<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: April 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _____________________
Commission File number: 0-028176
Marks Bros. Jewelers, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-1433610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 No. Wacker, Chicago, IL. 60606
(Address of principal executive offices)
312/782-6800
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of the Registrant's common stock $.001 par value per share,
outstanding as of June 8, 1998 was 10,172,638 and the number of the
Registrant's Class B common stock $1.00 par value as of June 8, 1998 was
101.298.
<PAGE> 2
MARKS BROS. JEWELERS, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 1998
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three months ended April 30, 1998
and 1997 (unaudited)
Balance Sheets - April 30, 1998, January 31, 1998 and April 30, 1997
(unaudited)
Statements of Cash Flows for the three months ended April 30, 1998
and 1997 (unaudited)
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Marks Bros. Jewelers, Inc.
Statements of Operations
for the three months ended April 30, 1998 and 1997
(unaudited)
(in thousands, except for per share data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net sales $ 41,584 $ 34,714
Cost of sales (including buying and occupancy expenses) 25,445 21,063
-------- --------
Gross profit 16,139 13,651
Selling, general and administrative expenses 14,193 11,842
-------- --------
Income from operations 1,946 1,809
Interest expense 814 923
-------- --------
Income before income taxes 1,132 886
Income tax expense 430 346
-------- --------
Net income $ 702 $ 540
======== ========
Basic earnings per share:
Net income $ 0.07 $ 0.05
======== ========
Weighted average common shares and common share equivalents 10,170 10,066
======== ========
Diluted earnings per share:
Net income $ 0.07 $ 0.05
======== ========
Weighted average common shares and common share equivalents 10,405 10,190
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
Marks Bros. Jewelers, Inc.
Balance Sheets
(unaudited, in thousands)
<TABLE>
<CAPTION>
April 30, January 31, April 30,
1998 1998 1997
--------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Accounts receivable, net $ 1,375 $ 2,532 $ 1,331
Layaway receivables, net 2,604 2,636 2,090
Merchandise inventories 105,393 85,053 79,549
Other current assets 979 996 573
Deferred financing costs 252 240 292
Deferred income taxes, net 1,257 1,257 1,326
--------- --------- ---------
Total current assets 111,860 92,714 85,161
Property and equipment, net 24,605 22,701 19,024
Deferred financing costs 557 635 1,075
Deferred income tax, net 1,953 1,953 5,947
--------- --------- ---------
Total assets $ 138,975 $ 118,003 $ 111,207
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Outstanding checks, net $ 1,565 $ 9,608 $ 737
Revolver loan 26,300 16,841 23,455
Current portion of long-term debt 1,250 1,000 ---
Accounts payable 36,204 16,525 26,015
Accrued payroll 2,401 2,906 2,605
Income taxes 79 1,419 367
Other accrued expenses 10,620 9,448 8,238
--------- --------- ---------
Total current liabilities 78,419 57,747 61,417
Total long-term debt, net of current portion 10,566 11,066 10,520
Other long-term liabilities 1,462 1,387 1,220
--------- --------- ---------
Total liabilities 90,447 70,200 73,157
Commitments and contingencies
Stockholders' equity:
Common stock 10 10 10
Class B common stock --- --- ---
Class C common stock --- --- ---
Class D common stock --- --- ---
Additional paid-in capital 59,928 59,905 59,807
Accumulated deficit (11,410) (12,112) (21,767)
--------- --------- ---------
Total stockholders' equity, net 48,528 47,803 38,050
--------- --------- ---------
Total liabilities and stockholders' equity $ 138,975 $ 118,003 $ 111,207
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
Marks Bros. Jewelers, Inc.
Statements of Cash Flows
for the three months ended April 30, 1998 and 1997
(unaudited, in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 702 $ 540
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,080 874
Loss on disposition of assets 27 24
Changes in assets and liabilities:
Decrease in accounts receivable, net 1,157 23
(Increase) Decrease in layaway receivables, net 32 (49)
(Increase) in merchandise inventories (20,340) (15,067)
Decrease in other current assets 17 65
Increase in accounts payable 19,679 11,663
(Decrease) in accrued liabilities (598) (735)
--------- ---------
Net cash provided by (used in) operating activities 1,756 (2,662)
Cash flows from investing activities:
Capital expenditures (2,945) (3,544)
--------- ---------
Net cash used in investing activities (2,945) (3,544)
Cash flows from financing activities:
Borrowing on revolver loan 145,754 126,327
Repayment of revolver loan (136,295) (113,619)
Repayment of term loan (250) ---
Proceeds from exercise of stock options 23 3
(Decrease) in outstanding checks, net (8,043) (6,505)
--------- ---------
Net cash provided by financing activities 1,189 6,206
--------- ---------
Net change in cash and cash equivalents --- ---
Cash and cash equivalents at beginning of period --- ---
--------- ---------
Cash and cash equivalents at end of period $ --- $ ---
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
Marks Bros. Jewelers, Inc.
Notes to Financial Statements
1. Description of Operations
The financial statements of Marks Bros. Jewelers, Inc. (the "Company")
include the results of the Company's chain of specialty retail fine jewelry
stores. The Company operates exclusively in one business segment, specialty
retail jewelry. The Company has a national presence with 198 stores as of
April 30, 1998, located in 24 states, operating in regional or superregional
shopping malls.
2. Summary of Significant Accounting Policies
Basis for Presentation
The accompanying Balance Sheet as of January 31, 1998 was derived from the
audited financial statements for the year ended January 31, 1998. The
accompanying unaudited Balance Sheets as of April 30, 1998 and 1997 and the
Statements of Income and Cash Flows for the three months ended April 30, 1998
and 1997 have been prepared in accordance with generally accepted accounting
principles for interim financial information. The interim financial statements
reflect all adjustments (consisting only of normal recurring accruals) which
are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented. The interim financial statements
should be read in the context of the Financial Statements and footnotes thereto
included in the Marks Bros. Jewelers, Inc. Annual Report for the fiscal year
ended January 31, 1998. The Company operates on a fiscal year which ends on
January 31. References in the following notes to years and quarters are
references to fiscal years and fiscal quarters.
3. Accounts Receivable, Net
Accounts receivable is shown net of the allowance for doubtful accounts of
$690,000, $693,000, and $656,000 as of April 30, 1998, January 31, 1998 and
April 30, 1997, respectively.
4. Inventory
As of April 30, 1998, January 31, 1998 and April 30, 1997, merchandising
inventories consist of:
<TABLE>
<CAPTION>
April 30, 1998 January 31, 1998 April 30, 1997
(in thousands)
<S> <C> <C> <C>
Raw Materials $ 6,649 $ 3,504 $ 5,591
Finished Goods 98,744 81,549 73,958
-------------- ---------------- --------------
Inventory $105,393 $85,053 $79,549
============== ================ ==============
</TABLE>
6
<PAGE> 7
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 $1,713,000, $1,700,000, and
$1,708,000 as of April 30, 1998, January 31, 1998 and April 30, 1997,
respectively. As of April 30, 1998, January 31, 1998 and April 30, 1997,
consignment inventories held by the Company that are not included in the balance
sheets total $30,470,000, $32,530,000, and $16,493,000, respectively.
In addition, gold consignments of $15,295,000 are not included in the
Company's balance sheets as of April 30, 1998, January 31, 1998 and April 30,
1997.
5. Financing Arrangements
Effective November 7, 1997, the Company and its bank group amended the
Credit Agreement to provide for a total facility of $72.0 million through April
30, 2001. Interest rates and the commitment fee charged on the unused facility
float in a grid based upon the Company's quarterly financial performance.
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 measure, including fixed charge ratio and certain balance
sheet measures.
Revolver Loan
The Revolving Credit Facility is available up to a maximum of $40.0
million 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 125 basis points or the banks' prime
rate. Interest is payable monthly for prime borrowings and upon maturity for
Eurodollar borrowing. The interest expense for the quarter ended April 30,
1998 and 1997 was $414,000 and $336,000, respectively, reflecting a weighted
average interest rate of 7.3% and 8.2%, respectively.
Term Loans
The term loan facility is available up to a maximum of $11,426,000.
Interest rates for these borrowings were, at the Company's option, Eurodollar
rates plus 200.0 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 quarter ended April 30, 1998 for
these borrowings was $212,000 reflecting a weighted average interest rate of
7.8%.
7
<PAGE> 8
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 39,000 troy
ounces or $20,000,000. Under the agreement, the Company pays consignment fees
of 125 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. The
consignment fees totaled $102,000 and $119,000, respectively, for the three
months ended April 30, 1998 and 1997 at a weighted average rate of 3.5% in both
periods. 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.
Subordinated Notes
Series C Subordinated Notes due 2004 (the "Series C Notes") totaling
$640,000 aggregate principal amount outstanding as of April 30, 1998, bear
interest at 12.15% per annum payable in cash, with interest payments due
quarterly. Interest expense was $19,000 and $320,000 for the quarters ended
April 30, 1998 and 1997, respectively.
As of April 30, 1998, January 31, 1998, and April 30, 1997, respectively,
the current portion and noncurrent portion of long-term debt consisted of the
following:
<TABLE>
<CAPTION>
April 30, January 31, April 30,
1998 1998 1997
--------- ----------- ---------
(in thousands)
<S> <C> <C> <C>
Current portion of long-term debt
Term loan $ 1,250 $ 1,000 $ ---
--------- --------- ---------
Total $ 1,250 $ 1,000 $ ---
========= ========= =========
Long-term debt, net of current portion
Term loan $ 9,926 $ 10,426 $ ---
Subordinated debt 640 640 10,520
--------- --------- ---------
Total $ 10,566 $ 11,066 $ 10,520
========= ========= =========
</TABLE>
8
<PAGE> 9
6. Earnings Per Share
The following table reconciles the numerators and denominators of the
basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C> <C> <C>
EPS Numerator: Basic Diluted Basic Diluted
Net income $ 702 $ 702 $ 540 $ 540
EPS Denominator:
Average common shares
outstanding 10,170 10,170 10,066 10,190
Effect of dilutive securities:
Stock options --- 235 --- ---
------- ------- ------- -------
Total shares 10,170 10,405 10,066 10,190
======= ======= ======= =======
Earnings per share before
extraordinary item $ 0.07 $ 0.07 $ 0.05 $ 0.05
======= ======= ======= =======
</TABLE>
7. Subsequent Events
On May 8, 1998, the Company sold and simultaneously consigned an additional
20,000 troy ounces of gold for $6.0 million under a gold consignment facility,
for a total of 59,000 troy ounces of gold consigned under the facility. The
total facility provides for the sale of a maximum of 60,000 troy ounces, or
$20.0 million.
9
<PAGE> 10
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net sales for the first quarter of fiscal 1998 increased $6.9 million, or
19.8%, to $41.6 million. Comparable store sales increased $1.9 million, or
5.8%, in the first quarter of fiscal 1998. Sales from new stores contributed
$5.3 million to the overall sales increase. Increases in layaway balances
contributed to a higher sales increase of $0.2 million compared to the prior
period. These sales increases were partially offset by a decrease in sales of
$0.5 million due to store closings, together with stores closed for limited
periods for remodeling. The average number of units sold on a comparable store
basis decreased by approximately 0.6% in the first quarter of fiscal 1998,
while the average price per merchandise sale increased to $292 in fiscal 1998
from $274 in fiscal 1997. Comparable store sales increased in 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 store-based personnel, as well
as a solid retail environment. The Company opened 7 new stores in the first
quarter of fiscal 1998, increasing the number of stores opened to 198 as of
April 30, 1998 compared to 177 as of April 30, 1997.
Gross profit increased $2.5 million to $16.1 million in the first quarter
of fiscal 1998. Gross profit as a percentage of sales declined to 38.8% in the
first quarter of fiscal 1998 compared to 39.3% in the first quarter of fiscal
1997. This decline primarily resulted from a shift in sales away from the
higher margin gold category to the diamond and colored stone jewelry
categories, increased sales of higher priced items which have a slightly
narrower margin, slightly higher occupancy expense and slightly higher
shrinkage expense.
Selling, general and administrative expenses increased $2.4 million, or
19.9%, to $14.2 million in the first quarter of fiscal 1998 from $11.8 million
in the first quarter of fiscal 1997. New stores accounted for $1.5 million of
this increase. As a percentage of net sales, selling, general and
administrative expenses remained constant at 34.1% in the first quarter of
fiscal 1998 compared to the first quarter of fiscal 1997. The dollar increase
primarily relates to higher payroll expenses of $1.4 million and $0.5 million
in credit expense. Private label non-recourse credit sales, as a percentage of
net sales increased to 39.6% in the first quarter of fiscal 1998 from 37.5% in
the first quarter of fiscal 1997, primarily as a result of the usage of the
one-year no interest credit program.
Interest expense decreased $0.1 million to $0.8 million in the first
quarter of fiscal 1998 from $0.9 million in the first quarter of fiscal 1997.
The impact of higher average borrowings was offset by reduced interest rates
resulting from the Company's repurchase of debt under the tender offer which
was financed through the term loan facility in the fourth quarter of fiscal
1998.
10
<PAGE> 11
Income tax expense increased $0.1 million to $0.4 million in the first
quarter of 1998 from $0.3 million in the prior period, reflecting an effective
annual tax rate of 38.0% and 39.0%, respectively.
Net income increased to $0.7 million in the first quarter of fiscal 1998
compared to $0.5 million in the first quarter of fiscal 1997 as a result of the
factors discussed above.
Liquidity and Capital Resources
The Company's cash requirements consist principally of funding increases
in inventory at existing stores, capital expenditures and working capital
(primarily inventory) associated with the Company's new stores. The Company's
primary sources of liquidity have been cash flow from operations and bank
borrowings under the Company's revolver.
The Company's inventory levels and working capital requirements have
historically been highest in advance of the Christmas season. The Company has
funded these seasonal working capital needs through borrowings under the
Company's revolver and increases in trade payables and accrued expenses.
The Company's cash flow used in operations increased from $2.7 million in
the first quarter of 1997 to cash flow provided by operations of $1.8 million
in the first quarter of fiscal 1998. Higher income from operations together
with an increase in accounts payable were offset by an increase in merchandise
inventories. The increase in merchandise inventories primarily related to
inventory for new store openings, including anticipated store openings in the
second quarter of fiscal 1998 and completed new store openings in the first
quarter of fiscal 1998, in addition to increased inventory levels of primarily
diamond and colored stone jewelry categories. In the first quarter of 1998,
the primary sources of the Company's liquidity included a $9.5 million net
increase in the amount outstanding under the Company's revolver less a decrease
of $8.0 million in outstanding checks. The Company utilized cash in the first
quarter of 1998 primarily to fund capital expenditures of $2.9 million,
primarily related to the opening of 7 new stores in the first quarter of 1998.
Inflation
Management believes that inflation generally has not had a material effect
on results of its operations.
11
<PAGE> 12
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security-Holders
Item 5 - Other Information
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; (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.
Exhibit 27 Financial Data Schedule (SEC/EDGAR only)
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARKS BROS. JEWELERS, INC.
(Registrant)
Date: June 15, 1998 By: /s/ John R. Desjardins
________________________________
John R. Desjardins
Executive Vice President -
Finance and Administration
and Treasurer (principal
financial officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> (1,565)
<SECURITIES> 0
<RECEIVABLES> 3,979
<ALLOWANCES> 690
<INVENTORY> 105,393
<CURRENT-ASSETS> 111,860
<PP&E> 48,104
<DEPRECIATION> 23,605
<TOTAL-ASSETS> 138,975
<CURRENT-LIABILITIES> 78,419
<BONDS> 10,566
0
0
<COMMON> 10
<OTHER-SE> 48,518
<TOTAL-LIABILITY-AND-EQUITY> 138,975
<SALES> 41,584
<TOTAL-REVENUES> 41,584
<CGS> 25,445
<TOTAL-COSTS> 25,445
<OTHER-EXPENSES> 14,193
<LOSS-PROVISION> 247
<INTEREST-EXPENSE> 814
<INCOME-PRETAX> 1,132
<INCOME-TAX> 430
<INCOME-CONTINUING> 702
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 702
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
