6
Company has expanded its merchandise assortment in higher price points. The
Company's average price per merchandise sale has increased from $245 in fiscal
1995 to $255 in fiscal 1996 and $273 in fiscal 1997.
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 16% over
the past five fiscal years (as measured by the inventory and consigned items on
hand at fiscal year end). During fiscal 1996, the Company placed a
significantly expanded selection of higher priced merchandise in approximately
35 stores on a test basis. Based on the initial success of expanding our
higher priced merchandise selection, the Company increased the amount of this
merchandise in a significant portion of its stores during fiscal 1997.
The following table sets forth the Company's percentage of total
merchandise sales by category for the following periods:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------------
1994 1995 1996 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Diamonds 54.0% 56.8% 57.6% 57.5% 61.3%
Gold 26.6 25.0 25.2 25.4 21.2
Precious/Semi-Precious 15.0 15.1 14.6 14.8 15.5
Watches 2.7 2.4 2.1 2.1 2.0
Other 1.7 0.7 0.5 0.2 ---
------- -------- -------- ------ -----
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 3.8% of fiscal
1997 net sales). Actual repair work is performed by jewelers under independent
contract. Approximately 110 of the Company's stores have independent jewelers
located in the store to provide on-site repair services to the customer.
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. Company personnel are authorized to
discount most merchandise prices within certain limits.
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
- 5 -
<PAGE> 7
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 1997, 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 1997. The Company's credit card discount expense for fiscal 1997 and
fiscal 1996 represented 2.9% and 3.0%, 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 purveyors, 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 certain personal checks.
During the third quarter of fiscal 1997, the Company introduced a
"One-Year No-Interest" program through a non-recourse agreement with Bank One.
Under this program, Bank One offers customers a financing arrangement with no
interest for one year, for which the Company pays Bank One a significantly
higher fee than it pays under its standard program. The Company feels the
usage of this program contributed to an increase in comparable store sales.
During recent periods there has been an increase in consumer credit
delinquencies generally, which has resulted in financial institutions
reexamining their pending practices and procedures. Consequently, the
availability or cost of third party credit offered by the Company could be
adversely affected.
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 are
brightly-lit and generally 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.
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
- 6 -
<PAGE> 8
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.
The Company has approximately 30 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 senior
officers spend a substantial percentage of their time visiting stores to
reinforce the close communication between senior executives and store
personnel.
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. Due to computerization, more efficient use
of personnel, and the elimination of certain non-essential functions, the
Company reduced central overhead as a percentage of net sales from 6.6% in
fiscal 1993 ($6.0 million) to 5.0% in fiscal 1997 ($9.4 million). During that
period, the Company's sales increased by over 169% and the number of stores
increased by 69%.
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 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 weeks of employment and
continuous on-the-job training provided by management, the Company has several
training videos to supplement its written training materials for sales
associates. Store managers complete a manager training and development
program.
ADVERTISING AND PROMOTIONS
In the second quarter of fiscal 1997, the Company retained a full-service
advertising and marketing firm which helped the Company implement expanded
advertising campaigns and strategies. The Company improved the in-store and
point-of-sale signage with a more upscale look which is a key element of its
advertising strategy. The Company initiated a holiday season radio campaign in
certain markets, and tested various direct mail campaigns as part of its new
advertising initiatives. 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. The Company plans to continue its usage of
certain direct mail and media advertising programs in fiscal 1998.
The Company offers a 30-day return policy; however, for certain sales,
store personnel may choose from a variety of return or exchange options to
offer the customer, including a 30-day return policy or a 90-day exchange
policy. During the second quarter of fiscal 1997, the Company implemented this
more liberal customer return policy.
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 purchases
merchandise from approximately 150 vendors, primarily in the United
- 7 -
<PAGE> 9
States, Israel, Italy and the Far East, who supply various jewelry products
under U.S. dollar-denominated agreements. During fiscal 1997, the
Company's largest supplier and five largest suppliers accounted for
approximately 17% and 35%, 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, or other companies. 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. However, 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 the Company.
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.
During fiscal 1997, the Company's average net monthly investment in
inventory (i.e., the total cost of inventory owned and paid for) was 66% of the
total cost of the Company's on-hand merchandise. The amount of consignment
merchandise has increased in recent years. For example, the average amount of
consignment merchandise per store has increased from $106,000 on January 31,
1997 to $169,000 on January 31, 1998. The Company is also often granted
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. Those arrangements also 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.
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 1997, diamonds,
gold, precious and semi-precious jewelry accounted for approximately 98% of the
Company's net merchandise sales. 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. The Company has been increasing the amount of inventory (especially
higher priced items) carried in its stores. Higher priced jewelry items tend
to have a slower rate of turnover, thereby increasing the risks to the Company
associated with price fluctuations and changes in fashion trends.
- 8 -
<PAGE> 10
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. The
Company's management information system utilizes an IBM AS400. 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 necessary to
support the Company's 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 has implemented, 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 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 point of sale
systems also track required inspection dates for customers with diamond
warranties. Sales associates are prompted by the system to contact these
customers to remind them of the required in-store inspection.
The Company's supervisors use laptop computers in the field to obtain
up-to-date financial information on their stores and down-load it on an
as-needed basis from the Company's central computer system. The information
available via laptop includes, among other items, store sales, gross profit,
personnel costs, and sales associates' productivity information.
YEAR 2000
The Company has reviewed its computer and other operating systems to
identify those which it believes could be affected by the "Year 2000" issue.
The Company has begun to upgrade certain information systems to improve
operations and support future growth as well as to address the "Year 2000"
issue. With respect to systems that the Company is not upgrading, the Company
plans to renovate those systems to be "Year 2000" compliant. The Company
believes that such systems upgrades and renovations will be made on a timely
basis, and that if made on a timely basis, that the "Year 2000" issue will not
pose significant operational problems or results in costs that have a material
adverse impact on the Company's business, financial condition or results of
operations. In addition, certain systems of third party suppliers and service
providers which are not currently "Year 2000" compliant could adversely impact
the Company's operations. The Company has confirmed with these suppliers
- 9 -
<PAGE> 11
and service providers that they are implementing plans to address the "Year
2000" issue. However, there can be no assurance that the systems of such
third parties will be timely converted. A failure by the Company or any such
third party to timely address the "Year 2000" issue could have a material
impact on the Company's business, financial condition or results of operations.
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 1997, in-store inventory shrinkage amounted to
approximately 1.0% of sales. The Company has a full-time manager who directs
the Company's loss prevention efforts. The Company maintains insurance
(subject to certain deductibles) covering the risk of loss of merchandise in
transit and at store premises (whether owned or on consignment) in amounts that
the Company believes are reasonable and adequate for the types and amounts of
merchandise carried by the Company.
COMPETITION
The jewelry business is fragmented and highly competitive. The Company
competes with national and regional jewelry chains and local independently
owned jewelry stores, especially those that operate in malls, as well as with
department stores, catalog showrooms, discounters, direct mail suppliers and
televised home shopping networks. Certain of the Company's competitors are
substantially larger and have greater financial resources than the Company and
can take advantage of national advertising programs. 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.
TRADEMARKS
Whitehall Co. Jewellers(R), Lundstrom Jewelers(R) and Marks Bros.
Jewelers(TM) are registered trademarks in the United States.
EMPLOYEES
As of January 31, 1998 the Company had approximately 1,300 employees,
including approximately 1,200 store level 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
- 10 -
<PAGE> 12
availability of credit to the Company's customers and, consequently, the
Company's results of operations or financial condition.
The Company's operations are also affected by federal and state laws
relating to marketing practices in the retail jewelry industry. In marketing
to its customers, the Company compares many of its prices to "reference
prices." The Company's literature indicates to customers that its reference
price for an item is either the manufacturer's suggested retail price or the
Company's determination of the non-discounted price at which comparable
merchandise of like grade or quality is advertised or offered for sale by
competitive retailers and is not the Company's current selling price or the
price at which it formerly sold such item. Although the Company believes that
pricing comparisons are common in the jewelry business and that the Company's
practice is in compliance with applicable laws relating to trade practices,
there can be no assurance that this position would be upheld.
ITEM 2. PROPERTIES
PROPERTIES
As of April 15, 1998 the Company operated 198 stores in 24 states. All of
these stores are leased and are located in regional or super-regional malls.
The Company's typical new store lease has a 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. At January 31,
1998 the average remaining life of the leases for the Company's stores was
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 24,300 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 2, 2004.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- 11 -
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Incorporated herein by reference to section entitled "Related Stockholder
Matters and Market for the Company's Common Stock" in the Company's 1997 Annual
Report, which is included as Exhibit 13 to this Annual Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference to section entitled "Selected Historical
Financial and Operating Data" in the Company's 1997 Annual Report, which is
included as Exhibit 13 to this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated herein by reference to section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Company's 1997 Annual Report, which is included as Exhibit 13 to this
Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
N/A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference to sections entitled "Statements of
Operations," "Balance Sheets," "Statements of Stockholders' Equity (Deficit),"
"Statements of Cash Flows" and "Notes to Financial Statements" in the Company's
1997 Annual Report, which is included as Exhibit 13 to this Annual Report on
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- 12 -
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the headings "Election of Directors" and
"Executive Officers" in the Proxy Statement (which Proxy Statement will be
filed with the Securities and Exchange Commission on or before May 10, 1998) is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Except for information referred to in Item 402(a)(8) of Regulation S-K,
the information contained under the headings "Election of Directors" and
"Executive Compensation and Other Information" in the Proxy Statement (which
Proxy Statement will be filed with the Securities and Exchange Commission on or
before May 10, 1998) is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement (which Proxy Statement
will be filed with the Securities and Exchange Commission on or before May 10,
1998) is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Relationships and
Related Transactions" in the Proxy Statement (which Proxy Statement will be
filed with the Securities and Exchange Commission on or before May 10, 1998) is
incorporated herein by reference.
- 13 -
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
--------------------
The following financial statements are filed as part of this report:
Report of Independent Public Accountants.*
Balance Sheets of the Company as of January 31, 1998 and 1997.*
Statements of Operations of the Company for the years ended
January 31, 1998, 1997 and 1996.*
Statements of Stockholders' Equity (Deficit) of the Company for
the years ended January 31, 1998, 1997 and 1996.*
Statements of Cash Flows of the Company for the years ended
January 31, 1998, 1997 and 1996.*
Notes to Financial Statements.*
_________________________
* Incorporated herein by reference from the Company's 1997 Annual Report.
(a)(2) Financial Statement Schedules
---------------------------
Report of Independent Public Accountants on Finanical
Statement Schedule Page 17
Schedule II - Valuation and Qualifying Accounts Page 18
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
(a)(3) Exhibits
The following Exhibits are filed herewith or incorporated herein:
EXHIBIT NO. DESCRIPTION
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Restated By-Laws of the Company (1)
4.1 Stockholders Rights Plan (2)
4.2 Certificate of Designations of Series A Junior Participating
Preferred Stock (1)
4.3 Indenture governing the Notes dated as of April 15, 1996
between the Company and Norwest Bank Minnesota, National
Association, as Trustee (2)
4.4 Form of Series C Notes (included in Exhibit 4.3 to this
Form 10-K) (2)
4.5 Form of Series D Notes (included in Exhibit 4.3 to this Form
10-K) (2)
4.6 First Supplemental Indenture to Indenture (incorporated by
reference to Exhibit 4.4 of the Registration Statement on
Form S-1 (Commission File No. 333-0403))
4.7 Second Supplemental Indenture to Indenture
10.1 Second Amended and Restated Registration Agreement (2)
- 14 -
<PAGE> 16
10.2 Letter Agreements re: Incentive Stock Option dated
September 28, 1995 between the Company and each of Hugh M.
Patinkin, John R. Desjardins and Matthew M. Patinkin,
respectively (1) (3)
10.3 Letter Agreements re: Restricted Stock Awards dated
September 28, 1995 between the Company and each of Hugh M.
Patinkin, John R. Desjardins and Matthew M. Patinkin (1)(3)
10.4 Letter Agreements re: Incentive Compensation dated September
28, 1995 between the Company and each of Hugh M.
Patinkin, John R. Desjardins and Matthew M. Patinkin (1)
(3)
10.5 Company's 1995 Executive Incentive Stock Option Plan (1) (3)
10.6 Letter Agreement re: Incentive Stock Option between the
Company and Lynn D. Eisenheim (1) (3)
10.7 1996 Long-Term Incentive Plan (2) (3)
10.8 Amended and Restated Private Label Revolving Credit Plan
Agreement, dated May 31, 1996, between the Company and
Bank One, N.A. (2)
10.9 Lease dated May 14, 1992 between the Company and New
York Life Insurance Company relating to the Company's
corporate headquarters (1)
10.10 Revolving Credit, Term Loan and Gold Consignment Agreement,
dated as of May 3, 1996, among the Company, the Banks (as
defined therein), The First National Bank of Boston and
Rhode Island Hospital Trust National Bank, as Agent for the
Banks, governing the Bank Facility and the Gold Consignment
Facility, as amended by the First Amendment thereto, the
Second Amendment thereto and the Third Amendment thereto (4)
10.11 Executive Severance Agreements each dated May 7, 1996,
between the Company and each of Hugh M. Patinkin, John R.
Desjardins, Matthew M. Patinkin and Lynn D. Eisenheim (2)
(3)
10.12 ESOP Restructuring Agreement, dated as of March 29, 1996,
between the Company and the Marks Bros. Jewelers, Inc.
Employee Stock Ownership Trust (2)
10.13 1997 Long-Term Incentive Plan (incorporated by reference
to exhibits filed with the Company's Registration Statement
on Form S-8 (Registration No. 333-47601)) (3)
10.14 Fourth Amendment to Revolving Credit, Term Loan and Gold
Consignment Agreement, dated as of March 14, 1997, among the
Company, the Banks (as defined therein), The First
National Bank of Boston and Rhode Island Hospital Trust
National Bank, as Agent for the Banks, governing the Bank
Facility and the Gold Consignment Facility (5)
10.15 Amended and Restated Employee Stock Ownership Plan (5)
10.16 1998 Non-Employee Directors Stock Option Plan (incorporated
by reference to exhibits filed with the Company's
Registration Statement on Form S-8 (Registration No.
333-5015) (3)
10.17 401(k) Plan (3)
10.18 Fifth Amendment to Revolving Credit, Term Loan and Gold
Consignment Agreement, dated as of November 13, 1997, among
the Company, the Banks (as defined therein), The First
National Bank of Boston and Rhode Island Hospital Trust
National Bank, as Agent for the Banks, governing the Bank
Facility and the Gold Consignment Facility
13 1997 Annual Report
23 Consent of Coopers & Lybrand, L.L.P.
24 Powers of Attorney (included on signature page)
27 Financial Data Schedules.
- 15 -
<PAGE> 17
_______________________
(1) Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1, as amended
(Registration No. 333-1794).
(2) Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1, as amended
(Registration No. 333-0403).
(3) Represents management contract or compensatory plan or arrangement.
(4) Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1, as amended
(Registration No. 333-13903).
(5) Incorporated herein by reference to the exhibits filed with the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 1997.
(b) Reports on Form 8-K
None.
- 16 -
<PAGE> 18
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Marks Bros. Jewelers, Inc.
Our report on the financial statements of Marks Bros. Jewelers, Inc. has been
incorporated by reference in this Form 10-K from page 28 of the 1997 Annual
Report of Mark Bros. Jewelers, Inc. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule which is included on page 18 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
Chicago, Illinois
March 12, 1998
- 17 -
<PAGE> 19
MARKS BROS. JEWELERS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
TWELVE MONTHS ENDED JANUARY 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------- -------------------- -------------------------------- --------- --------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTION OF PERIOD
- --------------------------------- -------------------- -------------------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C>
Twelve months ended 1/31/96:
Allowance for doubtful accounts. $ 505 $ 918 -- $ 858(1) $ 565
==================== ==================== ========= ==============
Inventory allowance............. 1,564 2,045 -- 2,346 1,263
==================== ==================== ========= ==============
Twelve months ended 1/31/97
Allowance for doubtful accounts. $ 565 $ 1,037 -- 894(1) 708
==================== ==================== ========= ==============
Inventory allowance............. 1,263 2,662 -- 2,214 1,711
==================== ==================== ========= ==============
Twelve months ended 1/31/98
Allowance for doubtful accounts. $ 708 $ 1,182 -- $ 1,206 684
==================== ==================== ========= ==============
Inventory allowance............. 1,711 3,764 -- 3,776 1,699
==================== ==================== ========= ==============
</TABLE>
Note:
(1) Uncollectible items written off, less recoveries of items previously
written off.
- 18 -
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, this Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 24, 1998 MARKS BROS. JEWELERS, INC.
By: /s/ John R. Desjardins
----------------------
John R. Desjardins
Executive Vice President, Finance &
Administration, Treasurer and
Secretary
POWER OF ATTORNEY AND SIGNATURES
Each of the undersigned officers and directors of Marks Bros Jewelers,
Inc. hereby severally constitutes and appoints Hugh M. Patinkin and John R.
Desjardins, and each of them singly, our true and lawful attorneys, with full
power to them and each of them singly, to sign for us in our names in the
capacities indicated below, all amendments to this Annual Report on Form 10-K,
and generally to do all things in our names and on our behalf in such
capacities to enable Marks Bros. Jewelers, Inc. to comply with the provisions
of the Securities Exchange Act of 1934, as amended, and all requirements of the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed by the following persons on behalf of
the registrant and in the capacities indicated on this 24th day of April, 1998.
Name Capacity
---- --------
/s/ Hugh M. Patinkin Chairman, President and Chief Executive Officer
---------------------- (principal executive officer) and Director
Hugh M. Patinkin
/s/ John R. Desjardins Executive Vice President, Finance & Administration,
---------------------- Treasurer and Secretary (principal financial
officer) and Director
John R. Desjardins
/s/ Matthew M. Patinkin Director
- -----------------------
Matthew M. Patinkin
/s/ Norman J. Patinkin Director
- -----------------------
Norman J. Patinkin
/s/ Jack A. Smith Director
- -----------------------
Jack A. Smith
/s/ Daniel H. Levy Director
- -----------------------
Daniel H. Levy
- 19 -
<PAGE> 1
EXHIBIT 4.7
__________________________________________________
SECOND SUPPLEMENTAL INDENTURE
FROM
MARKS BROS. JEWELERS, INC.
TO
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
TRUSTEE
____________________
DATED AS OF DECEMBER 19, 1997
____________________
SUPPLEMENTAL TO INDENTURE
DATED AS OF APRIL 15, 1996, AS SUPPLEMENTED
BY THE FIRST SUPPLEMENTAL INDENTURE
DATED AS OF SEPTEMBER 10, 1996
______________________________________________
<PAGE> 2
MARKS BROS. JEWELERS, INC..
SECOND SUPPLEMENTAL INDENTURE
DATED AS OF DECEMBER 19, 1997
Second Supplemental Indenture, dated as of 12:00 p.m., December 19, 1997,
between MARKS BROS. JEWELERS, INC., a corporation organized and existing under
the laws of the State of Delaware (the "Company"), and NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, a national banking corporation, as trustee (the
"Trustee").
W I T N E S S E T H:
WHEREAS, there have heretofore been authenticated and delivered by the
Trustee under the Indenture dated as of April 15, 1996 (as supplemented by the
First Supplemental Indenture dated as of September 10, 1996, the "Indenture")
between the Company and the Trustee, $12,000,000 aggregate principal amount of
12.15% Series C Senior Subordinated Notes due 2004 (the "Notes"); and
WHEREAS, Section 902 of the Indenture provides, among other things, that
the Company may, with the consent of the Holders of not less than a majority in
principal amount of the Outstanding Notes, amend certain covenants set forth in
the Indenture; and
WHEREAS, the Holders of at least a majority in principal amount of the
Outstanding Notes on the date of this Second Supplemental Indenture have
consented to the amendments to the Indenture as set forth in Article Two
hereof; and
WHEREAS, the Company and the Trustees desire to modify the Indenture as
and to the extent set forth in Article Two hereof; and
WHEREAS, the terms and provisions of this Second Supplemental Indenture
and the execution thereof by the Company have been duly authorized; and
WHEREAS, all acts and things prescribed by law and by the Restated
Certificate of Incorporation and by-laws, as amended, of the Company and by the
Indenture have been duly complied with and the Company has executed this Second
Supplemental Indenture in the exercise of legal rights and powers vested in it,
and all things necessary to make this Second Supplemental Indenture the valid
and binding obligation of the Company and a valid and binding agreement
supplemental to the Indenture have been done and performed;
NOW, THEREFORE, for and in consideration of the premises, it is mutually
covenanted and agreed, for the equal and proportionate benefit of all Holders
of Notes, as follows:
<PAGE> 3
ARTICLE ONE
RELATION TO INDENTURE; DEFINITIONS.
SECTION 1.01. This Second Supplemental Indenture constitutes an integral
part of the Indenture and shall be construed in connection with and as a part
of the Indenture.
SECTION 1.02. For all purposes of this Second Supplemental Indenture:
(1) Capitalized terms used herein without definition shall have the
meanings specified in the Indenture;
(2) All references herein to Articles and Sections, unless otherwise
specified, refer to the corresponding Articles and Sections of this
Second Supplemental Indenture;
(3) The terms "hereof", "herein", "hereby", "hereto", "hereunder", and
"herewith" refer to this Second Supplemental Indenture.
ARTICLE TWO
AMENDMENTS TO THE INDENTURE
SECTION 2.01. From and after the Acceptance Date (as defined herein),
Article Eight of the Indenture is hereby amended by:
(a) Amending subparagraph (ii) of Section 801(a) by deleting it in its
entirety and inserting in lieu thereof the following:
"(ii) immediately before and immediately after giving effect to such
transaction or series of transactions, no Default or Event of Default
shall have occurred and be continuing;"
and
(b) Deleting subparagraph (iii) of Section 801(a).
SECTION 2.02. From and after the Acceptance Date, Article Ten of the
Indenture is hereby amended by deleting in its entirety the text of each of the
following Sections of the Indenture and by inserting in its place
"[Intentionally omitted]":
(a) SECTION 1010 Limitation on Consolidated Funded Debt.
(b) SECTION 1011 Limitation on Restricted Payments.
(c) SECTION 1012 Limitation on Liens.
(d) SECTION 1013 Limitation on Issuance and Sale of Capital Stock By
Restricted Subsidiaries.
(e) SECTION 1014 Limitation on Transactions with Affiliates.
(f) SECTION 1015 Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries.
(g) SECTION 1016 Restriction on Transfer of Assets.
(h) SECTION 1017 Limitation on Certain Other Subordinated
Indebtedness.
(i) SECTION 1019 Consolidated Tangible Net Worth.
(j) SECTION 1020 Fixed Charge Coverage Ratio.
<PAGE> 4
SECTION 2.03. From and after the Acceptance Date, Article Five of the
Indenture is hereby amended by deleting the text of each of paragraphs (5) and
(6) of Section 501 and inserting in lieu thereof "[Intentionally omitted]".
ARTICLE THREE
EFFECT OF AMENDMENTS TO THE INDENTURE
This Second Supplemental Indenture shall take effect and be binding upon
execution and delivery by the parties hereto; provided, however, that the
provisions of Article Two hereof will not take effect, the provisions of
Article Five, Article Eight and Article Ten of the Indenture referred to in
Article Two hereof (such provisions being referred to as the "Amended
Provisions") will remain in effect in the form they existed prior to the
execution of this Second Supplemental Indenture, the deletions and amendments
of the Amended Provisions contemplated in Article Two above will not become
operative, and the terms of the Amended Provisions will not be amended,
modified, waived, or deleted, in each case until the date and time (the
"Acceptance Date") that the Company accepts for payment pursuant to the
Company's Offer to Purchase and Consent Solicitation dated November 14, 1997,
as the same may be further amended and supplemented through the date hereof, at
least a majority of the aggregate principal amount of the Notes that are
Outstanding immediately prior to such acceptance. Upon the Acceptance Date,
Article Five, Article Eight and Article Ten of the Indenture will be
automatically amended as contemplated by Article Two above.
Any good faith determination by the Company concerning any conditions of
the Company's offer to purchase for cash all of the Outstanding Notes, or the
satisfaction thereof, and any waiver by the Company of any such conditions
shall be conclusive and binding upon all persons.
ARTICLE FOUR
MISCELLANEOUS
SECTION 4.01. (a) If any provision of this Second Supplemental Indenture
limits, qualifies or conflicts with another provision of the Indenture required
to be included in indentures qualified under the Trust Indenture Act of 1939
(as in effect on the date of this Second Supplemental Indenture) by any of the
provisions of Sections 310 to 317, inclusive, of said Act, such required
provisions shall control.
(b) In case any one or more of the provisions contained in this Second
Supplemental Indenture should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein and in the Indenture shall not in any way be affected,
impaired, prejudiced or disturbed thereby.
SECTION 4.02. Whenever in this Second Supplemental Indenture any of the
parties hereto are named or referred to, this shall be deemed to include the
successors or assigns of such party, and all of the covenants and agreements in
this Second Supplemental Indenture or in the Indenture contained by or on
behalf of the Company or by or on behalf of the Trustee shall bind and inure to
the benefit of the respective successors and assigns of such parties, whether
so expressed or not.
SECTION 4.03. This Second Supplemental Indenture may be simultaneously
executed in several counterparts, and all said counterparts executed and
delivered, each as an original, shall constitute but one and the same
instrument.
SECTION 4.04. Except as specifically amended or supplemented by this
Second Supplemental Indenture, all of the provisions of the Indenture shall
remain and continue in full force and effect and unaffected by the execution of
this Second Supplemental Indenture.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed and their respective corporate seals
to be hereunto affixed and attested, all as of the day and year first written
above.
MARKS BROS. JEWELERS, INC.
By:
[CORPORATE SEAL] Name: John R. Desjardins
Title: Executive Vice President, Finance
& Administration, Treasurer and
Secretary
Attest:
____________________________
Name: Dawn Kennedy
Title: Assistant Secretary
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Trustee
By:
______________________________
Name:
Title:
[CORPORATE SEAL]
Attest:
____________________________
Name:
Title:
<PAGE> 1
MARKS BROS. JEWELERS
401(K) PLAN
Effective as of February 1, 1997
<PAGE> 2
MARKS BROS. JEWELERS
401(K) PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 TITLE, PURPOSE AND EFFECTIVE DATES................................ 1
ARTICLE 2 DEFINITIONS....................................................... 1
ARTICLE 3 PARTICIPATION..................................................... 4
Section 3.1. Eligibility for Participation............................. 4
Section 3.2. Applications for Before-Tax Contributions................. 5
Section 3.3. Transfer to Affiliates.................................... 5
ARTICLE 4 EMPLOYER CONTRIBUTIONS............................................ 6
Section 4.1. Before-Tax Contributions.................................. 6
Section 4.2. $7,000 Annual Limit on Before-Tax
Contributions............................................. 9
Section 4.3. Limitations Imposed by Section 401(k)(3)
of the Code on Contributions for Highly-
Compensated Eligible Employees............................10
Section 4.4. Limitation on Employer Contributions......................15
ARTICLE 5 TRUST AND INVESTMENT FUNDS........................................16
Section 5.1. Trust.....................................................16
Section 5.2. Investment Funds..........................................17
ARTICLE 6 PARTICIPANT ACCOUNTS AND INVESTMENT ELECTIONS.....................17
Section 6.1. Participant Accounts and Investment
Elections.................................................17
Section 6.2. Allocation of Net Income of Trust Fund and
Fluctuation in Value of Trust Fund Assets.................20
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 6.3. Allocations of Contributions Among
Participants' Accounts.....................................20
Section 6.4. Limitations on Allocations Imposed by
Section 415 of the Code....................................21
Section 6.5. Correction of Error........................................24
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 7 DISTRIBUTIONS......................................................24
Section 7.1. Distributions Upon Termination of
Employment.................................................24
Section 7.2. Time of Distribution.......................................26
Section 7.3. Designation of Beneficiary.................................27
Section 7.4. Distributions to Minor and Disabled
Distributees...............................................29
ARTICLE 8 SPECIAL PARTICIPATION AND DISTRIBUTION RULES
RELATING TO REEMPLOYMENT OF TERMINATED EMPLOYEES
AND EMPLOYMENT BY RELATED ENTITIES.................................29
Section 8.1. Change of Employment Status................................29
Section 8.2. Reemployment of an Eligible Employee Whose
Employment Terminated Prior to His or Her
Becoming a Participant.....................................30
Section 8.3. Reemployment of a Terminated Participant...................30
Section 8.4. Employment by an Affiliate.................................31
Section 8.5. Leased Employees...........................................31
ARTICLE 9 ADMINISTRATION.....................................................32
Section 9.1. The Committee..............................................32
Section 9.2. Claims Procedure...........................................36
Section 9.3. Procedures for Domestic Relations Orders...................37
Section 9.4. Notices to Participants, Etc...............................40
Section 9.5. Notices to Committee.......................................40
Section 9.6. Records....................................................40
Section 9.7. Reports of Trustee and Accounting to
Participants...............................................41
ARTICLE 10 PARTICIPATION BY OTHER EMPLOYERS...................................41
Section 10.1. Adoption of Plan...........................................41
Section 10.2. Withdrawal from Participation..............................41
Section 10.3. Company as Agent for Employers.............................42
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 11 CONTINUANCE BY A SUCCESSOR........................................43
ARTICLE 12 MISCELLANEOUS.....................................................44
Section 12.1. Expenses..................................................44
Section 12.2. Non-Assignability.........................................44
Section 12.3. Employment Non-Contractual................................47
Section 12.4. Limitation of Rights......................................47
Section 12.5. Merger or Consolidation with Another Plan.................47
Section 12.6. Gender and Plurals........................................48
Section 12.7. Applicable Law............................................48
Section 12.8. Severability..............................................48
Section 12.9. No Guarantee..............................................48
ARTICLE 13 TOP-HEAVY PLAN REQUIREMENTS.......................................49
Section 13.1. Top-Heavy Plan Determination..............................49
Section 13.2. Definitions and Special Rules.............................50
Section 13.3. Minimum Contribution for Top-Heavy Years..................51
Section 13.4. Special Rules for Applying Statutory
Limitations on Benefits...................................52
ARTICLE 14 AMENDMENT, ESTABLISHMENT OF SEPARATE PLAN
AND TERMINATION...................................................53
Section 14.1. Amendment.................................................53
Section 14.2. Establishment of Separate Plan............................54
Section 14.3. Full Vesting upon Termination of
Participation or Partial Termination
of the Plan...............................................54
Section 14.4. Distribution upon Termination of the Plan.................55
Section 14.5. Trust Fund to Be Applied Exclusively for
Participants and Their Beneficiaries......................56
</TABLE>
-iv-
<PAGE> 6
ARTICLE 1
TITLE, PURPOSE AND EFFECTIVE DATES
The title of this Plan shall be the "Marks Bros. Jewelers 401(k)
Plan". This Plan is effective February 1, 1997.
This Plan is designated as a "profit sharing plan" within the meaning
of section 1.401-1(a)(2)(ii) of the Regulations; and is also designated as an
ERISA section 404(c) Plan within the meaning of section 2550.404c-1 of the
Regulations.
ARTICLE 2
DEFINITIONS
As used herein, the following words and phrases shall have the
following respective meanings when capitalized:
(1) Account. The account established for a Participant pursuant to
Section 6.1 to which Before-Tax Contributions made on behalf of the
Participant, if any, and any earnings (or losses) thereon are credited.
(2) Affiliate. (a) A corporation that is a member of the same
controlled group of corporations (within the meaning of section 414(b) of
the Code) as an Employer, (b) a trade or business (whether or not
incorporated) under common control (within the meaning of section 414(c)
of the Code) with an Employer, (c) any organization (whether or not
incorporated) that is a member of an affiliated service group (within the
meaning of section 414(m) of the Code) that includes an Employer, a
corporation described in clause (a) of this
<PAGE> 7
subdivision or a trade or business described in clause (b) of this
subdivision or (d) any other entity that is required to be aggregated with
an Employer pursuant to Regulations promulgated under section 414(o) of
the Code.
(3) Before-Tax Contributions. Contributions made on behalf of a
Participant pursuant to Section 4.1.
(4) Beneficiary. The person or persons entitled under Section 7.3
to receive benefits in the event of the death of a Participant.
(5) Code. The Internal Revenue Code of 1986, as amended.
(6) Committee. The committee appointed by the Company pursuant to
Section 9.1 that administers the Plan.
(7) Company. Marks Bros. Jewelers, Inc., a Delaware corporation,
and any successor to such corporation that adopts the Plan pursuant to
Article 11.
(8) Compensation. The total of all wages within the meaning of
section 3401(a) of the Code (for purposes of income tax withholding at the
source) paid by an Employer to an Employee while such person is an
Eligible Employee during a Plan Year, but determined without regard to any
rules that limit the remuneration included in wages based on the nature or
location of the employment or the services performed, increased by amounts
not includible in the Employee's wages as a result of the Employee's
election to have his or her compensation reduced pursuant to a qualified
cash or deferred arrangement described in section 401(k) of the Code or a
cafeteria plan described in section 125 of the Code or amounts that are
otherwise excludible from gross income under sections 125, 402(e)(3),
402(h) and 403(b) of the Code. An Employee's "compensation" (within the
meaning of section 415 of the Code) in excess of $150,000 (as adjusted for
changes in the cost of living pursuant to section 401(a)(17) of the Code)
shall not be taken into account for any purposes under the Plan.
(9) Effective Date. The effective date of the Plan with respect to
the Company shall be February 1, 1997 and in
-2-
<PAGE> 8
the case of any other Employer shall be the date designated by such
Employer.
(10) Eligible Employee. An Employee other than (i) an Employee the
terms of whose employment are subject to a collective bargaining
agreement which does not provide for participation in this Plan, and (ii)
an individual who performs services for an Employer, pursuant to an
agreement (written or oral) that classifies such individual's
relationship with the Employer as other than an Employee, regardless of
whether such individual is at any time determined to be an Employee.
(11) Employee. An individual whose relationship with an Employer
is, under common law, that of an employee. An individual whose
relationship with an Employer is that of a leased employee (within the
meaning of section 414(n) of the Code) shall not be an Employee for any
purpose under this Plan except to the extent provided in Section 8.5.
(12) Employer. The Company and any other entity that, with the
consent of the Company, elects to participate in the Plan in the manner
described in Article 10 and any successor entity that adopts the Plan
pursuant to Article 11. If any such entity withdraws from participation
in the Plan pursuant to Section 10.2, or terminates its participation in
the Plan pursuant to Section 14.4, such entity shall thereupon cease to
be an Employer.
(13) Entry Date. January 1, April 1, July 1 and October 1 of each
Plan Year. The first Entry Date shall be October 1, 1997.
(14) ERISA. The Employee Retirement Income Security Act of 1974, as
amended.
(15) Hour of Service. Each hour for which an Employee is directly
or indirectly compensated by, or entitled to receive compensation from,
an Employer, including hours for any period during which the Employee
receives compensation without rendering services such as paid holidays,
vacations, sick leave, disability leave, layoff (excluding severance
pay), jury duty, military duty or leave of absence, but not exceeding 501
hours for any one period of consecutive such
-3-
<PAGE> 9
days. For purposes of determining the number of Hours of Service to be
credited to an Employee, "compensation" shall include any back pay,
irrespective of mitigation of damages, either awarded to the Employee or
agreed to by an Employer. The computation of Hours of Service and the
periods to which Hours of Service are credited shall be determined under
uniform rules adopted by the Committee in accordance with Department of
Labor regulations Section 2530.200b-2(b), (c) and (f).
(16) Military Service. (a) Service on active duty, in time of
national or local emergency, in the armed forces of the United States or
of any State thereof; (b) service in the armed forces of the United
States or of any State thereof under any compulsory service law; or (c)
service in the armed forces of the United States or any of its allies in
time of war in which the United States is engaged within the meaning of
the Uniform Services Employment and Reemployment Act of 1994 for a period
of not longer than five years.
(17) Participant. An Eligible Employee who satisfies the conditions
set forth in Section 3.1. An individual shall cease to be a Participant
upon the complete distribution of his or her account under the Plan.
(18) Plan. The plan herein set forth, and as from time to time
amended.
(19) Plan Year. For the initial Plan Year, the period beginning on
February 1, 1997 and ending on December 31, 1997, and thereafter means
the twelve-month period beginning on January 1 of each subsequent year.
(20) Regulations. Written promulgations of the Department of Labor
construing Title I of ERISA or the Internal Revenue Service construing the
Code.
(21) Trust. The Trust created by agreement between the Company and
the Trustee, as from time to time amended.
(22) Trust Fund. All money and property of every kind of the Trust
held by the Trustee pursuant to the terms of the Trust agreement.
-4-
<PAGE> 10
(23) Trustee. The trustee that executes the Trust instrument
provided for in Article 5, or any successor trustee or, if there is more
than one trustee acting at any time, all of such trustees collectively.
(24) Year of Service. The twelve month period, beginning on the
first day an Employee is credited with one Hour of Service and each
calendar year beginning with the calendar year that includes the first
day the Employee is credited with one Hour of Service in which the
Employee completes at least 1,000 Hours of Service.
(25) Valuation Date. The last day of each calendar quarter of each
Plan Year, or if such date is not a business day, the immediately
preceding business day, and such other day as the Committee may
designate.
ARTICLE 3
PARTICIPATION
Section 3.1. Eligibility for Participation. Each Eligible Employee
shall become a Participant as of the first Entry Date coinciding with or next
following the 60th day after the date the Eligible Employee completes one Year
of Service; provided, that for the first Entry Date, each Eligible Employee
shall become a Participant as of October 1, 1997 if the Eligible Employee has
completed one Year of Service as of September 30, 1997.
Section 3.2. Applications for Before-Tax Contributions. At least 30
days (or such shorter period as may be designated by the Committee) prior to the
date as of which an Eligible Employee
-5-
<PAGE> 11
desires to commence Before-Tax Contributions pursuant to Section 4.1, the
Eligible Employee shall make a request in the manner prescribed by the Committee
specifying the Employee's chosen rate of Before-Tax Contributions pursuant to
Section 4.1. Such request shall authorize the Employee's Employer to reduce the
Eligible Employee's Compensation by the amount of any such Before-Tax
Contributions. The request shall also specify the Employee's investment
elections pursuant to Section 6.1(b) and shall evidence the Employee's
acceptance of and agreement to all provisions of the Plan. All requests to
commence contributions shall be effective as of such time after the Committee
(or its delegate) receives such request as shall be established by the
Committee, provided, that all such requests shall be effective on an Entry Date
or such other date specified by the Committee.
Section 3.3. Transfer to Affiliates. If a Participant is
transferred from one Employer to another Employer or from an Employer to an
Affiliate, such transfer shall not terminate the Participant's participation in
the Plan and such Participant shall continue to participate in the Plan until an
event occurs that would have terminated his or her participation had the
Participant continued in the service of an Employer until the occurrence of
-6-
<PAGE> 12
such event; provided, however, that a Participant shall not be entitled to make
contributions to the Plan during any period of employment by any Affiliate that
is not an Employer. Periods of employment with an Affiliate shall be taken into
account only to the extent set forth in Section 8.4 (relating to employment by
Affiliates). Payments received by a Participant from an Affiliate that is not
an Employer shall not be treated as compensation for any purposes under the
Plan.
ARTICLE 4
EMPLOYER CONTRIBUTIONS
Section 4.1. Before-Tax Contributions. (a) Initial Election.
Subject to the limitations set forth in Sections 4.2 (relating to the $7,000
annual limit on Before-Tax Contributions), 4.3 (relating to limitations imposed
by section 401(k)(3) of the Code on contributions for highly-compensated
Eligible Employees), 4.4 (relating to the limitation on Employer contributions)
and 6.4 (relating to limitations on allocations imposed by section 415 of the
Code), each Employer shall contribute on behalf of each Participant who is an
Employee of such Employer an amount equal to a whole percentage not less than 2
and not more than 15 percent of such Participant's Compensation for each payroll
period as
-7-
<PAGE> 13
designated by the Participant in his or her request pursuant to Section 3.2.
Before-Tax Contributions shall be delivered to the Trustee no later
than as soon as practicable after the end of the month in which such
contribution would otherwise have been paid to the Participant as Compensation.
(b) Changes in the Rate or Suspension of Before-Tax Contributions.
A Participant's Before-Tax Contributions shall pursuant to subsection (a) of
this Section 4.1 continue in effect at the rate designated by a Participant in
his or her request until the Participant changes such designation or suspends
such contributions. A Participant may change such designation as of any Entry
Date or any other date prescribed by the Committee by giving direction to the
Committee (or its delegate) in the manner prescribed by the Committee. Any such
direction shall be limited to the contribution rates described in subsection (a)
of this Section 4.1.
A Participant may suspend future Before-Tax Contributions by giving
notice to the Committee (or its delegate)
-8-
<PAGE> 14
in the manner prescribed by the Committee. A Participant who has ceased
Before-Tax Contributions pursuant to this subsection may resume Before-Tax
Contributions by so directing the Committee (or its delegate) in the manner
prescribed by the Committee. All directions to change the rate of, suspend or
resume Before-Tax Contributions shall be effective as of such time after the
Committee (or its delegate) receives any such direction as shall be established
by the Committee, provided that such direction shall be effective as of an Entry
Date or other date prescribed by the Committee following receipt by the
Committee (or its delegate).
(c) Military Service. Notwithstanding any provision of this Plan to
the contrary, Before-Tax Contributions shall be permitted for periods of
Military Service upon the Participant's reemployment by an Employer after such
Military Service to the extent required by the Uniformed Services Employment and
Reemployment Rights Act of 1994 and in accordance with section 414(u) of the
Code.
(d) Certain Restrictions on Key Employees' Before-Tax Contributions.
Notwithstanding any provision of the Plan to the
-9-
<PAGE> 15
contrary, if for any Plan Year (the "Current Plan Year") the Committee
determines that the Plan has a substantial likelihood of being "top-heavy"
within the meaning of section 416(g) of the Code or that the Plan was top-heavy
for the immediately preceding Plan Year, no Participant who the Committee
determines will be, or has a substantial likelihood of being, a key employee (as
defined in section 416(i)(1) of the Code) with respect to the Current Plan Year
(a "restricted employee") shall be allowed to make for the Current Plan Year any
Before-Tax Contributions unless and until the Company, by resolution of its
board of directors, determines that restricted employees are allowed for the
Current Plan Year to make Before-Tax Contributions.
Section 4.2. $7,000 Annual Limit on Before-Tax Contributions. (a)
General Rule. Notwithstanding the provisions of Section 4.1 (relating to
Before-Tax Contributions), a Participant's Before-Tax Contributions for any
calendar year shall not exceed $7,000 (as adjusted for cost-of-living increases
in accordance with section 402(g)(5) of the Code).
(b) Correction of Excess Before-Tax Contributions. If for any
calendar year a Participant determines that the aggregate
-10-
<PAGE> 16
of the (i) Before-Tax Contributions to this Plan and (ii) amounts contributed
under other plans or arrangements described in section 401(k), 408(k) or 403(b)
of the Code will exceed the limit imposed by subsection (a) of this Section 4.2
for the calendar year in which such contributions were made ("Excess Before-Tax
Contributions"), such Participant shall, pursuant to such rules and at such time
following such calendar year as determined by the Committee, be allowed to
submit a written request that the Excess Before-Tax Contributions plus any
income and minus any loss allocable thereto be distributed to him or her. The
request described in this subsection shall be made in the manner and form
prescribed by the Committee and shall state the amount of the Participant's
Excess Before-Tax Contributions for the calendar year. The request shall be
accompanied by the Participant's written statement that if such Excess
Before-Tax Contributions are not distributed, such Excess Before-Tax
Contributions, when added to amounts deferred under other plans or arrangements
described under section 401(k), 408(k), or 403(b) of the Code will exceed the
limit for such Participant under section 402(g) of the Code. A Participant
shall be deemed to have made the request described in this Section 4.2(b) for a
calendar year to the extent that the Before-Tax Contributions made on behalf of
the Participant to this
-11-
<PAGE> 17
Plan alone exceed the limit imposed by subsection (a) of this Section 4.2 for
the calendar year in which such contributions were made. A distribution of
Excess Before-Tax Contributions (reduced by any amounts distributed pursuant to
Section 4.3(c) (relating to adjustments to comply with section 401(k)(3) of the
Code)), plus earnings, shall be made no later than the April 15 of the calendar
year following the calendar year for which such Excess Before-Tax Contributions
were made. The amount of any income or loss allocable to such Excess Before-Tax
Contributions shall be determined pursuant to applicable Regulations.
Notwithstanding the provisions of this paragraph, any such Excess Before-Tax
Contributions shall be treated as "annual additions" for purposes of Section 6.4
(relating to limitations on allocations imposed by section 415 of the Code).
Section 4.3. Limitations Imposed by Section 401(k)(3) of the Code on
Contributions for Highly-Compensated Eligible Employees. (a) In General.
Notwithstanding the provisions of Section 4.1 (relating to Before-Tax
Contributions), if the Before-Tax Contributions for a Plan Year fail, or in the
judgment of the Committee are likely to fail, to satisfy both of the tests set
forth in paragraphs (1) and (2) of this subsection, the
-12-
<PAGE> 18
adjustments prescribed in subsection (c) of this Section 4.3 shall be made.
(1) The highly compensated average deferral percentage for such year
does not exceed the product of the non-highly compensated average deferral
percentage for such year multiplied by 1.25.
(2) The highly compensated average deferral percentage for such year
(i) does not exceed the non-highly compensated average deferral percentage
for such year by more than two percentage points, and (ii) does not exceed
the product of the non-highly compensated average deferral percentage
multiplied by 2.0.
(b) Definitions. For purposes of this Section:
(1) the "highly compensated average deferral percentage" for a Plan
Year shall be the average of the ratios, calculated separately for each
highly compensated eligible employee who is a Participant for such year to
the nearest one-hundredth of one percent, of the Before-Tax Contributions
made for the benefit of such highly compensated eligible employee for such
Plan Year to the total compensation for such Plan Year paid to such highly
compensated eligible employee;
(2) the "non-highly compensated average deferral percentage" for a
Plan Year shall be the average of the ratios, calculated separately for
each person who was a non-highly compensated eligible employee and a
Participant for the immediately preceding Plan Year (i.e., regardless of
whether such person is a non-highly compensated eligible employee for the
current Plan Year) to the nearest one-hundredth of one percent, of the
Before-Tax Contributions made for such immediately preceding year for the
benefit of such person to the total compensation of such person for such
immediately preceding Plan Year; provided, that, solely for
-13-
<PAGE> 19
purposes of determining whether either of the tests described in
paragraphs (a)(1) or (a)(2) of this Section 4.3 are satisfied for the Plan
Year beginning February 1, 1997, the "non-highly compensated average
deferral percentage" shall be deemed to be 3%;
(3) the term "highly compensated eligible employee" shall mean any
Eligible Employee who is a Participant, who performs service in the
determination year and who is described in section 414(q) of the Code;
(4) the term "non-highly compensated eligible employee" shall mean
any Eligible Employee who is a Participant, who performs services in the
determination year and is not a highly compensated eligible employee;
(5) the term "compensation" shall have the meaning set forth in
section 414(s) of the Code or, in the discretion of the Committee, any
other meaning in accordance with the Code for these purposes; and
(6) if this Plan and one or more other plans of the Employer to
which Before-Tax Contributions are made are treated as one plan for
purposes of section 410(b) of the Code, such plans shall be treated as
one plan for purposes of this Section 4.3. If a highly compensated
eligible employee participates in this Plan and one or more other plans
of the Employer to which such contributions are made, all such
contributions shall be aggregated for purposes of this Section 4.3.
(c) Adjustments to Comply with Section 401(k)(3) of the Code. The
Committee shall cause to be made such periodic computations as it shall deem
necessary or appropriate to determine whether either of the tests set forth in
paragraph (a)(1) or (a)(2) of this Section 4.3 shall be satisfied during a Plan
Year, and, if it appears to the Committee that neither of
-14-
<PAGE> 20
such tests will be satisfied, the Committee shall take such steps as it deems
necessary or appropriate to reduce or otherwise adjust the Before-Tax
Contributions contributed or to be contributed for all or a portion of such Plan
Year on behalf of each Participant who is a highly compensated eligible employee
to the extent necessary in order for one of such tests to be satisfied. The
Committee shall make such reductions or other adjustments by calculating the
maximum deferral percentage permissible for Participants who are highly
compensated eligible employees under the tests set forth in paragraph (a)(1) and
(a)(2) of this Section 4.3. The Before-Tax Contributions made on behalf of each
Participant who is a highly compensated eligible employee and whose deferral
percentage for such Plan Year is the highest shall be reduced until such
deferral percentage equals the greater of (A) the largest deferral percentage
such that one of such tests shall be satisfied, and (B) the next highest
deferral percentage of Before-Tax Contributions made for such Plan Year by any
highly compensated eligible employee. If further reductions are necessary, then
such contributions on behalf of each Participant who is a highly compensated
eligible employee and whose deferral percentage for such Plan Year, after the
reduction described in the preceding sentence, is the highest shall be reduced
in
-15-
<PAGE> 21
accordance with the previous sentence. Such reductions shall continue to be
made to the extent necessary so that one of such tests shall be satisfied.
If within 2-1/2 months after the close of a Plan Year the Committee
determines that notwithstanding any reductions or other adjustments made during
such Plan Year neither of the tests described in paragraph (a)(1) or (a)(2) of
this Section 4.3 has been satisfied for such Plan Year, the Committee shall
within such 2-1/2 month period make an additional reduction or adjustment
pursuant to the first paragraph of this Section so that one of such tests is
satisfied. The amount of such reductions, plus any income and minus any loss
allocable thereto, shall be distributed pro rata, no later than the last day of
the subsequent Plan Year, to each Participant who is a highly compensated
eligible employee and who has the highest amount of Before-Tax Contributions
until the amount of Before-Tax Contributions of each such Participant does not
exceed the Before-Tax Contributions of each Participant who is a highly
compensated eligible employee with the next highest amount of Before-Tax
Contributions. Any Before-Tax Contributions that must be distributed which have
not been distributed under the preceding sentence shall be successively
-16-
<PAGE> 22
distributed pro rata to the Participants who are highly compensated eligible
employees and who have the highest amount of Before-Tax Contributions in the
manner described in the preceding sentence until the entire amount of the
Before-Tax Contributions that must be distributed under this paragraph (c) have
been distributed.
The amount of Before-Tax Contributions to be distributed to a
Participant pursuant to this Section shall be reduced by any Before-Tax
Contributions previously distributed to such Participant pursuant to Section
4.2(b) (relating to correction of Excess Before-Tax Contributions) for such Plan
Year. The amount of any income or loss allocable to any such reductions to be
so distributed shall be determined pursuant to Regulations. The unadjusted
amount of any such reductions so distributed shall be treated as "annual
additions" for purposes of Section 6.4 (relating to limitations on allocations
imposed by section 415 of the Code).
Section 4.4. Limitation on Employer Contributions. The
contributions of an Employer for any Plan Year shall not exceed the maximum
amount for which a deduction is allowable to such
-17-
<PAGE> 23
Employer for federal income tax purposes for the fiscal year of such Employer
that coincides with such Plan Year.
Any contribution made by an Employer by reason of a good faith
mistake of fact, or the portion of any contribution made by an Employer that
exceeds the maximum amount for which a deduction is allowable to such Employer
for federal income tax purposes by reason of a good faith mistake in determining
the maximum allowable deduction, shall upon the request of such Employer be
returned by the Trustee to the Employer. An Employer's request and the return
of any such contribution must be made within one year after such contribution
was mistakenly made or after the deduction of such excess portion of such
contribution was disallowed, as the case may be. The amount to be returned to
an Employer pursuant to this paragraph shall be the excess of (i) the amount
contributed over (ii) the amount that would have been contributed had there not
been a mistake of fact or a mistake in determining the maximum allowable
deduction. Earnings attributable to the mistaken contribution shall not be
returned to the Employer, but losses attributable thereto shall reduce the
amount to be so returned. If the return to the Employer of the amount
attributable to the mistaken contribution would cause the
-18-
<PAGE> 24
balance of any Participant's account as of the date such amount is to be
returned (determined as if such date coincided with the close of a Plan Year) to
be reduced to less than what would have been the balance of such account as of
such date had the mistaken amount not been contributed, the amount to be
returned to the Employer shall be limited so as to avoid such reduction.
ARTICLE 5
TRUST AND INVESTMENT FUNDS
Section 5.1. Trust. A Trust shall be created by the execution of a
trust agreement between the Company and the Trustee. All contributions under
the Plan shall be paid to the Trustee. The Trustee shall hold all monies and
other property received by it and invest and reinvest the same, together with
the income therefrom, on behalf of the Participants collectively in accordance
with the provisions of the trust agreement. The Trustee shall make
distributions from the Trust Fund at such time or times to such person or
persons and in such amounts as the Committee directs in accordance with the
Plan.
Section 5.2. Investment Funds. The Trustee shall establish and
maintain, or shall cause to be established and
-19-
<PAGE> 25
maintained, as directed by the Committee, one or more separate investment funds,
which shall be invested as directed by the Committee. For purposes of the
preceding sentence, the Committee may purchase a group annuity contract from an
insurance company that permits investment in one or more separate investment
funds. The Committee also may, from time to time, and in its sole discretion,
segregate any of the assets held under any investment fund established pursuant
to this Section 5.2 and allocate the investment results from such segregated
assets among all or a portion of the accounts of Participants in such manner as
it shall determine to be appropriate.
All charges and expenses incurred in connection with the purchase and
sale of investments for a fund shall be charged to such fund except to the
extent such charges and expenses are paid by the Employers.
ARTICLE 6
PARTICIPANT ACCOUNTS
AND INVESTMENT ELECTIONS
Section 6.1. Participant Accounts and Investment Elections. (a)
Participant Accounts. For each Participant the
-20-
<PAGE> 26
Committee shall establish and maintain, or shall cause to be established and
maintained, an account to which shall be credited all Before-Tax Contributions
made on behalf of the Participant, if any, and any earnings (or losses) thereon.
Such Account shall consist of investment accounts to which amounts contributed
under the Plan shall be credited according to each Participant's investment
elections pursuant to paragraph (b) of this Section 6.1, subject to the last
sentence of the first paragraph of Section 5.2 (relating to the Committee's
authority to segregate any of the assets held under any investment fund).
Earnings and losses on investment of funds in each account shall be
credited or debited to that account. All such accounts shall be for accounting
purposes only, and there shall be no segregation of assets within the investment
funds among the separate Participants' accounts.
(b) Investment Election. Each Participant, as part of his or her
request for participation described in Section 3.2, shall make an investment
election that shall apply to the investment of contributions to be made on his
or her behalf pursuant to Article 4 and any earnings on such contributions.
-21-
<PAGE> 27
Such election shall specify that such contributions be invested either (i)
wholly in one of the funds maintained or employed by the Trustee pursuant to
subsection (a) of this Section 6.1 or (ii) divided among such funds in
percentage increments established by the Committee from time to time. During
any period in which no direction as to the investment of an Employee's account
is on file with the Committee, contributions made on his or her behalf to the
Plan will be invested in such manner as the Committee shall determine.
(c) Change of Investment Election. Subject to such restrictions as
may be imposed by the Committee, a Participant may elect as of the first day of
each quarter Plan Year or at such other times specified by the Committee to
change as of any Valuation Date his or her investment election applicable to all
or any portion of his or her account balance. In addition, a Participant may
elect as of the first day of any quarter Plan Year or such other times specified
by the Committee to change as of any Valuation Date his or her investment
election applicable to future contributions made pursuant to Article 4, as
specified by the Participant. Such change shall be limited to the investment
funds then maintained or employed by the Trustee pursuant to
-22-
<PAGE> 28
Section 5.2. A Participant's change of investment election must be made in the
manner prescribed by the Committee at least 30 days (or such shorter period as
may be designated by the Committee) prior to the date as of which the change is
to be effective. Any such change shall specify that such contributions be
invested either (i) wholly in one of the funds maintained or employed by the
Trustee pursuant to Section 5.2, or (ii) divided among such funds in percentage
increments established by the Committee from time to time.
Section 6.2. Allocation of Net Income of Trust Fund and Fluctuation
in Value of Trust Fund Assets. In the event that contributions, income and
losses are not otherwise specifically allocated to Participant accounts by the
Trustee, as soon as practical after each Valuation Date, the net worth of each
investment fund as of such Valuation Date shall be determined. If the net worth
of such investment fund as so determined is more or less than the total of all
balances credited as of such Valuation Date to the subaccounts of Participants
invested in the investment fund as of such Valuation Date who are Participants
as of such Valuation Date, the amount of any excess or deficiency shall be
prorated and credited or charged to such subaccounts
-23-
<PAGE> 29
proportionally to the balances of such subaccounts as of the preceding Valuation
Date after making all allocations for such preceding Valuation Date prescribed
by this Article and after decreasing each such subaccount by any distributions
from such subaccount during such period (but not less than zero), with any such
decrease to be made in such manner as the Committee determines in its discretion
to be necessary.
Section 6.3. Allocations of Contributions Among Participants'
Accounts. Before-Tax Contributions shall be allocated to the Account of each
Participant for whom such contributions are made as soon as practical after such
contributions are delivered to the Trustee or insurer maintaining a group
annuity contract.
Section 6.4. Limitations on Allocations Imposed by Section 415 of
the Code. Notwithstanding any other provision of the Plan, the amount allocated
to a Participant's accounts under the Plan for each Plan Year shall be limited
so that (1) the aggregate annual additions to the Participant's accounts under
this Plan and in all other defined contribution plans maintained by an Employer
shall not exceed the lesser of (A) $30,000, and
-24-
<PAGE> 30
(B) 25 percent of the Participant's compensation for such Plan Year; and, for
Plan Years beginning before December 31, 1999 (2) the sum of (A) and (B) below
shall not exceed 1.
(A) The sum of the annual additions to the Participant's accounts in
this Plan and aggregate annual additions to the Participant's accounts in
all other defined contribution plans maintained by an Employer (computed
as of the close of the Plan Year for which these computations are being
made) for each Plan Year during which the Participant shall have
participated in any such plan divided by the sum of, calculated with
respect to each such Plan Year, the lesser of:
(I) 125% of the maximum dollar amount which under section
415(c)(1)(A) of the Code could have been contributed on behalf of the
Participant to a defined contribution plan for such year, and
(II) 35% of the Participant's compensation, for such Plan Year.
(B) The aggregate projected annual benefit of the Participant under
all defined benefit plans maintained by an Employer (determined as of the
close of the Plan Year for which such computations are made) divided by
the lesser of
(I) 125 percent of the maximum dollar limitation contained in
section 415(b)(1)(A) of the Code as adjusted for increases in the
cost of living pursuant to section 415(d) of the Code, and
(II) 140 percent of the average of the Participant's
compensation for the three consecutive calendar years of his or her
participation in such defined benefit plans during which the
Participant's compensation was the highest.
-25-
<PAGE> 31
If the amount to be allocated to a Participant's accounts pursuant to
Section 6.3 (relating to allocations of contributions among Participant's
accounts) for a Plan Year would exceed the limitation set forth in clause (1) of
this Section 6.4, such excess shall be reduced before allocations are made to
the Participant's accounts. If in any Plan Year the annual additions of a
Participant would exceed the limitation set forth in clause (1) of this Section
6.4 as a result of (i) a reasonable error in estimating a Participant's
compensation, (ii) a reasonable error in determining the amount of Before-Tax
Contributions that may be allocated to a Participant's account, or (iii) under
other limited facts and circumstances as determined by the Commissioner of
Internal Revenue, then the Committee shall reduce the Participant's annual
additions to the extent of such excess by reducing the Participant's Before-Tax
Contributions allocated to his or her account and distributing to the
Participant the amount by which his or her Before-Tax Contributions have been
reduced, plus or minus any earnings attributable thereto, determined in
accordance with Regulations.
-26-
<PAGE> 32
If, for Plan Years beginning before December 31, 1999, the amount to
be allocated to a Participant's account under this Plan and the aggregate
projected annual benefit of the Participant under all defined benefit plans
maintained by his or her Employer for the Plan Year would exceed the limitations
set forth in clause (2) of this Section, the adjustments described in the
preceding paragraph shall be made but only after the benefits to which a
Participant is entitled under all other qualified defined benefit plans
maintained by his or her Employer have been reduced in accordance with the terms
of any such plans to the maximum extent possible.
For purposes of this Section 6.4, the "annual additions" for a Plan
Year to a Participant's accounts in this Plan and in any other defined
contribution plan maintained by an Employer is the sum during such Plan Year of:
(i) the amount of Employer contributions and Employee contributions
(but excluding any rollover contribution or direct transfers made to such
plan) allocated to such Participant's accounts,
(ii) the amount of forfeitures allocated to such Participant's
accounts, and
-27-
<PAGE> 33
(iii) contributions allocated on behalf of the Participant to any
individual medical benefit account as defined in section 415(l) of the
Code.
For purposes of this Section 6.4, "defined contribution plan," "projected annual
benefit" and "defined benefit plan" shall have the meanings set forth in section
415 of the Code and Regulations, and the term "Employer" shall include all
Affiliates except that in defining Affiliates "more than 50 percent" shall be
substituted for "at least 80 percent" where required by section 415(g) of the
Code. In addition, for purposes of this Section 6.4, "compensation" shall mean
a Participant's compensation reportable on a Form W-2, but excluding amounts so
reportable on account of (i) a disposition of common stock of an Employer or
Affiliate, pursuant to any stock purchase plan, (ii) moving expenses deductible
under section 217 of the Code and (iii) other items receiving special tax
treatment within the meaning of section 1.415-2(d)(2)(iv) of the Regulations.
Section 6.5. Correction of Error. If it comes to the attention of
the Committee that an error has been made in any of the allocations prescribed
by this Article, appropriate adjustment shall be made to the accounts of all
Participants and designated
-28-
<PAGE> 34
Beneficiaries that are affected by such error, except that no adjustment need be
made with respect to any Participant or Beneficiary whose account has been
distributed in full prior to the discovery of such error.
ARTICLE 7
DISTRIBUTIONS
Section 7.1. Distributions Upon Termination of Employment. (a)
Vested Amount. If a Participant's employment with an Employer terminates for
any reason whatsoever, the Participant, or his or her designated Beneficiary, as
the case may be, shall be fully vested in the Participant's Account under the
Plan as of the Valuation Date coinciding with or immediately following the date
on which the Participant's termination of employment occurs.
(b) Form of Distribution. Any distribution to which a Participant or
Beneficiary, as the case may be, becomes entitled upon termination of employment
shall be distributed in a lump sum.
-29-
<PAGE> 35
(c) Direct Rollover Option. In the case of a distribution from the
Plan of at least $200 which is an "eligible rollover distribution" within the
meaning of section 402 of the Code, a Participant (or surviving spouse of a
Participant) may elect that all or any portion of such distribution shall be
directly transferred as a rollover contribution from this Plan to (i) an
individual retirement account described in section 408(a) of the Code, (ii) an
individual retirement annuity described in section 408(b) of the Code, (iii) an
annuity plan described in section 403(a) of the Code or (iv) another plan
qualified under section 401(a) of the Code (the terms of which permit the
acceptance of rollover contributions) (provided, however, that a surviving
spouse of a Participant may only elect to have such distribution directly
transferred to an individual retirement account or individual retirement
annuity). Notwithstanding the foregoing, a Participant (or surviving spouse of
a Participant) shall not be entitled to so elect to have an amount less than the
total amount of such distribution transferred as a rollover contribution unless
such portion equals at least $500.
Section 7.2. Time of Distribution. Subject to paragraph (4) below,
a Participant who has terminated employment
-30-
<PAGE> 36
shall receive distribution of his or her vested account balance as soon as
administratively practical after the Valuation Date coinciding with or
immediately following the later of (a) the date on which the Participant
terminates employment and (b) the date on which the Participant attains age 65,
except as provided below.
(1) Early Distribution. A Participant who terminates employment
prior to his or her 65th birthday may elect in writing to have
distribution of his or her vested account balance commence within 60 days
after any Valuation Date coinciding with or following the Participant's
termination of employment.
(2) Required Beginning Date. In the case of a Participant who is a
"five percent owner" (as defined in section 416 of the Code) with respect
to the Plan Year ending in the calendar year in which the Participant
attains age 70 1/2, a lump sum distribution paid during such Participant's
lifetime shall be made not later than the April 1 of the calendar year
following the calendar year in which the Participant attains age 70 1/2,
regardless of whether such Participant has terminated employment.
(3) Distributions Commencing After Participant's Death. A lump sum
distributions made after the Participant's death shall be made within five
years after the death of the Participant, except that if the Participant's
Beneficiary is the Participant's spouse, distribution may be deferred
until the date on which the Participant would have attained age 65 had he
or she survived.
(4) Small Benefits Payable in Lump Sum. Notwithstanding any
provision of the Plan to the contrary, if the amount of the Participant's
account balance to be distributed under this Section does not exceed
$3,500, such amount shall be distributed as soon as administratively
practical after the Valuation Date coinciding with or next following the
Participant's termination of employment.
-31-
<PAGE> 37
Section 7.3. Designation of Beneficiary. Each Participant shall
have the right to designate a Beneficiary or Beneficiaries (who may be
designated contingently or successively and that may be an entity other than a
natural person) to receive any distribution to be made under Section 7.1
(relating to distributions upon termination of employment) upon the death of
such Participant or, in the case of a Participant who dies subsequent to
termination of his or her employment but prior to the distribution of the entire
amount to which he or she is entitled under the Plan, any undistributed balance
to which such Participant would have been entitled, provided, however, that no
such designation (or change thereof) shall be effective if the Participant was
married on the date of the Participant's death unless such designation (or
change thereof) was consented to at the time of such designation (or change
thereof) by the person who was the Participant's spouse, in writing,
acknowledging the effect of such consent and witnessed by a notary public or a
Plan representative, or it is established to the satisfaction of the Committee
that such consent could not be obtained because the Participant's spouse cannot
be located or such other circumstances as may be prescribed in Regulations.
Subject to the preceding
-32-
<PAGE> 38
sentence, a Participant may from time to time, without the consent of any
Beneficiary, change or cancel any such designation. Such designation and each
change therein shall be made in the form prescribed by the Committee and shall
be filed with the Committee. If (i) no Beneficiary has been named by a deceased
Participant, (ii) such designation is not effective pursuant to the proviso
contained in the first sentence of this Section 7.3, or (iii) the designated
Beneficiary has predeceased the Participant, any undistributed balance of the
deceased Participant shall be distributed by the Trustee at the direction of the
Committee (a) to the surviving spouse of such deceased Participant, if any, or
(b) if there is no surviving spouse, to the surviving children of such deceased
Participant, if any, in equal shares, or (c) if there is no surviving spouse or
surviving children, to the surviving parents of such deceased Participant, if
any, in equal shares, or (d) if there is no surviving spouse, surviving children
or surviving parents, to the executor or administrator of the estate of such
deceased Participant or (e) if no executor or administrator has been appointed
for the estate of such deceased Participant within six months following the date
of the Participant's death, in equal shares to the person or persons who would
be entitled under the intestate succession laws of the state
-33-
<PAGE> 39
of the Participant's domicile to receive the Participant's personal estate.
The marriage of a Participant shall be deemed to revoke any prior designation
of a Beneficiary made by him or her and a divorce shall be deemed to revoke any
prior designation of the Participant's divorced spouse if written evidence of
such marriage or divorce is received by the Committee.
Section 7.4. Distributions to Minor and Disabled Distributees. Any
distribution under this Article that is payable to a distributee who is a minor
or to a distributee who, in the opinion of the Committee, is unable to manage
his or her affairs by reason of illness or mental incompetency may be made to or
for the benefit of any such distributee at such time consistent with the
provisions of Section 7.2 (relating to time of distribution) and in such of the
following ways as the legal representative of such distributee shall direct:
(a) directly to any such minor distributee, (b) to such legal representative,
(c) to a custodian under a Uniform Gifts to Minors Act for any such minor
distributee, or (d) to some near relative of any such distributee to be used for
the latter's benefit. Neither the Committee nor the Trustee shall be required
to see to the application by any
-34-
<PAGE> 40
third party of any distribution made to or for the benefit of such distributee
pursuant to this Section 7.4.
ARTICLE 8
SPECIAL PARTICIPATION AND DISTRIBUTION
RULES RELATING TO REEMPLOYMENT OF
TERMINATED EMPLOYEES AND
EMPLOYMENT BY RELATED ENTITIES
Section 8.1. Change of Employment Status. If an Employee who is not
a Participant becomes eligible to participate because of a change in his or her
employment status, such Employee shall become a Participant as of the date of
such change if the Employee has satisfied the eligibility service requirement
set forth in Section 3.1; otherwise the Employee shall become a Participant in
accordance with Section 3.1 following satisfaction of the eligibility service
requirement.
Section 8.2. Reemployment of an Eligible Employee Whose Employment
Terminated Prior to His or Her Becoming a Participant. (a) If the employment
of an Eligible Employee terminated before the Employee satisfied the eligibility
service requirement set forth in Section 3.1 and such Employee is thereafter
reemployed by
-35-
<PAGE> 41
an Employer, such Employee shall be eligible to become a Participant in
accordance with Section 3.1.
(b) If the employment of an Eligible Employee terminated after he or
she had satisfied the eligibility service requirement set forth in Section 3.1
but prior to becoming a Participant is reemployed by an Employer, he or she
shall not be required to satisfy again such requirement and shall be eligible to
become a Participant upon filing an application in accordance with Section 3.2.
Section 8.3. Reemployment of a Terminated Participant. If a
terminated Participant is reemployed, the Participant shall not be required to
satisfy again the eligibility service requirement set forth in Section 3.1 and
shall again become a Participant upon filing an application in accordance with
Section 3.2.
Section 8.4. Employment by an Affiliate. If an individual is
employed by an Affiliate, then any period of such employment shall be taken into
account solely for the purposes of determining whether and when such individual
is eligible to
-36-
<PAGE> 42
participate in the Plan under Article 3, when such individual has terminated his
or her employment for purposes of Article 7 to the same extent it would have
been had such period of employment been as an Employee of his or her Employer.
Section 8.5. Leased Employees. If an individual who performed
services as a leased employee (within the meaning of section 414(n)(2) of the
Code) of an Employer or an Affiliate becomes an Employee, or if an Employee
becomes such a leased employee, then any period during which such services were
so performed shall be taken into account solely for the purposes of determining
whether and when such individual is eligible to participate in the Plan under
Article 3 and determining when such individual has terminated his or her
employment for purposes of Article 7 to the same extent it would have been had
such service been as an Employee. This Section shall not apply to any period of
service during which such a leased employee was covered by a plan described in
section 414(n)(5) of the Code.
-37-
<PAGE> 43
ARTICLE 9
ADMINISTRATION
Section 9.1. The Committee. (a) The Company shall be the named
fiduciary and the "administrator" of the Plan within the meaning of such terms
as used in ERISA. Pursuant to a resolution of the Board of Directors of the
Company, or a committee thereof, the Company shall appoint the Committee, which
shall consist of not less than three members, to be responsible for the
administration of the provisions of the Plan, except for duties specifically
vested in the Trustee. The Committee shall be a "named fiduciary" within the
meaning of such term as used in ERISA for purposes of designating the investment
funds under Section 5.2 and for purposes of appointing one or more investment
managers as described in ERISA. The Company shall have the right at any time,
with or without cause, to remove one or more members of the Committee. Any
member of the Committee may resign and the resignation shall be effective upon
delivery of the written resignation to the Company. Upon the resignation,
removal or failure or inability for any reason of any member of the Committee to
act hereunder, the Company shall appoint a successor. Any successor Committee
member shall have all the rights, privileges
-38-
<PAGE> 44
and duties of the predecessor, but shall not be held accountable for the acts of
the predecessor.
(b) Any member of the Committee may, but need not, be an Employee,
trustee or officer of an Employer and such status shall not disqualify such
person from taking any action hereunder or render such person accountable for
any distribution or other material advantage received by him or her under this
Plan, provided that no member of the Committee who is a Participant shall take
part in any action of the Committee or any matter involving solely his or her
rights under this Plan.
(c) Promptly after the appointment of the Committee and from time to
time thereafter, and promptly after the appointment of any successor Committee,
the Trustee shall be notified as to the names of the persons so appointed by
delivery to the Trustee of a written instrument duly adopted by the Company
making such appointments.
(d) The Committee shall have the duty and authority to interpret and
construe the Plan in regard to all questions of eligibility, the status and
rights of Participants, distributees
-39-
<PAGE> 45
and other persons under the Plan, and the manner, time, and amount of payment of
any distribution under the Plan. Each Employer shall, from time to time, upon
request of the Committee, furnish to the Committee such data and information as
the Committee shall require in the performance of its duties.
(e) The Committee shall direct the Trustee to make payments of
amounts to be distributed from the Trust under Article 7.
(f) The Committee may allocate its responsibilities and may designate
any person, persons, partnership or corporation to carry out any of its
responsibilities with respect to administration of the Plan. Any such
allocation or designation shall be reduced to writing and such writing shall be
kept with the records of the Plan.
(g) The Committee may act at a meeting or by written consent
approved by a majority of its members. The Committee shall elect one of its
members as chairman and appoint a secretary, who may or may not be a member of
the Committee. The secretary shall keep a record of all meetings and forward
all
-40-
<PAGE> 46
necessary communications to the Employers or the Trustee. All decisions of the
Committee shall be made by the majority, including actions taken by written
consent. The Committee shall be the Plan's agent for service of legal process
and forward all necessary communications to the Trustee. The Committee may
adopt such rules and procedures as it deems desirable for the conduct of its
affairs and the administration of the Plan, provided that any such rules and
procedures shall be consistent with the provisions of the Plan and ERISA.
(h) The Committee shall discharge its duties with respect to the Plan
(i) solely in the interest of the Participants and Beneficiaries, (ii) for the
exclusive purpose of providing benefits to Employees participating in the Plan
and their Beneficiaries and of defraying reasonable expenses of administering
the Plan and (iii) with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like capacity and
familiar with such matters would use in the conduct of an enterprise of a like
character and with like aims. The Employers hereby jointly and severally
indemnify the Committee, the board of directors of the Company and the officers
of the Company and each of them, from the
-41-
<PAGE> 47
effects and consequences of their acts, omissions and conduct in their official
capacity, except to the extent that such effects and consequences result from
their own willful misconduct.
(i) The members of the Committee may not receive any compensation or
fee from the Plan for services as members of the Committee.
(j) The Committee may require a Participant or Beneficiary to
complete and file certain applications or forms approved by the Committee and to
furnish such information requested by the Committee. The Committee may rely
upon all such information so furnished to it.
(k) The Committee may employ such counsel (who may be of counsel for
an Employer) and agents and may arrange for such clerical and other services as
it may require in carrying out the provisions of the Plan.
Section 9.2. Claims Procedure. Any Participant or distributee who
believes he or she is entitled to benefits in an amount greater than those which
he or she is receiving or has
-42-
<PAGE> 48
received may file a claim with the Committee. Such a claim shall be in writing
and state the nature of the claim, the facts supporting the claim, the amount
claimed, and the address of the claimant. The Committee shall review the claim
and, unless special circumstances require an extension of time, within 90 days
after receipt of the claim, give written notice by registered or certified mail
to the claimant of his or her decision with respect to the claim. If special
circumstances require an extension of time, the claimant shall be so advised in
writing within the initial 90-day period and in no event shall such an extension
exceed 90 days. The notice of the decision of the Committee with respect to the
claim shall be written in a manner calculated to be understood by the claimant
and, if the claim is wholly or partially denied, set forth the specific reasons
for the denial, specific references to the pertinent Plan provisions on which
the denial is based, a description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of why such
material or information is necessary, and an explanation of the claim review
procedure under the Plan. The Committee shall also advise the claimant that the
claimant or his or her duly authorized representative may request a review by
the Chairman of the Committee of the denial by filing with the
-43-
<PAGE> 49
Chairman within 60 days after notice of the denial has been received by the
claimant, a written request for such review. The claimant shall be informed
that he or she may have reasonable access to pertinent documents and submit
comments in writing to the Chairman within the same 60-day period. If a request
is so filed, review of the denial shall be made by the Chairman of the Committee
within, unless special circumstances require an extension of time, 60 days after
receipt of such request, and the claimant shall be given written notice of the
Chairman's final decision. If special circumstances require an extension of
time, the claimant shall be so advised in writing within the initial 60-day
period and in no event shall such an extension exceed 60 days. The notice of
the Chairman's final decision shall include specific reasons for the decision
and specific references to the pertinent Plan provisions on which the decision
is based and shall be written in a manner calculated to be understood by the
claimant.
Section 9.3. Procedures for Domestic Relations Orders. If the
Committee receives any written judgment, decree or order (including approval of
a property settlement agreement) pursuant to domestic relations or community
property laws of any state
-44-
<PAGE> 50
relating to the provision of child support, alimony or marital property rights
of a spouse, former spouse, child or other dependent of a Participant and
purporting to provide for the payment of all or a portion of the Participant's
benefit under the Plan to or on behalf of one or more of such persons (such
judgment, decree or order being hereinafter called a "domestic relations
order"), the Committee shall promptly notify the Participant and each other
payee specified in such domestic relations order of its receipt and of the
following procedures. After receipt of a domestic relations order, the
Committee shall determine whether such order constitutes a "qualified domestic
relations order," as defined in Section 12.2(b), and shall notify the
Participant and each payee named in such order in writing of its determination.
Such notice shall be written in a manner calculated to be understood by the
parties and shall set forth specific reasons for the Committee's determination,
and shall contain an explanation of the review procedure under the Plan. The
Committee shall also advise each party that the party or his or her duly
authorized representative may request a review by the Committee's determination
by filing a written request for such review. The Committee shall give each
party affected by such request notice of such request for review. Each party
also shall
-45-
<PAGE> 51
be informed that he or she may have reasonable access to pertinent documents and
submit comments in writing to the Committee in connection with such request for
review. Each party shall be given written notice of the Committee's final
determination, which notice shall be written in a manner calculated to be
understood by the parties and shall include specific reasons for such final
determination. Any amounts subject to a domestic relations order which would be
payable to the alternate payee prior to the determination that such order is a
qualified domestic relations order shall be separately accounted for and not
distributed prior to such determination. If within a reasonable time after
receipt of written evidence of such order it is determined that such domestic
order constitutes a qualified domestic relations order, the amounts so
separately accounted for (plus any earnings thereon) shall be paid to the
alternate payee. If within such reasonable period of time it is determined that
such order does not constitute a qualified domestic relations order, the amounts
so separately accounted for (plus any earnings thereon) shall be paid to such
other persons, if any, entitled to such amounts at such time. Prior to the
issuance of regulations, the Committee shall establish the time periods in which
the Committee's determination, a request for review thereof and the review by
the
-46-
<PAGE> 52
Committee shall be made, provided that the total of such time periods shall not
be longer than 18 months from the date written evidence of a domestic relations
order is received by the Committee.
The duties of the Committee under this Section may be delegated by
the Committee to one or more persons other than the Committee.
Section 9.4. Notices to Participants, Etc. All notices, reports and
statements given, made, delivered or transmitted to a Participant or distributee
or any other person entitled to or claiming benefits under the Plan shall be
deemed to have been duly given, made or transmitted when mailed by first class
mail with postage prepaid and addressed to the Participant or distributee or
such other person at the address last appearing on the records of the Committee.
A Participant or distributee or other person may record any change of his or her
address from time to time by written notice filed with the Committee.
Section 9.5. Notices to Committee. Written directions, notices and
other communications from Participants or distributees
-47-
<PAGE> 53
or any other person entitled to or claiming benefits under the Plan to the
Committee shall be deemed to have been duly given, made or transmitted either
when delivered to such location as shall be specified upon the forms prescribed
by the Committee for the giving of such directions, notices and other
communications or when mailed by first class mail with postage prepaid and
addressed to the addressee at the address specified upon such forms.
Section 9.6. Records. The Committee shall keep a record of all of
its proceedings and shall keep or cause to be kept all books of account, records
and other data as may be necessary or advisable in its judgment for the
administration of the Plan.
Section 9.7. Reports of Trustee and Accounting to Participants. The
Committee shall keep on file, in such form as it shall deem convenient and
proper, all reports concerning the Trust Fund received by it from the Trustee,
and the Committee may, as soon as possible after the close of each Plan Year,
advise each Participant and Beneficiary of the balance credited to any account
for his or her benefit as of the close of such Plan Year pursuant to Article 6
hereof.
-48-
<PAGE> 54
ARTICLE 10
PARTICIPATION BY OTHER EMPLOYERS
Section 10.1. Adoption of Plan. With the consent of the Company,
any entity may become a participating Employer under the Plan by (a) taking such
action as shall be necessary to adopt the Plan, (b) becoming a party to the
agreement establishing the Trust, and (c) executing and delivering such
instruments and taking such other action as may be necessary or desirable to put
the Plan into effect with respect to such entity.
Section 10.2. Withdrawal from Participation. Any Employer may
withdraw from participation in the Plan at any time by filing with the Committee
a duly certified copy of a written instrument duly adopted by the Employer to
that effect and giving notice of its intended withdrawal to the Committee, the
other Employers and the Trustee prior to the effective date of withdrawal. Any
Employer, by action of its board of directors or other governing authority, may
withdraw from the Plan and Trust after giving 90 days' notice to the Company,
provided the Company consents to such withdrawal. Distribution may be
implemented through continuation of the Trust, or transfer to another trust
-49-
<PAGE> 55
fund exempt from tax under section 501 of the Code, or to a group annuity
contract qualified under section 401 of the Code, or distribution may be made as
an immediate cash payment in accordance with the directions of the Committee;
provided, however, that no such action shall divert any part of such fund to any
purpose other than the exclusive benefit of the Employees of such Employer.
Section 10.3. Company as Agent for Employers. Each entity that
becomes a participating Employer pursuant to Section 10.1 or Article 11 by so
doing shall be deemed to have appointed the Company its agent to exercise on its
behalf all of the powers and authorities hereby conferred upon the Company by
the terms of the Plan, including, but not by way of limitation, the power to
amend and terminate the Plan. The authority of the Company to act as such agent
shall continue unless and until the portion of the Trust Fund held for the
benefit of Employees of the particular Employer and their Beneficiaries is set
aside in a separate Trust Fund as provided in Section 14.2.
-50-
<PAGE> 56
ARTICLE 11
CONTINUANCE BY A SUCCESSOR
In the event that the Employer is reorganized by way of merger,
consolidation, transfer of assets or otherwise, so that another entity succeeds
to all or substantially all of the Employer's business, such successor entity
may be substituted for the Employer under the Plan by adopting the Plan and
becoming a party to the Trust agreement. Contributions by the Employer shall be
automatically suspended from the effective date of any such reorganization until
the date upon which the substitution of such successor entity for the Employer
under the Plan becomes effective. If, within 90 days following the effective
date of any such reorganization, such successor entity shall not have elected to
become a party to the Plan, or if the Employer adopts a plan of complete
liquidation other than in connection with a reorganization, the Plan shall be
automatically terminated with respect to Employees of such Employer as of the
close of business on the 90th day following the effective date of such
reorganization or as of the close of business on the date of adoption of such
plan of complete liquidation, as the case may be, and the Committee shall direct
the Trustee to distribute the
-51-
<PAGE> 57
portion of the Trust Fund applicable to such Employer in the manner provided in
Article 14.
If such successor entity is substituted for an Employer by electing
to become a party to the Plan as described above, then, for all purposes of the
Plan, employment of such Employee with such Employer, including service with and
compensation paid by such Employer, shall be considered to be employment with an
Employer.
ARTICLE 12
MISCELLANEOUS
Section 12.1. Expenses. Except as provided in the last sentence of
Section 5.2 (relating to expenses of investments for an investment fund), all
costs and expenses incurred in administering the Plan and the Trust, including
the expenses of the Committee, the fees of counsel and any agents for the
Committee, the fees and expenses of the Trustee, the fees of counsel for the
Trustee and other administrative expenses shall be paid by the Committee from
the Trust Fund to the extent such expenses are not paid by the Employers. The
Committee, in its
-52-
<PAGE> 58
sole discretion, having regard to the nature of a particular expense, shall
determine the portion of such expense that is to be borne by each Employer.
Section 12.2. Non-Assignability. (a) In general. It is a
condition of the Plan, and all rights of each Participant and Beneficiary shall
be subject thereto, that no right or interest of any Participant or Beneficiary
in the Plan shall be assignable or transferable in whole or in part, either
directly or by operation of law or otherwise, including, but not by way of
limitation, execution, levy, garnishment, attachment, pledge or bankruptcy, but
excluding devolution by death or mental incompetency, and no right or interest
of any Participant or Beneficiary in the Plan shall be liable for, or subject
to, any obligation or liability of such Participant or Beneficiary, including
claims for alimony or the support of any spouse, except as provided below.
(b) Exception for Qualified Domestic Relations Orders.
Notwithstanding any provision of the Plan to the contrary, if a Participant's
account balance under the Plan, or any portion thereof, is the subject of one or
more qualified domestic relations orders, as defined below, such account balance
or
-53-
<PAGE> 59
portion thereof shall be paid to the person and at the time and in the manner
specified in any such order. For purposes of this Section 12.2(b), "qualified
domestic relations order" shall mean any "domestic relations order" as defined
in Section 9.3 that creates (or recognizes the existence of) or assigns to a
person other than the Participant (an "alternate payee") rights to all or a
portion of the Participant's account balance under the Plan, and:
(A) clearly specifies
(i) the name and last known mailing address (if any) of the
Participant and each alternate payee covered by such order,
(ii) the amount or percentage of this Participant's benefits to be
paid by the Plan to each such alternate payee, or the manner in which such
amount or percentage is to be determined,
(iii) the number of payments to, or period of time for which, such
order applies, and
(iv) each plan to which such order applies;
(B) does not require
(i) the Plan to provide any type or form of benefit or any option
not otherwise provided under the Plan at the time such order is issued,
(ii) the Plan to provide increased benefits (determined on the basis
of actuarial equivalence), and
-54-
<PAGE> 60
(iii) the payment of benefits to an alternate payee that at the time
such order is issued already are required to be paid to a different
alternate payee under a prior qualified domestic relations order; and
(C) does not require the commencement of payments to any alternate payee
before the Valuation Date next following the date the Committee determines
the domestic relations order is a qualified domestic relations order;
all as determined by the Committee pursuant to the procedures contained in
Section 9.3. Any amounts subject to a domestic relations order prior to
determination of its status as a qualified domestic relations order that but for
such order would be paid to the Participant shall be segregated pending such
determination. If within the reasonable time period beginning with the date on
which the first payment would be required to be made under a domestic relations
order the Committee determines that the domestic relations order constitutes a
qualified domestic relations order, the amount so segregated (plus any earnings
thereon) shall be paid to the alternate payee. If such determination is not
made within such reasonable time period, then the amount so segregated (plus any
earnings thereon), shall, as soon as practicable after the end of such
reasonable time period, be paid to the Participant. Any determination regarding
the status of such order after such reasonable time period shall be
-55-
<PAGE> 61
applied only to payments on or after the date of such determination.
Section 12.3. Employment Non-Contractual. The Plan confers no right
upon an Employee to continue in employment.
Section 12.4. Limitation of Rights. A Participant or distributee
shall have no right, title or claim in or to any specific asset of the Trust
Fund, but shall have the right only to distributions from the Trust Fund on the
terms and conditions herein provided.
Section 12.5. Merger or Consolidation with Another Plan. A merger
or consolidation with, or transfer of assets or liabilities to, any other plan
shall not be effected unless the terms of such merger, consolidation or transfer
are such that each Participant, distributee, Beneficiary or other person
entitled to receive benefits from the Plan would, if the Plan were to terminate
immediately after the merger, consolidation or transfer, receive a benefit equal
to or greater than the benefit such person would be entitled to receive if the
Plan were to terminate immediately before the merger, consolidation, or
transfer.
-56-
<PAGE> 62
Section 12.6. Gender and Plurals. Wherever used in the Plan, words
in the masculine gender shall include masculine or feminine gender, and, unless
the context otherwise requires, words in the singular shall include the plural,
and words in the plural shall include the singular.
Section 12.7. Applicable Law. The Plan and all rights hereunder
shall be governed by and construed in accordance with the laws of the State of
Illinois to the extent such laws have not been preempted by applicable federal
law.
Section 12.8. Severability. If a provision of the Plan shall be
held illegal or invalid, the illegality or invalidity shall not affect the
remaining parts of the Plan and the Plan shall be construed and enforced as if
the illegal or invalid provision had not been included in the Plan.
Section 12.9. No Guarantee. Neither the Committee, the Employer,
nor the Trustee in any way guarantees the Trust from loss or depreciation nor
the payment of any money that may be or become due to any person from the Trust
Fund. Nothing herein contained shall be deemed to give any Participant,
distributee, or
-57-
<PAGE> 63
Beneficiary an interest in any specific part of the Trust Fund or any other
interest except the right to receive benefits out of the Trust Fund in
accordance with the provisions of the Plan and the Trust Fund.
ARTICLE 13
TOP-HEAVY PLAN REQUIREMENTS
Section 13.1. Top-Heavy Plan Determination. If as of the
determination date (as defined in Section 13.2) for any Plan Year (a) the sum of
the account balances under the Plan and all other defined contribution plans in
the aggregation group (as defined in Section 13.2) and (b) the present value of
accrued benefits under all defined benefit plans in such aggregation group of
all Participants in such plans who are key employees (as defined in Section
13.2) for such Plan Year exceeds 60 percent of the aggregate of the account
balances and present value of accrued benefits of all participants in such plans
as of the determination date (as defined in Section 13.2), then this Plan shall
be a top-heavy plan for such Plan Year, and the requirements of Sections 13.3
and 13.4 shall be applicable for such Plan Year as of the first day thereof. If
the Plan shall be a top-heavy plan
-58-
<PAGE> 64
for any Plan Year and not be a top-heavy plan for any subsequent Plan Year, the
requirements of this Article 13 shall not be applicable for such subsequent Plan
Year.
Section 13.2. Definitions and Special Rules. (a) Definitions. For
purposes of this Article, the following definitions shall apply:
(1) Determination Date. The determination date for all plans in the
aggregation group shall be the last day of the preceding Plan Year, and
the valuation date applicable to a determination date shall be (i) in the
case of a defined contribution plan, the date as of which account balances
are determined which is coincident with or immediately precedes the
determination date, and (ii) in the case of a defined benefit plan, the
date as of which the most recent actuarial valuation for the Plan Year
that includes the determination date is prepared, except that if any such
plan specifies a different determination or valuation date, such different
date shall be used with respect to such plan.
(2) Aggregation Group. The aggregation group shall consist of (a)
each plan of an Employer in which a key Employee is a participant, (b)
each other plan that enables such a plan to be qualified under section
401(a) of the Code, and (c) any other plans of an Employer that the
Company designates as part of the aggregation group and that shall permit
the aggregation group to continue to meet the requirements of sections
401(a) and 410 of the Code with such other plan being taken into account.
(3) Key Employee. Key Employee shall have the meaning set forth in
section 416(i) of the Code.
(4) Compensation. Compensation shall have the meaning set forth in
section 1.415-2(d) of the Regulations.
-59-
<PAGE> 65
(b) Special Rules. For the purpose of determining the accrued
benefit or account balance of a Participant, the accrued benefit or account
balance of any person who has not performed services for an employer at any time
during the five-year period ending on the determination date shall not be taken
into account pursuant to this Section, and any person who received a
distribution from a plan (including a plan that has terminated) in the
aggregation group during the five-year period ending on the last day of the
preceding Plan Year shall be treated as a Participant in such plan, and any such
distribution shall be included in such Participant's account balance or accrued
benefit, as the case may be.
Section 13.3. Minimum Contribution for Top-Heavy Years.
Notwithstanding any provision of the Plan to the contrary, the sum of the
Employer contributions under Article 4 allocated to the account of each
Participant (other than a key Employee) during any Plan Year and the forfeitures
allocated to the account of such Participant (other than a key Employee) during
any Plan Year for which the Plan is a top-heavy plan shall in no event be less
than the lesser of (i) three percent of such Participant's compensation
-60-
<PAGE> 66
during such Plan Year and (ii) the highest percentage at which contributions are
made on behalf of any key Employee for such Plan Year. Such minimum
contribution shall be made even if, under other provisions of the Plan, the
Participant would not otherwise be entitled to receive an allocation or would
receive a lesser allocation for the year because of (i) the Participant's
failure to complete 1,000 Hours of Service, or (ii) compensation of less than a
stated amount. If, during any Plan Year for which this Section 13.3 is
applicable, a defined benefit plan is included in the aggregation group and such
defined benefit plan is a top-heavy plan for such Plan Year, the percentage set
forth in clause (i) of the first sentence of this Section 13.3 shall be five
percent. The percentage referred to in clause (ii) of the first sentence of
this Section 13.3 shall be obtained by dividing the aggregate of contributions
made pursuant to Article 4 and pursuant to any other defined contribution plan
that is required to be included in the aggregation group (other than a defined
contribution plan that enables a defined benefit plan that is required to be
included in such group to be qualified under section 401(a) of the Code) during
the Plan Year on behalf of such key Employee by such key Employee's compensation
for the Plan Year. Notwithstanding the above, the provisions of this Section
13.3 shall not apply for any
-61-
<PAGE> 67
Plan Year with respect to an Eligible Employee who has accrued the defined
benefit minimum provided under section 416 of the Code under a qualified defined
benefit plan maintained by an Employer or Affiliate.
Section 13.4. Special Rules for Applying Statutory Limitations on
Benefits. (a) In any Plan Year for which the Plan is a top-heavy plan, clause
(A)(I) of Section 6.4 (relating to limitations on allocations imposed by section
415 of the Code) shall be applied by substituting "100 percent" for "125
percent" appearing therein, unless, for such Plan Year, (i) the percentage of
account balances of Participants who are key Employees determined under Section
13.1 does not exceed 90 percent, and (ii) Employer contributions and forfeitures
allocated to the accounts of Participants who are not key Employees equals at
least four percent of compensation of each such Participant.
(b) In any Plan Year for which the Plan is a top-heavy plan, clause
(B)(I) of Section 6.4 (relating to limitations on allocations imposed by section
415 of the Code) shall be applied by substituting "100 percent" for "125
percent" appearing therein unless for any such Plan Year (i) the percentage of
accrued
-62-
<PAGE> 68
benefits of Participants who are key Employees does not exceed 90 percent, and
(ii) the minimum accrued benefit of each Participant under all defined benefit
plans in the aggregation group is at least three percent of his or her average
compensation (determined under section 416(c) of the Code) multiplied by each
Year of Service, not in excess of ten, for which such plans are top-heavy plans.
ARTICLE 14
AMENDMENT, ESTABLISHMENT OF SEPARATE
PLAN AND TERMINATION
Section 14.1. Amendment. The Company may at any time and from time
to time amend or modify the Plan by resolution of the board of directors of the
Company or by resolution of any person or persons duly authorized by resolution
of the board of directors to take such action. Any such amendment or
modification shall become effective on such date as the Company shall determine,
including retroactively to the extent permitted by law, and may apply to
Participants in the Plan at the time thereof as well as to future Participants.
-63-
<PAGE> 69
Section 14.2. Establishment of Separate Plan. If an Employer
withdraws from the Plan under Section 10.2, the Committee shall determine the
portion of the Trust Fund held by the Trustee that is applicable to the
Participants and former Participants of such Employer and direct the Trustee to
segregate such portion in a separate Trust Fund. Such separate Trust Fund shall
thereafter be held and administered as a part of the separate plan of such
Employer.
The portion of the Trust Fund applicable to the Participants and
former Participants of a particular Employer shall be the sum of:
(a) the total amount credited to all accounts that are applicable to
the Participants and former Participants of such Employer and
(b) an amount that bears the same ratio to the excess, if any, of
(i) the total value of the Trust Fund over
(ii) the total amount credited to all accounts
as the total amount credited to the accounts that are applicable to the
Participants of such Employer bears to the total amount credited to such
accounts of all Participants.
-64-
<PAGE> 70
Section 14.3. Full Vesting upon Termination of Participation or
Partial Termination of the Plan. In the event that any Employer terminates its
participation in the Plan, or in the event of the partial termination of the
Plan, the accounts of all Participants of such Employer, or of those
Participants who are affected by the partial termination of the Plan, as the
case may be, shall become fully vested and shall not thereafter be subject to
forfeiture.
Section 14.4. Distribution upon Termination of the Plan. Any
Employer may at any time terminate its participation in the Plan by written
instrument executed on behalf of the Employer by resolution of its Board of
Directors to that effect. In the event of any such termination, the Committee
shall determine the portion of the Trust Fund held by the Trustee that is
applicable to the Participants and former Participants of such Employer and
direct the Trustee to distribute such portion to Participants ratably in
proportion to the balances of their respective accounts as follows:
(a) The balance in any account shall be distributed to the
distributee entitled to receive such account.
-65-
<PAGE> 71
(b) The remaining assets of the Trust Fund shall be distributed to
Participants ratably in proportion to the balances of their respective
accounts.
A complete discontinuance of contributions by an Employer shall be deemed a
termination of such Employer's participation in the Plan for purposes of this
Section 14.4.
Notwithstanding the preceding paragraph, no distribution shall be
made to any Participant if a successor plan, as defined in Regulations, is
established or maintained by the Participant's Employer except as otherwise
provided in Section 7.1 (relating to distributions upon termination of
employment).
To the extent that no discrimination in value results, any
distribution after termination or partial termination of the Plan may be made,
in whole or in part, in cash, in securities or other assets in kind, or in
non-transferable annuity contracts, as the Committee (in its discretion) may
determine. All non-cash distributions shall be valued at fair market value at
date of distribution.
-66-
<PAGE> 72
If the Internal Revenue Service refuses to issue an initial,
favorable determination letter that the Plan and Trust Fund as adopted by an
Employer meet the requirements of section 401(a) of the Code and that the Trust
Fund is exempt from tax under section 501(a) of the Code, the Employer may
terminate its participation in the Plan and shall direct the Trustee to pay and
deliver the portion of the Trust Fund applicable to the Participants of such
Employer, determined pursuant to Section 14.2, to such Employer and such
Employer shall pay to Participants or their beneficiaries the part of such
Employer's portion of the Trust Fund as is attributable to contributions made by
Participants.
Section 14.5. Trust Fund to Be Applied Exclusively for Participants
and Their Beneficiaries. Subject only to the provisions of Section 4.4
(relating to the limitation on Employer contributions), 6.4 (relating to
limitations on allocations imposed by section 415 of the Code) and 14.4
(relating to distribution upon termination of the Plan), and any other provision
of the Plan to the contrary notwithstanding, it shall be impossible for any part
of the Trust Fund to be used for or diverted to any purpose not for the
exclusive benefit of
-67-
<PAGE> 73
Participants and their Beneficiaries either by operation or termination of the
Plan, power of amendment or other means.
-68-
<PAGE> 74
IN WITNESS WHEREOF, Marks Bros. Jewelers, Inc. has caused this
instrument to be executed by its Chairman and attested by its Secretary, on this
_______ day of ______________, 1997.
MARKS BROS. JEWELERS, INC.
By_______________________________
Chairman
ATTEST:
_______________________________
Secretary
-69-
<PAGE> 1
Exhibit _________
FIFTH AMENDMENT TO REVOLVING CREDIT, TERM LOAN
AND GOLD CONSIGNMENT AGREEMENT
FIFTH AMENDMENT TO REVOLVING CREDIT, TERM LOAN AND GOLD CONSIGNMENT
AGREEMENT dated as of November 13, 1997 (this "Amendment"), by and among (a)
MARKS BROS. JEWELERS, INC. (the "Borrower"), a Delaware corporation having its
principal place of business at 155 North Wacker Drive, Suite 500, Chicago,
Illinois 60606; (b) the lending institutions (the "Banks") set forth on the
signature pages hereto; and (c) BANKBOSTON, N.A. (FORMERLY KNOWN AS THE FIRST
NATIONAL BANK OF BOSTON), a national banking association and RHODE ISLAND
HOSPITAL TRUST NATIONAL BANK as agents for themselves and the other Banks (in
such capacity, the "Agents"), amending certain provisions of the Revolving
Credit, Term Loan and Gold Consignment Agreement dated as of May 3, 1996 (as
amended and in effect prior to the date hereof, the "Credit Agreement"), by and
among the Borrower, the Banks and the Agents. Terms not otherwise defined
herein which are defined in the Credit Agreement shall have the respective
meanings herein assigned to such terms in the Credit Agreement.
WHEREAS, the Borrower has requested that the Agents and the Banks agree to
amend the terms of the Credit Agreement in several respects all as hereinafter
more fully set forth; and
WHEREAS, the Agents and the Banks are willing to amend the terms of the
Credit Agreement in such respects upon the terms and subject to the conditions
contained herein;
NOW, THEREFORE, in consideration of the mutual agreements contained in the
Credit Agreement, and herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
Section 1. AMENDMENT OF SECTION 1.1 OF THE CREDIT AGREEMENT. Subject to
the satisfaction of the conditions set forth in section 16 of this Amendment,
Section 1.1 of the Credit Agreement is hereby amended as follows:
(a) by amending the definitions of "Applicable Agent", "Applicable
Banks", "Base Rate Loans", "Consignment Limit", "Dollar Agent", "Dollar
Facility", "Dollar Facility Loans", "Eurodollar Rate Loans", "FNBB",
"Loans", "Majority Banks", "Notes", "Total Commitment" and "Type" to read
in their respective entireties as follows:
<PAGE> 2
-2-
"Applicable Agent. With respect to the Dollar Facility, the
Revolving Credit Loans, the Letters of Credit, the Term Loan or the
Dollar Banks, the Dollar Agent; with respect to the Gold Facility, the
Purchases and Consignments, the Gold Loans or the Gold Banks, the Gold
Agent."
"Applicable Banks. With respect to the Dollar Facility, the
Revolving Credit Loans, the Letters of Credit, or the Dollar Agent, the
Dollar Banks; with respect to the Gold Facility, the Purchases and
Consignments, the Gold Loans or the Gold Agent, the Gold Banks; with
respect to the Term Loan, each of the Banks."
"Base Rate Loans. Revolving Credit Loans, Gold Loans and all or
any portion of the Term Loan bearing interest calculated by reference
to the Base Rate."
"Consignment Limit. Either (a) 60,000 troy ounces of Precious
Metal (the "Consignment Ounce Cap") or (b) Consigned Precious Metal
having a Fair Market Value equal to $20,000,000.00 minus the aggregate
outstanding amount of Gold Loans (after giving effect to all amounts
requested) (the "Consignment Dollar Cap")."
"Dollar Agent. FNBB, acting as agent for the Banks under the
Dollar Facility."
"Dollar Facility. The Dollar Banks' commitments to make Revolving
Credit Loans, the Dollar Agent's agreement to issue, extend and renew
Letters of Credit, and the Banks' commitments to make the Term Loan."
"Dollar Facility Loans. The Revolving Credit Loans and the Term
Loan."
"Eurodollar Rate Loans. Revolving Credit Loans, Gold Loans and all
or any portion of the Term Loan bearing interest calculated by
reference to the Eurodollar Rate."
"FNBB. BankBoston, N.A. (formerly known as The First National Bank
of Boston), a national banking association, in its individual
capacity."
"Loans. The Revolving Credit Loans, the Term Loan and the Gold
Loans."
"Majority Banks. As of any date, the Banks (other than Delinquent
Banks) whose aggregate portions of the outstanding amount of the Term
Loan and whose aggregate Commitments or, as the case may be, Gold
<PAGE> 3
-3-
Commitments together constitute at least fifty-one percent (51%) of the
Total Commitment; provided, however, that if the Commitments or the
Gold Commitments shall have been terminated, then the Majority Banks
shall be the Banks whose aggregate portions of the outstanding amount
of the Term Loan and whose aggregate portions of the Outstanding
Facility Amounts together constitute at least fifty-one percent (51%)
of the sum of the outstanding principal amount of the Term Loan plus
the Outstanding Facility Amounts; provided, further, that until the
portion of the outstanding amount of the Term Loan and the Commitment
(or, as applicable, the portion of the Outstanding Facility Amounts) of
FNBB together with the Gold Commitment (or, as applicable, the portion
of the Outstanding Facility Amounts) of RIHT are in the aggregate less
than fifty-one percent (51%) of the Total Commitment (or, as
applicable, the Outstanding Facility Amounts), Majority Banks must
include at least one Bank other than FNBB and RIHT."
"Notes. The Term Notes, the Gold Notes and the Revolving Credit
Notes."
"Total Commitment. The sum of the Total Revolver Commitment, the
Total Gold Commitment and the outstanding principal amount of the Term
Loan."
"Type. As to any Revolving Credit Loan, Gold Loan or all or any
portion of the Term Loan, its nature as a Base Rate Loan or a
Eurodollar Rate Loan."
(b) by inserting the following new definitions of "Fifth Amendment",
"Fifth Amendment Effective Date", "Term Loan", "Term Loan Percentage",
"Term Notes" and "Term Note Record" therein in proper alphabetical order:
"Fifth Amendment. The Fifth Amendment hereto dated as of November
13, 1997, among the Borrower, the Agents and the Banks."
"Fifth Amendment Effective Date. The date on which the conditions
to the effectiveness of the Fifth Amendment (such conditions being set
forth in section 16 thereof) shall have been satisfied."
"Term Loan. The term loan made or to be made by the Banks to the
Borrower prior to January 5, 1998 in the aggregate principal amount of
up to $12,000,000.00 pursuant to Section 3.1."
<PAGE> 4
-4-
"Term Loan Percentage. With respect to each Bank, the percentage
set forth on Schedule 1 hereto under the column "Term Loan Percentage",
such percentage being such Bank's percentage of the aggregate
outstanding principal amount of the Term Loan."
"Term Notes. See Section 3.2."
"Term Note Record. A Record with respect to a Term Note."
Section 2. AMENDMENT OF SECTION 2.6 OF THE CREDIT AGREEMENT. Subject to
the satisfaction of the conditions set forth in section 16 of this Amendment,
Section 2.6 of the Credit Agreement is hereby amended by inserting the phrase
"and the Term Loan" prior to the period at the end thereof.
Section 3. AMENDMENT OF SECTION 3 OF THE CREDIT AGREEMENT. Subject to
the satisfaction of the conditions set forth in section 16 of this Amendment,
Section 3 of the Credit Agreement is hereby amended by deleting the text of
such section in its entirety and replacing it with the following new Section 3:
"3. THE DOLLAR FACILITY - THE TERM LOAN.
3.1. COMMITMENT TO LEND. Subject to the terms and conditions set
forth in this Credit Agreement, each Bank severally agrees to lend to the
Borrower upon notice given by the Borrower to the Dollar Agent in
accordance with Section 8.3, at any time on or prior to January 5, 1998,
such sum as is requested by the Borrower up to such Bank's Term Loan
Percentage of the principal amount of $12,000,000.00; provided that the
aggregate principal amount of the Term Loan made by the Banks shall not
exceed the amount necessary (a) to repurchase Senior Subordinated Notes on
or after the Fifth Amendment Effective Date, and (b) to pay any premium,
any accrued and unpaid interest and any fees and expenses in connection
with any such repurchase by the Borrower of Senior Subordinated Notes, in
each case with such repurchase of Senior Subordinated Notes to be made in
accordance with Section 12.8 hereof. The Borrower shall not be entitled to
make more than one (1) Loan Request with respect to the Term Loan, and the
Banks shall not be obligated after lending such initial portion of the Term
Loan to lend any undrawn portion of the Term Loan.
3.2. THE TERM NOTES. The Term Loan shall be evidenced by separate
promissory notes of the Borrower in substantially the form of Exhibit F
hereto (each a "Term Note"), dated the Fifth Amendment Effective Date and
completed with appropriate insertions. One Term Note shall be payable to
the order of each Bank in a principal amount equal to such Bank's Term Loan
Percentage of the maximum aggregate amount of the Term Loan set forth above
in Section 3.1 and representing the obligation of the Borrower to pay to
such Bank such principal
<PAGE> 5
-5-
amount or, if less, the outstanding amount of such Bank's Term Loan
Percentage of the Term Loan, plus interest accrued thereon, as set forth
below. The Borrower irrevocably authorizes each Bank to make or cause to
be made a notation on such Bank's Term Note Record reflecting the original
principal amount of such Bank's Term Loan Percentage of the maximum
aggregate amount of the Term Loan set forth above in Section 3.1 and, at or
about the time of such Bank's receipt of any principal payment on such
Bank's Term Note, an appropriate notation on such Bank's Term Note Record
reflecting such payment. The aggregate unpaid amount set forth on such
Bank's Term Note Record shall be prima facie evidence of the principal
amount thereof owing and unpaid to such Bank, but the failure to record, or
any error in so recording, any such amount on such Bank's Term Note Record
shall not affect the obligations of the Borrower hereunder or under any
Term Note to make payments of principal of and interest on any Term Note
when due.
3.3. SCHEDULE OF INSTALLMENT PAYMENTS OF PRINCIPAL OF TERM LOAN. The
Borrower promises to pay to the Dollar Agent for the account of the Banks
the principal amount of the Term Loan in twelve (12) consecutive quarterly
installment payments, payable on the first day of each fiscal quarter, and
each such installment being in the amount set forth in the table below
opposite the period in such table during which such payment date occurs,
with a final payment on the Maturity Date in an amount equal to the unpaid
balance of the Term Loan:
<TABLE>
<CAPTION>
AMOUNT OF
PERIOD: QUARTERLY PAYMENT:
------- ------------------
<S> <C>
2/1/98 - 1/31/99 $250,000
2/1/99 - 1/31/00 $500,000
2/1/00 - 1/31/01 $750,000
</TABLE>
3.4. OPTIONAL PREPAYMENT OF TERM LOAN. The Borrower shall have the
right at any time to prepay the Term Loan in accordance with the provisions
of Section 8.7. Any prepayment of principal of the Term Loan shall be
applied ratably against the remaining scheduled installments of principal
due on the Term Loan. No amount repaid with respect to the Term Loan may
be reborrowed.
3.5. INTEREST ON TERM LOAN. Except as otherwise provided in Section
8.20, the outstanding amount of the Term Loan shall bear interest in
accordance with the provisions of Section 8.1. The Borrower shall notify
the Dollar Agent, such notice to be irrevocable, at least two (2) Business
Days prior to the Drawdown Date of the Term Loan if all or any portion of
the Term Loan is to bear interest at the
<PAGE> 6
-6-
Eurodollar Rate. After the Term Loan has been made, the provisions of
Section 8.4 shall apply mutatis mutandis with respect to all or any portion
of the Term Loan so that the Borrower may have the same interest rate
options with respect to all or any portion of the Term Loan as it would be
entitled to with respect to the Revolving Credit Loans and the Gold Loans.
No Interest Period relating to the Term Loan or any portion thereof bearing
interest at the Eurodollar Rate shall extend beyond the date on which a
regularly scheduled installment payment of the principal of the Term Loan
is to be made unless a portion of the Term Loan at least equal to such
installment payment has an Interest Period ending on such date or is then
bearing interest at the Base Rate."
Section 4. AMENDMENT OF SECTION 6.4 OF THE CREDIT AGREEMENT. Subject to
the satisfaction of the conditions set forth in section 16 of this Amendment,
Section 6.4 of the Credit Agreement is hereby amended by inserting the phrase
"and the Term Loan" prior to the period at the end thereof.
Section 5. AMENDMENT OF SECTION 8.1 OF THE CREDIT AGREEMENT. Subject to
the satisfaction of the conditions set forth in section 16 of this Amendment,
Section 8.1 of the Credit Agreement is hereby amended to read in its entirety
as follows:
"8.1 INTEREST ON LOANS. Except as otherwise provided in Section
8.20,
(a) Each Base Rate Loan (other than any portion of the Term Loan
which is a Base Rate Loan) shall bear interest for the period
commencing with the Drawdown Date thereof and ending on the last day of
the Interest Period with respect thereto at a rate per annum equal to
the sum of (i) the Base Rate plus (ii) the Base Rate Applicable Margin.
(b) Each Eurodollar Rate Loan (other than any portion of the Term
Loan which is a Eurodollar Rate Loan) shall bear interest for the
period commencing with the Drawdown Date thereof and ending on the last
day of the Interest Period with respect thereto at a rate per annum
equal to the sum of (i) the Eurodollar Rate plus (ii) the Eurodollar
Applicable Margin.
(c) Each portion of the Term Loan which is a Base Rate Loan shall
bear interest for the period commencing with the Drawdown Date thereof
and ending on the last day of the Interest Period with respect thereto
at a rate per annum equal to the sum of (i) the Base Rate plus (ii) the
Base Rate Applicable Margin plus (iii) three quarters of one percent
(0.75%).
(d) Each portion of the Term Loan which is a Eurodollar Rate Loan
shall bear interest for the period commencing with the Drawdown Date
thereof and ending on the last day of the Interest Period with respect
thereto at a rate per annum equal to the sum of (i) the Eurodollar Rate
plus (ii) the Eurodollar Applicable Margin plus (iii) three quarters of
one percent (0.75%).
<PAGE> 7
-7-
(e) The Borrower promises to pay interest on each Loan in arrears
on each Interest Payment Date with respect thereto."
Section 6. AMENDMENT OF SECTION 8.7 OF THE CREDIT AGREEMENT. Subject to
the satisfaction of the conditions set forth in section 16 of this Amendment,
Section 8.7 of the Credit Agreement is hereby amended by inserting the phrase
", the Term Loan" immediately following the phrase "Revolving Credit Loan"
appearing therein.
Section 7. AMENDMENT OF SECTION 8.12.1 OF THE CREDIT AGREEMENT. Subject
to the satisfaction of the conditions set forth in section 16 of this
Amendment, Section 8.12.1 of the Credit Agreement is hereby amended by
inserting the parenthetical "(or, in the case of any such amounts due with
respect to the Term Loan, for the respective accounts of each of the Banks)"
immediately following the phrase "Dollar Banks" appearing therein.
Section 8. AMENDMENT OF SECTION 8.13 OF THE CREDIT AGREEMENT. Subject to
the satisfaction of the conditions set forth in section 16 of this Amendment,
Section 8.13 of the Credit Agreement is hereby amended by inserting the phrase
"the Term Note Records," immediately following the phrase ""Revolving Credit
Note Records," appearing therein.
Section 9. AMENDMENT OF SECTION 8.19(a) OF THE CREDIT AGREEMENT. Subject
to the satisfaction of the conditions set forth in section 16 of this
Amendment, Section 8.19(a) of the Credit Agreement is hereby amended by
inserting the phrase "notice (in the case of all or any portion of the Term
Loan pursuant to Section 3.5)," immediately following the phrase "Loan
Request," appearing therein.
Section 10. AMENDMENT OF SECTION 11.12 OF THE CREDIT AGREEMENT. Subject
to the satisfaction of the conditions set forth in section 16 of this
Amendment, Section 11.12 of the Credit Agreement is hereby amended to read in
its entirety as follows:
"11.12. USE OF PROCEEDS. The Borrower will use the proceeds of the
Revolving Credit Loans, the Gold Loans and the Purchases and Consignments
solely for refinancing certain existing Indebtedness of the Borrower and
for working capital and general corporate purposes; provided that the
Borrower may also use Revolving Credit Loans to repurchase Senior
Subordinated Notes in accordance with Section 12.8(c). The Borrower will
use the proceeds of the Term Loan solely for repurchasing Senior
Subordinated Notes and for the payment of premiums, accrued and unpaid
interest, fees and expenses in connection with such repurchase of Senior
Subordinated Notes. The Borrower will obtain Letters of Credit solely for
working capital and general corporate purposes."
<PAGE> 8
-8-
Section 11. AMENDMENT OF SECTION 12.8 OF THE CREDIT AGREEMENT. Subject
to the satisfaction of the conditions set forth in section 16 of this
Amendment, Section 12.8 of the Credit Agreement is hereby amended to read in
its entirety as follows:
"12.8 INDENTURES. The Borrower will not amend, supplement or
otherwise modify the terms of the Indentures or any of the Senior
Subordinated Notes or prepay, redeem, cause the defeasance of or repurchase
any of the Senior Subordinated Notes; provided, however, (a) the Borrower
may amend or modify the Senior Subordinated Notes or refinance, refund or
replace the Senior Subordinated Notes with new notes (any such amended,
modified or new notes resulting from any such amendment, modification,
refinancing, refunding or replacement being herein referred to as the "New
Notes") so long as (i) such New Notes are on substantially identical terms
as the Senior Subordinated Notes (including without limitation, terms
relating to subordination and covenants), provided that such New Notes may
have a longer maturity, lower interest rates, less restrictive covenants,
slower sinking fund payments and lower prepayment premiums and (ii) the
Agents shall have reviewed such New Notes prior to their issuance, (b) on
or prior to January 5, 1998, the Borrower may repurchase a portion of the
Senior Subordinated Notes with the proceeds of the Term Loan so long as the
repurchase price paid by the Borrower for each $1.00 of principal amount of
Senior Subordinated Notes does not exceed $1.12 plus the amount of accrued
and unpaid interest thereon, (c) the Borrower may repurchase a portion of
those Senior Subordinated Notes constituting the 12.15% Series C Senior
Subordinated Notes due 2004 with the proceeds of the Revolving Credit Loans
at a repurchase price (including any prepayment premiums payable thereon)
not to exceed $3,500,000 in the aggregate for all such repurchases from and
after the Fifth Amendment Effective Date, and (d) the Borrower may redeem
Senior Subordinated Notes during any fiscal year solely to the extent of
(i) the aggregate amount of net cash proceeds received by the Borrower
during such fiscal year in connection with any other public offering of its
Common Stock entered into after March 15, 1997 minus (ii) the amount of any
such net cash proceeds from any such public offerings which are used by the
Borrower during such fiscal year to make Capital Expenditures and/or
Investments as permitted by Section Section 13.2 and 12.3, respectively,
hereof. The Borrower will not pay any interest in cash on the Senior
Subordinated Notes in excess of fifteen percent (15%) per annum in the
aggregate with any interest in excess of fifteen percent (15%) per annum to
be payable only in Senior Subordinated Notes."
Section 12. AMENDMENT OF SECTION 15 OF THE CREDIT AGREEMENT. Subject to
the satisfaction of the conditions set forth in section 16 of this Amendment,
Section 15 of the Credit Agreement is hereby amended by inserting the phrase
"and the Term Loan" immediately following the phrase "Gold Loans" appearing in
the first paragraph thereof.
<PAGE> 9
-9-
Section 13. AMENDMENT OF SECTION 22.1 OF THE CREDIT AGREEMENT. Subject
to the satisfaction of the conditions set forth in section 16 of this
Amendment, Section 22.1 of the Credit Agreement is hereby amended by restating
clause (b) of such Section 22.1 to read in its entirety as follows:
"(b) each such assignment shall be of a constant, and not a varying,
percentage of all the assigning Bank's rights and obligations in respect of
(i) its Revolving Credit Commitment, its Revolving Credit Loans, its
participating interest in Letters of Credit and its portion of the Term
Loan or, as the case may be (ii) its Gold Commitment, its Purchases and
Consignments, its Gold Loans and its portion of the Term Loan,"
Section 14. AMENDMENT OF SECTION 29 OF THE CREDIT AGREEMENT. Subject to
the satisfaction of the conditions set forth in section 16 of this Amendment,
Section 29 of the Credit Agreement is hereby amended by deleting clause (f) of
the second sentence thereof in its entirety and replacing it with the following
new clause (f):
"(f) there can be no reduction in the amount or extension of the maturity
date of any of the Obligations (other than as a result of any permitted
prepayments made hereunder, it being understood that any waiver of the
application of any voluntary prepayment of, or the method of application of
any voluntary prepayment to the amortization of, the Term Loan shall not
constitute any such extension) without the consent of Banks (other than
Delinquent Banks) whose aggregate portions of the outstanding principal
amount of the Term Loan and whose aggregate Commitments or, as the case may
be, Gold Commitments together constitute at least sixty-six and two thirds
percent (66-2/3%) of the Total Commitment."
Section 15. CONCERNING EXHIBITS AND SCHEDULES TO THE CREDIT AGREEMENT.
Subject to the satisfaction of the conditions set forth in section 16 of this
Amendment, the Exhibits and Schedules to the Credit Agreement are hereby
amended as follows:
(a) Exhibit F hereto is hereby added to the Credit Agreement as
Exhibit F thereto; and
(b) Schedule 1 to the Credit Agreement is hereby replaced with
Schedule 1 attached hereto.
Section 16. CONDITIONS TO EFFECTIVENESS. The effectiveness of this
Amendment shall be subject to the delivery by (or on behalf of) the Borrower of
the following, in form and substance satisfactory to the Agents and the Banks:
(a) this Amendment signed by each of the Borrower, the Banks and the
Agents;
(b) a new Term Note for each of the Banks, each signed by the Borrower,
each substantially in the form of Exhibit F to this Amendment, and each
in the
<PAGE> 10
-10-
amount of each such Bank's Term Loan Percentage of the maximum
principal amount of the Term Loan;
(c) a certificate of the Secretary or Assistant Secretary of the Borrower
certifying as to (a) the Certificate of Incorporation or other
incorporation documents of the Borrower as in effect on such date of
certification, (b) the by-laws of the Borrower as in effect on such
date, (c) the corporate resolutions of the Borrower approving this
Amendment, the Term Notes referred to in section 12(b) above, and the
other documents and instruments required to be delivered hereunder by
the Borrower (collectively with the Amendment and such Term Notes, the
"Amendment Documents"), and (d) the names, titles, incumbency, and true
specimen signatures of the officers of the Borrower authorized to sign
the Amendment Documents;
(d) a certificate, as of a recent date, from the Secretary of State of
Delaware as to the legal existence and corporate good standing of the
Borrower;
(e) a favorable opinion of counsel to the Borrower in form and substance
satisfactory to the Agents and the Banks;
(f) evidence, satisfactory to the Agents and the Banks in all respects, of
the agreement of the holders of Senior Subordinated Notes having an
aggregate outstanding principal amount equal to greater than fifty
percent (50%) of the aggregate outstanding principal amount of all
Senior Subordinated Notes immediately prior to the Fifth Amendment
Effective Date to sell such portion of the Senior Subordinated Notes to
the Borrower;
(g) the Borrower shall have paid to the Agents, for the ratable accounts of
the Banks in accordance with their Term Loan Percentages, an amendment
fee in the amount of $60,000; and
(h) any other document or instrument the Agents and the Banks may
reasonably request.
Section 17. REPRESENTATIONS AND WARRANTIES; NO DEFAULT; AUTHORIZATION.
The Borrower hereby represents and warrants to the Banks and the Agents as
follows:
(a) Each of the representations and warranties made by it in the Credit
Agreement was true as of the date as of which it was made and is true as
and at the date of this Amendment (except to the extent of changes
resulting from transactions contemplated or permitted by the Credit
Agreement and the other Loan Documents and changes occurring in the
ordinary course of business that in the aggregate are not materially
adverse, and to the extent that such representations and warranties relate
expressly to
<PAGE> 11
-11-
an earlier date), and, after the execution of this Amendment, no Default or
Event of Default has occurred and is continuing as of the date of this
Amendment; and
(b) Each of this Amendment and the other Amendment Documents has been duly
authorized, executed and delivered by the Borrower and is in full force and
effect, and the agreements and obligations of the Borrower contained
herein, in the other Amendment Documents and in the Credit Agreement,
respectively constitute the legal, valid and binding obligations of the
Borrower, enforceable against the Borrower in accordance with their
respective terms, except as enforceability is limited by bankruptcy,
insolvency, reorganization, moratorium or other laws relating to or
affecting generally the enforcement of creditors' rights and except to the
extent that availability of the remedy of specific performance or
injunctive relief is subject to the discretion of the court before which
any proceeding therefor may be brought.
Section 18. RATIFICATION, ETC. Except as expressly amended hereby, the
Credit Agreement and all documents, instruments and agreements related thereto
are hereby ratified and confirmed in all respects. All references in the
Credit Agreement or any related agreement or instrument to the Credit Agreement
shall hereafter refer to the Credit Agreement as amended hereby.
Section 19. NO IMPLIED WAIVER. Except as expressly provided herein,
nothing contained herein shall constitute a waiver of, impair or otherwise
affect any Obligations, or any right of any of the Agents or the Banks
consequent thereon.
Section 20. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but which together
shall constitute one and the same instrument.
Section 21. GOVERNING LAW. THIS AMENDMENT SHALL FOR ALL PURPOSES BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICTS OF LAW).
<PAGE> 12
-12-
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment as a
sealed instrument as of the date first above written.
MARKS BROS. JEWELERS, INC.
By:_________________________
Name:
Title:
BANKBOSTON, N.A. (FORMERLY KNOWN AS THE
FIRST NATIONAL BANK OF BOSTON),
individually and as Agent
By:_________________________
Name: Ellen Heath
Title: Director
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK, individually and
as Agent
By:_________________________
Name:
Title:
LASALLE NATIONAL BANK
By:_________________________
Name:
Title:
ABN AMRO BANK, N.V.
By:_________________________
Name:
Title:
<PAGE> 13
SCHEDULE 1
PART 1 - DOLLAR BANKS - COMMITMENTS AND COMMITMENT PERCENTAGES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
COMMITMENT TERM LOAN
DOLLAR BANKS COMMITMENT PERCENTAGE PERCENTAGE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
BANKBOSTON, N.A.
Domestic Lending Office:
100 Federal Street
Boston, MA 02110
Telefax Number: (617) 434- 2309 $17,500,000.00 43.75% 25%
Attention: Ellen Heath, Director
Eurodollar Lending Office:
100 Federal Street
Boston, MA 02110
Telefax Number: (617) 434- 2309
Attention: Ellen Heath, Director
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 14
-2-
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
LASALLE NATIONAL BANK
Domestic Lending Office
135 South Lasalle Street
Chicago, IL 60603
Telefax Number: (312) 904- 6225 $22,500,000.00 56.25% 25%
Attention: Vanja St. Clar, Vice
President
Eurodollar Lending Office:
135 South Lasalle Street
Chicago, IL 60603
Telefax Number: (312) 904- 6225
Attention: Vanja St. Clar, Vice
President
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 15
-3-
SCHEDULE 1
PART 2 - GOLD BANKS - GOLD COMMITMENTS AND GOLD COMMITMENT PERCENTAGES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
GOLD COMMITMENT TERM LOAN
GOLD BANKS GOLD COMMITMENT PERCENTAGE PERCENTAGE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK
Domestic Lending Office:
One Hospital Trust Plaza, R-W09-01 $12,500,000.00 62.50% 25%
Providence, Rhode Island 02903
Telefax Number: (401) 278-7329
Attention: Michael Smith
Eurodollar Lending Office:
One Hospital Trust Plaza, R-W09-01
Providence, Rhode Island 02903
Telefax Number: (401) 278-7329
Attention: Michael Smith
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 16
-4-
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
ABN AMRO BANK, N.V.
Domestic Lending Office:
335 Madison Avenue
New York, NY 10017 $7,500,000.00 37.50% 25%
Telefax Number: (212) 644-6905
Attention: Jeffrey Sarfaty, Vice
President
Eurodollar Lending Office:
335 Madison Avenue
New York, NY 10017
Telefax Number: (212) 644-6905
Attention: Jeffrey Sarfaty, Vice
President
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 17
Exhibit F
TERM NOTE
$___________ November __, 1997
FOR VALUE RECEIVED, the undersigned MARKS BROS. JEWELERS, INC., a Delaware
corporation, (the "Borrower"), hereby promises to pay to the order of [NAME OF
BANK] (the "Bank") at the Dollar Agent's Head Office at 100 Federal Street,
Boston, Massachusetts 02110:
(a) prior to or on April 30, 2001 the principal amount of ___________
DOLLARS ($________ ), evidencing the Term Loan made by the Bank to the
Borrower pursuant to the Revolving Credit, Term Loan and Gold Consignment
Agreement dated as of May 3, 1996 (as amended and in effect from time to
time, the "Credit Agreement"), by and among the Borrower, the Bank and the
other parties thereto;
(b) the principal outstanding hereunder from time to time at the
times provided in the Credit Agreement; and
(c) interest from the date hereof on the principal amount from time
to time outstanding to and including the maturity hereof at the rates and
terms and in all cases in accordance with the terms of the Credit
Agreement.
This Note evidences borrowings under and has been issued by the Borrower in
accordance with the terms of the Credit Agreement. The Bank and any holder
hereof is entitled to the benefits of the Credit Agreement, the Security
Documents and the other Loan Documents, and may enforce the agreements of the
Borrower contained therein, and any holder hereof may exercise the respective
remedies provided for thereby or otherwise available in respect thereof, all in
accordance with the respective terms thereof. All capitalized terms used in
this Note and not otherwise defined herein shall have the same meanings herein
as in the Credit Agreement.
The Borrower irrevocably authorizes the Bank to make or cause to be made,
at the time of receipt of any payment of principal of this Note, an appropriate
notation on the grid attached to this Note, or the continuation of such grid,
or any other similar record, including computer records, reflecting the receipt
of such payment. The outstanding amount of the Term Loan set forth on the grid
attached to this Note, or the continuation of such grid, or any other similar
record, including computer records, maintained by the Bank with respect to the
Term Loan shall be prima facie evidence of the principal amount of the Term
Loan owing and unpaid to the Bank, but the failure to record, or any error in
so recording, any such amount on any such grid, continuation or other record
shall not limit or otherwise affect the obligation of
<PAGE> 18
-2-
the Borrower hereunder or under the Credit Agreement to make payments of
principal of and interest on this Note when due.
The Borrower has the right in certain circumstances and the obligation
under certain other circumstances to prepay the whole or part of the principal
of this Note on the terms and conditions specified in the Credit Agreement.
If any one or more of the Events of Default shall occur, the entire unpaid
principal amount of this Note and all of the unpaid interest accrued thereon
may become or be declared due and payable in the manner and with the effect
provided in the Credit Agreement.
No delay or omission on the part of the Bank or any holder hereof in
exercising any right hereunder shall operate as a waiver of such right or of
any other rights of the Bank or such holder, nor shall any delay, omission or
waiver on any one occasion be deemed a bar or waiver of the same or any other
right on any future occasion.
The Borrower and every endorser and guarantor of this Note or the
obligation represented hereby waives presentment, demand, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note, and assents to any extension
or postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of collateral and to the addition or release
of any other party or person primarily or secondarily liable.
THIS NOTE AND THE OBLIGATIONS OF THE BORROWER HEREUNDER SHALL FOR ALL
PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE
COMMONWEALTH OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR
CHOICE OF LAW). THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS
NOTE MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY
FEDERAL COURT SITTING THEREIN AND THE CONSENT TO THE NONEXCLUSIVE JURISDICTION
OF SUCH COURT AND THE SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE
BORROWER BY MAIL AT THE ADDRESS SPECIFIED IN Section 23 OF THE CREDIT
AGREEMENT. THE BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR
HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH
SUIT IS BROUGHT IN AN INCONVENIENT COURT.
This Note shall be deemed to take effect as a sealed instrument under the
laws of the Commonwealth of Massachusetts.
<PAGE> 19
-3-
IN WITNESS WHEREOF, the undersigned has caused this Note to be signed in
its corporate name and its corporate seal to be impressed thereon by its duly
authorized officer as of the day and year first above written.
[Corporate Seal]
MARKS BROS. JEWELERS, INC.
By:
-------------------------------
Name:
Title:
<PAGE> 20
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amount of Balance of
Amount Principal Paid Principal Notation
Date of Loan or Prepaid Unpaid Made By:
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
| | | |
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Marks Bros. Jewelers, Inc.
- -------------------------------------------------------------------------------
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth certain financial and operating data of the
Company. The selected statement of operations data and balance sheet data as of
and for the fiscal year ended January 31, 1998 (fiscal 1997) and each of the
four prior fiscal years, are derived from audited financial statements of the
Company. The selected financial information set forth below should be read in
conjunction with"Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's audited financial statements
appearing elsewhere herein.
<TABLE>
<CAPTION>
(in thousands, except per share and selected operating data) FISCAL 1997 Fiscal 1996 Fiscal 1995 Fiscal 1994 Fiscal 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 188,898 $155,474 $131,022 $106,683 $ 91,106
Cost of sales (including buying and
occupancy expenses) 110,873 91,134 77,722 64,223 54,511
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 78,025 64,340 53,300 42,460 36,595
Selling, general and administrative expenses 55,809 45,309 37,887 30,748 28,340
- ----------------------------------------------------------------------------------------------------------------------------------
Income from operations 22,216 19,031 15,413 11,712 8,255
Interest expense 3,806 6,993 12,314 10,594 8,920
Stock award expense -- -- 461 -- --
ESOP compensation expense -- -- 590 547 511
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 18,410 12,038 2,048 571 (1,176)
Income tax expense (benefit)(1) 7,180 4,695 (14,924) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 11,230 7,343 16,972 571 (1,176)
Gain on disposal of discontinued operations(2) -- -- -- -- 2,700
- ----------------------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of
accounting change for ESOP and
extraordinary gain 11,230 7,343 16,972 571 1,524
Cumulative effect of accounting change for ESOP(3) -- -- -- -- (8,526)
Extraordinary item, net(4) (1,035) 10,057 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 10,195 $ 17,400 $ 16,972 $ 571 $ (7,002)
==================================================================================================================================
EARNINGS PER SHARE:
Net income from continuing operations $ 1.10 $ 0.89 $ 3.49 $ 0.11 --
SELECTED OPERATING DATA:
Stores open at end of period 191 164 146 131 122
Average net sales per store(5) $1,045,000 $990,000 $936,000 $836,000 $ 791,000
Average net sales per gross square foot(6) $ 1,325 $ 1,247 $ 1,187 $ 1,068 $ 1,013
Average merchandise sale $ 273 $ 255 $ 245 $ 229 $ 210
Comparable store sales increase (decrease)(7) 4.8% 7.9% 11.0% 7.6% (0.5)%
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 34,967 $ 25,824 $ 21,512 $ 20,460 $ 20,079
Total assets 118,003 93,533 87,403 61,512 51,677
Total debt 28,907 21,267 107,891 110,806 105,953
Stockholders' equity (deficit) 47,803 37,507 (47,858) (66,578) (67,659)
</TABLE>
(1) Income tax benefit in the year ended January 31, 1996 (fiscal 1995)
resulted from the reversal of the Company's deferred tax valuation allowance
and corresponding recognition of a deferred tax asset (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Fiscal 1996 Compared to Fiscal 1995").
(2) The Company sold its direct marketing division as of January 31, 1992. In
connection with this disposition, the Company recorded a $2.7 million
gain on the sale of the discontinued operations in the year ended
January 31, 1994 (fiscal 1993) upon its receipt of deferred proceeds
from the sale.
(3) Reflects a charge for the cumulative effect of the Company's change in
accounting in the amount of $8.5 million to adopt AICPA SOP 93-6 for the
recognition of compensation expense on shares allocated to the ESOP.
(4) Reflects net extraordinary gain (loss) in connection with the
extinguishment of debt (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Background" and Note 10 of
Notes to Financial Statements).
(5) Average net sales per store represents the total net sales for stores open
for a full fiscal year divided by the total number of such stores.
(6) Average net sales per gross square foot represents total net sales for
stores open for a full fiscal year divided by the total square feet of such
stores.
(7) A store becomes comparable after it has been open for 12 full months.
5
<PAGE> 2
Marks Bros. Jewelers, Inc.
- -------------------------------------------------------------------------------
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.
BACKGROUND
The Company is a leading, national specialty retailer of fine jewelry operating
191 stores in 24 states as of January 31, 1998. The Company's sales and
income from operations have increased consistently since fiscal 1992 to $188.9
million and $22.2 million, respectively, in fiscal 1997. During that same
period, the number of Company stores grew to 191 from 111, and the Company's
average annual store sales increased to $1,045,000 from $784,000.
To strengthen its capital structure and provide greater financial
flexibility for new store openings, in May 1996, the Company completed an
initial public offering (the "IPO") and a concurrent restructuring of
outstanding indebtedness (the "Recapitalization") which substantially reduced
the Company's indebtedness and ongoing interest expense. In November 1996, the
Company completed a follow on equity offering (the "Offering") which further
strengthened the Company's capital structure, reduced indebtedness and
accelerated the pace of new store openings. The Recapitalization resulted in a
one-time extraordinary gain on early extinguishment of debt in the amount of
$18.3 million ($11.2 million net of tax) in the second quarter of fiscal 1996.
In connection with the reduction of indebtedness from the application of the
proceeds of the Offering, the Company incurred an extraordinary charge of
approximately $1.8 million ($1.1 million net of tax) in the fourth quarter of
fiscal 1996. In the fourth quarter of fiscal 1997, the Company completed a debt
tender offering (the "Tender Offer") in which the Company purchased for cash
$9.9 million of its outstanding 12.15% Series C Senior Subordinated Notes due
2004. In connection with the reduction of indebtedness resulting from the Tender
Offer, the Company incurred an extraordinary charge of $1.7 million ($1.0
million net of tax) in the fourth quarter of fiscal 1997.
The growth of the Company's net sales and earnings will depend to a
significant degree on the Company's ability to successfully expand its
operations through the opening of new stores. The Company plans to open a total
of 35 stores in calendar 1998, and a similar number of stores in 1999.
In fiscal 1997, the Company significantly increased its use of marketing
programs to increase sales and expects to continue to increase selling,
general and administrative expenses in the near term in connection with this
process. The Company is increasing its inventory in connection with its
merchandising programs and, in particular, in connection with its expanded
offerings of higher priced merchandise in a number of its stores.
A variety of factors affect the sales results for the Company's stores,
including economic conditions, the retail sales environment, the
availability and cost of credit from third party credit providers, the results
of the Company's merchandising and marketing strategies, and the Company's
ability to otherwise execute its business strategy. The Company experienced a
4.8% comparable store sales increase in fiscal 1997. There can be no assurance
that the Company will achieve comparable store sales increases in future
reporting periods.
The Company's business is highly seasonal, with a significant portion of
its sales and most of its income generated during the fourth fiscal quarter
ending January 31. The Company has historically experienced lower net sales in
each of its first three fiscal quarters and expects this trend to continue.
Historically, the Company has experienced net losses in one or more of its first
three fiscal quarters (see Note 20 of Notes to Financial Statements for
unaudited quarterly results). The Company's quarterly and annual results of
operations may fluctuate significantly as a result of factors including the
timing of new store openings; net sales contributed by new stores; increases or
decreases in comparable store sales; timing of certain holidays; changes in the
Company's merchandise, marketing, or credit programs; general economic, industry
and weather conditions that affect consumer spending; and pricing,
merchandising, marketing, credit and other programs of competitors.
6
<PAGE> 3
Marks Bros. Jewelers, Inc.
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain information
derived from the statements of operations of the Company expressed as a
percentage of net sales for such periods.
<TABLE>
<CAPTION>
Percentage of Net Sales FISCAL 1997 Fiscal 1996 Fiscal 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales (including buying and occupancy expenses) 58.7 58.6 59.3
- ----------------------------------------------------------------------------------------------
Gross profit 41.3 41.4 40.7
Selling, general and administrative expenses 29.5 29.2 28.9
- ----------------------------------------------------------------------------------------------
Income from operations 11.8 12.2 11.8
Interest expense 2.0 4.5 9.4
Stock award expense -- -- 0.4
ESOP compensation expense -- -- 0.4
- ----------------------------------------------------------------------------------------------
Income before income taxes 9.8 7.7 1.6
Income tax expense (benefit) 3.8 3.0 (11.4)
- ----------------------------------------------------------------------------------------------
Income before extraordinary item 6.0 4.7 13.0
Extraordinary item, net (0.6) 6.5 --
- ----------------------------------------------------------------------------------------------
Net income 5.4% 11.2% 13.0%
==============================================================================================
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased $33.4 million, or 21.5%, to $188.9 million in fiscal 1997
from $155.5 million in fiscal 1996. Comparable store sales increased $7.3
million, or 4.8%, in fiscal 1997. Sales from new stores contributed $26.9
million to the overall increase in net sales. Increases in layaway balances
contributed a higher sales increase of $0.4 million compared to the prior fiscal
year. These increases were partially offset by lower sales of $1.1 million
related to store closings, together with stores closed for remodeling for
limited periods. The average number of units sold per store decreased by
approximately 1.5% from fiscal 1996 on a comparable store basis, while the
average price per merchandise sale increased by 7.1% to $273 in fiscal 1997 from
$255 in fiscal 1996. Comparable store sales increased in large part due to
increased advertising and promotional initiatives including certain private
label non-recourse credit programs, expanded assortments of upscale merchandise
and improvements in the quality of the Company's personnel, as well as a solid
retail environment for most of the year. These increases were offset by higher
returns as a result of the implementation of a more liberal customer return
policy during fiscal 1997. The Company opened 30 new stores and closed three
stores during fiscal 1997, increasing the number of stores operated to 191 as of
January 31, 1998 from 164 as of January 31, 1997.
Gross profit increased $13.7 million, or 21.3%, to $78.0 million in fiscal
1997 from $64.3 million in fiscal 1996. As a percentage of net sales, gross
margin decreased slightly to 41.3% in fiscal 1997 from 41.4% in fiscal 1996.
This decrease was due primarily to a shift in product mix to somewhat lower
margin jewelry items. 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 $10.5 million, or
23.2%, to $55.8 million in fiscal 1997 from $45.3 million in fiscal 1996. As a
percentage of net sales, selling, general and administrative expenses increased
to 29.5% in fiscal 1997 from 29.1% in fiscal 1996. The dollar increase related
primarily to higher advertising expenses ($2.3 million), higher payroll expenses
($6.2 million) and higher credit expenses ($0.7 million). Selling, general and
administrative expenses attributable to the 30 stores opened in fiscal 1997 and
20 stores opened in fiscal 1996 accounted for $7.9 million of the total increase
in selling, general and administrative expenses. Advertising expenses increased
in fiscal 1997, as compared to fiscal 1996, due to an expansion of the Company's
marketing programs, including the addition of radio advertising during the
Christmas holiday season. Payroll costs increased in fiscal 1997, as compared to
fiscal 1996 primarily due to additions to the management team and an increase in
the number of field-based supervisors, as well as a continuing effort to upgrade
the quality of store managers and an increase in incentive compensation paid to
store-based personnel. Private label non-recourse credit sales as a percentage
of net sales decreased to 38.0% in fiscal 1997 from 40.1% in fiscal 1996
primarily as a result of the discontinuation of the first-time buyers program in
December 1996, which represented 4.2% of sales in fiscal 1996. While private
label non-recourse credit sales as a percentage of total sales decreased,
private label non-recourse credit sales excluding first-time buyers increased to
38.0% in fiscal 1997 from 36.0% in the previous year. In fiscal 1997, the
Company used a one-year no-interest credit program which resulted in increased
private label credit sales. These private label non-recourse credit sales carry
higher discount rates than bankcard sales. The usage of private label
non-recourse credit contributed to an increase in the average price per
merchandise sale and higher sales.
7
<PAGE> 4
Marks Bros. Jewelers, Inc.
- -------------------------------------------------------------------------------
As a result of the factors discussed above, income from operations
increased 16.7%, to $22.2 million in fiscal 1997 from $19.0 million in
fiscal 1996. As a percentage of net sales, income from operations decreased to
11.8% in fiscal 1997 from 12.2% in fiscal 1996.
Interest expense decreased $3.2 million, or 45.6%, to $3.8 million in
fiscal 1997 from $7.0 million in fiscal 1996. As a percentage of net sales,
interest expense decreased to 2.0% in fiscal 1997 from 4.5% in fiscal 1996. The
dollar decrease in interest expense was due primarily to lower average
indebtedness and lower interest rates.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased $24.5 million, or 18.7%, to $155.5 million in fiscal 1996
from $131.0 million in fiscal 1995. Comparable store sales increased $10.1
million, or 7.9%, during fiscal 1996. Sales from new stores contributed $14.9
million to the overall sales increase while sales from layaways increased sales
by $0.5 million. These sales increases were partially offset by a decrease in
sales of $1.0 million related to the closing of two stores. The average number
of units sold on a comparable store basis increased by approximately 4.0% in
fiscal 1996, while the average price per merchandise sale increased to $255 in
fiscal 1996 from $245 in fiscal 1995. Comparable store sales increased in part
due to the implementation of certain return/exchange policies, increased use of
private label non-recourse credit, increased inventory levels, and on-going
improvements in the quality of the Company's sales force, as well as a solid
retail environment for most of the year. The Company opened 20 new stores and
closed 2 stores during fiscal 1996, increasing the number of stores operated
to 164 as of January 31, 1997 compared to 146 as of January 31, 1996.
Gross profit increased $11.0 million to $64.3 million in fiscal 1996. As a
percentage of net sales, gross profit increased to 41.4% in fiscal 1996 from
40.7% in fiscal 1995, primarily due to the leveraging of certain buying and
occupancy costs over the Company's higher sales.
Selling, general and administrative expenses increased $7.4 million, or
19.6%, to $45.3 million in fiscal 1996 from $37.9 million in fiscal 1995. As a
percentage of net sales, selling, general and administrative expenses increased
to 29.2% in fiscal 1996 from 28.9% in fiscal 1995. The dollar increase related
primarily to higher payroll expenses ($4.5 million), higher credit expenses
($1.2 million), and higher other store expenses ($1.0 million). Selling, general
and administrative expenses attributable to the opening of 20 new stores in
fiscal 1996 and 15 in fiscal 1995 account for $4.3 million of the increase.
Comparable store payroll costs increased 8.6% in fiscal 1996, as compared to
fiscal 1995, primarily due to an effort to upgrade the quality of the sales
force and increase incentive-based compensation paid to store personnel. Private
label non-recourse credit sales as a percentage of net sales increased to 40.1%
in fiscal 1996 from 36.9% in fiscal 1995. These private label non-recourse
credit sales carry higher discount rates than bankcard sales, which resulted in
higher credit expenses. The first-time buyers program as a percentage of net
sales increased to 4.2% in fiscal 1996 from 1.9% in fiscal 1995. The first-time
buyers program was discontinued in December 1996.
As a result of the factors discussed above, income from operations
increased 23.5% to $19.0 million in fiscal 1996 from $15.4 million in fiscal
1995. As a percentage of net sales, income from operations increased to 12.2%
in fiscal 1996 from 11.8% in fiscal 1995.
Interest expense decreased $5.3 million to $7.0 million in fiscal 1996
from $12.3 million in fiscal 1995. This resulted from lower outstanding debt
balances and lower average interest rates on revolver and term borrowings
resulting primarily from the IPO, Recapitalization and Offering.
No ESOP compensation expense was recorded in fiscal 1996. ESOP
compensation expense recorded in fiscal 1995 was $0.6 million. Also, in fiscal
1995, the Company recognized a $0.5 million expense relating to restricted
stock awards.
An income tax expense of $11.1 million was recorded in fiscal 1996 ($4.7
million has been charged to income tax expense and $6.4 million has been
charged against the extraordinary item) reflecting an effective annual tax rate
of 39%. A one-time income tax benefit of $14.9 million was recorded in fiscal
1995. The one-time recognition of the deferred tax benefit resulted from a
reduction in the valuation allowance relating to the Company's expectation that
future taxable income would be at least $41.5 million prior to the expiration of
the deferred tax assets. The deferred tax asset principally relates to the
Company's net operating loss carryforwards and a temporary difference arising
from the recognition of interest expenses and fees on the outstanding debt as of
January 31, 1996. At February 1, 1997 and 1996, respectively, the Company had
available net operating loss tax carryforwards in the amount of $11.3 million
and $17.9 million, which begin expiring in 2008. While these carryforwards are
expected to reduce future income tax payments, the benefits of such
carryforwards have already been recognized in the Company's balance sheets and
results of operations for fiscal 1995.
8
<PAGE> 5
Marks Bros. Jewelers, Inc.
- -------------------------------------------------------------------------------
An extraordinary gain on the extinguishment of debt was recorded for $10.1
million ($6.4 million net of taxes). This included debt discounts on senior
accreting loans of $0.6 million, zero coupon loans of $4.0 million and
subordinated debt of $13.7 million offset by prepayment premiums on subordinated
debt of $1.0 million and the write-off of deferred financing costs of $0.8
million.
Net income increased to $17.4 million in fiscal 1996 from $17.0 million in
fiscal 1995 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Over the last three fiscal years, the Company's on-going capital requirements
have been 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, increased trade support and bank
borrowings under the Company's revolver.
The Company's cash flow from operating activities increased to a positive
cash flow of $0.4 million in fiscal 1997 from a cash flow shortfall of
$3.6 million in fiscal 1996. Higher income from operations together with
increases in accounts payable ($1.8 million), accrued expenses ($2.7 million)
and deferred income tax ($4.2 million) were partially offset by increases in
merchandise inventories ($20.6 million) and accounts receivable ($1.2 million).
Cash used in investing activities included the funding of capital expenditures
($10.5 million), related primarily to the opening of 30 new stores in fiscal
1997. Cash generated from financing activities included (i) proceeds from the
term loan ($11.4 million), (ii) an increase in revolver borrowings under the
current revolving credit facility ($6.1 million), (iii) proceeds from the
exercise of stock options ($0.1 million), and (iv) an increase in the net amount
of outstanding checks ($2.4 million). The Company utilized cash in fiscal 1997
primarily to repurchase subordinated debt ($9.9 million) and to pay associated
costs ($1.0 million, net of tax). Stockholders' equity increased to $47.8
million at January 31, 1998 from $37.5 million at January 31, 1997.
The Company's cash flow from operating activities decreased from a
positive cash flow of $9.6 million in fiscal 1995 to a cash flow shortfall
of $3.6 million in fiscal 1996. Higher income from operations together with
increases in accounts payable ($5.7 million) and accrued expenses ($3.9 million)
were more than offset by increases in merchandise inventories ($24.4 million)
(before the effects of the Company's gold consignment facility) and deferred
financing costs ($2.5 million). Cash used in investing activities included the
funding of capital expenditures ($7.0 million), related primarily to the opening
of 20 new stores in fiscal 1996. Cash generated from financing activities
included (i) proceeds from the IPO and the Offering ($66.1 million), (ii)
proceeds from a term loan ($15.0 million), (iii) proceeds from the gold
consignment facility ($15.3 million), (iv) proceeds from subordinated debt
($20.0 million), (v) an increase in revolver borrowings under the current
revolving credit facility ($10.7 million), and (vi) proceeds from the exercise
of stock options ($0.5 million), less a $0.7 million decrease in the net amount
of outstanding checks. The Company utilized cash in fiscal 1996 primarily to (i)
repay outstanding bank borrowings on revolving loans under the previous credit
facility ($2.1 million), (ii) repay the Company's term loans ($41.6 million),
(iii) repay senior accreting loans ($50.5 million), (iv) repay revolving zero
coupon notes ($2.0 million), and (v) repay or repurchase subordinated debt
($20.1 million). Primarily as a result of the financing transactions described
above, stockholders' equity increased from a deficit of ($47.9) million at
January 31, 1996 to $37.5 million at January 31, 1997.
At February 1, 1998, the Company had net operating loss tax carryforwards
in the amount of $2.2 million, which will reduce cash payments for income
taxes in future periods but which have already been recognized for financial
reporting purposes. The timing of the use of some portion of these carryforwards
is expected to be deferred under Section 382 of the Internal Revenue Code.
The Company has a $40.0 million revolving credit facility, a $12.0 million
term loan facility, and a $20.0 million gold consignment facility through April
30, 2001. Interest rates and commitment fees charged on the unused facility
float in a grid based on the Company's quarterly performance. Since these
interest rates are determined by reference to Eurodollar or prime rates, changes
in market interest rates can materially affect the Company's interest expense.
Borrowings under the revolver are limited to a borrowing base determined based
on levels of inventory and accounts receivable. The peak outstanding borrowing
under the Company's revolver during fiscal 1997 and 1996 was $32.5 million and
$19.0 million, respectively. The unused facility was $23.2 million as of January
31, 1998.
The Company has a gold consignment facility with a lending institution
pursuant to which the Company accepts as consignee, and is responsible to
return at some future date a fixed number of ounces of gold. The periodic
charges paid by the Company are computed based on a percentage of the value of
the gold consigned. Therefore, an increase in the price of gold could
substantially increase
9
<PAGE> 6
Marks Bros. Jewelers, Inc.
- -------------------------------------------------------------------------------
the annual costs to the Company of the gold consignment and the eventual cost to
the Company upon the termination of this arrangement. During fiscal 1996, the
Company sold and simultaneously consigned 39,000 troy ounces of gold for $15.3
million.
A substantial portion of the merchandise sold by the Company is carried on
a consignment basis prior to sale or is otherwise financed by vendors, thereby
reducing the Company's direct capital investment in inventory. The peak
consigned inventories from merchandise vendors was $32.5 million and $17.4
million during fiscal 1997 and 1996, respectively. The willingness of vendors to
enter into such arrangements may vary substantially from time to time based on a
number of factors, including the merchandise involved, the financial resources
of vendors, interest rates, availability of financing, fluctuations in gem and
gold prices, inflation, the financial condition of the Company and a number of
economic or competitive conditions in the jewelry business or the economy
generally. Any change in these relationships could have a material adverse
effect on the Company's results from operations or financial condition.
During 1998, the Company plans to open 35 stores. New stores on average
require inventory of approximately $450,000 and capital expenditures of
approximately $250,000. The Company is in the process of increasing the amount
of inventory (especially higher priced items) carried in its stores. Pre-opening
expenses for each new store average approximately $20,000. The Company's policy
is to charge as incurred pre-opening costs associated with new stores. The
Company anticipates capital expenditures of approximately $14.0 million for new
store openings and other fixed assets to be placed in service during fiscal
1998.
The Company's inventory levels and working capital requirements
historically have been highest in advance of the Christmas season. The Company
has funded these seasonal working capital needs through borrowings under the
Company's revolver and increases in trade payables and accrued expenses.
Management expects that cash flows from operating activities, funds
available under its revolving credit facility and other sources should be
sufficient to support the Company's current new store expansion program and
seasonal working capital needs for the foreseeable future.
INFLATION
The Company believes that inflation generally has not had a material effect on
the results of its operations. There is no assurance, however, that inflation
will not materially affect the Company in the future.
YEAR 2000
The Company has reviewed its computer and other operating systems to identify
those which it believes could be affected by the "Year 2000" issue. The Company
has begun to upgrade certain information systems to improve operations and
support future growth as well as to address the "Year 2000" issue. With respect
to systems that the Company is not upgrading, the Company plans to renovate
those systems to be "Year 2000" compliant. The Company believes that such
systems upgrades and renovations will be made on a timely basis, and if made on
a timely basis, that the "Year 2000" issue will not pose significant operational
problems or result in costs that have a material adverse impact on the Company's
business, financial condition or results of operations. In addition, certain
systems of third party suppliers and service providers which are not currently
"Year 2000" compliant could adversely impact the Company's operations. The
Company has confirmed with these suppliers and service providers that they are
implementing plans to address the "Year 2000" issue. However, there can be no
assurance that the systems of such third parties will be timely converted. A
failure by the Company or any such third party to timely address the "Year 2000"
issue could have a material adverse impact on the Company's business, financial
condition or results of operations.
FORWARD-LOOKING STATEMENTS
All statements, trend analysis and other information contained in this report
relative to markets for the Company's products and trends in the Company's
operations or financial results, as well as other statements including words
such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and
other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things: (1) the extent and results of the Company's store expansion
strategy; (2) the seasonality of the Company's business; (3) economic
conditions, the retail sales environment and the Company's ability to execute
its business strategy and the related effects on comparable store sales and
other results; (4) the success of the Company's marketing and promotional
programs; (5) the extent to which the Company is able to retain and attract key
personnel; (6) competition; (7) the availability and cost of consumer credit;
(8) relationships with suppliers; (9) the Company's leverage; (10) fluctuations
in gem and gold prices; (11) regulation; (12) timely "Year 2000" compliance by
the Company and third party suppliers and service providers; and (13) the risk
factors listed from time to time in the Company's filings with the Securities
and Exchange Commission.
10
<PAGE> 7
Marks Bros. Jewelers, Inc.
- -------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(in thousands, except for per share data) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $188,898 $155,474 $131,022
Cost of sales (including buying and occupancy expenses) 110,873 91,134 77,722
- -----------------------------------------------------------------------------------------------
Gross profit 78,025 64,340 53,300
Selling, general and administrative expenses 55,809 45,309 37,887
- -----------------------------------------------------------------------------------------------
Income from operations 22,216 19,031 15,413
Interest expense 3,806 6,993 12,314
Stock award expense -- -- 461
ESOP compensation expense -- -- 590
- -----------------------------------------------------------------------------------------------
Income before income taxes 18,410 12,038 2,048
Income tax expense (benefit) 7,180 4,695 (14,924)
- -----------------------------------------------------------------------------------------------
Income before extraordinary item 11,230 7,343 16,972
Extraordinary item, net (1,035) 10,057 --
- -----------------------------------------------------------------------------------------------
Net income $ 10,195 $ 17,400 $ 16,972
===============================================================================================
Basic earnings per share:
Income before extraordinary item $ 1.11 $ 0.93 $ 3.59
Extraordinary item, net (0.10) 1.28 --
- -----------------------------------------------------------------------------------------------
Net income $ 1.01 $ 2.21 $ 3.59
===============================================================================================
Weighted average common share and
common share equivalents 10,093 7,868 4,729
Diluted earnings per share:
Income before extraordinary item $ 1.10 $ 0.89 $ 3.49
Extraordinary item, net (0.10) 1.22 --
- -----------------------------------------------------------------------------------------------
Net income $ 1.00 $ 2.11 $ 3.49
===============================================================================================
Weighted average common share and
common share equivalents 10,225 8,216 4,856
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE> 8
Marks Bros. Jewelers, Inc.
- -------------------------------------------------------------------------------
BALANCE SHEETS
AS OF JANUARY 31, 1998, AND JANUARY 31, 1997
<TABLE>
<CAPTION>
(in thousands, except for share amounts) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, net $ 2,532 $ 1,354
Layaway receivables, net 2,636 2,041
Merchandise inventories 85,053 64,482
Other current assets 996 638
Deferred income taxes, net 1,257 1,326
Deferred financing costs 240 292
- -------------------------------------------------------------------------------
Total current assets 92,714 70,133
Property and equipment, net 22,701 16,305
Deferred income taxes, net 1,953 5,947
Deferred financing costs 635 1,148
- -------------------------------------------------------------------------------
Total assets $118,003 $ 93,533
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Outstanding checks, net $ 9,608 $ 7,242
Revolver loans 16,841 10,747
Current portion of long-term debt 1,000 --
Accounts payable 16,525 14,706
Income taxes 1,419 176
Accrued payroll 2,906 2,607
Other accrued expenses 9,448 8,831
- -------------------------------------------------------------------------------
Total current liabilities 57,747 44,309
Total long-term debt, net of current portion 11,066 10,520
Other long-term liabilities 1,387 1,197
- -------------------------------------------------------------------------------
Total liabilities 70,200 56,026
Commitments and contingencies
Stockholders' equity:
Common Stock ($.001 par value; 60,000,000 shares
authorized; 10,149,019 shares, 10,061,142 shares
issued and outstanding, respectively) 10 10
Class B Common Stock ($1.00 par value;
29,567 shares authorized; 101 shares issued
and outstanding) -- --
Class C Common Stock ($.001 par value; 39,371
shares authorized; no shares issued
and outstanding) -- --
Class D Common Stock ($.001 par value; 60,000 shares
authorized; no shares issued and outstanding) -- --
Additional paid-in capital 59,905 59,804
Accumulated deficit (12,112) (22,307)
Treasury stock, 17 shares at cost -- --
- -------------------------------------------------------------------------------
Total stockholders' equity 47,803 37,507
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $118,003 $ 93,533
===============================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE> 9
Marks Bros. Jewelers, Inc.
- -------------------------------------------------------------------------------
STATMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(in thousands, Common Class B Additional Accumulated Treasury Deferred ESOP
except for share amounts) Stock Common Stock Paid-In Capital Deficit Stock Compensation
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1995 $ -- $ 30 $ 11,855 $ (31,645) $ (20,270) $ (26,548)
Net income -- -- -- 16,972 -- --
Repurchase of ESOP shares -- -- -- -- (63) --
ESOP amortization -- -- (4,310) -- -- 4,900
Income tax effect of the
difference between the average
fair market value and the cost
of the released shares -- -- 767 -- -- --
Issuance of stock awards -- -- 454 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1996 -- 30 8,766 (14,673) (20,333) (21,648)
Net income -- -- -- 17,400 -- --
Issued 3,269,500 shares in
initial public offering 3 -- 40,413 -- -- --
Conversion of stock 6 (24) 18 -- -- --
Restructuring of ESOP -- -- (15,609) (3,027) (3,012) 21,648
Cancellation of treasury stock (1) (6) (5) (23,333) 23,345 --
Issued 1,265,000 shares in
follow-on equity offering 1 -- 25,697 -- -- --
Exercise of options 1 -- 524 -- -- --
Tax effect of the disqualifying
disposition of stock options -- -- -- 1,326 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1997 10 -- 59,804 (22,307) -- --
Net income -- -- -- 10,195 -- --
Exercise of options -- -- 101 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 31, 1998 $ 10 $ -- $ 59,905 $ (12,112) $ -- $ --
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE> 10
Marks Bros. Jewelers, Inc.
- -------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,195 $ 17,400 $ 16,972
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss (gain) on extinguishment of debt, net of taxes 218 (10,687) --
Depreciation and amortization 3,964 3,656 2,948
Stock award expense non-cash portion -- -- 454
ESOP compensation expense -- -- 590
Income tax benefit -- -- (14,924)
Interest on zero coupon notes -- 121 434
Interest on senior accreting notes -- 1,339 4,994
Interest on subordinated debt -- 790 2,743
Loss on disposition of assets 41 132 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net (1,178) (185) 325
(Increase) in layaway receivables, net (595) (465) (170)
(Increase) in merchandise inventories, net of gold consignment (20,571) (24,376) (9,347)
(Increase) decrease in other current assets (358) 76 (24)
Decrease in deferred taxes, net 4,241 1,584 --
(Increase) in deferred financing costs (100) (2,503) --
Increase in accounts payable 1,819 5,669 3,031
Increase in accrued liabilities and long-term liabilities 2,712 3,869 1,575
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 388 (3,580) 9,601
Cash flows from investing activities:
Capital expenditures (10,495) (7,041) (3,932)
Proceeds from assets sold, net -- 8 --
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,495) (7,033) (3,932)
Cash flows from financing activities:
Borrowing on old revolver loan -- 38,078 127,109
Repayment of old revolver loan -- (40,197) (131,795)
Borrowing on new revolver loan 499,529 224,835 --
Repayment of new revolver loan (493,435) (214,088) --
Repayment of term loan -- (15,000) --
Repayment of old term loan -- (26,600) (6,400)
Repayment of senior accreting note -- (50,502) --
Repayment of zero coupon note -- (2,000) --
Repayment of old subordinated debt -- (10,618) --
Repayment of new subordinated debt (9,880) (9,480) --
Proceeds from term loan 11,426 15,000 --
Proceeds from subordinated debt -- 20,000 --
Proceeds from gold consignment -- 15,295 --
Proceeds from stock issuance, net -- 66,114 --
Proceeds from exercise of stock options 101 525 --
Repurchase of ESOP shares -- -- (63)
Increase (decrease) in outstanding checks, net 2,366 (749) 5,480
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 10,107 10,613 (5,669)
- ----------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents -- -- --
Cash and cash equivalents at beginning of year -- -- --
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ -- $ -- $ --
====================================================================================================
Supplemental disclosures of cash flow information:
Interest paid during year $ 3,481 $ 4,304 $ 3,891
Income taxes paid during year 945 82 64
Non-cash financing activity:
Tax effect of compensation expense $ -- $ -- $ 767
Tax effect of the disqualifying disposition of stock options -- 1,326 --
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE> 11
Marks Bros. Jewelers, Inc.
-------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. DESCRIPTION The financial statements of Marks Bros. Jewelers, Inc.
OF OPERATIONS (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 191 stores as of January 31, 1998, located
in 24 states operating in regional or superregional
shopping malls.
- -------------------------------------------------------------------------------
2. SUMMARY OF CASH AND CASH EQUIVALENTS
SIGNIFICANT For the purpose of the statements of cash flows, the
ACCOUNTING Company considers all temporary cash investments
POLICIES purchased with a maturity of three months or less to
be cash equivalents.
OUTSTANDING CHECKS
Outstanding checks are stated net of store cash
balances, of which cash balances were approximately
$2,488,000 and $878,000 as of January 31, 1998 and 1997,
respectively.
LAYAWAY RECEIVABLES, NET
Layaway receivables include those sales to customers
under the Company's layaway policies which have not
been collected fully as of the end of the year. Layaway
receivables are net of customer payments received to
date, and net of an estimate for those layaway sales
which the Company anticipates will never be consummated.
This estimate is based on the Company's historical
calculation of layaway sales that will never be
completed. While it is reasonably possible that the
estimate will change, it is the Company's expectation
that the financial impact will not be significant in the
near term. The Company charges the customer to cover the
costs of administration for inactive layaways.
MERCHANDISE INVENTORIES
Merchandise inventories are stated principally at the
lower of average cost or market. The Company also
obtains merchandise from vendors under various
consignment agreements. The consigned inventory and
related contingent obligations are not reflected in the
Company's financial statements. At the time of sale, the
Company records the purchase liability and the related
cost of merchandise in cost of sales.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less
accumulated depreciation and amortization. Furniture
and fixtures are depreciated on a straight-line basis
over estimated useful lives ranging from five to ten
years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the remaining
lease terms or ten years. Upon retirement or disposition
of property and equipment, the applicable cost and
accumulated depreciation are removed from the accounts
and any resulting gains or losses are included in the
results of operations.
LONG LIVED ASSETS
When facts and circumstances indicate potential
impairment, the Company evaluates the recoverability of
long lived assets carrying values, using estimates of
undiscounted future cash flows over remaining asset
lives. When impairment is indicated, any impairment loss
is measured by the excess of carrying values over fair
values.
DEFERRED FINANCING COSTS
In connection with the Recapitalization (see Note 7,
Initial Equity Offering and Recapitalization), the
Company incurred various financing costs which have been
deferred on the Company's balance sheet and are
amortized over the terms of the agreements.
15
<PAGE> 12
Marks Bros. Jewelers, Inc.
-------------------------------------------------------
STORE PREOPENING EXPENSE
Expenses associated with the opening of new store
locations are expensed in the period such costs are
incurred.
LEASE EXPENSE
The Company leases office facilities and all retail
stores. Certain leases require increasing annual
minimum lease payments over the term of the lease.
Minimum lease expense under these agreements is
recognized on a straight-line basis over the terms of
the respective leases. Virtually all leases covering
retail stores provide for additional contingent rentals
based on a percentage of sales. These costs are expensed
in the period incurred.
EARNINGS PER SHARE
Earnings per share are calculated by dividing net income
by the weighted average common share equivalents
outstanding during the period. In accordance with
Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share", the prior period amounts have
been restated (see Note 14, Earnings Per Common Share).
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.
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 SFAS No. 123, "Accounting for
Stock-Based Compensation" have been adopted.
MANAGEMENT ESTIMATES
The preparation of financial statements in conjunction
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain amounts for the years ended January 31, 1997 and
1996 were reclassified to conform to the current year
presentation.
- -------------------------------------------------------------------------------
3. ACCOUNTS The Company has charged $1,182,000, $1,037,000, and
RECEIVABLE, NET $918,000 for doubtful accounts for the years ended
January 31, 1998, 1997, and 1996, respectively.
<TABLE>
<CAPTION>
(in thousands) 1998 1997
-------------------------------------------------------
<S> <C> <C>
Accounts receivable $3,225 $2,062
Less: allowance for doubtful accounts (693) (708)
-------------------------------------------------------
Accounts receivable, net $2,532 $1,354
=======================================================
</TABLE>
16
<PAGE> 13
Marks Bros. Jewelers, Inc.
-------------------------------------------------------
4. INVENTORY As of January 31, 1998 and January 31, 1997,
merchandise inventories consisted of:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
-------------------------------------------------------
<S> <C> <C>
Raw materials $ 3,504 $ 5,908
Finished goods inventory 81,549 58,574
-------------------------------------------------------
Merchandise inventories $85,053 $64,482
=======================================================
</TABLE>
Raw materials primarily consist of diamonds,
precious gems, semi-precious gems and gold. Included
within finished goods inventory are allowances for
inventory shrink, scrap, and miscellaneous costs of
$1,700,000 and $1,711,000 for the years ended January
31, 1998 and 1997, respectively. As of January 31, 1998
and 1997, merchandise consignment inventories held by
the Company that are not included in its balance sheets
total $32,530,000 and $17,395,000, respectively. In
addition, gold consignments of $15,295,000 are not
included in the Company's balance sheet at January 31,
1998 and 1997 (see Note 11, Financing Arrangements).
Certain general and administrative costs are
allocated to inventory. As of January 31, 1998 and
1997, the amounts included in inventory are
$1,688,000 and $1,409,000, respectively. General and
administrative expenses included in cost of sales were
$2,608,000, $2,237,000 and $2,240,000 for the years
ended January 31, 1998, 1997 and 1996, respectively.
- -------------------------------------------------------------------------------
5. PROPERTY AND Property and equipment includes the following as of
EQUIPMENT January 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
-------------------------------------------------------
<S> <C> <C>
Furniture and fixtures $31,174 $26,735
Leasehold improvements 15,005 11,616
-------------------------------------------------------
Property and equipment 46,179 38,351
Less accumulated depreciation
and amortization 23,478 22,046
-------------------------------------------------------
Property and equipment, net $22,701 $16,305
=======================================================
</TABLE>
Depreciation expense was $3,657,000, $3,374,000,
and $2,948,000 for the years ended January 31, 1998,
1997, and 1996, respectively.
- -------------------------------------------------------------------------------
6. LONG-TERM Included in long-term liabilities at January 31, 1998
LIABILITIES and 1997 are $1,387,000 and $1,197,000, respectively,
of deferred lease costs.
- -------------------------------------------------------------------------------
7. INITIAL EQUITY In May 1996, the Company completed an initial public
OFFERING AND offering (the "IPO"). The Company issued 3,269,500
RECAPITALIZATION shares of Common Stock after giving effect to a stock
split of approximately 35.4 for 1, and received
proceeds of $40.4 million net of underwriting discounts
and offering costs. Concurrent with the IPO, the
outstanding warrants for 177,887 shares of Common Stock
were exercised and 39,370 shares of Class C Common
Stock were converted into 1,349,521 shares of Common
Stock.
With the completion of the IPO, the Company
completed a recapitalization (the "Recapitalization"),
consisting of a Revolving Credit, Term Loan and
Gold Consignment Agreement totaling $60.0 million and
$20.0 million of Senior Subordinated Notes.
Approximately $87.0 million of the funds available from
the Recapitalization were used by the Company
principally to repay all outstanding bank borrowings
under the Company's bank agreements, including
approximately $7.8 million outstanding under the
Company's revolving credit facility, $26.6 million
outstanding under the Company's term loan, $51.1
million of senior accreting notes and $6.0 million of
zero coupon notes due May 31, 1997.
17
<PAGE> 14
Marks Bros. Jewelers, Inc.
-------------------------------------------------------
In addition, the Company used $10.6 million of
the funds available from the Recapitalization to
repurchase the Company's subordinated notes at a
discount.
The bank borrowing and subordinated debt
repayments utilized a debt discount due to the
early repayment of the debt of $18.3 million, less $7.1
million of taxes (see Note 10, Extraordinary Items).
In conjunction with the completion of the IPO and
the Recapitalization, the Company restructured its
Employee Stock Ownership Plan (see Note 15, Employee
Stock Ownership Plan).
- -------------------------------------------------------------------------------
8. FOLLOW-ON EQUITY In November 1996, the Company completed a follow-on
OFFERING equity offering (the "Offering"). The Company issued
1,265,000 shares of Common Stock, and received
proceeds of $25.7 million net of underwriting discounts
and offering costs. The Company used such proceeds to
reduce the Company's indebtedness, to accelerate the
pace of new store openings, and for working capital and
other general corporate purposes.
Net proceeds from the Offering were used to
redeem $8.0 million in principal amount of the
Company's Series D Senior Subordinated Notes due 2004
(the "Series D Notes") at a total cost of $9.0 million
including a premium. The Series D Notes otherwise would
have matured in October 2004, and bore interest at a
rate of 15.0% per annum plus, for subsequent periods
commencing May 1, 1998, 1% per annum (increasing in 1%
increments per each subsequent year commencing May 1,
1999). The Company used the remaining net proceeds from
the Offering to repay the term loan and reduce
borrowings under its Revolving Credit Facility which
bore interest at fluctuating rates.
In conjunction with the Offering, the Company
amended the Revolving Credit, Term Loan and Gold
Consignment Agreement to allow for the prepayment of
Series D Notes and up to $5.0 million of the Company's
Series C Senior Subordinated Notes due 2004 (the
"Series C Notes") (including any prepayment premiums),
increase the capital expenditures limitations, and
repay the term loan.
- -------------------------------------------------------------------------------
9. TENDER OFFER On January 2, 1998, the Company completed a debt
tender offering (the "Tender Offer") to purchase
$9.9 million of its outstanding 12.15% Series C Notes.
Under the terms of the Tender Offer, the Company
purchased the outstanding notes at a price equal to
$1.11 per $1,000 principal amount (111.00% of the
principal amount), plus accrued interest. In connection
with the Tender Offer, the Company eliminated certain
restrictive covenants contained in the indenture,
thereby affording the Company additional financial and
operating flexibility.
In conjunction with the Tender Offer, the Company
and its bank group amended the Revolving Credit,
Term Loan and Gold Consignment agreement to provide for
a total facility up to a maximum of $72.0 million
through April 30, 2001. The amendment provides for a
term loan facility up to $12.0 million. The term loan
facility was used to purchase the Series C Notes, and
to pay premiums, accrued interest and fees in
connection with the purchase of such notes.
- -------------------------------------------------------------------------------
10. EXTRAORDINARY In connection with the IPO and Recapitalization, the
ITEMS Company utilized a debt discount due to the early
repayment of the debt of approximately $18.3 million,
less taxes of $7.1 million, resulting in an
extraordinary gain on extinguishment of debt.
The $18.3 million of debt discount consists of
the following:
i) $0.6 million on the senior accreting notes
ii) $4.0 million on the zero coupon note
iii) $13.7 million on the senior subordinated
debt
In the fourth quarter of fiscal 1996, the Company
recorded an extraordinary loss of $1.1 million, net
of $0.7 million of tax, in connection with the Offering
(see Note 8, Follow-on Equity Offering). The loss
consisted of $1.0 million of costs associated with the
extinguishment of debt and $0.8 million write-off of
deferred financing costs.
18
<PAGE> 15
Marks Bros. Jewelers, Inc.
-------------------------------------------------------
In the fourth quarter of fiscal 1997, the Company
recorded an extraordinary loss of $1.0 million, net
of $0.7 million of tax in connection with the Tender
Offer (See Note 9, Tender Offer). The loss consisted of
$1.3 million of costs associated with the
extinguishment of debt and $0.4 million write-off of
deferred financing costs.
- -------------------------------------------------------------------------------
11. FINANCING The Company completed a restructuring of its
ARRANGEMENTS outstanding indebtedness in conjunction with the IPO
and Recapitalization. Effective May 3, 1996, the
Company entered into a Revolving Credit, Term Loan and
Gold Consignment agreement ("Credit Agreement") with a
group of banks totaling $60.0 million which expires
April 30, 2001. In conjunction with the Tender Offer,
the Company amended the Credit Agreement effective
November 7, 1997. Under the terms of this agreement,
the Company is provided a total facility of up to a
maximum of $72.0 million.
Under this agreement, the banks have a security
interest in substantially all of the assets of
the Company. The Credit Agreement contains certain
restrictions on capital expenditures, payment of
dividends and assumption of additional debt, and
requires the Company to maintain specified minimum
levels of certain financial and balance sheet measures,
including the fixed charge ratio.
REVOLVER LOAN
The revolving credit facility, which expires April 30,
2001, is available up to a maximum of $40.0
million as of January 31, 1998, and is limited by a
borrowing base computed based on the value of the
Company's inventory and accounts receivable. A
commitment fee of 25 basis points per annum on the
unused portion of the commitment is payable monthly.
Interest rates for these borrowings under this
agreement are, at the Company's option, Eurodollar
rates plus 137.5 basis points or the banks' prime rate.
Interest rates and the commitment fee charged on the
unused facility float in a grid based on the Company's
quarterly financial performance. Interest is payable
monthly for prime borrowings and upon maturity for
Eurodollar borrowings. The interest expense for the
years ended January 31, 1998, 1997 and 1996 was
$1,646,000, $793,000, and $701,000, respectively,
reflecting a weighted average interest rate of 7.4%,
10.2% , and 10.6%, respectively.
TERM LOANS
In conjunction with the Tender Offer, the Company
received proceeds of $11,426,000 under the term loan
facility to purchase at a premium Series C Notes and to
pay accrued interest and fees associated with the
Tender Offer. Interest rates for these borrowings were,
at the Company's option, Eurodollar rates plus 212.5
basis points or the banks' prime rate plus 75 basis
points. Interest was payable monthly for prime
borrowings and upon maturity for Eurodollar borrowings.
Interest rates and the commitment fee charged on the
unused facility float in a grid based on the Company's
quarterly financial performance. The interest expense
for the year ended January 31, 1998 for these
borrowings was $75,000 reflecting a weighted average
interest rate of 7.9%. In conjunction with the IPO and
Recapitalization, the Company borrowed $15.0 million
which was subsequently repaid in conjunction with the
Offering. Interest expense for the year ended January
31, 1997 for these borrowings was $621,000 reflecting a
weighted average interest rate of 8.2%. Interest
expense on the term loan facility repaid in connection
with the IPO and Recapitalization was $709,000 and
$3,485,000 for the years ended January 31, 1997 and
1996, respectively, reflecting a weighted average
interest rate of 10.0% and 10.6%, respectively.
GOLD CONSIGNMENT FACILITY
During the second quarter of 1996, the Company sold and
simultaneously consigned a total of 39,000 troy ounces
of gold for $15,295,000 under a gold consignment
facility which provides for the sale of a maximum of
60,000 troy ounces, or $20.0 million. Under the
agreement, the Company
19
<PAGE> 16
Marks Bros. Jewelers, Inc.
-------------------------------------------------------
agreed to pay consignment fees of 137.5 basis points
over the rate set by the bank based on the London
Interbank Bullion Rates payable monthly. A commitment
fee of 25 basis points per annum on the unused portion
of the gold consignment facility is payable monthly.
Interest rates and the commitment fee charged on the
unused facility float in a grid based on the Company's
quarterly financial performance. The consignment fees
total $447,000 and $445,000 for the years ended January
31, 1998 and 1997, respectively, at a weighted average
rate of 3.4% and 3.8%, respectively. On April 30, 2001,
the Company is required to repurchase 39,000 troy
ounces of gold under this agreement at the prevailing
gold rate in effect on that date, or the facility will
be renewed. Based on the gold rate as of January 31,
1998, the value of the gold consignment was $11.9
million.
SUBORDINATED NOTES
In conjunction with the IPO and Recapitalization, the
Company issued Senior Subordinated Notes totaling
$20,000,000 due in 2004. Series A Senior Subordinated
Notes due 2004 (the "Series A Notes") totaling
$12,000,000 bear interest at 12.15% per annum payable
in cash, with interest payments due quarterly. The
Series B Senior Subordinated Notes due 2004 (the
"Series B Notes") totaling $8,000,000 bear interest at
15% per annum increasing 1% per annum beginning May 1,
1998, payable in cash, with interest payments due
quarterly.
The Series A Notes subsequently were exchanged
for the Series C Notes which are identical in all
material respects to the Series A Notes, except that
the Series C Notes have been registered under the
Securities Act of 1933, as amended. The Series B Notes
subsequently were exchanged for the Series D Notes
which are identical in all material respects to the
Series B Notes, except that the Series D Notes have
been registered under the Securities Act of 1933, as
amended.
In conjunction with the Offering, the Series D
Notes were redeemed at a premium (see Note 10,
Extraordinary Items). In January 1997, $1,480,000 of
the Series C Notes were redeemed for a total of
$1,554,000. In conjunction with the Tender Offer in
January 1998, $9,880,000 of the Series C Notes were
redeemed at a premium of $1,087,000. Interest expense
was $1,185,000 and $757,000 for the years ended January
31, 1998 and 1997, respectively.
As of January 31, 1998 and 1997, the current
portion and noncurrent portion of long-term debt
consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
-------------------------------------------------------
<S> <C> <C>
Current portion of long-term debt:
Term loan $ 1,000 $ --
-------------------------------------------------------
Total $ 1,000 $ --
=======================================================
Long-term debt, net of current portion:
Term loan $10,426 $ --
Subordinated debt 640 10,520
-------------------------------------------------------
Total $11,066 $10,520
=======================================================
</TABLE>
Future scheduled maturities under the loan
agreements, excluding the revolver for January 31,
1998, are as follows:
<TABLE>
<CAPTION>
Subordinated
(in thousands) Term Notes Total
-------------------------------------------------------
<S> <C> <C> <C>
January 31, 1999 $ 1,000 $ -- $ 1,000
January 31, 2000 2,000 -- 2,000
January 31, 2001 3,000 -- 3,000
April 1, 2001 5,426 -- 5,426
April 30, 2004 -- 640 640
-------------------------------------------------------
TOTAL $11,426 $ 640 $12,066
=======================================================
</TABLE>
20
<PAGE> 17
Marks Bros. Jewelers, Inc.
-------------------------------------------------------
The carrying amount of the Company's borrowings
under the Credit Agreement and other long-term
borrowings approximate fair value.
DEFERRED FINANCING COSTS
In conjunction with the Recapitalization, the Company
incurred $2,503,000 in deferred financing costs
which are being amortized over the term of the
agreements. In conjunction with the Offering and Tender
Offer and subsequent repayment of debt, $358,000 and
$781,000 of these costs were included in extraordinary
loss on repayment of debt for the years ended January
31, 1998 and 1997, respectively (see Note 10,
Extraordinary Items). Amortization expense in the years
ended January 31, 1998 and 1997 was $308,000 and
$282,000, respectively.
- -------------------------------------------------------------------------------
12. INCOME TAXES The 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 January 31:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------
Temporary Tax Temporary Tax
(in thousands) Difference Effect Difference Effect
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Merchandise inventories $ ,878 $ 342 $ 868 $ 339
Property and equipment, net 1,185 462 1,131 441
Accrued rent 1,385 540 1,244 485
Other 2,346 915 2,531 987
Net operating loss carryforwards 2,164 844 11,296 4,405
AMT credit carryforward 175 175 691 691
--------------------------------------------------------------------------------
Total deferred tax asset 8,133 3,278 17,761 7,348
--------------------------------------------------------------------------------
Other liability 177 68 192 75
--------------------------------------------------------------------------------
Total deferred tax liability (177) (68) (192) (75)
--------------------------------------------------------------------------------
Net deferred tax asset $7,956 $3,210 $17,569 $7,273
================================================================================
</TABLE>
The net current and non-current components of
deferred income taxes recognized in the balance sheet
at January 31 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
-------------------------------------------------------
<S> <C> <C>
Net current assets $ 1,257 $ 1,326
Net non-current assets 1,953 5,947
-------------------------------------------------------
$ 3,210 $ 7,273
=======================================================
</TABLE>
Net operating loss carryforwards of $2,164,000 at
January 31, 1998, begin expiring in 2008. Section 382 of
the Internal Revenue Code of 1986 limits the use of net
operating losses and net operating loss carryforwards
following an ownership change. The restrictions under
Section 382, if applicable, would impose an annual
limitation on the use of the net operating loss
carryforwards in any taxable year ended after the
ownership change. Such limitations apply to the year
ended January 31, 1998. The AMT credit carryforwards at
January 31, 1998 of $175,000 have no expiration.
The income tax expense (benefit) for the years
ended January 31, consists of the following:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
-------------------------------------------------------
<S> <C> <C> <C>
Current expense $2,456 $ 1,381 $ --
Deferred tax expense (benefit) 4,063 9,744 (14,924)
-------------------------------------------------------
Total income tax
expense (benefit) $6,519 $11,125 $(14,924)
=======================================================
</TABLE>
21
<PAGE> 18
Marks Bros. Jewelers, Inc.
-------------------------------------------------------
Of the $6,519,000 income tax expense charged in
the year ended January 31, 1998, $7,180,000 has
been charged to the income statement as an income tax
expense, and $661,000 has been charged against the
extraordinary item as a tax benefit.
The provision for income taxes on income differs
from the statutory tax expense computed by applying
the federal corporate tax rate of 34% for the years
ended January 31 as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Taxes computed at statutory rate $5,683 $ 9,699 $ 696
Deferred tax asset valuation (benefit) allowance -- -- (15,104)
ESOP tax benefit -- -- (602)
Deferred state tax expense -- -- 47
State tax expense, net of federal benefit 743 1,457 --
Other 93 (31) 39
-----------------------------------------------------------------------------
Total income tax expense (benefit) $6,519 $11,125 $ (14,924)
=============================================================================
</TABLE>
- -------------------------------------------------------------------------------
13. COMMON STOCK Following are the number of shares issued for each of
the Company's classes of Common Stock as of January 31:
<TABLE>
<CAPTION>
Class B Class C Class D
Common Stock Common Stock Common Stock Common Stock
(Par value $.001) (par value $1.00) (par value $.001) (par value $.001)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 31, 1995 3,450,411 29,567 39,370 --
Issuance of stock awards 506,147 -- -- --
----------------------------------------------------------------------------------------------------------
Balance at January 31, 1996 3,956,558 29,567 39,370 --
Exercise of warrants 177,887 -- -- --
Conversion of Class C
Shares to Common 1,394,521 -- (39,370) --
Conversion of Class B
Shares to Common 918,270 (25,915) -- --
Cancellation of Shares
Received from ESOP (74,384) -- -- --
Cancellation of treasury
shares (1,396,785) (3,551) -- --
Initial public offering 3,269,500 -- -- --
Follow-on equity offering 1,265,000 -- -- --
Exercise of options 550,592 -- -- --
----------------------------------------------------------------------------------------------------------
Balance at January 31, 1997 10,061,159 101 -- --
----------------------------------------------------------------------------------------------------------
Exercise of options 87,877 -- -- --
----------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 10,149,036 101 --
==========================================================================================================
</TABLE>
The Company declared a stock split of
approximately 35.4 to 1 on April 1, 1996, and the
financial statements have been revised to give effect
for this split. Each share of Class B Common Stock and
Class D Common Stock are convertible into Common Stock
on a 35.4 for 1 basis. The Class C Common Stock has been
converted on a 35.4 for 1 basis to Common Stock. Each
share of Common Stock is entitled to one vote, and each
share of Class B Common Stock is entitled to the number
of votes equal to the number of shares of Common Stock
into which it is convertible.
- -------------------------------------------------------------------------------
14. EARNINGS PER The Company adopted SFAS No. 128, "Earnings Per Share,"
COMMON SHARE in 1997. This new accounting pronouncement eliminates
the measure of performance called "primary" earnings
per share and replaces it with "basic" earnings per
share. The essential difference between the two
calculations is that the dilutive effects of stock
options outstanding are not considered in the basic
computation. As a result,
22
<PAGE> 19
Marks Bros. Jewelers, Inc.
-------------------------------------------------------
basic earnings per share tend to be slightly higher
than primary earnings per share. The pronouncement also
changed the measure previously reported as "fully
diluted" earnings per share to "diluted" earnings per
share. All prior periods have been restated.
Basic earnings per share is computed by dividing
net earnings available to holders of common stock
by the weighted average number of shares of common stock
outstanding. Diluted earnings per share is computed
assuming the exercising of all stock options that are
profitable to the recipients. Under these assumptions,
the weighted average number of common shares outstanding
is increased accordingly.
The following table reconciles the numerators and
denominators of the basic and diluted earnings per
share computations:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EPS Numerator:
Income before extraordinary
item 11,230 11,230 7,343 7,343 16,972 16,972
EPS Denominator:
Average common shares
outstanding: 10,093 10,093 7,868 7,868 4,729 4,729
Effect of dilutive securities:
Stock options -- 132 -- 348 -- 127
------------------------------------------------------------------------------------------
Total shares 10,093 10,225 7,868 8,216 4,729 4,856
==========================================================================================
Earnings per share before
extraordinary item $1.11 $1.10 $0.93 $0.89 $3.59 $3.49
==========================================================================================
</TABLE>
- -------------------------------------------------------------------------------
15. EMPLOYEE STOCK In 1988, the Company established an Employee Stock
OWNERSHIP PLAN Ownership Plan (the "ESOP"), which is a noncontributory
plan established to acquire shares of the Company's
Class B Common Stock for the benefit, effectively, of
all employees.
In conjunction with completion of the IPO and the
Recapitalization, the Company restructured its ESOP.
The Company canceled the remaining unamortized portion
of the ESOP debt owed to the Company. In settlement of
the debt, the trustee transferred to the Company 8,206
shares of Class B Common Stock held in suspense by the
ESOP. The Company transferred to the ESOP 216,263 shares
of Common Stock in exchange for the ESOP's cancellation
of the accumulated dividend preference and other
preferences associated with the Class B Common Stock.
The ESOP also exchanged 17,719 shares of allocated Class
B Common Stock for 627,624 shares of Common Stock of the
Company. The restructuring resulted in the elimination
of the deferred ESOP compensation equity account.
During the years ended January 31, 1998, 1997 and
1996, the Company recognized compensation expense
of $0, $0 and $590,000, respectively, 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 the estimated
fair value of $4,310,000 for the year ended January 31,
1996 has been recorded as a reduction of additional
paid-in capital. As of January 31, 1997, all remaining
shares have been released to participants.
In the event of death, disability or retirement,
a participant (or beneficiary) in the ESOP may
receive his account balance as soon as practicable. If
the participant terminates employment with the Company
for any other reason, he may choose to receive his
account after the last day of the fifth year following
his termination date. During the year ended January 31,
1996, the Company repurchased shares from the ESOP
participants at a total purchase price of approximately
$63,000. As long as the Company's stock is publicly
traded, the Company is not required to repurchase shares
from ESOP participants.
23
<PAGE> 20
Marks Bros. Jewelers, Inc.
-------------------------------------------------------
16. EMPLOYEE Effective October 1, 1997, the Company established a
BENEFIT PLAN 401(k) Plan (the "Plan") for the benefit of
substantially all employees. Employees become eligible
to participate in the Plan after one year of
service which is defined as at least one year of
employment and 1,000 hours worked in that year. The
Company may make discretionary contributions to the
Plan. No such contributions have been made.
- -------------------------------------------------------------------------------
17. STOCK PLANS On September 28, 1995, the Company authorized the
equivalent of 693,098 options under the Incentive
Stock Option Plan (the "1995 Plan") to be granted to
certain members of the Company's management. Options for
the equivalent of 688,228 were issued at exercise prices
ranging from $0.90 to $0.99 per share. These prices are
greater than or equal to the fair market value at the
date of grant, as determined by an independent third
party valuation. The options allow the holders to
purchase Common Stock within a period ranging from five
years to five years and eight months, at a fixed price.
No expense was recorded in connection with these
options. On September 28, 1995, the Company granted the
equivalent of 506,148 shares of Restricted Stock to
certain members of the Company's management. During
fiscal 1995, the Company recognized $461,000 in
compensation expense relating to the issuance of these
shares. This amount represents the fair market value of
the shares at the grant date, as determined by an
independent third party valuation.
In April 1996, the Company approved the 1996
Long-Term Incentive Plan (the "1996 Plan"). Under the
1996 Plan, the Company may grant incentive stock options
("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, or
nonqualified stock options. In addition, the Company may
grant stock appreciation rights, bonus stock awards
which are vested upon grant, stock awards which may be
subject to a restriction period and specified
performance measures, and performance shares.
Performance shares are rights, contingent upon the
attainment of the performance measures within a
specified performance period, to receive one share of
Common Stock, which may be restricted, or the fair
market value of such performance share in cash. A total
of 771,189 shares of Common Stock have been reserved for
issuance under the 1996 Plan. Grants may be made under
the 1996 Plan during the ten years after its effective
date. Options granted under the 1996 Plan generally vest
in four equal annual installments and expire ten years
after the date of grant. Options and shares granted
under the plan are subject to forfeiture based on, among
other things, the nature and timing of the termination
of employment.
During the year ended January 31, 1997, the
Company canceled and reissued 57,176 options that had
been granted earlier in the year. These options were
granted at various dates at current market prices
ranging from $14.00 to $27.00, with a weighted-average
exercise price of $19.57. These options were reissued at
terms equal to the originally issued options with
reduced exercise prices ranging from $10.13 to $10.75
and a weighted-average exercise price of $10.53. The
reissued options were issued at exercise prices equal to
the current market price of the Company's stock at the
date of reissuance. No options which had been granted to
executive officers were reissued.
The Company approved the 1997 Long-Term Incentive
Plan (the "1997 Plan") on February 24, 1997 and the
stockholders adopted the 1997 Plan on June 5, 1997.
Under the 1997 Plan, the Company may grant ISOs or
nonqualified stock options. The 1997 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 400,000
shares of Common Stock have been reserved for issuance
under the 1997 Plan. Grants may be made under the 1997
Plan during the ten years after its effective date.
Options granted under the 1997 Plan generally vest in
four equal annual installments and expire ten years
after the date of grant.
24
<PAGE> 21
Marks Bros. Jewelers, Inc.
-------------------------------------------------------
In December 1997, the Company adopted the 1998
Non-Employee Director Stock Option Plan (the "1998
Plan"), effective February 1, 1998. Under the 1998 Plan,
non-employee directors may elect to receive all or a
designated amount of their directors' fee in the form of
stock options. A total of 25,000 shares have been
reserved for issuance under the 1998 Plan. Grants may be
made during the ten years after its effective date.
Options granted under the 1998 Plan vest at the end of
the quarter in which the date of grant occurs and expire
ten years after the date of grant. As of January 31,
1998, no options had been granted under the 1998 Plan.
Option activity for the years ended January 31,
1996, 1997 and 1998 was as follows:
<TABLE>
<CAPTION>
Weighted-Average Options
Shares Exercise Price Exercisable
--------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 31, 1995 -- -- --
--------------------------------------------------------------------------
Options granted 688,228 $ 0.94
Options canceled (7,758) 0.90
--------------------------------------------------------------------------
Balance at January 31, 1996 680,470 0.94 680,470
--------------------------------------------------------------------------
Options granted 761,716 14.30
Options exercised (550,602) 0.95
--------------------------------------------------------------------------
Balance at January 31, 1997 891,584 11.78 129,868
--------------------------------------------------------------------------
Options granted 189,150 11.55
Options exercised (87,877) 0.94
Options canceled (11,150) 9.68
--------------------------------------------------------------------------
BALANCE AT JANUARY 31, 1998 981,707 $12.73 232,424
==========================================================================
</TABLE>
For the years ended January 31, 1998, 1997, and
1996, respectively, the weighted-average fair value of
189,150, 761,716 and 335,247 options at the date of
grant with an exercise price equal to market price was
$6.27, $7.65 and $0.27, respectively. For the year ended
January 31, 1996, the weighted-average fair value of
352,971 options at the date of grant with an exercise
price equal to 110% of market price was $0.16. No
options were granted with an exercise price below market
price.
The following table summarizes the status of
outstanding stock options as of January 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------------------
Number of Weighted Average Weighted- Number of Weighted-
Range of Options Remaining Average Options Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.90 - $ 0.90 41,991 7.66 $ 0.90 41,991 $ 0.90
$10.13 - $13.13 246,626 9.03 11.12 19,296 10.47
$14.00 - $14.00 684,540 8.26 14.00 171,137 14.00
$15.75 - $15.75 8,550 9.75 15.75 -- --
---------------------------------------------------------------------------------------------
$ 0.90 - $15.75 981,707 8.44 $12.73 232,424 $11.34
=============================================================================================
</TABLE>
Had the Company elected to apply the provisions
of SFAS No. 123, "Accounting for Stock Based
Compensation" regarding recognition of compensation
expense to the extent of the calculated fair value of
stock options granted during the years ended January 31,
1998, 1997 and 1996, reported net income and earnings
per share would have been reduced as follows:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1998 1997 1996
-------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $10,195 $17,400 $16,972
Pro forma net income 8,782 16,495 16,888
Earnings per share, as reported 1.00 2.11 3.49
Pro forma earnings per share 0.86 2.01 3.48
</TABLE>
25
<PAGE> 22
Marks Bros. Jewelers, Inc.
-------------------------------------------------------
For purposes of pro forma net income and earnings
per share calculation in accordance with SFAS No. 123,
for each option granted under the 1995 Plan during
the year ended January 31, 1996, the fair value is
estimated as of the date of grant using the Minimum
Value method using a weighted-average assumption of 6.1%
risk-free interest rate and 5.5 year option life. For
each option granted during the years ended January 31,
1998 and 1997, the fair value is estimated using the
Black-Scholes option-pricing model. The assumptions used
are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 6.4% 6.7%
Dividend yield 0 0
Option life 6 YEARS 6 years
Volatility 47% 45%
</TABLE>
- -------------------------------------------------------------------------------
18. 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, 1998 are as follows:
<TABLE>
<CAPTION>
(in thousands) Years ending January 31, Amount
-------------------------------------------------
<S> <C>
1999 $12,174
2000 11,398
2001 10,930
2002 10,489
2003 9,886
thereafter 34,841
---------------------------------
$89,718
=================================
</TABLE>
Total rental expense for all operating leases is as
follows, for the years ended January 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------
<S> <C> <C> <C>
Rental expense:
Minimum $10,748 $ 8,947 $8,044
Rentals based on sales 1,746 1,523 1,135
-------------------------------------------------------
$12,494 $10,470 $9,179
=======================================================
</TABLE>
- -------------------------------------------------------------------------------
19. RELATED PARTY The Company purchased $0, $57,000, and $80,000 of
TRANSACTIONS inventory from MBM Company, Inc., an entity affiliated
with two of the Company's directors, during the years
ended January 31, 1998, 1997 and 1996, respectively.
Certain members of senior management are active
in a business that operates retail snack food
stores. This related entity reimburses the Company a set
amount each month for certain incidental expenses
including postage, delivery, telephone and other
administrative expenses. Such amounts were approximately
$4,000 during each of the years ended January 31, 1998,
1997 and 1996.
- -------------------------------------------------------------------------------
20. UNAUDITED The Company's results of operations fluctuate on a
QUARTERLY quarterly basis. The following table sets forth
RESULTS summary unaudited financial information of the Company
for each quarter in fiscal 1997 and fiscal 1996. In the
opinion of management, this quarterly information has
been prepared on a basis consistent with the Company's
audited financial statements appearing elsewhere in this
annual report, and reflects adjustments, consisting of
normal recurring adjustments, necessary for a fair
26
<PAGE> 23
Marks Bros. Jewelers, Inc.
-------------------------------------------------------
presentation of such unaudited quarterly results when
read in conjunction with the audited financial
statements and notes thereto.
<TABLE>
<CAPTION>
1997 QUARTERS ENDED
(in thousands, --------------------------------------------------------------------------
except per share amounts) APRIL 30, 1997 JULY 31, 1997 OCTOBER 31, 1997 JANUARY 31, 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $34,714 $40,515(1) $39,477 $74,192
Gross profit 13,651 16,297(1) 15,514 32,563
Income from operations 1,809 3,868(1) 2,504 14,035
Income before extraordinary item 540 1,760(1) 909 8,021
Net income 540 1,760(1) 909 6,986(1)
Diluted earnings per share:
Income before extraordinary item $ 0.05 $ 0.17 $ 0.09 $ 0.78(1)
===========================================================================================================
<CAPTION>
1996 QUARTERS ENDED
(in thousands, --------------------------------------------------------------------------
except per share amounts) APRIL 30, 1996 JULY 31, 1996 OCTOBER 31, 1996 JANUARY 31, 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $29,560 $34,906 $32,573 $58,435
Gross profit 11,626 14,214 13,064 25,436
Income from operations 1,608 3,847 2,310 11,266
Income (loss) before
extraordinary item (858) 1,406 457 6,338
Net income (loss) (858) 12,570(2) 457 5,231(2)
Diluted earnings per share:
Income (loss) before
extraordinary item $ (0.17) $ 0.16 $ 0.05 $ 0.63
===========================================================================================================
</TABLE>
(1) Reflects extraordinary loss on extinguishment of
debt in the fourth quarter of fiscal 1997 (See
Note 10,(1) Extraordinary Items).
(2) Reflects extraordinary gain on extinguishment of
debt in the second quarter of fiscal 1996 and
extraordinary (1) loss on extinguishment of debt
in the fourth quarter of fiscal 1996 (see Note 10,
Extraordinary Items).
27
<PAGE> 24
Marks Bros. Jewelers, Inc.
-------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
[COOPER & LYBRAND LOGO]
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, 1998 and 1997 and the related statements of
operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended
January 31, 1998. 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, 1998 and 1997 and the results of its
operations and its cash flows for each of the three
years in the period ended January 31, 1998 in
conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
----------------------------
Chicago, Illinois
March 12, 1998
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's stock began trading on the NASDAQ
National Market System under the symbol MBJI on May 2,
1996. At April 24, 1998, there were approximately 160
registered shareholders.
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------
High Low High Low
--------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $ 12.250 $ 9.000 $ -- $ --
Second Quarter 13.875 10.500 24.750 20.000
Third Quarter 18.125 10.875 28.250 20.000
Fourth Quarter 17.750 14.000 23.750 8.000
</TABLE>
The Company has not declared any dividends in
fiscal 1997 and 1996 and intends to retain its
earnings to finance future growth. Therefore, the
Company does not anticipate paying any cash dividends in
the foreseeable future. The declaration and payment of
dividends, if any, is subject to the discretion of the
Board of Directors of the Company and to certain
limitations under the General Corporation Law of the
State of Delaware. In addition, the Company's Credit
Agreement contains restrictions of the Company's ability
to pay dividends. The timing, amount and form of
dividends, if any, will depend, among other things, on
the Company's results of operations, financial
condition, cash requirements and other factors deemed
relevant by the Board of Directors.
28
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Form 10-K of Marks Bros.
Jewelers, Inc. and in the registration statements of Marks Bros. Jewelers, Inc.
on Form S-8 (File no. 333-50159, 333-47601, and 333-14895) of our reports dated
March 12, 1998, on our audits of the financial statements and financial
statement schedule of Marks Bros. Jewelers, Inc. as of January 31, 1998, and
1997, and for the years ended January 31, 1998, 1997 and 1996, which reports
are included in the Marks Bros. Jewelers, Inc. Annual Report on Form 10-K for
the fiscal year ended January 31, 1998.
/s/ Coopers & Lybrand L.L.P.
Chicago, Illinois
April 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,107
<ALLOWANCES> 638
<INVENTORY> 59,942
<CURRENT-ASSETS> 66,646
<PP&E> 34,916
<DEPRECIATION> 20,849
<TOTAL-ASSETS> 98,168
<CURRENT-LIABILITIES> 47,622
<BONDS> 107,871
0
0
<COMMON> 30
<OTHER-SE> (48,622)
<TOTAL-LIABILITY-AND-EQUITY> 98,168
<SALES> 29,560
<TOTAL-REVENUES> 29,560
<CGS> 17,934
<TOTAL-COSTS> 17,934
<OTHER-EXPENSES> 10,018
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,014
<INCOME-PRETAX> (1,406)
<INCOME-TAX> (548)
<INCOME-CONTINUING> (858)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (858)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JUL-31-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,126
<ALLOWANCES> 686
<INVENTORY> 46,542
<CURRENT-ASSETS> 51,278
<PP&E> 36,284
<DEPRECIATION> 21,627
<TOTAL-ASSETS> 75,300
<CURRENT-LIABILITIES> 36,248
<BONDS> 33,500
0
0
<COMMON> 8
<OTHER-SE> 4,387
<TOTAL-LIABILITY-AND-EQUITY> 4,395
<SALES> 64,466
<TOTAL-REVENUES> 64,466
<CGS> 38,626
<TOTAL-COSTS> 38,626
<OTHER-EXPENSES> 20,385
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,557
<INCOME-PRETAX> 898
<INCOME-TAX> 350
<INCOME-CONTINUING> 548
<DISCONTINUED> 0
<EXTRAORDINARY> 11,164
<CHANGES> 0
<NET-INCOME> 11,712
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.71
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> N/A
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,961
<ALLOWANCES> 623
<INVENTORY> 68,920
<CURRENT-ASSETS> 73,421
<PP&E> 37,509
<DEPRECIATION> 21,666
<TOTAL-ASSETS> 98,276
<CURRENT-LIABILITIES> 59,288
<BONDS> 33,000
0
0
<COMMON> 8
<OTHER-SE> 4,852
<TOTAL-LIABILITY-AND-EQUITY> 98,276
<SALES> 97,039
<TOTAL-REVENUES> 97,039
<CGS> 38,904
<TOTAL-COSTS> 38,904
<OTHER-EXPENSES> 31,139
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,118
<INCOME-PRETAX> 1,647
<INCOME-TAX> 642
<INCOME-CONTINUING> 1,005
<DISCONTINUED> 0
<EXTRAORDINARY> 11,164
<CHANGES> 0
<NET-INCOME> 12,169
<EPS-PRIMARY> 1.69
<EPS-DILUTED> 1.61
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,421
<ALLOWANCES> 656
<INVENTORY> 79,549
<CURRENT-ASSETS> 85,161
<PP&E> 41,225
<DEPRECIATION> 22,201
<TOTAL-ASSETS> 111,207
<CURRENT-LIABILITIES> 61,417
<BONDS> 10,520
0
0
<COMMON> 10
<OTHER-SE> 38,040
<TOTAL-LIABILITY-AND-EQUITY> 38,050
<SALES> 34,714
<TOTAL-REVENUES> 34,714
<CGS> 21,063
<TOTAL-COSTS> 21,063
<OTHER-EXPENSES> 11,842
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 923
<INCOME-PRETAX> 886
<INCOME-TAX> 346
<INCOME-CONTINUING> 540
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 540
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-31-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,091
<ALLOWANCES> 669
<INVENTORY> 82,164
<CURRENT-ASSETS> 88,272
<PP&E> 43,346
<DEPRECIATION> 22,165
<TOTAL-ASSETS> 116,402
<CURRENT-LIABILITIES> 64,795
<BONDS> 10,520
0
0
<COMMON> 10
<OTHER-SE> 39,808
<TOTAL-LIABILITY-AND-EQUITY> 39,818
<SALES> 75,229
<TOTAL-REVENUES> 75,229
<CGS> 45,281
<TOTAL-COSTS> 45,281
<OTHER-EXPENSES> 24,271
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,906
<INCOME-PRETAX> 3,771
<INCOME-TAX> 1,471
<INCOME-CONTINUING> 2,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,300
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,666
<ALLOWANCES> 783
<INVENTORY> 99,954
<CURRENT-ASSETS> 105,937
<PP&E> 44,832
<DEPRECIATION> 22,528
<TOTAL-ASSETS> 135,117
<CURRENT-LIABILITIES> 82,591
<BONDS> 10,520
0
0
<COMMON> 10
<OTHER-SE> 40,776
<TOTAL-LIABILITY-AND-EQUITY> 135,117
<SALES> 114,706
<TOTAL-REVENUES> 114,706
<CGS> 69,244
<TOTAL-COSTS> 69,244
<OTHER-EXPENSES> 37,281
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,920
<INCOME-PRETAX> 5,261
<INCOME-TAX> 2,052
<INCOME-CONTINUING> 3,209
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,209
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,395
<ALLOWANCES> 708
<INVENTORY> 64,482
<CURRENT-ASSETS> 70,133
<PP&E> 38,351
<DEPRECIATION> 22,046
<TOTAL-ASSETS> 93,533
<CURRENT-LIABILITIES> 44,309
<BONDS> 21,267
0
0
<COMMON> 10
<OTHER-SE> 37,497
<TOTAL-LIABILITY-AND-EQUITY> 93,533
<SALES> 155,474
<TOTAL-REVENUES> 155,474
<CGS> 91,134
<TOTAL-COSTS> 91,134
<OTHER-EXPENSES> 45,309
<LOSS-PROVISION> 1,037
<INTEREST-EXPENSE> 6,993
<INCOME-PRETAX> 12,038
<INCOME-TAX> 4,695
<INCOME-CONTINUING> 7,343
<DISCONTINUED> 0
<EXTRAORDINARY> 10,057
<CHANGES> 0
<NET-INCOME> 17,400
<EPS-PRIMARY> 2.21
<EPS-DILUTED> 2.12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,168
<ALLOWANCES> 693
<INVENTORY> 85,053
<CURRENT-ASSETS> 92,714
<PP&E> 46,179
<DEPRECIATION> 23,478
<TOTAL-ASSETS> 118,003
<CURRENT-LIABILITIES> 57,747
<BONDS> 28,907
0
0
<COMMON> 10
<OTHER-SE> 47,803
<TOTAL-LIABILITY-AND-EQUITY> 118,003
<SALES> 188,898
<TOTAL-REVENUES> 188,898
<CGS> 110,873
<TOTAL-COSTS> 110,873
<OTHER-EXPENSES> 55,809
<LOSS-PROVISION> 1,182
<INTEREST-EXPENSE> 3,806
<INCOME-PRETAX> 18,410
<INCOME-TAX> 7,180
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (1,035)
<CHANGES> 0
<NET-INCOME> 10,195
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.00
</TABLE>
