<PAGE> 1
As filed with the Securities and Exchange Commission on August 2, 1996
REGISTRATION NO. 333-04043
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
AMENDMENT NO. 1
to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
__________________________
MARKS BROS. JEWELERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 5944 36-1433610
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification
No.)
155 N. WACKER DRIVE
CHICAGO, ILLINOIS 60606
(312) 782-6800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
JOHN R. DESJARDINS
EXECUTIVE VICE PRESIDENT, FINANCE
AND ADMINISTRATION AND TREASURER
MARKS BROS. JEWELERS, INC.
155 N. WACKER DRIVE
CHICAGO, ILLINOIS 60606
(312) 782-6800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
__________________________
Copies to:
JOHN J. SABL
SIDLEY & AUSTIN
ONE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60603
(312) 853-7567
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
<PAGE> 2
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
__________________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER NOTE OFFERING PRICE REGISTRATION FEE
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series C Senior
Subordinated Notes $12,000,000 N/A N/A $4,138.00 (1)
Due 2004.............
Series D Senior $ 8,000,000 N/A N/A $2,759.00 (1)
Subordinated Notes Due
2004.................
Series A Senior
Subordinated Notes Due
2004.................. $ 2,255,000 100% (2) $ 2,255,000 (2) $ 778.00
</TABLE>
(1) Previously filed
(2) Estimated solely for the purpose of determining the registration fee.
No consideration will be received by the Registrant for the sale of
these securities.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
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<PAGE> 3
MARKS BROS. JEWELERS, INC.
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY PART I OF FORM S-1
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND CAPTION LOCATION OR HEADING IN PROSPECTUS
--------------------------------------- ---------------------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus . . . . . . . Facing Page; Cross Reference Sheet; Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus . . . . . . . . . . . . . . . . . . . Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges . . . . . . . . . . . . . Prospectus Summary; Risk Factors, Selected Financial and Operating
Data
4. Use of Proceeds . . . . . . . . . . . . . . . . . . Prospectus Summary; The Recapitalization
5. Determination of Offering Price . . . . . . . . . . Information Concerning Selling Noteholder and Plan of Distribution
6. Dilution . . . . . . . . . . . . . . . . . . . . . . Not Applicable
7. Selling Security Holders . . . . . . . . . . . . . . Information Concerning Selling Noteholder and Plan of Distribution
8. Plan of Distribution . . . . . . . . . . . . . . . . Exchange Offer Distribution; Information Concerning Selling
Noteholder and Plan of Distribution
9. Description of Securities to be Registered. . . . . The New Notes and Resale Series A Notes
10. Interests of Named Experts and Counsel . . . . . . . Not Applicable
11. Information with Respect to the Registrant . . . . . Prospectus Summary; Risk Factors; The Recapitalization; The
Exchange Offer; Price Range of Common Stock; Capitalization;
Selected Historical Financial and Operating Data; Pro Forma
Financial Data; Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business; The New Notes; Other
Indebtedness; Management; Certain Transactions; Stock Ownership;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities . . . Not Applicable
</TABLE>
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<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROPSECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Subject to Completion, Dated August 2, 1996
PROSPECTUS
MARKS BROS. JEWELERS, INC.
EST. 1895
Offer to Exchange its
Series C Senior Subordinated Notes Due 2004
which have been registered under the Securities Act
for any and all of its outstanding
Series A Senior Subordinated Notes Due 2004 and
Series D Senior Subordinated Notes Due 2004
which have been registered under the Securities Act
for any and all of its outstanding
Series B Senior Subordinated Notes Due 2004
and Offer by Selling Noteholder
to sell Series A Senior Subordinated Notes due 2004
____________________
The Exchange Offer will expire at 5:00 p.m., New York
City time on __________ __, 1996, unless extended. Marks Bros. Jewelers,
Inc., a Delaware corporation (the "Company"), hereby offers (the "Exchange
Offer"), upon the terms and subject to the conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange (i) $1,000 principal amount of its Series
C Senior Subordinated Notes Due 2004 (the "Series C Notes"), which will have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement of which this Prospectus is a part,
for each $1,000 principal amount of its outstanding Series A Senior
Subordinated Notes Due 2004 (the "Series A Notes"), of which $12,000,000
aggregate principal amount is outstanding, and (ii) $1,000 principal amount of
its Series D Senior Subordinated Notes Due 2004 (the "Series D Notes," and,
together with the Series C Notes, the "New Notes" or the "Securities"), which
will have been registered under the Securities Act, pursuant to a Registration
Statement of which this Prospectus is a part, for each $1,000 principal amount
of its outstanding Series B Senior Subordinated Notes Due 2004 (the "Series B
Notes," and, together with the Series A Notes, the "Old Notes") of which
$8,000,000 aggregate principal amount is outstanding. The form and terms of
the Series C Notes are the same as the form and terms of the Series A Notes,
and the form and terms of the Series D Notes are the same as the form and terms
of the Series B Notes, except that the Series C Notes and the Series D Notes
will have been registered under the Securities Act. The Series C Notes will
evidence the same debt as the Series A Notes (which they replace) and the
Series D Notes will evidence the same debt as the Series B Notes (which they
replace) and, in each case, will be issued under, and entitled to the benefits
of, the Indenture governing the Series A Notes and the Series B Notes dated as
of April 15, 1996, as supplemented or amended (the "Indenture"). All references
herein to the "Notes" shall be references to the Old Notes and/or the New Notes,
whichever was, is or will be outstanding in the particular context. See "The
Exchange Offer" and "The New Notes."
The Company will accept for exchange any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on __________, 1996, unless extended by the Company in its sole
discretion (the "Expiration Date"). Tenders of Old Notes may be withdrawn at
any time prior to the Expiration Date. The Exchange Offer is subject to
certain customary conditions. See "The Exchange Offer." Old Notes may be
tendered only in integral multiples of $1,000 principal amount at maturity.
Interest on the Series C Notes is payable quarterly on
January 31, April 30, July 31 and October 31 in each year, commencing July 31,
1996, and will accrue at the rate of 12.15% per annum until maturity or earlier
redemption. The Series C Notes mature on October 31, 2004. Quarterly
installments of principal of the Series C Notes in the amount of $855,000 will
be mandatorily prepayable, commencing July 31, 2001, through operation of a
mandatory sinking fund. See "The New Notes--Mandatory Redemption." The Series
C Notes are redeemable, in whole or in part, at the option of the Company, for
cash at any time on or after July 31, 2001 at the redemption prices set forth
herein, plus accrued and unpaid interest to the date of redemption.
Interest on the Series D Notes is payable quarterly on
January 31, April 30, July 31 and October 31 in each year, commencing July 31,
1996, and will accrue at the rate of (a) 15% per annum, payable in cash, plus,
for subsequent periods commencing May 1, 1998, (b) 1% per annum (increasing in
1% increments per each subsequent year commencing May 1, 1999), payable, at the
option of the Company, in cash or by delivery of additional Series D Notes, in
each case until maturity or earlier redemption. The Series D Notes mature on
October 31, 2004. Quarterly installments of principal of the Series D Notes in
the amount of not less than $571,000 will be mandatorily prepayable, commencing
July 31, 2001, through operation of a mandatory sinking fund. See "The New
Notes -- Mandatory Redemption." The Series D Notes are redeemable, in whole or
in part, at the option of the Company, for cash at any time at the redemption
prices set forth herein, plus accrued and unpaid interest to the date of
redemption.
<PAGE> 5
The Series C Notes and the Series D Notes will be
unsecured general obligations of the Company and will be subordinated
to all existing and future Senior Indebtedness (as defined) of the Company. As
of April 30, 1996, on a pro forma basis after giving effect to the
Recapitalization (as defined), the Company had outstanding Senior Indebtedness
in the principal amount of approximately $19,519,000.
The New Notes will be issued in fully-registered
book-entry form. Ownership interests in the New Notes will be shown on, and
transfers thereof will be effected only through, records maintained by DTC (as
defined), and its participants. Purchases of the New Notes under the DTC
system must be made by or through DTC participants, which will receive a credit
for the New Notes on DTC's records. Owners of beneficial interests in the New
Notes will be entitled to physical delivery of the New Notes in certificated
form equal in principal amount to their respective beneficial interests only
under the circumstances described under the caption "The New Notes--Book-Entry
Only System."
There has not previously been any public market for the
Notes. The Company does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active market for the New Notes will
develop. See "Risk Factors--Lack of Public Market." The Company has agreed
to pay the expenses of the Exchange Offer.
Any broker or dealer participating in the Exchange Offer
will be required to acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of the New
Notes received by it in the Exchange Offer. Only brokers or dealers who hold
Old Notes that were acquired for their own accounts as a result of
market-making activities or other trading activities (other than Old Notes
acquired directly from the Company), may use this Prospectus to satisfy the
prospectus delivery requirements of the Securities Act. The delivery of this
Prospectus by such a broker or dealer shall not constitute an admission that
such a broker or dealer is an "underwriter" under the Securities Act. See
"Plan of Distribution."
This Prospectus also relates to $2,255,000 aggregate principal amount
of the Company's Series A Notes (the "Resale Series A Notes") to be sold
hereunder by a Selling Noteholder. The Resale Series A Notes to be sold by the
Selling Noteholder may be sold from time to time by the Selling Noteholder
directly to one or more purchasers, at prices and on terms then prevailing or
at prices related to the then-current market price or in negotiated
transactions, or through brokers and/or dealers engaged by the Selling
Noteholders. See "Information Concerning Selling Noteholder and Plan
of Distribution."
SEE "RISK FACTORS" AT PAGE 9 FOR A DESCRIPTION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER
AND AN INVESTMENT IN THE NEW NOTES OFFERED HEREBY.
_____________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is __________ __, 1996
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<PAGE> 6
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING
MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED
IN THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THE EXCHANGE
OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS FOR EXCHANGE
FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR
THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE
SKY LAWS OF SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
Until __________ __, 1996 (90 days after commencement of
this offering), all dealers effecting transactions in the New Notes, whether or
not participating in this offering, may be required to deliver a Prospectus.
Except as provided below, the New Notes will be
available initially only in book-entry form. The Company expects that, except
as provided below, the New Notes sold pursuant hereto will be issued in the
form of one fully-registered Series C Note in the aggregate issuance amount and
one fully-registered Series D Note in the aggregate issuance amount (the
"Global Notes"). The Global Notes will be deposited with, or on behalf of, The
Depository Trust Company (the "Depository" or "DTC") and registered in its name
or in the name of Cede & Co., its nominee. Beneficial interests in the Global
Notes representing the New Notes will be shown on, and transfers thereof will
be effected only through, records maintained by DTC and its participants.
After the initial issuance of the Global Notes, New Notes in certificated form
will be issued in exchange for the Global Notes only as set forth in the
Indenture. See "The New Notes--Book-Entry Only System."
____________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
The Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Price Range Of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Selected Historical Financial And Operating Data . . . . . . . . . . . . . . . . . . . . . . . 25
Pro Forma Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Management's Discussion And Analysis Of Financial Condition And Results Of Operations . . . . . 29
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
The Recapitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
The New Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Stock Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Exchange Offer Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Information Concerning Selling Noteholder and Plan Of Distribution . . . . . . . . . . . . . . 80
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Index To Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
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<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Certain terms used throughout this
Prospectus have the meanings set forth in "The New Notes--Certain Definitions."
The Company s fiscal year ends on January 31. References to fiscal years by
date refer to the fiscal year beginning February 1 of that calendar year; for
example, "fiscal 1995" began on February 1, 1995 and ended on January 31,
1996.
THE COMPANY
Marks Bros. Jewelers, Inc. (the "Company") is a leading, national
specialty retailer of fine jewelry (based on number of stores, according to the
May 16, 1995 issue of National Jeweler), operating 151 stores in 24 states at
April 30, 1996. Founded in 1895, the Company operates stores in regional and
super-regional shopping malls under the names Whitehall Co. Jewellers(R) (117
stores), Lundstrom Jewelers(R) (30 stores) and Marks Bros. Jewelers(TM) (4
stores)(in each case, as of April 30, 1996). The Company offers at competitive
prices an in-depth selection of fine jewelry in the following key categories:
diamond, gold, precious and semi-precious jewelry. The Company's target
customers are middle to upper middle income women over 25 years old. Central
to the Company's growth in operating profits and its high store productivity
are its small but flexible store format, the absence of recourse credit risk,
its strong sales culture, and its operating efficiencies at both the store and
corporate levels.
From fiscal 1991 to fiscal 1995, the Company's net sales grew at a
compound annual rate of 14.3%, from $76.7 million to $131.0 million, while
income from operations grew at a compound annual rate of 30.2%, from $5.4
million to $15.4 million. The Company's growth during this period is
attributable to (i) new store openings, which resulted in an increase in the
number of stores from 111 to 146 stores, (ii) higher store productivity, as
average annual sales per store increased from $699,000 to $936,000, and (iii)
improved operating efficiencies, which resulted in an increase in the Company's
operating margin from 7.0% to 11.8%. Although the Company recorded income from
operations in each of the last five fiscal years, it recognized net losses in
fiscal 1991, 1992 and 1993, primarily due to high interest expense. In fiscal
1995, the Company s operating return on store investment for new stores opened
during the prior fiscal year was approximately 28%. Virtually all of the
Company's stores are profitable on a store operating basis, and almost all of
the Company's new stores are profitable on a store operating basis for their
first year of operation.
The Company believes it has significant opportunities to increase
sales and profitability through an increased number of planned store openings
(including 18 in fiscal 1996 and 23 in fiscal 1997), the implementation of
several new sales and merchandising programs designed to continue comparable
store sales growth, and continued adherence to its strict operating standards
regarding performance of sales personnel, store profitability and cost control.
The cost of opening a new store on average is approximately $545,000, including
inventory, capital expenditures and pre-opening expenses.
The key elements of the Company's multi-faceted operating and growth
strategies are as follows:
OPERATING STRATEGIES
- Small, Flexible Store Format in Regional Malls. The Company
believes it has a competitive advantage in obtaining high
traffic, "center court" locations in desirable regional and
super-regional malls due principally to (i) its small average
store size of approximately 775 square feet, which, while
considerably smaller than the average store size of most of
the Company's competitors, generates comparable sales volumes,
(ii) its ability to adapt its store design to various sizes
and configurations, and (iii) its high average annual sales
per square foot (approximately $1,200 in fiscal 1995). Over
two-thirds of the Company's stores are located in high
traffic, "center court" locations. The stores' small,
flexible format (which lowers the Company's fixed occupancy
costs) and high productivity are desirable to mall owners.
- Absence of Recourse Credit Risk. The Company operates based
upon a "no credit risk" policy. When purchasing on credit,
customers must use their personal credit cards, the Company's
private label credit card (which is available through a third
party and is non-recourse to the Company), or other
non-recourse third party credit arrangements. The Company's
strict credit policy eliminates its credit risk associated
with the customer's failure to pay. This policy also
distinguishes the Company from most of its
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<PAGE> 8
competitors, which not only bear such credit risk, but also
rely on finance income in addition to merchandise sales.
- Motivated, Sales-Oriented Store Personnel. The primary
responsibility of store sales personnel is selling to
customers. Most non-sales activities are largely centralized.
Compensation and bonus programs reinforce sales and margin
goals on a daily, weekly and monthly basis. The Company
continually seeks to enhance the selling skills of its sales
associates through recruitment of experienced sales personnel
and extensive, ongoing training programs.
- Differentiated Merchandising. The Company offers an in-depth
selection of merchandise in several key categories of fine
jewelry: diamond, gold, precious and semi-precious jewelry.
This "key category" focus is oriented to the Company's target
customer, the middle to upper middle income woman. Unlike many
of its competitors, the Company carries only a limited
selection of watches and virtually no costume jewelry or gift
merchandise.
- Strict Operating Controls. The Company emphasizes high
performance standards, backed by strong incentive programs.
Adherence to these standards in the areas of store site
selection, sales targets, store profitability and cost control
is fundamental to the Company's success.
GROWTH STRATEGIES
- Accelerated New Store Openings. The Company has opened 42 new
stores (net of closings) since the beginning of fiscal 1991,
including 15 in fiscal 1995 and five during February,
March and April of fiscal 1996. The Company expects the
Recapitalization (defined below) and the Offering of Notes
made hereby to allow the Company to accelerate the pace of its
new store openings. The Company currently plans to open 18
new stores in fiscal 1996 (five of which had been opened as
of April 30, 1996) and 23 new stores in fiscal 1997. The
Company seeks to open additional stores in existing markets
where the Company believes it can obtain greater market
penetration and to enter new geographic markets where it can
"cluster" stores.
- Comparable Store Sales Increases. The Company has achieved
comparable store sales increases of 7.6% and 11.0% in fiscal
1994 and fiscal 1995, respectively. The Company seeks to
achieve comparable store sales increases by (i) expanding the
availability of non-recourse credit through its new "First
Time Buyers" program, (ii) continuing to increase merchandise
offerings in selected categories (especially higher priced
merchandise), (iii) continuing the implementation of its
return/exchange policy, (iv) using enhanced information
systems to better monitor merchandise selection and provide
important data on key customers, and (v) expanding its
"customer friendly" merchandise displays to enhance the
shopping experience and to create a more comfortable
environment in which to encourage impulse purchases.
Marks Bros. Jewelers, Inc. was incorporated in Delaware in
1947 as the successor to a business dating back to 1895. Its principal place
of business is located at 155 North Wacker Drive, Chicago, Illinois 60606, and
its telephone number is (312) 782-6800.
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange
Offer. The Old Notes were issued as part of the Company's recently completed
Recapitalization, which included a restructuring of its outstanding
indebtedness, intended to reduce the amount of the Company's debt and the
related interest expense and to provide the Company with greater financial
flexibility for operations and to support its store expansion strategy. The
Recapitalization was completed on May 7, 1996. The Company utilized the funds
generated by the Recapitalization principally to retire all of the Company's
senior and subordinated indebtedness then outstanding. See "Use of Proceeds"
and "The Recapitalization."
The Company will not receive any proceeds from the sale of the Resale
Series A Notes by the Selling Noteholder. See "Information Concerning Selling
Noteholder and Plan of Distribution."
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<PAGE> 9
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Agreement to Exchange Securities. . The Placement Agent Agreement, dated May 2, 1996, between the
Company and William Blair & Company, L.L.C., as placement agent,
relating to the Series A Notes (the "Placement Agreement"), and the
Note Agreement, dated as of April 15, 1996, between the Company
and the Purchasers thereunder, relating to the Series B Notes (the
"Note Agreement"), grant the holders of Old Notes certain exchange
and registration rights. See "The Exchange Offer -- Termination of
Certain Rights." This Exchange Offer is intended to satisfy such
rights, which terminate upon the Consummation (as defined) of the
Exchange Offer. Therefore, the holders of New Notes are not
entitled to any exchange or registration rights with respect to the
New Notes.
The Exchange Offer . . . . . . . . $1,000 principal amount of Series C Notes in exchange for each
$1,000 principal amount of Series A Notes, and $1,000 principal
amount of Series D Notes in exchange for each $1,000 principal
amount of Series B Notes. As of the date hereof, $12,000,000
aggregate principal amount of Series A Notes are outstanding and
$8,000,000 aggregate principal amount of Series B Notes are
outstanding. The Company will issue the New Notes to holders on
the earliest practicable date following the Expiration Date.
Based on an interpretation by the staff of the Securities and
Exchange Commission (the "Commission") set forth in no-action
letters issued to third parties, the Company believes that New
Notes issued pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold and otherwise transferred
by any holder or beneficial owner thereof (other than any such
holder or beneficial owner which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act or a
"broker" or "dealer" registered under the Securities and Exchange
Act of 1934, as amended (the "Exchange Act") without compliance
with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the
ordinary course of such holder's or beneficial owner's business and
that such holder or beneficial owner has no arrangement or
understanding with any person to participate in the distribution of
such New Notes. See "The Exchange Offer -- Resales of the New
Notes."
Expiration Date . . . . . . . . . . 5:00 p.m., New York City time, on __________ __, 1996, unless the
Exchange Offer is extended by the Company in its sole discretion,
in which case the term "Expiration Date" means the latest date and
time to which the Exchange Offer is extended.
Condition to the Exchange Offer . . The Exchange Offer is subject to certain customary conditions,
which may be waived by the Company. See "The Exchange Offer --
Conditions of the Exchange Offer."
Amendment to Indenture . . . . . . By executing the Letter of Transmittal, each holder of Old Notes
will consent to a supplemental indenture that will amend the
Indenture to provide, among other things, that the Series C Notes
and the Series D Notes will be issued under, and entitled to the
benefits of, the Indenture governing the Series A Notes and the
Series B Notes. See "Exchange Offer--Conditions of the Exchange
Offer."
</TABLE>
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<PAGE> 10
<TABLE>
<S> <C>
Procedures for Tendering Old Each holder of Old Notes wishing to accept the Exchange Offer must
Notes . . . . . . . . . . . . . . complete, sign and date the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of Transmittal,
or such facsimile, together with the Old Notes and any other
required documentation to the Exchange Agent (as defined) at the
address set forth herein. By executing the Letter of Transmittal,
each holder will represent to the Company that, among other things,
the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving
such New Notes, whether or not such person is the holder, that
neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of
such New Notes and that neither the holder nor any such other
person is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company. See "The Exchange Offer --
Procedures for Tendering."
Brokers or Dealers . . . . . . . . Any broker or dealer participating in the Exchange Offer will be
required to acknowledge that it will deliver a prospectus in
connection with any resales of the New Notes received by it in the
Exchange Offer. A broker or dealer registered under the Exchange
Act that acquired Old Notes for its own account pursuant to its
market-making or other trading activities (other than Old Notes
acquired directly from the Company) may participate in the Exchange
Offer but may be deemed an underwriter under the Securities Act
and, therefore, must deliver a prospectus relating to the New Notes
in connection with any resales by it of New Notes acquired by it
for its own account in the Exchange Offer; only such brokers or
dealers may use this Prospectus in connection with the resales of
the New Notes. See "Plan of Distribution."
Special Procedures for Any beneficial owner whose Old Notes are registered in the name of
Beneficial Owners . . . . . . . a broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact such registered holder
promptly and instruct such registered holder to tender on such
beneficial owner's behalf. See "The Exchange Offer -- Procedures
for Tendering."
Guaranteed Delivery Holders of Old Notes who wish to tender their Old Notes and whose
Procedures . . . . . . . . . . . Old Notes are not immediately available or who cannot deliver their
Old Notes, the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the Exchange Agent prior
to the Expiration Date, must tender their Old Notes according to
the guaranteed delivery procedures set forth herein. See "Exchange
Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights . . . . . . . . . Tenders may be withdrawn at any time prior to the Expiration Date.
Acceptance of Old Notes and The Company will accept for exchange any and all Old Notes which
Delivery of New Notes . . . . . . are properly tendered in the Exchange Offer prior to the Expiration
Date. The New Notes issued pursuant to the Exchange Offer will be
delivered on the earliest practicable date following the Expiration
Date. See "The Exchange Offer -- Terms of the Exchange Offer."
Certain Tax Considerations . . . . For a discussion of certain federal income tax consequences of the
exchange of Old Notes, see "Risk Factors--Certain Tax Consequences" and
"Certain Federal Income Tax Consequences."
Exchange Agent . . . . . . . . . . Norwest Bank Minnesota, National Association is serving as exchange agent
(the "Exchange Agent") in connection with the Exchange Offer.
</TABLE>
RESALE OF SERIES A NOTES
This Prospectus also relates to $2,255,000 aggregate principal amount
of the Company's Series A Notes (the "Resale Series A Notes") to be sold
hereunder by a Selling Noteholder. The Resale Series A Notes may be sold from
time to time by the Selling Noteholder directly to one or more
purchasers, at prices and on terms then prevailing or at prices related to the
then-current market price or in negotiated transactions, or through brokers
and/or dealers engaged by the Selling Noteholder. See "Information Concerning
Selling Noteholder and Plan of Distribution." Purchasers of the Resale Series A
Notes may exchange such Resale Series A Notes for Series C Notes pursuant to
the Exchange Offer made hereby, if tender of such Resale Series A Notes for
Series C Notes is made on or before the Expiration Date. See "The Exchange
Offer."
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<PAGE> 11
SUMMARY OF TERMS OF THE NEW NOTES AND RESALE SERIES A NOTES
The Exchange Offer relates to $12,000,000 aggregate principal
amount of Series A Notes and $8,000,000 aggregate amount of Series B Notes.
This Prospectus also relates to $2,255,000 aggregate principal amount of the
Company's Series A Notes (the "Resale Series A Notes") to be sold hereunder by
a Selling Noteholder. The form and terms of the Series C Notes are the same in
all material respects as the Series A Notes and the form and terms of the
Series D Notes are the same in all material respects as the Series B Notes,
except that the Series C Notes and the Series D Notes will have been registered
under the Securities Act and will not bear legends restricting their transfer.
The Series C Notes will evidence the same debt as the Series A Notes (which
they replace) and the Series D Notes will evidence the same debt as the Series
B Notes (which they replace). The Series C Notes and the Series D Notes will
be issued under, and entitled to the benefits of, the Indenture
governing the Series A Notes and the Series B Notes. All references in this
summary to "Series C Notes" shall be deemed to also mean and include the
$2,255,000 aggregate principal amount of Resale Series A Notes offered hereby.
See "The Exchange Offer--Conditions of the Exchange Offer."
<TABLE>
<S> <C>
Maturity Date . . . . . . . . . . .
Series C Notes . . . . . . . . October 31, 2004
Series D Notes . . . . . . . . October 31, 2004
Interest Rate . . . . . . . . . . .
Series C Notes . . . . . . . . 12.15% per annum, payable in cash
Series D Notes . . . . . . . . 15% per annum, payable in cash, plus, for subsequent periods
commencing May 1, 1998, 1% per annum (increasing in 1% increments
per each subsequent year commencing May 1, 1999), payable, at the
option of the Company, in cash or by delivery of additional Series
D Notes.
Interest Payment Dates . . . . . . January 31, April 30, July 31 and October 31 of each year,
commencing July 31, 1996.
Mandatory Redemption . . . . . . .
Series C Notes . . . . . . . . Quarterly installments of principal of the Series C Notes in the
amount of $855,000 will be mandatorily prepayable, commencing July
31, 2001, through operation of a mandatory sinking fund. See "The
New Notes--Mandatory Redemption."
Series D Notes . . . . . . . . Quarterly installments of principal of the Series D Notes in the
amount of not less than $571,000 will be mandatorily prepayable,
commencing July 31, 2001, through operation of a mandatory sinking
fund. See "The New Notes--Mandatory Redemption."
Optional Redemption . . . . . . . .
Series C Notes . . . . . . . . The Series C Notes will be redeemable at the option of the Company,
in whole or in part, at any time on or after July 31, 2001 at the
redemption prices set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption. See "The New
Notes--Optional Redemption."
Series D Notes . . . . . . . . The Series D Notes will be redeemable at the option of the Company,
in whole or in part, at any time, at the redemption prices set
forth herein, plus accrued and unpaid interest, if any, to the date
of redemption. See "The New Notes--Optional Redemption."
</TABLE>
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<PAGE> 12
<TABLE>
<S> <C>
Ranking . . . . . . . . . . . . . . The New Notes will be unsecured senior subordinated obligations of
the Company, subordinated to all existing and future Senior
Indebtedness, which includes borrowings under the Bank Credit
Agreement. The New Notes will rank pari passu with any existing
and future senior subordinated indebtedness of the Company and will
rank senior to all other Subordinated Indebtedness (as defined).
As of April 30, 1996, on a pro forma basis after giving effect
to the Recapitalization, the aggregate principal amount of Senior
Indebtedness outstanding of the Company was approximately
$19,519,000. See "The New Notes--Subordination."
Restrictive Covenants . . . . . . . The Indenture pursuant to which the New Notes will be issued
contains certain covenants, including, but not limited to,
covenants with respect to the following matters: (i) limitation on
indebtedness, (ii) limitation on dividends and other restricted
payments, (iii) limitation on redemption of capital stock of the
Company and of certain subordinated obligations of the Company,
(iv) limitation on liens, (v) restriction on transfer of assets,
(vi) certain financial covenants, (vii) limitation on issuance and
sale of capital stock by restricted subsidiaries, (viii) limitation
on transactions with affiliates, (ix) limitation on dividend and
other payment restrictions affecting restricted subsidiaries,
(x) limitation on guarantees by restricted subsidiaries,
(xi) limitation on certain other subordinated indebtedness and
(xii) restrictions on mergers, consolidation and the transfer of
all or substantially all of the assets of the Company to another
person. See "The New Notes--Certain Covenants."
</TABLE>
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<PAGE> 13
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------------------------- PRO FORMA
1992 1993 1994 1995 1996 1996(1)
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 76,749 $ 88,141 $ 91,106 $106,683 $131,022 $ 131,022
Gross profit............................. 31,143 36,035 36,595 42,460 53,300 53,300
Income from operations................... 5,362 8,064 8,255 11,712 15,413 15,413
Interest expense......................... 9,397 7,821 8,920 10,594 12,314 5,798
ESOP compensation........................ -- 3,800 511 547 590 --
Income (loss) from continuing operations
before income tax...................... (17,157) (3,557) (1,176) 571 2,048 9,154
Net income (loss)(2)(3)(4)(5)............ $(24,454) $ (3,557) $ (7,002) $ 571 $ 16,972 $ 21,235
SUPPLEMENTAL PRO FORMA STATEMENT OF
OPERATIONS DATA(5)(6):
Net income............................... $ 5,492
Net income per share..................... $ 0.62
Weighted average number of common shares
and common share equivalents
outstanding(7)......................... 8,892,305
SELECTED OPERATING DATA:
Ratio of Earnings to Fixed Charges(8).... (.50) .64 .90 1.04 1.13 2.03
Stores open at end of period............. 111 113 122 131 146
Average net sales per store(9)........... $699,000 $784,000 $791,000 $836,000 $936,000
Average net sales per gross square
foot(10)............................... $ 883 $ 1,008 $ 1,013 $ 1,068 $ 1,187
Comparable store sales increase
(decrease)(11)......................... 0.4% 12.5% (0.5)% 7.6% 11.0%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED APRIL 30, 1996 (13) ENDED APRIL 30, 1996 (13)
PRO FORMA (1)
------------- ----------- --------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 29,560 $ 29,560
Gross profit............................. 11,626 11,626
Income from operations................... 1,608 1,608
Interest expense......................... 3,014 1,397
ESOP compensation........................ -- --
Income (loss) from continuing operations
before income tax...................... (1,406) 211
Net income (loss)(2)(3)(4)(5)............ $ (858) $ 129
Net (loss) earnings per share............ (0.17) 0.01
Total weighted common shares and common
share equivalents...................... 5,080,787 8,892,305
SUPPLEMENTAL PRO FORMA STATEMENT OF
OPERATIONS DATA(5)(6):
Net income...............................
Net income per share.....................
Weighted average number of common shares
and common share equivalents
outstanding(7).........................
SELECTED OPERATING DATA:
Ratio of Earnings to Fixed Charges(8).... 0.63 1.10
Stores open at end of period.............
Average net sales per store(9)...........
Average net sales per gross square
foot(10)...............................
Comparable store sales increase
(decrease)(11)......................... %
</TABLE>
<TABLE>
<CAPTION>
JANUARY APRIL 30, 1996
31, 1996 ---------------------------------
ACTUAL ACTUAL PRO FORMA (12)
-------- ---------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................... $ 21,512 $ 19,024 $18,101
Total assets.............................................................. 87,403 98,168 74,096
Total debt................................................................ 107,891 115,352 39,519
Stockholders' (deficit) equity............................................ (47,858) (48,592) 3,169
</TABLE>
- ------------------------------
(1) Pro forma to give effect to the Recapitalization (including the Offering,
the IPO, the Bank Facility, the Gold Consignment Facility and the
restructuring of the Company's ESOP (each as defined)), and the use of the
funds generated thereby, as if the Recapitalization had occurred on
February 1, 1995. See "The Recapitalization" and "Pro Forma Financial
Data."
(2) The Company sold its direct marketing division as of January 31, 1992. In
connection with this disposition, the Company recorded a $7.3 million loss
in the year ended January 31, 1992 on the sale of the discontinued
operations and a $2.7 million gain in the year ended January 31, 1994 upon
its receipt of the deferred proceeds from the sale.
(3) Net loss for the year ended January 31, 1994 reflects a charge for the
cumulative effect of the Company's change in accounting in the amount of
$8.5 million to adopt AICPA SOP 93-6 for the recognition of compensation
expense on shares allocated to the ESOP. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Background"
and Note 5 of Notes to Financial Statements.
(4) Net income and pro forma net income for the year ended January 31, 1996
reflect an income tax benefit of $14.9 million and $12.1 million,
respectively, resulting from the reversal of the Company's valuation
allowance and recognition of a corresponding net deferred tax asset. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Background," "Pro Forma Financial Data" and Note 6 of Notes
to Financial Statements.
(5) In accordance with the accounting rules relating to pro forma financial
information, pro forma net income and supplemental pro forma net income and
net income per share do not reflect a one-time extraordinary gain of $17.4
million ($10.2 million net of tax) which will be recognized in the second
quarter of fiscal 1996 upon the early extinguishment of debt in connection
with the Recapitalization. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Background."
(6) Supplemental pro forma statement of operations data (i) reflect the
application of a tax provision (assuming a statutory rate of 40%) to
historical net income from continuing operations before income tax and (ii)
give effect to
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<PAGE> 14
the Recapitalization and use of the funds generated thereby, as if it
occurred on February 1, 1995. See "Pro Forma Financial Data."
(7) The weighted average number of common shares and common share equivalents
outstanding consists of (i) 8,372,267 shares of Common Stock outstanding
(including 3,269,500 shares of Common Stock offered hereby); (ii) 3,588
common share equivalents relating to Class B Common Stock; and (iii)
516,449 common share equivalents relating to incentive stock options
granted within one year prior to the IPO.
(8) Represents income (loss) from continuing operations before fixed charges
and income taxes divided by fixed charges.
(9) Average net sales per store represents the total net sales for stores open
for a full fiscal year divided by the total number of such stores.
(10) Average net sales per gross square foot represents total net sales for
stores open for a full fiscal year divided by the total gross square feet
of such stores.
(11) A store becomes comparable after it has been open for 12 full months.
(12) Pro forma to give effect to the Recapitalization (including the Offering,
the IPO, the Bank Facility, the Gold Consignment Facility and the
restructuring of the ESOP) and the use of the funds generated thereby
(including realization of the benefits of approximately $18.3 million in a
debt discount (as of April 30, 1996)), as if the Recapitalization had
occurred on April 30, 1996. See Use of Proceeds, "The Recapitalization"
and "Pro Forma Financial Data."
(13) The financial data for the three months ended April 30, 1996 is derived
from unaudited consolidated financial statements of the Company and
reflects all adjustments (consisting only of normal recurring
accruals) that the Company considers necessary for a fair presentation of
the financial position and results of operations for this period.
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<PAGE> 15
RISK FACTORS
In addition to the other information in this Prospectus, holders of
the Old Notes should carefully consider the following factors in this
Prospectus.
LEVERAGE
The Company is substantially leveraged. The Company's debt as of
April 30, 1996, calculated on a pro forma basis after giving effect to the
Recapitalization (and the use of the funds generated thereby), would have been
approximately $39,519,000, or 93% of its total capitalization,. The Company's
ratio of earnings to fixed charges (calculated based on income (loss) from
continuing operations before fixed charges and income tax divided by fixed
charges) on such pro forma basis for fiscal 1995 was approximately 2.03x.
The degree to which the Company is leveraged could have important
consequences to the holders of the New Notes, including the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired; (ii) a substantial portion of the Company's cash flow from operations
will be dedicated to the payment of the principal and interest on its
indebtedness; (iii) the Company may be more highly leveraged than some of its
competitors, which may place the Company at a competitive disadvantage; and
(iv) the Company's significant degree of leverage could make it more vulnerable
to changes in general economic conditions or factors affecting the jewelry
business in particular. A substantial portion of the Company's indebtedness
will bear interest at fluctuating rates, and changes in interest rates could
adversely affect the Company's results of operations or financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Furthermore, because the Bank
Facility is secured by substantially all of the Company's assets, the lenders
thereunder could look to the pledged assets to satisfy their claims.
SUBORDINATION AND UNSECURED NATURE OF THE NEW NOTES
The payment of the principal of, premium, if any, and interest on, and
any other amounts owing in respect of, the New Notes will be subordinated to
the prior payment in full of all existing and future Senior Indebtedness (as
defined). As of April 30, 1996, on a pro forma basis after giving effect to
the Recapitalization (and the use of the funds generated thereby) the aggregate
outstanding principal amount of Senior Indebtedness of the Company was
approximately $19,519,000. The amount of Senior Indebtedness outstanding will
fluctuate from time to time based upon, among other things, borrowings under
the New Revolver. In the event of the bankruptcy, liquidation, dissolution,
reorganization or winding up of the Company, the assets of the Company will be
available to pay obligations in respect of the New Notes only after all Senior
Indebtedness has been paid in full, and there may not be sufficient assets
remaining to pay amounts due on any or all of the New Notes. In addition, the
Company may not pay the principal of, premium, if any, or interest on, and any
other amounts owing in respect of, the New Notes, or purchase, redeem or
otherwise retire the New Notes, if a default in payment exists with respect to
Senior Indebtedness. Under certain circumstances, no payments may be made for
a specific period with respect to the principal of, premium, if any, or
interest on, and any other amounts owing in respect of, the New Notes if a
nonpayment default exists with respect to certain Senior Indebtedness,
including indebtedness to be outstanding under the Bank Facility. See "The New
Notes--Subordination."
The Company's borrowings under the Bank Facility are secured by
substantially all of the assets of the Company. The agreement governing the
Bank Facility contains restrictions on the Company's operations and requires
the Company to comply with certain financial covenants. If the Company fails
to comply with such restrictions or financial covenants relating to the Bank
Facility, the lenders thereof may accelerate the indebtedness and exercise
their remedies with respect to the assets securing the Bank Facility. In
addition, in the event of the Company's insolvency or liquidation, the claims
of the lenders under the Bank Facility would have to be satisfied out of such
collateral before any such assets would be available to pay claims of holders
of the New Notes. If the lenders under the Bank Facility should foreclose on
such collateral, it is possible that there would not be sufficient assets
available in the Company to pay amounts due on the New Notes. See "The
Recapitalization--Bank Facility."
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<PAGE> 16
FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS
A variety of factors affect the Company's comparable store sales
results, including economic conditions, the retail sales environment and the
Company's ability to execute its business strategy. The Company experienced an
11.0% comparable store sales increase in fiscal 1995. Although the Company has
recently implemented strategies designed to increase comparable store sales,
including its return/exchange program, its expanded non-recourse credit program
(including the "First Time Buyers" program) and its merchandising policies, the
Company does not expect comparable store sales to increase at as high a rate in
the future. The Company's ability to achieve comparable store sales increases
in the future will depend in large part on the successful implementation of
these programs. There can be no assurance that any of these programs will be
successful or that the Company will continue to achieve comparable store sales
gains. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
The Company's business is highly seasonal, with a significant portion
of its sales and most of its income generated during the fourth fiscal quarter
ending January 31. Sales in the fourth quarters of fiscal 1995 and 1994
accounted for 39.1% and 40.2%, respectively, of annual sales for such fiscal
years. Income from operations for the fourth quarters of fiscal 1995 and 1994
accounted for 64.6% and 75.5%, respectively, of annual income from operations
for such fiscal years. The Company has historically experienced net losses and
lower net sales in each of its first three fiscal quarters. The Company
expects this trend to continue for the foreseeable future and, in particular,
expects to experience a net loss in the first fiscal quarter of 1996. The
Company expects to continue to experience fluctuations in its net sales and net
income due to a variety of factors. A shortfall in results for the fourth
quarter of any fiscal year could have a material adverse effect on the
Company's annual results of operations. The Company's quarterly results of
operations also may fluctuate significantly as a result of a variety of
factors, including the timing of new store openings, net sales contributed by
new stores, increases or decreases in comparable store sales, timing of certain
holidays, changes in the Company's merchandise, general economic, industry and
weather conditions that affect consumer spending, and actions of competitors.
"See Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results."
IMPACT OF GENERAL ECONOMIC CONDITIONS
Jewelry purchases are discretionary for consumers and may be
particularly affected by adverse trends in the general economy. The success of
the Company's operations depends to a significant extent upon a number of
factors relating to discretionary consumer spending, including economic
conditions affecting disposable consumer income such as employment, business
conditions, interest rates, availability of credit and taxation, for the
economy as a whole and in regional and local markets where the Company
operates. In addition, the Company is dependent upon the continued popularity
of malls as a shopping destination and the ability of malls or tenants and
other attractions to generate customer traffic for its stores. There can be no
assurance that consumer spending will not be adversely affected by general
economic conditions or a decrease in mall traffic, thereby negatively impacting
the Company's results of operations or financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent upon the ability and experience of its
senior executives and other key employees, including Hugh M. Patinkin, its
Chairman, President and Chief Executive Officer, John R. Desjardins, its
Executive Vice President, Finance and Administration, Matthew M. Patinkin, its
Executive Vice President, Store Operations, and Lynn D. Eisenheim, its
Executive Vice President, Merchandising. The loss of services of these
individuals or other members of management could have a material adverse effect
on the Company's results of operations or financial condition. The Company
maintains "key executive" life insurance on the first three individuals, but
does not have employment agreements with any executives of the Company. See
"Management." There can be no assurance that the Company will be able to
attract and retain additional qualified personnel as needed in the future.
COMPETITION
The retail jewelry business is fragmented and highly competitive. The
Company competes with national and regional jewelry chains and local
independently owned jewelry stores, especially those that operate in malls, as
well as with department stores, catalog showrooms, discounters, direct mail
suppliers and televised home shopping networks. Certain
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<PAGE> 17
of the Company's competitors are substantially larger and have greater
financial resources than the Company. Management believes that the primary
competitive factors affecting its operations are store location and atmosphere,
quality of sales personnel and service, breadth and depth of merchandise
offered, pricing, credit and reputation. The Company also believes that it
competes for consumers' discretionary spending dollars with retailers that
offer merchandise other than jewelry. In addition, the Company competes with
jewelry and other retailers for desirable locations and qualified personnel.
The foregoing competitive conditions (which could intensify) may adversely
affect the Company's results of operations or financial condition. See
"Business--Competition."
SUPPLIERS; AVAILABILITY OF CONSIGNED MERCHANDISE
The Company does not manufacture its own merchandise but instead works
closely with a number of suppliers. In fiscal 1995, the Company's largest
supplier accounted for approximately 14% of the Company's total purchases, and
its largest five suppliers accounted for approximately 37% of such purchases.
Although the Company believes that there are a number of suppliers of fine
jewelry, the loss of one or more of its major suppliers, particularly at
certain critical times during the year, could have a material adverse effect on
its results of operations or financial condition.
A substantial portion of the merchandise sold by the Company is
carried on a consignment basis prior to sale or is otherwise financed by
vendors, thereby reducing the Company's direct capital investment in inventory.
The weighted average percentage of the Company's total inventory that was
carried on consignment for fiscal 1993, 1994 and 1995 (based on the inventory
levels at the end of each fiscal quarter) was 24.8%, 25.8% and 27.1%,
respectively. The willingness of vendors to enter into such arrangements may
vary substantially from time to time based on a number of factors, including
the merchandise involved, the financial resources of vendors, interest rates,
availability of financing, fluctuations in gem and gold prices, inflation, the
financial condition of the Company and a number of economic or competitive
conditions in the jewelry business or the economy generally. Any change in
these relationships could have a material adverse effect on the Company's
results of operations or financial condition. See "Business--Purchasing."
Third party credit offered by the Company to its customers is supplied
primarily through a "private label" credit card arrangement with Bank One,
N.A., and other credit programs offered by other financial institutions. The
loss or any substantial modification of any of these arrangements could have a
material adverse effect on the Company's results of operations or financial
condition. See "Business--Credit."
EFFECT OF FLUCTUATIONS IN GEM AND GOLD PRICES
The Company and the jewelry industry in general are affected by
fluctuations in the prices of diamonds and gold and, to a lesser extent, other
precious and semi-precious metals and stones. During fiscal 1995, diamonds,
gold, precious and semi-precious jewelry accounted for approximately 95% of the
Company's net merchandise sales. A significant change in prices or in the
availability of diamonds, gold or other precious and semi-precious metals and
stones could have a material adverse effect on the Company's results of
operations or financial condition. The supply and price of diamonds in the
principal world markets are significantly influenced by a single entity, the
Central Selling Organization ("CSO"), a marketing arm of DeBeers Consolidated
Mines Ltd. of South Africa. The CSO has traditionally controlled the marketing
of a substantial majority of the world's supply of diamonds and sells rough
diamonds to worldwide diamond cutters from its London office in quantities and
at prices determined in its sole discretion. The availability of diamonds to
the CSO and the Company's suppliers is to some extent dependent on the
political situation in diamond producing countries, such as South Africa,
Botswana, Zaire, republics of the former Soviet Union and Australia, and on
continuation of the prevailing supply and marketing arrangements for raw
diamonds. Until alternate sources could be developed, any sustained
interruption in the supply of diamonds or any oversupply from the producing
countries could adversely affect the Company and the retail jewelry industry as
a whole.
In connection with the Recapitalization, the Company entered into the
Gold Consignment Facility pursuant to which the Company accepts as consignee,
and will be responsible to return at some future date, a fixed number of ounces
of gold. The periodic charges to be paid by the Company will be computed based
on a percentage of the value of the gold consigned. Therefore, an increase in
the price of gold could substantially increase the annual costs to the Company
of the gold consignment and the eventual cost to the Company upon the
termination of this arrangement. See "The Recapitalization--Gold Consignment
Facility."
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<PAGE> 18
REGULATION
The Company's operations are affected by numerous federal and state
laws that impose disclosure and other requirements upon the origination,
servicing and enforcement of credit accounts, and limitations on the maximum
amount of finance charges that may be charged by a credit provider. Although
credit to the Company's customers is provided by third parties without recourse
to the Company based upon a customer's failure to pay, any restrictive change
in the regulation of credit, including the imposition of, or changes in,
interest rate ceilings, could adversely affect the cost or availability of
credit to the Company's customers and, consequently, the Company's results of
operations or financial condition.
In marketing to its customers the Company compares many of its prices
to "reference prices." The Company's literature indicates to customers that
its reference price for an item is either the manufacturer's suggested retail
price or the Company's determination of the non-discounted price at which
comparable merchandise of like grade or quality is advertised or offered for
sale by competitive retailers and is not the Company's current selling price or
the price at which it formerly sold such item. Although the Company believes
that pricing comparisons are common in the jewelry business and that the
Company s practice is in compliance with applicable laws relating to trade
practices, there can be no assurance that this practice would be upheld. See
"Business--Regulation."
AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS
At February 1, 1996, the Company had $17.9 million of net operating
loss carryforwards. While these carryforwards are expected to reduce future
income tax payments, the benefits of such carryforwards have already been
recognized in the Company's balance sheets and results of operations for fiscal
1995. However, Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"), limits the use of net operating losses and net operating loss
carryforwards following an "ownership change." If the limitations imposed by
Section 382 applied, the Company might pay taxes earlier or in larger amounts
than would be the case if all net operating losses could be used in future
years to reduce federal income taxes without restriction.
The Company believes that an "ownership change" did not occur with
respect to the Company as a result of the Company's recently completed IPO (as
defined). However, the Company's belief is based on certain assumptions,
including assumptions as to factual matters. There can be no assurance as to
any position that might be taken by the Internal Revenue Service with respect
to the consequences of the IPO on the utilization of net operating loss
carryforwards. Furthermore, future transactions involving equity securities of
the Company could trigger an "ownership change" resulting in the imposition of
limitations on the Company's use of net operating loss carryforwards in periods
following such ownership change. See "Stock Ownership--Possible Limitation on
the Company's Use of Net Operating Loss Carryforwards."
EFFECTIVE CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The Company's four senior executive officers (Messrs. H. Patinkin,
Desjardins, M. Patinkin and Eisenheim) beneficially own approximately 17.4% of
the outstanding shares of Common Stock and, together with the directors and
certain other stockholders beneficially own approximately 42.3% of the
outstanding shares of Common Stock. By virtue of such holdings and if and to
the extent such stockholders act in concert, such stockholders will effectively
have the ability to control the election of directors and other matters,
including the outcome of certain fundamental corporate transactions (such as
certain mergers and sales of assets) requiring stockholder approval. See "Stock
Ownership."
CERTAIN TAX CONSEQUENCES
An exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as a sale, exchange or other taxable event for federal
income tax purposes. A New Note received by a beneficial owner of an Old Note
should be treated as a continuation of the Old Note in the hands of such owner
for federal income tax purposes. The Series B Notes were issued with "original
issue discount" for federal income tax purposes. Because a Series D Note
received by a beneficial owner of a Series B Note should be treated as a
continuation of a Series B Note in the hands of such owner for federal income
tax purposes, the Series D Notes will be treated as being issued with original
issue discount equal to the original issue discount on the Series B Notes.
Holders of the Series D Notes therefore generally will be required to include
original issue
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<PAGE> 19
discount in gross income for federal income tax purposes over the term of the
Series D Notes in advance of the receipt of the cash payments to which the
income is attributable. See "Certain Federal Income Tax Consequences."
LACK OF PUBLIC MARKET
Prior to this offering, there has been no market for the Company's
Notes. The Company does not intend to apply for the listing of the New Notes
on any national securities exchange or on the Nasdaq National Market. The
Company has been advised that William Blair & Company, L.L.C. intends to make
a market in the New Notes, but it is not obligated to do so and may discontinue
any such market making at any time without notice. Accordingly, there can be
no assurance that an active trading market will develop for, or as to the
liquidity of, the New Notes.
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<PAGE> 20
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer.
The Old Notes were issued as part of the Company's recently completed
Recapitalization, including a restructuring of its outstanding indebtedness,
intended to reduce the amount of the Company's debt outstanding and the related
interest expense and to provide the Company with greater financial flexibility
for operations and to support its store expansion strategy.
The Recapitalization was completed on May 7, 1996 and consisted of (i)
the private placement of the Old Notes (the "Offering"); (ii) an initial public
offering of 3,269,500 shares of Common Stock resulting in net proceeds to the
Company of approximately $40.7 million (the "IPO"); (iii) a new $44
million five-year secured credit facility (the "Bank Facility"), consisting of
a $29 million senior secured revolving line of credit (the "New Revolver") and
a $15 million senior secured term loan (the "New Term Loan"), each of which
bears interest at fluctuating interest rates based upon the LIBOR Rate (as
herein defined) or a base rate, in each case plus an applicable spread; and
(iv) a bank gold consignment facility (the "Gold Consignment Facility") in an
amount of up to $16 million. The Company utilized the funds generated by the
Offering, the IPO, the Bank Facility and the Gold Consignment Facility
principally to retire all of the Company's senior and subordinated indebtedness
then outstanding, as described below. Simultaneously with the completion of
the Recapitalization, the Company completed a restructuring of its employee
stock ownership plan (the "ESOP"). See "The Recapitalization." The repayment
and redemption of outstanding debt with the funds generated by the Offering,
the Bank Facility and the Gold Consignment Facility, together with the IPO and
the restructuring of the Company's ESOP, is referred to herein as the
"Recapitalization."
Approximately $87.0 million of the funds generated by or available
from the Recapitalization were used by the Company principally to repay all
outstanding bank borrowings under the Company's bank agreements, including (i)
approximately $7.8 million outstanding under the Company's revolving credit
facility, which bore interest at a floating rate (with an annual weighted
average interest rate of 10.6% in fiscal 1995) and which required a paydown to
a certain level on an annual basis and would have otherwise been available
through May 31, 1997; (ii) $26.6 million outstanding under the Company's term
loan, which bore interest at a floating rate (with an annual weighted average
interest rate of approximately 10.6% in fiscal 1995) and of which $0.7 million
would have otherwise matured on September 15, 1996, $7.2 million would have
otherwise matured on January 31, 1997, and the balance would have otherwise had
been due on May 31, 1997; (iii) approximately $51.1 million of senior accreting
notes, which bore interest at a floating rate (with an annual weighted average
interest rate of approximately 11.0% during fiscal 1995) and of which $2.0
million would have otherwise matured on September 15, 1996 and the balance
would have otherwise been due on May 31, 1997; and (iv) approximately $6
million of zero coupon notes due May 31, 1997, which would have begun accruing
interest on June 1, 1996 at a floating rate per annum (based on the lender's
base rate or certificate of deposit rate plus 1.8%). In addition, the Company
used approximately $10.6 million of the funds generated by or available from
the Recapitalization to repurchase the Company's subordinated notes at a
discount. As of May 7, 1996, one of these subordinated notes had a principal
amount outstanding of $23.5 million and bore interest at a rate per annum of
12.5% and the other subordinated note had a principal amount outstanding of
$0.9 million and bore interest at a rate per annum of 13.75%.
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<PAGE> 21
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Pursuant to the Placement Agreement and the Note Agreement, the
Company agreed (i) to use its best efforts to cause to become effective a
registration statement under the Securities Act with the Commission with
respect to (a) a registered offer to exchange the Series A Notes for the Series
C Notes and (b) a registered offer to exchange the Series B Notes for the
Series D Notes, and (ii) upon the effectiveness of such registration statement,
(a) to offer the Series C Notes in return for surrender of the Series A Notes
and (b) to offer the Series D Notes in return for surrender of the Series B
Notes. This Registration Statement is intended to satisfy such obligations of
the Company under the Placement Agreement and the Note Agreement.
Following the Consummation (as defined) of the Exchange Offer, holders
of Old Notes not tendered will not have any further registration rights and the
Old Notes will continue to be subject to certain restrictions on transfer. See
"--Termination of Certain Rights" and "--Consequences of Failure to Exchange."
Accordingly, the liquidity of the market for the Old Notes could be adversely
affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company will accept any and
all Old Notes validly tendered and not withdrawn prior to the Expiration Date.
The Company will issue $1,000 principal amount of Series C Notes in exchange
for each $1,000 principal amount of outstanding Series A Notes accepted in the
Exchange Offer and will issue $1,000 principal amount of Series D Notes in
exchange for each $1,000 principal amount of outstanding Series B Notes
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only
in integral multiples of $1,000 principal amount at maturity.
The form and terms of the Series C Notes are the same in all material
respects as the form and terms of the Series A Notes and the form and terms of
the Series D Notes are the same in all material respects as the form and terms
of the Series B Notes, except that the New Notes will have been registered
under the Securities Act and hence will not bear legends
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<PAGE> 22
restricting their transfer pursuant to the Securities Act. The Series C Notes
will evidence the same debt as the Series A Notes (which they replace) and the
Series D Notes will evidence the same debt as the Series B Notes (which they
replace) and will be issued under, and be entitled to the benefits of, the
Indenture governing the Old Notes.
As of the date of this Prospectus, (i) $12,000,000 aggregate principal
amount of the Series A Notes were outstanding and registered in the name of
Cede & Co., as nominee for DTC, and there were approximately 107 beneficial
owners and (ii) $8,000,000 aggregate principal amount of the Series B Notes
were outstanding and registered in the name of Cede & Co., as nominee for DTC,
and there were approximately 3 beneficial owners. Solely for reasons of
administration (and for no other purpose) the Company has fixed the close of
business on July 30, 1996 as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially. Only a registered holder of Old Notes
(or such holder's legal representative or attorney-in-fact) as reflected on the
records of the Trustee under the Indenture may participate in the Exchange
Offer. There will be no fixed record date for determining registered holders
of Old Notes entitled to participate in the Exchange Offer.
Holders of Old Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation law or the Indenture in connection with
the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders of Old Notes for the purposes of receiving the New Notes from the
Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned (or,
in the case of Old Notes tendered by book-entry transfer through DTC, will be
credited to an account maintained with DTC), without expense, to the tendering
holder thereof as promptly as practicable after the Expiration Date. See
"--Procedures for Tendering."
Holders who tender Old Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Old Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time,
on __________ __, 1996, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by oral or written notice and will make a
public announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under "Conditions to the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (iv)
to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by a public announcement thereof. If the Exchange Offer is amended
in a manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendments by means of a prospectus
supplement that will be distributed to the registered holders of Old Notes, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
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<PAGE> 23
Without limiting the manner in which the Company may choose to make
public announcement of any delay, extension, termination or amendment of the
Exchange Offer, the Company shall not have an obligation to publish, advertise,
or otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
PROCEDURES FOR TENDERING
Only a registered holder of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes and any other required documents, to the Exchange Agent at the
address set forth below under "Exchange Agent" for receipt prior to the
Expiration Date; provided, however, that in lieu of the foregoing, a holder may
either (i) tender the Old Notes pursuant to the procedure for book-entry tender
set forth below, or (ii) comply with the guaranteed delivery procedure set
forth below.
The tender by a holder will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS
MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTION FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instruction to Registered Holder from Beneficial Owner" included with the
Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, must be guaranteed by an Eligible Institution (as defined)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Delivery Instructions"
on the Letter of Transmittal, or (ii) for the account of an Eligible
Institution. In the event that signatures on a Letter of Transmittal or a
notice of withdrawal, as the case may be, are required to be guaranteed, such
guarantee must be by a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., a commercial bank
or trust company having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys- in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and evidence
satisfactory to the Company of their authority to so act must be submitted with
the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company, in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Old Notes. The Company's interpretation of the
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<PAGE> 24
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
must be cured within such time as the Company shall determine. Although the
Company intends to notify holders of defects or irregularities with respect to
tenders of Old Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not validly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
By tendering, each registered holder will represent to the Company
that, among other things, (i) the New Notes to be acquired by the holder and
any beneficial owner(s) of Old Notes ("Beneficial Owner(s)") in connection with
the Exchange Offer are being acquired by the holder and any Beneficial Owner(s)
in the ordinary course of business of the holder and any Beneficial Owner(s),
(ii) the holder and each Beneficial Owner are not participating, do not intend
to participate, and have no arrangement or understanding with any person to
participate, in the distribution of the New Notes, (iii) the holder and each
Beneficial Owner acknowledge and agree that any person participating in the
Exchange Offer for the purpose of distributing the New Notes must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction of the New Notes acquired by
such person and cannot rely on the position of the Staff of the Commission set
forth in no-action letters that are discussed herein under "--Resales of the
New Notes," (iv) the holder and each Beneficial Owner understands that a
secondary resale transaction described in clause (iii) above should be covered
by an effective registration statement containing the selling securityholder
information required by Item 507 of Regulation S-K of the Commission, and (v)
neither the holder nor any Beneficial Owner(s) is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company except as otherwise
disclosed to the Company in writing.
EXCHANGING BOOK-ENTRY OLD NOTES
The Exchange Agent and DTC have confirmed that any financial
institution that has an account with DTC (a "Participant") may utilize DTC's
Automated Tender Offer Program ("ATOP") to tender Old Notes.
The Exchange Agent will request that DTC establish an account with
respect to the Series A Notes and an account with respect to the Series B Notes
for purposes of the Exchange Offer within two business days after the date of
this Exchange Offer. Any Participant may make book-entry delivery of Old Notes
by causing DTC to transfer such Old Notes into such Exchange Agent's account in
accordance with DTC's ATOP procedures for transfer. However, the exchange for
the Old Notes so tendered will only be made after timely confirmation (a
"Book-Entry Confirmation") of such book-entry transfer of Old Notes into the
Exchange Agent's account, and timely receipt by the Exchange Agent of an
Agent's Message (as defined) and any other documents required by the Letter of
Transmittal. The term "Agent's Message" means a message, transmitted by DTC
and received by the Exchange Agent and forming part of a Book-Entry
Confirmation, which states that DTC has received an express acknowledgment from
a Participant tendering Old Notes which are the subject of such Book-Entry
Confirmation, that such Participant has received and agrees to be bound by the
terms of the Letter of Transmittal, and that the Company may enforce such
agreement against such Participant.
The method of delivery of Old Notes is at the option and risk of the
tendering holder and, except as otherwise provided in the Letter of
Transmittal, the delivery will be deemed to be made only when actually received
by the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are
not immediately available, or (ii) who cannot deliver their Old Notes, the
Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date or (iii) who cannot comply with the procedure for
book-entry tender on a timely basis, may effect a tender if:
(a) The tender is made through an Eligible Institution;
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<PAGE> 25
(b) Prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by facsimile transmission,
mail or hand delivery) setting forth the name and address of the
holder, the certificate number(s) of such Old Notes and the principal
amount of the Old Notes being tendered, stating that the tender is
being made thereby and guaranteeing that, within five business days
after the Expiration Date, the Letter of Transmittal (or facsimile
thereof) together with the certificate(s) representing the Old Notes
and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of
Transmittal (or facsimile thereof), as well as the certificate(s)
representing all tendered Old Notes in proper form for transfer and
all other documents required by the Letter of Transmittal, are
received by the Exchange Agent within five business days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery
will be sent to holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, a tender of Old Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to
be withdrawn (including the certificate number or numbers (except in the case
of book-entry tenders) and principal amount (regardless of the means of
tendering) of such Old Notes), (iii) be signed by the holder in the same manner
as the original signature on the Letter of Transmittal by which such Old Notes
were tendered (including any required signature guarantees) or be accompanied
by documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the Depositor
withdrawing the tender, and (iv) specify the name in which any such Old Notes
are to be registered, if different from that of the Depositor. If the Old
Notes have been tendered pursuant to the procedure for book-entry tender set
forth above under "Exchanging Book-Entry Old Notes," a notice of withdrawal
must specify, in lieu of certificate numbers, the name and account number at
DTC to be credited with the withdrawn Old Notes. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company in its sole discretion, which determination shall
be final and binding on all parties. Any Old Notes so withdrawn will be deemed
not to have been validly tendered for purposes of the Exchange Offer and no New
Notes will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Properly withdrawn Old Notes may be retendered by
following one of the procedures described above under "Procedures for
Tendering" at any time prior to the Expiration Date.
Any Old Notes which have been tendered but which are not accepted for
exchange due to rejection of tender or termination of the Exchange Offer, or
which have been validly withdrawn, will be returned as soon as practicable to
the holder thereof without cost to such holder.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company
shall not be required to accept for exchange, or exchange New Notes for, any
Old Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in
any court or by or before any governmental agency with respect to the
Exchange Offer which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the
Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company, or any material adverse development has
occurred in any existing action or proceeding with respect to the
Company or any of its subsidiaries; or
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<PAGE> 26
(b) any change, or any development involving a prospective
change, in the business or financial affairs of the Company or any of
its subsidiaries has occurred which, in the sole judgment of the
Company, might materially impair the ability of the Company to proceed
with the Exchange Offer or materially impair the contemplated benefits
of the Exchange Offer to the Company; or
(c) any law, statute, rule or regulation is proposed,
adopted or enacted, which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the
Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company;
(d) any governmental approval has not been obtained, which
approval the Company shall, in its sole discretion, deem necessary for
the consummation of the Exchange Offer as contemplated hereby; or
(e) the Company receives consents from an insufficient
number of holders of Old Notes to amend the Indenture as provided in
the Letter of Transmittal.
If the Company determines in its sole discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old
Notes and return (or, in the case of Old Notes tendered by book-entry transfer
through DTC, will promptly credit to an account maintained with DTC) all
tendered Old Notes to the tendering holders, (ii) extend the Exchange Offer and
retain all Old Notes tendered prior to the Expiration Date, subject, however,
to the rights of holders to withdraw such Old Notes (see "--Withdrawal of
Tenders") or (iii), waive such unsatisfied conditions (except with respect to
the condition identified in (e) above which may not be waived by the Company)
with respect to the Exchange Offer and accept all validly tendered Old Notes
which have not been withdrawn. If such waiver constitutes a material change to
the Exchange Offer, the Company will promptly disclose such waiver by means of
a prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
By executing the Letter of Transmittal, each holder of Old Notes will
consent to a supplemental indenture that will amend the Indenture to provide,
among other things, that the Series C Notes and the Series D Notes will be
issued under, and entitled to the benefits of, the Indenture governing the
Series A Notes and the Series B Notes. To the extent the Company does not
receive consents from a sufficient number of holders of Old Notes to amend the
Indenture as provided for in the Letter of Transmittal, the Company will not be
required to accept for exchange, or exchange New Notes for, any Old Notes, and
may terminate the Exchange Offer.
TERMINATION OF CERTAIN RIGHTS
Holders of the Old Notes to whom this Exchange Offer is made have
special rights under the Placement Agreement and the Notes Agreement that will
terminate upon the consummation of the Exchange Offer (the "Consummation").
Such special rights which will terminate include (a) the right to require the
Company to file with the Commission a registration statement under the
Securities Act with respect to the New Notes within 10 days after the
completion of the Recapitalization (the "Closing Date"), and (b) the right to
require the Company to use its best efforts to cause such registration
statement to become effective under the Securities Act within 45 days after
the Closing Date.
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as
Exchange Agent for the Exchange Offer. Questions and requests for assistance,
requests for additional copies of this Prospectus or the Letter of Transmittal
and requests for Notices of Guaranteed Delivery should be directed to the
Exchange Agent at (612) 667-9764 or addressed as follows:
- 20 -
<PAGE> 27
<TABLE>
<S> <C>
By Overnight Courier: By Facsimile:
Norwest Bank Minnesota, (for Eligible Institutions only)
National Association Norwest Bank Minnesota,
Corporate Trust Operations National Association
Norwest Center Corporate Trust Operations
Sixth and Marquette (612) 667-4927
Minneapolis, MN 55479-0113
By Mail:
(registered or certified recommended)
Norwest Bank Minnesota,
National Association
Corporate Trust Operations
P.O. Box 1517
Minneapolis, MN 55480-1517
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitations are being made by mail; however, additional
solicitations may be made by telegraph, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer
will be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee (as defined), accounting and legal fees and printing
costs, among others.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes which are not exchanged for New Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) so long as the Old Notes are eligible for resale pursuant to Rule 144A
under the Securities Act to a person whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A, purchasing for
its own account or for the account of a qualified institutional buyer to whom
notice is given that the resale, pledge or other transfer is being made in
reliance on Rule 144A, (iii) in an offshore transaction in accordance with
Regulation S under the Securities Act, but only in the case of a transfer that
is effected by the delivery to the transferee of Old Notes registered in its
name (or its nominee's name) on the books maintained by the registrar of the
Old Notes, (iv) pursuant to an exemption from registration in accordance with
Rule 144 (if available) or Rule 145 under the Securities Act, (v) in reliance
on another exemption from the registration requirements of the Securities Act,
but only in the case of a transfer that is effected by the delivery to the
transferee of Old Notes registered in its name (or its nominee's name) on the
books maintained by the registrar of the Old Notes, and subject to the receipt
by the registrar or co-registrar of a certification of the transferor and an
opinion (satisfactory to the Company) of counsel (satisfactory to the Company)
to the effect that such transfer is in compliance with the Securities Act, or
(vi) pursuant to an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any state of
the United States. Following the Consummation of the Exchange Offer, holders
of Old Notes will have no further rights of registration or exchange under the
Placement Agreement or the Notes Agreement.
- 21 -
<PAGE> 28
ACCOUNTING TREATMENT
The carrying value of the Old Notes is not expected to be materially
different from the fair value of the New Notes at the time of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the Exchange Offer will be amortized over the term of the New
Notes.
RESALES OF THE NEW NOTES
With respect to resales of New Notes, based on an interpretation by
the staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that any holder or beneficial owner (other than a
person that is an affiliate of the Company within the meaning of Rule 405 under
the Securities Act or a "broker" or "dealer" registered under the Exchange Act)
who exchanges Old Notes for New Notes in the ordinary course of business and
who is not participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in the
distribution of the New Notes, will be allowed to resell the New Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the New Notes a prospectus that satisfies the
requirements of Section 10 thereof. The Company has not entered into any
arrangement or understanding with any person to participate in the distribution
of the New Notes and, to management's knowledge, the persons participating in
the Exchange Offer are acquiring the New Notes in the ordinary course of
business and have not entered into any arrangement or understanding with any
person to participate in the distribution of the New Notes. However, if any
holder or beneficial owner acquires New Notes in the Exchange Offer for the
purpose of distributing or participating in a distribution of the New Notes,
such holder or beneficial owner cannot rely on the position of the staff of the
Commission enunciated in Exxon Capital Holdings Corporation (available April
13, 1988) or similar no-action letters or any similar interpretive letters and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction, unless an
exemption from registration is otherwise available.
A broker or dealer registered under the Exchange Act that acquired Old
Notes for its own account pursuant to its market-making or other trading
activities (other than Old Notes acquired directly from the Company) may
participate in the Exchange Offer but may be deemed to be an underwriter within
the meaning of the Securities Act and, therefore, must deliver a prospectus
relating to the New Notes in connection with any resales by it of New Notes
acquired for its own account in the Exchange Offer. The delivery of a
prospectus by a broker or dealer in connection with its resales of the New
Notes does not constitute an admission that such broker or dealer is an
"underwriter" under the Securities Act.
As contemplated by the above no-action letters, the Placement
Agreement and the Note Agreement, each holder participating in the Exchange
Offer is required by the Letter of Transmittal to represent that (i) the New
Notes are to be acquired by the holder and any beneficial owners in the
ordinary course of business, (ii) the holder and any beneficial owners are not
engaging and do not intend to engage in the distribution of the New Notes,
(iii) neither the holder nor any beneficial owner is an affiliate of the
Company within the meaning of Rule 405 under the Securities Act, and (iv) the
holder and each beneficial owner acknowledge that if such holder or beneficial
owner participates in the Exchange Offer for the purpose of distributing the
New Notes such holder or beneficial owner must comply with the registration and
prospectus delivery requirements of the Securities Act and cannot rely on the
above no-action letters. See "Plan of Distribution."
- 22 -
<PAGE> 29
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol MBJI. The Company's Common Stock was recently listed on the
Nasdaq National Market. The high and low bid quotations per share of the
Company's Common Stock as reported by the Nasdaq National Market for the period
beginning on May 2 (the initial date of listing) and ending on April 30, were
$23 and $22 respectively. Quotations represent prices between dealers, do not
reflect retail mark-ups, mark downs or commissions, and may not represent actual
transactions. On July 30, 1996, the closing bid price of the Company's Common
Stock as reported by the Nasdaq National Market was $21 per share.
As of July 31, 1996, there were 49 holders of record of the Company's
Common Stock. The Company believes that there are a significant number of
beneficial owners of its Common Stock whose shares are held in street name.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock in recent
years. The Company currently intends to retain earnings to finance the growth
and development of its business and does not anticipate paying cash dividends
on its Common Stock in the foreseeable future. Any payment of cash dividends
in the future will depend upon the financial condition, capital requirements
and earnings of the Company, limitations on dividend payments pursuant to the
terms of current or future debt agreements and such other factors as the Board
of Directors may deem relevant. The agreement governing the Bank Facility
prohibits the Company from paying cash dividends without the prior consent of
the lenders. See "The Recapitalization." In addition, the Indenture governing
the Notes contains substantial restrictions on the Company's ability to pay
dividends. See "The New Notes."
- 23 -
<PAGE> 30
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company at April 30, 1996 (i) on an actual basis and (ii) on a pro forma
basis to give effect to the Recapitalization. See "The Recapitalization." This
table should be read in conjunction with the financial statements, including the
notes thereto, and the pro forma balance sheet of the Company appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
APRIL 30, 1996
----------------------
ACTUAL PRO FORMA
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of long-term debt:
Old revolver loan..................................................... $ 7,481 $ --
Senior accreting notes-current........................................ 1,956 --
Old term loan-current................................................. 7,938 --
New Revolver.......................................................... -- 4,519
Outstanding checks, net............................................... 4,686 4,686
------- -------
Total short-term debt.............................................. $22,061 $ 9,205
======= =======
Long-term debt:
Old term loan......................................................... $18,662 $ --
Senior accreting notes................................................ 49,014 --
Zero coupon notes..................................................... 5,962 --
Subordinated debt..................................................... 24,339 --
New Term Loan......................................................... -- 15,000
Subordinated Notes.................................................... -- 20,000
------- -------
Total long-term debt............................................... 97,977 35,000
Stockholders' equity:
Preferred stock....................................................... -- --
Common stock and additional paid-in capital(1)........................ 8,920 33,595
Accumulated deficit................................................... (15,531) (30,426)
Treasury stock........................................................ (20,333) --
Deferred ESOP compensation............................................ (21,648) --
------- -------
Total stockholders' (deficit) equity............................... (48,592) 3,169
------- -------
Total capitalization............................................. $49,385 $38,169
======= =======
</TABLE>
- ------------------------------
(1) Excludes (i) 553,770 shares of Common Stock reserved for issuance upon
exercise of options previously granted, (ii) 717,216 shares of Common Stock
reserved for issuance pursuant to stock options granted as of the
consummation of the IPO and (iii) 57,414 additional shares of Common Stock
reserved for issuance under the Company's 1996 Long-Term Incentive Plan. See
"Management--Stock Plans."
- 24 -
<PAGE> 31
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth certain financial and operating data of
the Company. The selected statement of operations data and balance sheet data as
of and for each of the five years ended January 31, 1996 are derived from
audited financial statements of the Company. Pro forma financial data for the
year ended January 31, 1996 and for the three months ended April 30, 1996 are
unaudited and are derived from condensed pro forma financial statements. See
"Pro Forma Financial Data". The selected statement of operations data and
balance sheet data as of and for the three months ended April 30, 1996 have
been derived from unaudited financial statements of the Company, which, in the
opinion of management include all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the information set forth
therein. The selected financial information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's audited financial statements as of
January 31, 1995 and 1996, and for the years ended January 31, 1994, 1995 and
1996, and the related notes and pro forma data appearing elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------------------------------- PRO FORMA(1)
1992 1993 1994 1995 1996 1996
-------- ------- ------- -------- -------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 76,749 $88,141 $91,106 $106,683 $131,022 $ 131,022
Cost of sales......................... 45,606 52,106 54,511 64,223 77,722 77,722
-------- ------- ------- -------- -------- --------
Gross profit........................ 31,143 36,035 36,595 42,460 53,300 53,300
Selling, general and administrative
expenses............................ 25,781 27,971 28,340 30,748 37,887 37,887
-------- ------- ------- -------- -------- --------
Income from operations.............. 5,362 8,064 8,255 11,712 15,413 15,413
Interest expense...................... 9,397 7,821 8,920 10,594 12,314 5,798
Stock award expense................... -- -- -- -- 461 461
ESOP compensation expense............. -- 3,800 511 547 590 --
Provision for store closings(2)....... 491 -- -- -- -- --
Refinancing costs(3).................. 12,631 -- -- -- -- --
-------- ------- ------- -------- -------- --------
Income (loss) from continuing
operations before income taxes.... (17,157) (3,557) (1,176) 571 2,048 9,154
Income tax benefit (expense) (4)...... -- -- -- -- 14,924 12,081
-------- ------- ------- -------- -------- --------
Income (loss) from continuing
operations........................ (17,157) (3,557) (1,176) 571 16,972 21,235
Gain (loss) on disposal of
discontinued operations(5).......... (7,297) -- 2,700 -- -- --
-------- ------- ------- -------- -------- --------
Net income (loss) before cumulative
effect of accounting change
for ESOP.......................... (24,454) (3,557) 1,524 571 16,972 21,235
Cumulative effect of accounting change
for ESOP(6)......................... -- -- (8,526) -- -- --
-------- ------- ------- -------- -------- --------
Net income (loss)................... $(24,454) $(3,557) $(7,002) $ 571 $ 16,972 $ 21,235
======== ======= ======= ======== ======== ========
SUPPLEMENTAL PRO FORMA STATEMENT OF
OPERATIONS DATA(7):
Net income............................ $ 5,492
Net income per share.................. $ 0.62
Weighted average number of common
shares and common share equivalents
outstanding(8)...................... 8,892,305
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
THREE MONTHS ENDED APRIL 30, 1996
APRIL 30, 1996 PRO FORMA
----------------- ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 29,560 $ 29,560
Cost of sales......................... 17,934 17,934
-------- ------
Gross profit........................ 11,626 11,626
Selling, general and administrative
expenses............................ 10,018 10,018
-------- ------
Income from operations.............. 1,608 1,608
Interest expense...................... 3,014 1,397
Stock award expense................... -- --
ESOP compensation expense............. -- --
Provision for store closings(2)....... -- --
Refinancing costs(3).................. -- --
-------- ------
Income (loss) from continuing
operations before income taxes.... (1,406) 211
Income tax benefit (expense) (4)...... 548 (82)
-------- -------
Income (loss) from continuing
operations........................ (858) 129
Gain (loss) on disposal of
discontinued operations(5).......... -- --
-------- --------
Net income (loss) before cumulative
effect of accounting change
for ESOP.......................... (858) 129
Cumulative effect of accounting change
for ESOP(6)......................... -- --
-------- --------
Net income (loss)................... $ (858) $ 129
======== ========
Net (loss) earnings per share....... (0.17) 0.01
Total weighted common share and
common share equivalents.......... 5,080,787 8,892,305
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Ratio of Earnings to Fixed Charges(9)......... (.50) .64 .90 1.04 1.13
Stores open at end of period.................. 111 113 122 131 146
Average net sales per store(10)............... $699,000 $784,000 $791,000 $836,000 $ 936,000
Average net sales per gross square foot(11)... $ 883 $ 1,008 $ 1,013 $ 1,068 $ 1,187
Comparable store sales increase
(decrease)(12).............................. 0.4% 12.5% (0.5)% 7.6% 11.0%
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital............................... $ 29,731 $ 15,123 $ 20,079 $ 20,460 $ 21,512
Total assets.................................. 59,376 59,174 51,677 61,512 87,403
Total debt.................................... 97,932 112,247 105,953 110,806 107,891
Stockholders' deficit......................... (69,877) (69,634) (67,659) (66,578) (47,858)
</TABLE>
- ------------------------------
(1) Pro forma to give effect to the Recapitalization (including the Offering,
the IPO, the Bank Facility, the Gold Consignment Facility and the
restructuring of the Company's ESOP) and the use of the funds generated
thereby, as if the Recapitalization had occurred on February 1, 1995. See
"The Recapitalization" and "Pro Forma Financial Data."
- 25 -
<PAGE> 32
(2) During the year ended January 31, 1992, the Company recorded a charge to
provide for the closure of certain stores it expected to close subsequent
to year-end as well as for contingent liabilities on stores closed
previously.
(3) In connection with its fiscal 1991 refinancing of debt, the Company
recorded refinancing costs in the amount of $12.6 million, which included
$2 million in interest and fees payable under interest rate hedge
agreements, $1.8 million in default interest, $4.3 million in zero coupon
notes, $1.5 million in restructuring fees, $2.3 million in accrued legal
and other professional fees, and $0.7 million of previously deferred costs
incurred in connection with the establishment of the ESOP. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Background."
(4) Income tax benefit in the year ended January 31, 1996 resulted from the
reversal of the Company's valuation allowance and corresponding recognition
of a deferred tax asset. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Background" and Note 6 of
Notes to Financial Statements.
(5) The Company sold its direct marketing division as of January 31, 1992. In
connection with this disposition, the Company recorded a $7.3 million loss
in the year ended January 31, 1992 on the sale of the discontinued
operations and a $2.7 million gain in the year ended January 31, 1994 upon
its receipt of deferred proceeds from the sale.
(6) Reflects a charge for the cumulative effect of the Company's change in
accounting in the amount of $8.5 million to adopt AICPA SOP 93-6 for the
recognition of compensation expense on shares allocated to the ESOP. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Background" and Note 5 of Notes to Financial Statements.
(7) Supplemental pro forma statement of operations data (i) reflect the
application of a tax provision (assuming a statutory rate of 40%) to
historical net income from continuing operations before income tax and (ii)
give effect to the Recapitalization and use of the funds generated thereby,
as if it had occurred on February 1, 1995. See "Pro Forma Financial Data."
(8) The weighted average number of common shares and common share equivalents
outstanding consists of (i) 8,372,267 shares of Common Stock outstanding
(including 3,269,500 shares of Common Stock offered hereby); (ii) 3,588
common share equivalents relating to Class B Common Stock; and (iii)
516,449 common share equivalents relating to incentive stock options
granted within one year prior to the IPO.
(9) Represents income (loss) from continuing operations before fixed charges
and income taxes divided by fixed charges.
(10) Average net sales per store represents the total net sales for stores open
for a full fiscal year divided by the total number of such stores.
(11) Average net sales per gross square foot represents total net sales for
stores open for a full fiscal year divided by the total gross square feet
of such stores.
(12) A store becomes comparable after it has been open for 12 full months.
- 26 -
<PAGE> 33
PRO FORMA FINANCIAL DATA
The following pro forma financial data of the Company present the
Company's unaudited pro forma condensed statement of operations for the year
ended January 31, 1996 and for the three months ended April 30, 1996 and the
unaudited pro forma condensed balance sheet as of January 31, 1996 and April
30, 1996. The pro forma financial data give effect to the Recapitalization
(including the Offering, the IPO, the Bank Facility and the Gold Consignment
Facility and utilization of approximately $17.4 million of a debt discount at
January 31, 1996 and of approximately $18.3 million of a debt discount at April
30, 1996) and (ii) the restructuring of the ESOP, as if each such transaction
had occurred as of April 30, 1996 with respect to the pro forma condensed
balance sheet and as of February 1, 1995 with respect to the pro forma
statement of operations for the year ended January 31, 1996 and for the three
months ended April 30, 1996. The pro forma financial data appearing herein do
not purport to represent what the Company's results of operations would have
been had such transactions in fact occurred on the dates or at the beginning of
the periods indicated or to project the results of operations of the Company
for the present year or for any future period or the Company's financial
condition on January 31, 1996 or on any other date.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1996
------------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net sales....................................................... $131,022 $ -- $131,022
Cost of sales................................................... 77,722 -- 77,722
-------- -------- ---------
Gross profit.................................................. 53,300 -- 53,300
Selling, general and administrative expenses.................... 37,887 -- 37,887
-------- -------- ---------
Income from operations........................................ 15,413 -- 15,413
Interest expense (income):
Old revolver loan; old term loan; senior accreting notes; zero
coupon notes; and subordinated debt......................... 12,358 12,358(1) --
New Revolver; New Term Loan; Subordinated Notes; and Gold
Consignment Facility........................................ -- 5,668(2) 5,668
Other......................................................... (44) 174(3) 130
Stock award expense............................................. 461 -- 461
ESOP compensation expense....................................... 590 (590)(4) --
-------- -------- ---------
Income before taxes........................................... (2,048) 7,106 9,154
Income tax benefit (provision).................................. 14,924 (2,843)(5) 12,081
-------- -------- ---------
Net income(6)................................................. $ 16,972 $ 4,263 $ 21,235
======== ======== =========
SUPPLEMENTAL PRO FORMA STATEMENT OF OPERATIONS DATA(7):
Net income.................................................... $ 5,492
Net income per share.......................................... $ 0.62
Weighted average number of common shares and common share
equivalents outstanding(8).................................. 8,892,305
</TABLE>
- ------------------------------
(1) To reflect the retirement of all of the Company's currently existing bank
indebtedness and subordinated debt as a result of the Recapitalization.
(2) To record the interest expense and related amortization of estimated debt
issuance costs related to the New Revolver, the New Term Loan and the Notes
and the fee related to the Gold Consignment Facility.
(3) To reflect the sale of the interest rate cap agreement.
(4) To reflect the elimination of deferred compensation expense as a result of
the restructuring of the ESOP.
(5) To record the tax effect of the pro forma adjustments, utilizing an assumed
40% statutory tax rate.
(6) The following gains and losses directly attributable to the Recapitalization
have been excluded from the pro forma statement of operations: (a) the $17.4
million gain ($10.2 million net of tax) resulting from the debt discount and
(b) a $7.2 million reversal of the tax-effected temporary difference related
to interest accruals on long term debt. These amounts have been reflected in
retained earnings (accumulated deficit) on the pro forma balance sheet.
(7) Supplemental pro forma statement of operations data (i) refect the
application of a tax provision (assuming a statutory rate of 40%) to
historical net income from continuing operations before income tax and (ii)
give effect to the Recaptilization and use of the funds generated thereby,
as if it had occurred on February 1, 1995.
(8) The weighted average number of common shares and common shares
equivalents outstanding consists of (i) 8,372,267 shares of Common Stock
outstanding (including 3,269,500 shares of Common Stock offered hereby);
(ii) 3,588 common share equivalents relating to Class B Common Stock; and
(iii) 516,449 common share equivalents relating to incentive stock options
granted within one year prior to the IPO.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30, 1996
------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net Sales......................................................... $ 29,560 $ -- $29,560
Cost of sales..................................................... 17,934 -- 17,934
------- ------- -------
Gross profit................................................... 11,626 -- 11,626
Selling, general and administrative expenses...................... 10,018 -- 10,018
------- ------- -------
Income from operations......................................... 1,608 -- 1,608
Interest expense (income):
Old revolver loan; old term loan; senior accreting notes, zero
coupon notes; and subordinated debt............................ 2,923 2,923(1) --
New Revolver; New Term Loan; Subordinated Notes; and Gold
Consignment Facility........................................... -- 1,306(2) 1,306
Other........................................................... 91 -- 91
Stock award expense............................................... -- -- --
ESOP compensation expense......................................... -- -- --
------- ------- -------
(Loss) Income before taxes........................................ (1,406) 1,617 211
Income tax benefit (provision).................................... 548 (630)(3) (82)
------- ------- -------
Net (Loss) income (4)............................................. $ (858) $ 987 $ 129
===== ===== =====
</TABLE>
- ----------------
(1) To reflect the retirement of all of the Company's currently existing bank
indebtedness and subordinated debt as a result of Recapitalization.
(2) To record the interest expense and related amortization of estimated
debt issuance costs related to the New Revolver, the New Term Loan and the
Notes and the fee related to the Gold Consignment Facility.
(3) To record the tax effect of the pro forma adjustments, utilizing an assumed
40% statutory tax rate.
(4) The following gains and losses directly attributable to the Recapitalization
have been excluded from the pro forma statement of operations: (a) the $17.4
million gain ($10.2 million net of tax) resulting from the debt discount and
(b) a $7.2 million reversal of the tax-effected temporary difference related
to interest accruals on long term debt. These amounts have been reflected in
retained earnings (accumulated deficit) on the pro forma balance sheet.
- 27 -
<PAGE> 34
PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
APRIL 30, 1996
---------------------------------------
PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS AS ADJUSTED
------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Accounts receivable, net................................... 1,607 $ -- $ 1,607
Layaway receivable, net.................................... 1,500 -- 1,500
Merchandise inventories.................................... 59,942 (15,000)(1) 44,942
Other current assets....................................... 456 -- 456
Deferred income taxes, net................................. 16,239 (7,172)(3) 9,067
Property and equipment, net................................ 14,067 -- 14,067
Deferred financing costs................................... 4,357 (1,900)(4) 2,457
------- -------- -------
Total assets.......................................... $98,168 $ (24,072) $ 74,096
======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Old revolver loan........................................ $ 7,481 $ (7,481)(5) $ --
Current portion of old term loan......................... 7,938 (7,938)(5) --
Long-term portion of old term loan....................... 18,662 (18,662)(5) --
Current portion of senior accreting notes................ 1,956 (1,956)(5) --
Long-term portion of senior accreting notes.............. 49,014 (49,014)(5) --
Zero coupon notes........................................ 5,962 (5,962)(5) --
Subordinated debt........................................ 24,339 (24,339)(5) --
Other long-term liabilities.............................. 1,161 -- 1,161
Outstanding checks....................................... 4,686 -- 4,686
Other current liabilities................................ 22,016 -- 22,016
Accrued financing cost................................... 3,545 -- 3,545
New Revolver............................................. -- 4,519(6) 4,519
New Term Loan............................................ -- 15,000(7) 15,000
Subordinated Notes....................................... -- 20,000(8) 20,000
------- -------- -------
Total liabilities..................................... 146,760 75,833 70,927
STOCKHOLDERS' EQUITY:
Common Stock and additional paid-in capital.............. 8,920 24,675(9) 33,595
Accumulated deficit...................................... (15,531) (14,895)(10) (30,426)
Treasury stock........................................... (20,333) 20,333(11) --
Deferred ESOP compensation............................... (21,648) 21,648(12) --
------- -------- -------
Total stockholders' (deficit) equity.................. (48,592) 51,761 3,169
------- -------- -------
Total liabilities and stockholders' (deficit)
equity.............................................. $98,168 $ (24,072) $ 74,096
======= ======== =======
</TABLE>
- ------------------------------
(1) To record the reduction in inventory pursuant to the Gold Consignment
Facility.
(3) To record the reversal of the tax-effected temporary difference related to
interest accruals for long-term debt.
(4) To record the equity issuance costs, previously deferred
(5) To record the retirement of debt with the proceeds from the
Recapitalization.
(6) To record borrowings under the New Revolver as part of the
Recapitalization.
(7) To record the New Term Loan component of the Recapitalization.
(8) To record the Notes component of the Recapitalization.
(9) To reflect (i) the net proceeds of $40.7 million from the IPO of 3,269,500
shares of Common Stock issued by the Company; and (ii) a charge of $16.1
million relating to the restructuring of the ESOP.
(10) To record the following accumulated deficit effects: (i) $25.7 million
relating to the restructuring of the ESOP; (ii) $7.2 million relating to
the reversal of the tax-effected temporary difference described in note 3
above; and (iii) the gain of $18.3 million resulting from the debt
discount.
(11) To reflect (i) $2.6 million relating to the surrendering of unallocated
ESOP shares to the Company in connection with the restructuring of the ESOP
and (ii) $22.9 million relating to the cancellation of the treasury stock
at the date of the Offering.
(12) To reflect the elimination of deferred compensation expense as a result of
the restructuring of the ESOP.
- 28 -
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
Company's financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
BACKGROUND
The Company is a leading, national specialty retailer of fine jewelry
(based on number of stores, according to the May 16, 1995 issue of National
Jeweler), operating 151 stores in 24 states at April 30, 1996. The Company's
sales and income from operations have increased consistently since fiscal 1991
to $131.0 million and $15.4 million, respectively, in fiscal 1995. During that
same period, the number of Company stores grew from 111 to 146, and the
Company's operating margins improved from 7.0% in fiscal 1991 to 11.8% in
fiscal 1995. The Company achieved this operating performance despite
significant financial leverage.
The capitalization of the Company prior to the Recapitalization is
primarily the result of transactions which occurred in the late 1980's and
early 1990's. In 1988, the Company incurred $70.0 million in indebtedness to
finance the purchase from stockholders of outstanding equity in the Company by
a newly-formed ESOP. The $70.0 million paid for the shares purchased by the
ESOP was recorded on the Company's balance sheet as deferred ESOP compensation,
and constituted a $70.0 million reduction in stockholders' equity. The Company
has incurred ongoing ESOP compensation expense since the establishment of the
ESOP. As a result of the restructuring of the ESOP, the Company does not
expect to incur ESOP compensation expense subsequent to January 31, 1996. See
"The Recapitalization--ESOP Restructuring." In addition, in 1991 due to the
sale of the Company's direct marketing business, and a recessionary
environment, the Company restructured its debt arrangements and incurred
one-time charges in connection therewith.
To strengthen its capital structure and provide greater financial
flexibility for new store openings, the Company restructured its outstanding
indebtedness to reduce the amount and cost of its outstanding debt. The
Recapitalization, which was completed on May 7, 1996, resulted in a one-time
extraordinary gain on early extinguishment of debt in an amount aggregating
approximately $18.3 million (approximately $11.2 million net of tax).
The Company anticipates opening 18 stores in fiscal 1996 (five of
which had been opened as of April 30, 1996) and 23 stores in fiscal 1997. The
Company's policy is to charge as incurred pre-opening costs associated with new
stores. In fiscal 1995, the Company enhanced and upgraded its personnel to
increase sales and expects to continue to incur selling, general and
administrative expense in the near term in association with this ongoing
upgrade. The Company's continuing efforts to increase the use of its private
label credit programs are expected to result in higher credit-related expense.
In addition, the Company experienced 11.0% comparable store sales increases in
fiscal 1995. While the Company has a number of new programs in place to
enhance sales, there can be no assurance that the Company will achieve
comparable store sales increases in future reporting periods.
RECENT SALES RESULTS
For the first quarter of fiscal 1996, net sales increased $5.9 million,
or 24.9%, to $29.6 million from $23.7 million in the first quarter of fiscal
1995. Comparable store sales increased by 13.8% ($3.2 million) in the first
quarter of fiscal 1996, as compared to a 10.6% ($2.0 million) increase in the
first quarter of fiscal 1995.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
information derived from the statements of operations of the Company expressed
as a percentage of net sales for such periods and the percentage change in such
items compared to the amount for the prior fiscal year.
- 29 -
<PAGE> 36
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES PERCENTAGE OF NET
YEAR ENDED JANUARY 31, SALES FOR THE THREE
---------------------------------------- MONTHS ENDED
APRIL 30,
1994 1995 1996 1995 1996
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0 100.0
Cost of Sales (including buying and
occupancy expenses) . . . . . . . . . . . . . . . 59.8 60.2 59.3 62.5 60.7
------ ------ ------ ---- -----
Gross Profit . . . . . . . . . . . . . . . . . . 40.2 39.8 40.7 37.5 39.3
Selling, general and administrative expenses . . . . 31.1 28.8 28.9 33.9 33.9
----- ----- ----- ---- -----
Income from operations . . . . . . . . . . . . . 9.1 11.0 11.8 3.6 5.4
Interest expense, including deferred interest
of $5,467, $6,685, $8,171, $1,948 and $2,099,
respectively . . . . . . . . . . . . . . . . . . 9.8 9.9 9.4 12.4 10.2
Stock award expense . . . . . . . . . . . . . . . . . -- -- 0.4 -- --
ESOP compensation expense . . . . . . . . . . . . . . 0.6 0.5 0.5 0.6 --
----- ------ ------ ----- ------
Income (loss) from continuing
operations before income taxes . . . . . . . . . . (1.3) 0.5 1.6 (9.4) (4.8)
Income tax benefit . . . . . . . . . . . . . . . . . -- -- 11.4 -- 1.9
------ ----- -----
Gain on disposal of discontinued operations . . . . . 3.0 -- -- -- --
------ ----- ----- ------ ------
Income before cumulative effect or
change in accounting for ESOP . . . . . . . . 1.7 0.5 13.0 (9.4) (2.9)
Cumulative effect of change in accounting
for ESOP . . . . . . . . . . . . . . . . . . . . . (9.4) -- -- -- --
------ ---- ------ ---- ----
Net income (loss) . . . . . . . . . . . . . . . . (7.7)% 0.5% 13.0% (9.4) (2.9)
- -------------------- ====== ==== ====== ===== =====
</TABLE>
* Not meaningful
First Quarter Fiscal 1996 Compared to First Quarter Fiscal 1996
Net sales for the first quarter of fiscal 1996 increased by $5.9
million or 24.9% to $29.6 million. Comparable store sales increased $3.2
million or 13.8% in the first quarter of fiscal 1996. Sales from new stores
contributed $2.6 million to the overall sales increase. The average number of
units sold on a comparable store basis increased by approximately 9.6% in the
first quarter of fiscal 1996, while the average price per merchandise sale
increased to $257 in fiscal 1996 from $252 in fiscal 1995. Comparable store
sales increased in part due to increased use of non-recourse credit, the
implementation of new return/exchange policies and ongoing improvements in the
quality of the Company's sales force. The Company opened five new stores in the
first quarter of fiscal 1996 increasing the number of stores opened to 151 as
of April 30, 1996 compared to 137 as of April 30, 1995.
Gross profit increased $2.7 million to $11.6 million in first quarter
of fiscal 1996. Gross profit increased to 39.3% in the first quarter of fiscal
1996 from 37.5% in the first quarter of fiscal 1995. This increase was due
primarily to the spreading of certain buying and occupancy costs over the
Company's larger store base and to increased sales.
Selling, general and administrative expenses increased by $2.0 million
or 24.8% to $10.0 million in the first quarter of fiscal 1996 from $8.0
million. New stores accounted for $0.9 million of this increase. As a
percentage of net sales, selling, general and administrative expenses remained
consistent at 33.9% in the first quarters of fiscal 1996 and 1995. The dollar
increase primarily relates to higher payroll expenses of $1.2 million and $0.3
million in credit expense. Comparable store payroll costs increased 9.0% in
the first quarter of fiscal 1996 as compared to the first quarter of fiscal
1995 primarily due to a continuing effort to upgrade the quality of the sales
force and an increase in incentive compensation paid to store based personnel.
Private label non-recourse credit sales as a percentage of net sales increased
to 43.3% in the first quarter of fiscal 1996 from 36.0% in the first quarter of
fiscal 1995. These non-recourse credit sales carry higher discount rates than
bankcard sales, which resulted in higher credit expense.
<TABLE>
<CAPTION>
PERCENTAGE
INCREASE
PERCENTAGE THREE MONTHS
INCREASE ENDED APRIL
--------------- 30, 1996 OVER
1995 1996 THREE MONTHS
OVER OVER ENDED APRIL
1994 1995 30, 1995
---- ---- ------------
<S> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . . . . . . 17.1% 22.8% 24.9
Cost of Sales (including buying and
occupancy expenses) . . . . . . . . . . . . . 17.8 21.0 21.2
Gross Profit . . . . . . . . . . . . . . . . 16.0 25.5 30.9
Selling, general and administrative expenses . . 8.5 23.2 24.8
Income from operations . . . . . . . . . . . 41.9 31.6 88.3
Interest expense . . . . . . . . . . . . . . . . 18.8 16.2 2.6
Stock award expense . . . . . . . . . . . . . . . * * *
ESOP compensation expense . . . . . . . . . . . . 7.0 7.9 *
Income (loss) from continuing
operations before income taxes . . . . . . . . * * *
Income tax benefit . . . . . . . . . . . . . . . * * *
Gain on disposal of discontinued operations . . . * * *
Income before cumulative effect or
change in accounting for ESOP . . . . . . * * *
Cumulative effect of change in accounting
for ESOP . . . . . . . . . . . . . . . . . . . * * *
Net income (loss). . . . . . . . . . . . . . . . . * * *
</TABLE>
- --------------------
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales increased $24.3 million, or 22.8%, to $131.0 million in
fiscal 1995 from $106.7 million in fiscal 1994. Comparable store sales
increased $11.6 million, or 11.0%, in fiscal 1995. Sales from new stores
contributed $12.5 million to the overall increase in net sales. The average
number of units sold per store increased by approximately 4.4% from fiscal 1994
to fiscal 1995, while the average price per merchandise sale increased by 7.0%,
to $245 in fiscal 1995 from $229 in fiscal 1994. Comparable store sales
increased in large part due to improvements in the quality of the Company's
personnel, increased use of non-recourse credit, and the implementation of new
return/exchange policies. The Company opened 15 new stores in fiscal 1995,
increasing the weighted average number of stores to 141 in fiscal 1995 from 126
in fiscal 1994.
Gross profit increased $10.8 million, or 25.5%, to $53.3 million in
fiscal 1995, from $42.5 million in fiscal 1994. Gross margin increased to
40.7% in fiscal 1995 from 39.8% in fiscal 1994. This increase was due
primarily to a slight shift in product mix to the Company's higher margin
jewelry items, as well as stricter discounting policies implemented during
fiscal 1995. Occupancy, distribution and buying costs decreased as a
percentage of net sales, due to economies of scale achieved through the
Company's larger store base and increased net sales.
Selling, general and administrative expenses increased $7.1 million,
or 23.2%, to $37.9 million in fiscal 1995 from $30.7 million in fiscal 1994.
As a percentage of net sales, selling, general and administrative expenses
increased slightly to 28.9% in fiscal 1995 from 28.8% in fiscal 1994. The
dollar increase primarily relates to higher payroll expenses ($4.9 million) and
credit expense ($1.7 million), partially offset by a decrease in advertising
expenses ($0.4 million). Selling, general and administrative expenses
attributable to the 15 stores opened in fiscal 1995 and 11 stores opened in
fiscal 1994 accounted for $3.6 million of the total increase in selling,
general and administrative expenses. Payroll costs increased in fiscal 1995,
as compared to fiscal 1994, primarily due to an effort to upgrade the quality
of store managers and an increase in incentive compensation paid to store-based
personnel. Credit sales as a percentage of net sales increased to 36.9% in
fiscal 1995 from 29.3% in fiscal 1994 as a result of an increase in use of the
Company's "private label" credit programs
- 30 -
<PAGE> 37
(including its new "First Time Buyers" program). These non-recourse credit
sales carry higher discount rates than bankcard sales. The increased usage of
private label credit contributed to higher sales as well as increases in the
average price per merchandise sale. The Company intends to continue to upgrade
its sales staff and expand its credit programs. Advertising expenses decreased
as a result of eliminating radio advertising in fiscal 1995.
As a result of the factors discussed above, income from operations
increased 31.6%, to $15.4 million in fiscal 1995 from $11.7 million in fiscal
1994. As a percentage of net sales, income from operations increased to 11.8%
in fiscal l995 from 11.0% in fiscal l994.
Interest expense increased $1.7 million, or 16.2%, to $12.3 million in
fiscal 1995 from $10.6 million in fiscal 1994. As a percentage of net sales,
interest expense decreased to 9.4% in fiscal 1995 from 9.9% in fiscal 1994.
The dollar increase in interest expense was due primarily to higher average
indebtedness and higher interest rates. Approximately two-thirds of fiscal
1995 interest expense consisted of non- cash interest accrued on the Company's
senior accreting note and subordinated indebtedness. The Recapitalization and
Offering will substantially reduce the Company's debt levels in fiscal 1996.
ESOP compensation expense increased by $43,000, or 7.9%, to $590,000
in fiscal 1995 from $547,000 in fiscal 1994. The expense is related to the
estimated fair value of shares held by the ESOP committed to be released to
participants' accounts. After the Recapitalization, the Company expects to
record no future ESOP compensation expense. The Company also recognized a
one-time $461,000 expense relating to restricted stock awards made in fiscal
1995.
At the end of fiscal 1995, the Company recognized into net income a
deferred tax benefit of $14.9 million. The recognition of the deferred tax
benefit resulted from a reduction in the valuation allowance relating to the
Company's expectation of future taxable income being, at a minimum, $41.5
million, prior to the expiration of the deferred tax assets. The deferred tax
asset principally relates to the Company's net operating loss carryforwards and
a temporary difference arising from the recognition of interest expenses and
fees on the currently outstanding debt. At February 1, 1996, the Company had
available net operating loss tax carryforwards in the amount of $17.9 million,
which begin expiring in 2006. While these carryforwards are expected to reduce
future income tax payments, the benefits of such carryforwards have already
been recognized in the Company's balance sheets and results of operations for
fiscal 1995. The Company expects to realize $7.2 million of the deferred tax
asset in 1996, concurrent with the recognition of the gain relating to the debt
forgiveness.
Giving pro forma effect to the Offering and the Recapitalization and
realization of a portion of the deferred tax asset in the amount of $7.2
million associated with the debt forgiveness, the Company would have a
remaining net deferred tax asset in the amount of $8.5 million as of January
31, 1996. This deferred tax asset relates primarily to net operating tax loss
carryforwards generated in prior years. Full utilization of the remaining
deferred tax asset will require the Company to generate aggregate future
taxable income of approximately $22.1 million prior to the carryforwards'
expiration, which will begin in 2006. For the fiscal year ended January 31,
1996, the Company had pro forma taxable income of $9.2 million, giving effect
to the Offering and the Recapitalization.
In years prior to the fiscal year ended January 31, 1996, the Company
determined that, in accordance with the criteria set forth in Statement of
Accounting Standards No. 109 ("SFAS 109"), realization of the tax benefits was
not "more likely than not." As a result, in accordance with SFAS 109, in years
prior to the fiscal year ended January 31, 1996, the Company recorded a full
valuation allowance with respect to the deferred tax asset. See Note 6 of
Notes to Financial Statements.
The Company's results of operations have improved significantly over
the past five fiscal years and, despite nominal net income and net losses due
primarily to significant interest expense associated with its high debt level,
the Company has generated positive cash flow from operations and strong gross
margins. Based on its significantly improved operating performance in the year
ended January 31, 1996 and its expectations of future profitability (without
regard to the Offering and the Recapitalization) as of January 31, 1996, the
Company determined that it is more likely than not that it will generate
sufficient taxable income to utilize its deferred tax asset prior to the
expiration of the net operating loss carryforwards. Accordingly, in accordance
with SFAS 109, effective January 31, 1996, the Company reversed the valuation
allowance and recognized a corresponding net deferred tax asset. Realization
of the net deferred tax asset is not assured, however, and the amount of the
asset considered realizable could be reduced in future periods if the Company's
estimates of future taxable
- 31 -
<PAGE> 38
income during the carryforward period are reduced for any reason. A number of
factors could affect the Company's future results of operations, including
without limitation, general economic conditions, competition and fluctuations
in gem and gold prices. See "Risk Factors," Note 6 of Notes to Financial
Statements and "Stock Ownership--Possible Limitations on the Company's Use of
Net Operating Loss Carryforwards."
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales increased $15.6 million, or 17.1%, to $106.7 million in
fiscal 1994 from $91.1 million in fiscal 1993. Comparable store sales
increased $6.7 million, or 7.6%, in fiscal 1994. Sales from new stores
contributed $10.1 million to the overall increase in net sales. These
increases were partially offset by a decrease in net sales related to the
closing of stores in fiscal 1994 and 1993. In addition, the average price per
merchandise sale increased by 9.0%, to $229 in fiscal 1994 from $210 in fiscal
1993. Comparable store sales increased in large part due to the Company's
competitive pricing strategy, its selection of key merchandise inventory
categories, and an increase in average price per merchandise sale due to a
higher proportion of non-recourse credit sales. Stores closed in fiscal 1994
and 1993 accounted for a $1.3 million decrease in net sales. The Company
opened 11 new stores in fiscal 1994, increasing the weighted average number of
stores to 126 in fiscal 1994 compared to 117 in fiscal 1993.
Gross profit increased $5.9 million, or 16.0%, to $42.5 million in
fiscal 1994 from $36.6 million in fiscal 1993. The increase in gross profit
was attributable to the Company's increase in net sales. Gross margin
decreased to 39.8% in fiscal 1994 from 40.2% in fiscal 1993 due to the
implementation of certain more competitively priced merchandise programs, which
were introduced in the second half of fiscal 1993. At the same time, tighter
controls over store discounting were implemented to achieve margin improvements
on other merchandise. Occupancy, distribution and buying costs decreased as a
percentage of net sales, due to economies of scale achieved through the
Company's larger store base and increased net sales.
Selling, general and administrative expenses increased $2.4 million,
or 8.5%, to $30.7 million in fiscal 1994 from $28.3 million in fiscal 1993. As
a percentage of net sales, selling, general and administrative expenses
decreased to 28.8% in fiscal 1994 from 31.1% in fiscal 1993. The dollar
increase primarily relates to higher payroll expenses, credit expense and
supplies and other expenses attributable to 11 stores opened in fiscal 1994 and
11 stores opened in fiscal 1993. Payroll costs as a percentage of net sales
decreased in fiscal 1994, as compared to fiscal 1993. This gain in sales
productivity was primarily due to a reduction in average store staffing hours.
Automation of certain store functions and centralization of certain activities
at the corporate office permitted this reduction without impacting sales.
Advertising costs decreased slightly as a result of discontinuing radio
advertising in certain markets.
As a result of the factors discussed above, income from operations
increased 41.9% to $11.7 million in fiscal 1994 from $8.3 million in fiscal
1993. As a percentage of net sales, income from operations increased to 11.0%
in fiscal l994 from 9.1% in fiscal l993.
Interest expense increased $1.7 million, or 18.8%, to $10.6 million in
fiscal 1994 from $8.9 million in fiscal 1993. This increase in interest
expense was due primarily to higher average indebtedness and to higher interest
rates. As a percentage of net sales, interest expense increased to 9.9% in
fiscal l994 from 9.8% in fiscal 1993.
ESOP compensation expense increased $36,000, or 7.0%, to $547,000 in
fiscal 1994 from $511,000 in fiscal 1993. The expense is related primarily to
an increase in the estimated fair value of the shares held by the ESOP
committed to be released to participant's accounts.
QUARTERLY RESULTS
The Company's results of operations fluctuate on a quarterly basis.
The Company has historically experienced net losses and lower net sales in each
of its first fiscal quarters. The Company expects this trend to continue.
The following table sets forth summary unaudited quarterly financial
information of the Company for each quarter in fiscal 1994 and fiscal 1995. In
the opinion of management, this quarterly information has been prepared on a
basis consistent with the Company's audited financial statements appearing
elsewhere in this Prospectus and reflects adjustments,
- 32 -
<PAGE> 39
consisting of normal recurring adjustments, necessary for a fair presentation
of such unaudited quarterly results when read in conjunction with the audited
financial statements and notes thereto. The operating results for any quarter
are not necessarily indicative of results for any future period and there can
be no assurance that any trends reflected in such results will continue in the
future.
<TABLE>
<CAPTION>
1994 QUARTERS ENDED 1995 QUARTERS ENDED
(in thousands) (in thousands) 1996
QUARTER
ENDED
(in thousands)
APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, April 30,
1994 1994 1994 1994 1995 1995 1995 1996 1996
---- ----- ---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales . . . . . . . $19,091 $22,578 $22,125 $42,889 $23,676 $28,398 $27,688 $51,260 $29,560
Gross Profit . . . . . 6,968 8,494 8,326 18,672 8,880 11,235 10,724 22,461 11,626
Income from
operations . . . . . 370 1,424 1,079 8,839 854 2,803 1,800 9,956 1,608
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Over the last three fiscal years, the Company's primary ongoing
capital requirements have been to amortize its term debt incurred as part of
the Company's 1991 debt restructuring, to fund increases in inventory at
existing stores and to fund capital expenditures and working capital (primarily
inventory) associated with the Company's new stores. During the same period,
the Company's primary sources of liquidity have been cash flow from operations
and bank borrowings under the Company's revolver.
The Company's inventory levels and working capital requirements have
historically been highest in advance of the Christmas shopping season. The
Company has funded these seasonal working capital needs through borrowings
under the Company's revolver and increases in trade payables and accrued
experiences.
The Company's cash flow from operating activities decreased from
$3.5 million provided by operations in the first quarter of 1995 to a use
of cash for operations of $0.2 million in the first quarter of 1996. Higher
income from operations together with increases in accounts payable and accrued
expenses were more than offset by increases in merchandise inventories and
deferred financing costs incurred in connection with the initial public
offering and the new financing arrangements. In the first quarter of 1996, the
primary sources of the Company's liquidity included a $5.4 million net increase
in the amount outstanding under the Company's revolver less a decrease of $3.3
million in outstanding checks. The Company utilized cash in the first quarter
of 1996 primarily to fund capital expenditures of $2.0 million, primarily
related to the opening of five new stores in the first quarter of 1996 and new
stores scheduled to open early in the second quarter.
During May 1996, the Company completed (i) an IPO, (ii) a
restructuring of its loan agreements, and (iii) a restructuring of the
Company's ESOP. The proceeds of the IPO and the new financing arrangements
were primarily used to repay all outstanding bank borrowings and subordinated
debt.
The Company's cash flow from operating activities increased from $4.7
million in fiscal l994 to $9.6 million in fiscal l995, primarily due to higher
income from operations. In fiscal 1995, the sources of the Company's liquidity
included cash flow from operating activities, together with a $5.5 million
increase in outstanding checks less a $4.7 million decrease in amounts
outstanding under the Company's revolver. The Company utilized cash during
fiscal l995 primarily to (i) increase inventories, net of corresponding
payables ($6.3 million), (ii) repay the Company's term loan ($6.4 million), and
(iii) fund capital expenditures ($3.9 million). The increase in inventories
and capital expenditures were primarily related to the opening of the Company's
15 new stores in fiscal 1995. The peak outstanding borrowings under the
Company's revolver during fiscal 1995 was $10.7 million. In addition, at
November 30, l995, the Company had consigned inventories from vendors in the
amount of $18.0 million.
The Company's cash flow from operating activities increased from a
cash flow deficit of $4.7 million in fiscal 1993 to a positive cash flow of
$4.7 million in fiscal 1994, primarily due to higher income from operations.
In fiscal 1994, the sources of the Company's liquidity included cash flow from
operating activities, together with a $1.8 million increase in borrowings under
the Company's revolver and outstanding checks. The Company utilized cash
during fiscal 1994 primarily to (i) increase inventories, net of corresponding
payables ($6.6 million), (ii) repay the Company's term loan ($2.5 million), and
(iii) fund capital expenditures ($3.9 million). The increase in inventories
and capital expenditures were primarily related to the opening of 11 new stores
in fiscal 1994. The peak outstanding borrowings under the Company's revolver
loan during fiscal 1994 was $9.4 million. In addition, at November 30, l994,
the Company had consigned inventories from vendors in the amount of $16.6
million.
During fiscal 1996, the Company plans to open 18 stores, eight of which had
been opened as of July 25, 1996. In addition, as of July 25, 1996, the
Company has entered into leases for ten new stores and has reached
understandings with respect to 17 leases for additional stores. New stores on
average require inventory of approximately $300,000 and capital
- 33 -
<PAGE> 40
expenditures of approximately $225,000. Pre-opening expenses for new stores
average approximately $20,000. The Company has budgeted capital expenditures
in fiscal 1996 of $5.2 million, primarily for new stores and store remodeling.
At February 1, 1996, the Company had net operating loss tax
carryforwards in the amount of $17.9 million, which will reduce cash payments
for income taxes in future periods but which have already been recognized for
financial reporting purposes. The timing of the use of these carryforwards may
be deferred if the Company has an "ownership change," as defined in Section 382
of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code").
See "Stock Ownership--Possible Limitations on the Company's Use of Net
Operating Loss Carryforwards."
The Company utilized the funds generated by the Recapitalization
(including the Offering, the IPO, the Bank Facility and the Gold Consignment
Facility) principally to retire all of the Company's bank indebtedness and
subordinated debt outstanding. The Recapitalization, which was completed on
May 7, 1996, was intended to reduce the amount of the Company's debt and the
related interest expense and to provide the Company with greater financial
flexibility for operations and to support its store expansion strategy.
Interest expense on a pro forma basis giving effect to the Recapitalization for
fiscal 1995 would have been $5.8 million, as compared to historical interest
expense of $12.3 million for fiscal 1995. The Company believes that
approximately three-quarters of this reduction is attributable to a lower level
of obligations resulting from the Recapitalization with the remainder resulting
from lower average interest rates on the new financing arrangements. As part
of the Recapitalization, the Company's ESOP was restructured. See "The
Recapitalization--ESOP Restructuring."
The Company believes that its cash flow from operating activities
together with available borrowings under the New Revolver will be sufficient to
satisfy its cash requirements, including anticipated capital expenditures, for
the foreseeable future.
INFLATION
The Company believes that inflation generally has not had a material
effect on the results of its operations.
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<PAGE> 41
BUSINESS
THE COMPANY
General. Marks Bros. Jewelers, Inc. (the "Company") is a leading,
national specialty retailer of fine jewelry (based on number of stores,
according to the May 16, 1995 issue of National Jeweler), operating 151 stores
in 24 states at April 30, 1996. Founded in 1895, the Company operates stores
in regional and super-regional shopping malls under the names Whitehall Co.
Jewellers(R) (117 stores), Lundstrom Jewelers(R) (30 stores) and Marks Bros.
Jewelers(TM) (4 stores) (in each case, as of April 30, 1996). The Company
offers at competitive prices an in-depth selection of fine jewelry in the
following key categories: diamond, gold, precious and semi-precious jewelry.
The Company's target customers are middle to upper middle income women over 25
years old. Central to the Company's growth in operating profits and its high
store productivity are its small but flexible store format, the absence of
recourse credit risk, its strong sales culture and its operating efficiencies
at both the store and corporate levels.
From fiscal 1991 to fiscal 1995, the Company's net sales grew at a
compound annual rate of 14.3%, from $76.7 million to $131.0 million, while
income from operations grew at a compound annual rate of 30.2%, from $5.4
million to $15.4 million. The Company's growth during this period is
attributable to (i) new store openings, which resulted in an increase in the
number of stores from 111 to 146 stores, (ii) higher store productivity, as
average annual sales per store increased from $699,000 to $936,000, and (iii)
improved operating efficiencies resulting in an increase in the Company's
operating margin from 7.0% to 11.8%. Although the Company recorded income from
operations in each of the last five fiscal years, it recognized net losses in
fiscal 1991, 1992 and 1993, primarily due to high interest expense. In fiscal
1995, the Company s operating return on store investment (measured by store
operating profits divided by the sum of capital expenditures and gross
inventory) for new stores opened during the prior fiscal year was approximately
28%. Virtually all the Company's stores are profitable on a store operating
basis, and almost all of the Company's new stores are profitable on a store
operating basis for their first year of operation.
The Company believes it has significant opportunities to increase
sales and profitability through an increased number of planned store openings
(including 18 in fiscal 1996 and 23 in fiscal 1997), the implementation of
several new sales and merchandising programs designed to continue comparable
store sales growth, and continued adherence to its strict operating standards
regarding performance of sales personnel, store profitability and cost control.
The cost of opening a new store on average is approximately $545,000, including
inventory, capital expenditures and pre-opening expenses.
Retailing Concepts. The Company's stores currently operate under the
names Whitehall Co. Jewellers(R) (117 stores), Lundstrom Jewelers(R) (30
stores) and Marks Bros. Jewelers(TM) (4 stores) (in each case, as of April 30,
1996). Each store concept is designed around an open, brightly-lit and
inviting layout which encourages browsing by mall shoppers. The Company s
multiple name format allows the Company to open additional stores in malls
where it already has profitable locations. Whitehall Co. Jewellers is the
Company's primary trademark and is positioned to be somewhat more upscale than
the average mall-based jewelry store. Lundstrom Jewelers operates in 30 malls,
- -- of which also have a Whitehall store. In most cases a Lundstrom store is
added to a mall only after the Company has operated a successful Whitehall
store in the same center. Generally, Lundstrom is positioned slightly more
upscale than Whitehall, with greater emphasis on more expensive diamond and
gold merchandise. The Company is testing a new concept that will be closer to
a "guild" jewelry retailer. This concept is in the implementation stage with
the first store opened in May 1996 in a mall in which the Company already
operates a Whitehall and a Lundstrom store.
INDUSTRY
Total retail sales by jewelry stores in the United States in 1994 were
approximately $16.9 billion, and such sales grew between l989 and l994 at an
annual rate of approximately 3.3%, according to the U.S. Department of
Commerce.
The jewelry market is generally divided into three segments: fine
jewelry, costume jewelry, and guild jewelry. The broad "fine" jewelry market
segment represents a majority of the jewelry market in terms of revenue, and it
includes jewelry made from precious metals and gemstones, as well as finer
watches. Fine jewelry is sold at a range of price points from middle to upper
end, with the upper end consisting of luxury items such as unique design
jewelry items and expensive time pieces. Except for a few designer label
offerings, fine jewelry is generally not marketed under brand names. Costume
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<PAGE> 42
jewelry consists of jewelry made of non-precious stones and rhinestones, as
well as inexpensive watches. The "guild" market represents a small percentage
of the total market.
Jewelry is mainly distributed through jewelry stores (both independent
stores and chains), general merchandise and discount stores, department stores,
mail order and catalogs, apparel and accessories stores, and televised home
shopping networks. General merchandisers, discount stores, and apparel and
accessories stores generally sell costume jewelry and lower-priced "fine"
jewelry. Mail order and home shopping distributors generally offer costume
jewelry and fine jewelry at low to middle price points. Department stores
generally offer a wider assortment of merchandise including a selection of
costume, fine and some "guild" jewelry.
Jewelry stores, including independent stores and jewelry chains,
represent the largest distribution channel based on industry sales. Most
jewelry stores cater to the broad fine jewelry market offering a variety of
items at a range of price points. As of December 31, 1995, there were over
28,000 retail jewelry stores nationwide accounting for almost one-half of all
jewelry sales. The retail jewelry industry is highly fragmented with no single
chain accounting for a significant percentage of the fine jewelry market.
Although jewelry stores have declined as a distribution channel in
recent years, the Company believes that this decline is attributable primarily
to the disappearance of many independent jewelers from the retailing
environment and a consolidation within the industry among national and regional
jewelry chains. The Company believes that this consolidation resulted from a
variety of factors, including (i) bad debt exposure, which impacted jewelry
stores that extended recourse credit to customers, (ii) overexpansion of stores
and the failure to close unprofitable stores, and (iii) financial risk of high
leverage. The Company believes that industry consolidation will continue as
independent jewelers find it increasingly difficult to achieve economies of
scale in merchandise purchasing and real estate site selection.
OPERATING STRATEGIES
The Company believes that its success is attributable in large measure
to its business strategy which emphasizes adherence to the Company's strict
operating standards regarding real estate selection, credit policies,
performance of sales personnel, store profitability and cost control. The
principal elements of the Company's operating strategies are as follows:
Small, Flexible Store Format in Regional Malls. The Company believes
it has a competitive advantage in obtaining high traffic, "center court"
locations in desirable regional and super-regional malls due principally to
(i) its small average store size of approximately 775 square feet, which, while
considerably smaller than the average store size of most of the Company's
competitors, generates comparable sales volumes, (ii) its ability to adapt its
store design to various sizes and configurations, and (iii) its high average
sales per square foot (approximately $1,200 in fiscal 1995). Over two-thirds
of the Company's stores are located in high traffic, "center court" locations.
The stores' small, flexible format (which lowers the Company's fixed occupancy
costs) and high productivity are desirable to mall owners. The stores' open,
attractive design appeals to customers, while facilitating foot traffic and
enhancing sales opportunities for the Company.
Absence of Recourse Credit Risk. The Company operates based upon a
"no credit risk" policy. When purchasing on credit, customers must use their
personal credit cards, the Company's private label credit card (which is
available through a third party and is non-recourse to the Company) or other
non-recourse third party credit arrangements. The Company's strict policy
eliminates its credit risk associated with the customer's failure to pay. This
policy also distinguishes the Company from most of its competitors, which not
only bear such credit risk, but also rely on finance income in addition to
merchandise sales.
Motivated, Sales-Oriented Store Personnel. The primary responsibility
of store sales personnel is selling to customers. To assist them in their
selling efforts, store personnel are authorized to discount prices within
certain limits and to choose from a variety of return/exchange options to offer
the customer. Most non-sale activities are largely centralized. In addition,
the absence of internal credit operations reduces the need for sales personnel
to focus on many in-store credit activities. Compensation and bonus programs
reinforce sales and margin goals on a daily, weekly and monthly basis. The
Company continually seeks to enhance the selling skills of its sales associates
through recruitment of experienced sales personnel and extensive, ongoing
training programs.
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<PAGE> 43
Differentiated Merchandising. The Company offers an in-depth
selection of merchandise in several key categories of fine jewelry: diamond,
gold, precious and semi-precious jewelry. This "key category" focus is
oriented to the Company's target customer, the middle to upper middle income
woman. Unlike many of its competitors, the Company carries only a limited
selection of watches and virtually no costume jewelry or gift merchandise.
During the past four fiscal years the Company has increased its average store
inventory at an annual rate of approximately 12.6% in an effort to expand the
upper price points and add more depth to the merchandise mix.
Strict Operating Controls. The Company emphasizes high performance
standards, backed by strong incentive programs. Adherence to these standards
in the areas of store site selection, sales targets, store profitability and
cost control is fundamental to the Company's success. For example, the Company
reduced central overhead from $7.5 million (9.8% of net sales) in fiscal 1991
to $7.3 million (5.6% of net sales) in fiscal 1995. During this same period,
the Company's net sales increased by over 70% and the number of its stores
increased by 32.0%.
GROWTH STRATEGIES
The Company believes that it has significant opportunities to increase
sales and profits through continued execution of its store expansion strategy
and continued comparable store sales gains. The key elements of the Company's
growth strategies are as follows:
Accelerated New Store Openings. The Company has opened 26 stores
during the last two fiscal years. In recent years store expansion has been
somewhat constrained by the terms of the Company's credit facilities, and the
Recapitalization is expected to allow the Company to continue its new store
openings. The following table shows the Company's store expansion during its
last five fiscal years reflecting both store openings and closings for the
respective fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, Three months
--------------------------------------- ended
NUMBER OF STORES: 1992 1993 1994 1995 1996 April 30, 1996
---------------- ---- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
Open at beginning of period . . . . . . . . 109 111 113 122 131 146
Opened during period . . . . . . . . . . . 8 4 11 11 15 5
Closed during period . . . . . . . . . . . (6) (2) (2) (2) -- --
--- --- --- --- ---- ---
Open at End of period . . . . . . . . . . . 111 113 122 131 146 151
=== === === === === ===
Net Increase 2 2 9 9 15 5
</TABLE>
The Company currently plans to open 18 new stores in fiscal 1996
(five of which had been opened as of April 30, 1996) and 23 new stores in
fiscal 1997. To reduce the Company's risk associated with entering new malls,
the Company prefers to expand in established malls. In addition, the Company
seeks to open additional stores in its existing markets where the Company
believes it can obtain greater market penetration. The Company also seeks to
identify new geographic markets where it can cluster stores for ease of
supervision and increased name recognition. The two most recent examples of
the Company's entrance into new geographic markets are St. Louis and Phoenix,
both of which the Company entered in fiscal 1994. The Company now has three
stores in the Phoenix area and five stores in the St. Louis area with a fourth
store planned to be opened in Phoenix in fiscal 1997. The Company does not
plan to enter any new geographic markets in fiscal 1996.
The Company seeks to open new stores in key locations in regional and
super-regional malls. The Company's national presence permits it to focus its
new store openings on desirable malls throughout the country and often to
obtain high traffic, "center court" locations in those malls to maximize
exposure to mall shoppers. The Company uses its multiple name format to open
additional stores in malls where it already has profitable locations. For
example, of the Company's 30 Lundstrom stores, 27 are located in malls with
Whitehall stores.
The Company continuously evaluates the performance of its stores and
closes certain stores from time to time that do not continue to meet its
strategic location profile or its performance requirements. The Company is
currently considering
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<PAGE> 44
closing a limited number of such stores in fiscal l996 or fiscal l997 and
currently expects that the number of such closings will not vary substantially
from historical experience.
Comparable Store Sales Increases. The Company has achieved comparable
store sales increases of 7.6% and 11.0% in fiscal 1994 and 1995, respectively.
The Company seeks to achieve comparable store sales increases by (i) expanding
the availability of non-recourse credit through its new "First Time Buyers"
program, (ii) continuing to increase merchandise offerings in selected
categories (especially higher priced items), (iii) continuing to implement its
return/exchange policy, (iv) using enhanced information systems to better
monitor merchandise selection and provide important data on key customers, and
(v) expanding its "customer friendly" merchandise displays to enhance the
shopping experience and to create a more comfortable environment in which to
encourage impulse purchases.
MERCHANDISING
The Company believes that an important element of its success is a
focused merchandising strategy that reflects its upscale customer orientation
and small store format. The Company seeks to provide a deep assortment of
items across a broad range of price points in its key product categories:
diamonds (such as diamond jewelry, diamond solitaires and bridal), gold and
precious and semi-precious jewelry. Unlike many of its competitors, the
Company carries only a limited selection of watches and virtually no costume
jewelry or gift merchandise.
Each store offers approximately 2,500 individual items, including
approximately 500 core jewelry items, which accounted for approximately 38% of
net sales in fiscal 1995. In addition, the Company increasingly seeks to
expand its merchandise assortment in higher price points. The Company's
average price per merchandise sale has increased from $210 in fiscal 1993 to
$229 in fiscal 1994 and $245 in fiscal 1995.
In recent years, the Company has increased the average number of items
available in its stores to broaden the appeal of its merchandise assortment and
expand its product breadth in selected product categories, particularly bridal
and other diamond jewelry. For example, store merchandise per store (including
consigned items) has grown at a compound annual rate of approximately 12.6%
over the past four fiscal years (as measured by the inventory and consigned
items on hand at fiscal year end).
The following table sets forth the Company's percentage of total
merchandise sales by category for the last five fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Diamonds . . . . . . . 46.5% 48.0% 51.0% 54.1% 55.1%
Gold . . . . . . . . . 23.9 25.5 26.6 25.0 25.2
Precious/Semi-Precious 19.6 16.8 15.0 15.1 14.6
Watches . . . . . . . . 3.2 3.0 2.7 2.4 2.1
Other . . . . . . . . . 6.8 6.7 4.7 3.4 3.0
------ ------ ------ ------ ------
Total . . 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
</TABLE>
All stores carry the Company's core items. The Company also
customizes the merchandising of its stores based upon each store's sales
volume, individual market preferences and historical selling patterns. The
Company continually tests new items in its stores and monitors their sales
performance to identify additional sales opportunities.
Along with its broad product assortment, the Company also provides
jewelry repair services to its customers (sales from which represented
approximately four percent of fiscal 1995 net sales). Actual repair work is
performed by jewelers under independent contract. Approximately 80 of the
Company's stores have jewelers located in the store to provide on-site repair
services to the customer. To enhance customer service, the Company plans to
continue to expand the number of stores with on-site jewelry repair.
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<PAGE> 45
Pricing Strategy. For purposes of pricing, the Company classifies its
merchandise into several broad categories. Consistent with many fine jewelry
retailers, a substantial portion of the Company's sales are made at prices
discounted from listed reference prices. Sales associates are authorized to
discount most merchandise prices within certain limits. Store managers,
supervisors, and executive officers of the Company have the ability to further
discount merchandise to increase sales. The Company believes that this
flexibility and responsiveness enables it to increase sales.
CREDIT
The Company operates based upon a "no credit risk" policy. When
purchasing on credit, customers must use their personal credit cards (e.g.,
Visa, MasterCard, American Express and others), the Company's private label
credit cards, which are available through a third party and are non-recourse to
the Company, or other non-recourse third party credit arrangements. Because
the Company's credit programs are non-recourse to the Company, the Company has
no customer credit risk for non-payment by the customer associated with the
sale. At the same time, the Company believes that its ability to offer credit
through its "private label" credit cards and other non-recourse arrangements is
attractive to many customers, including those who prefer not to have their
jewelry purchases count towards their credit limits on their personal third
party credit cards. The Company encourages sales on the Company's private
label credit card or other non-recourse third-party credit arrangements because
customer purchases on this type of credit tend to generate higher average
sales. In fiscal 1995, the Company's average credit sale was approximately
$600, versus approximately $100 for a purchase paid for with cash or by check.
The Company believes that its success in building its non-recourse credit sales
has been a significant factor in its improvement in comparable store sales.
The Company's credit strategy and its focus on a more upscale
clientele are interrelated. A substantial portion of the users of private
label credit offered by most jewelers tend to be customers with more limited
financial resources or a weaker credit history. In contrast, the Company's
adherence to a "no credit risk" policy limits the Company's sales to such
individuals. Thus, the Company has historically oriented its merchandising
programs to appeal to a more affluent, less credit-reliant consumer.
The Company has established its private label program through Bank One
(and other non-recourse credit purveyors), whereby customers may apply for
instant credit on merchandise purchases. Under these credit programs, the
credit purveyors have no recourse against the Company based on the customer's
failure to pay; recourse against the Company is restricted to those limited
cases where the receivable itself is defective (such as incorrectly completed
documentation or certain situations involving customer fraud). The Company's
expense related to these limited cases was approximately 0.5% of sales during
fiscal 1995. The Company's credit card discount expense for fiscal 1995 and
fiscal 1994 represented 2.6% and 1.9%, respectively, of credit sales for those
years. In general, the Company's credit card discount expense is higher for
its private label programs than for personal credit cards, such as Visa and
MasterCard. Pursuant to the Company's relationship with Bank One, the bank
provides credit to the Company's customers using its own credit criteria and
policies. The Company pays a fee to Bank One based primarily upon the volume
of credit so extended. The Company has similar non-recourse arrangements with
other credit providers, which it uses in addition to the Bank One program to
assist customers in financing their purchases. In addition, the Company
utilizes a check authorization company which guarantees payments on
transactions involving personal checks.
In an effort to sell to a greater percentage of younger customers
having little or no credit history (e.g., the recently engaged), in late 1995
the Company implemented its "First Time Buyers" program through a non-recourse
arrangement with Bank One. Bank One will grant credit to young customers with
little or no credit history. In return, the Company will pay Bank One a higher
fee than it pays under its standard program. Through this program, the Company
seeks to expand its sale of diamond engagement rings and other merchandise.
The Company has devoted considerable effort and sales training to
credit, and it anticipates that its non-recourse credit programs combined with
its new "First Time Buyers" program will continue to be a focus of its efforts.
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<PAGE> 46
STORE OPERATIONS
Store Layout. Over two-thirds of the Company's stores are located in
high traffic, "center court" locations. Nearly all of the stores have an open
entrance rather than the more traditional single-doorway entrance. Stores
generally have at least 60 lineal feet of display cases, are brightly-lit and
are designed to have display cases situated along the lease line. By
formatting the stores in this "customer- friendly" manner and without a formal
entryway, a casual mall shopper comes in very close contact with the store's
merchandise and personnel without the natural apprehension many have upon
"entering" a fine jewelry store. In addition, by utilizing very colorful
window or counter signage featuring simple and straightforward messages, the
Company has found that shoppers are more apt to browse its product offerings,
thereby greatly increasing the possibility of a sale.
Store Management. Each of the Company's stores is operated under the
direction of a store manager who is responsible for management of all
store-level operations, including sales and personnel matters. Most non-sales
related administrative functions are performed at the Company's corporate
office in Chicago. A significant portion of the compensation of store managers
is based on incentives which focus on sales productivity. The store managers
are assisted by a staff that usually includes an assistant manager and four to
eight sales associates, depending upon store operating hours and anticipated
sales volume. Matthew M. Patinkin, the Company's Executive Vice President,
Store Operations, supervises a total of 20 supervisors who concentrate their
efforts on store-focused sales strategies. Each supervisor is based in one
store, but spends most of his or her time visiting other stores. The Company's
four executive officers spend a substantial percentage of their time visiting
stores to reinforce the close communication between senior executives and store
personnel. The vast majority of stores were visited at least three times by
one of those senior executives in fiscal 1995, and all but one of the Company's
stores was visited at least once during that period.
Operating Cost Controls. The Company's store operations are designed
to maintain low operating costs at the store level. The Company's small
average store size reduces fixed costs, and the lack of recourse credit
eliminates the need for most overhead expenses normally associated with credit
operations. The Company also seeks to reduce store-level operating costs
through efficient sales staff utilization. To assist store personnel in their
selling efforts, many of the administrative functions normally performed at the
store level are performed at the corporate level. The Company also focuses on
reducing expenses at its central office. Due to computerization, more
efficient use of personnel, and the elimination of certain non-essential
functions, the Company has reduced central overhead from $7.5 million in fiscal
1991 (9.8% of net sales) to $7.3 million in fiscal 1995 (5.6% of net sales).
During that period, the Company's sales increased by over 70% and the number of
stores increased by 32.0%.
Store Employee Compensation. The Company seeks to hire experienced
sales personnel and motivate its store employees by linking a substantial
percentage of employee compensation to individual and store sales performance,
as well as by offering opportunities for promotion within the Company.
Employee incentives include bonus opportunities and recognition programs on a
daily, weekly and monthly basis. In order to earn a bonus, it is generally
necessary for the store to achieve store sales goals and for the individual
sales associate or manager to produce personal sales.
Employee Training. The Company believes that providing knowledgeable
and responsive customer service is critical to the Company's success and,
accordingly, has developed and implemented extensive employee training
programs. In addition to training during the first four weeks of employment
and continuous on-the-job training provided by management, the Company has
recently produced several training videos to supplement its written training
materials for sales associates. Store managers complete a manager training and
development program.
ADVERTISING AND PROMOTIONS; CUSTOMER SATISFACTION
The Company uses in-store and point-of-sale promotional activities as
the main elements of its advertising strategy. The bulk of the Company's
advertising and promotional budget is dedicated to in-store signage, flyers,
special merchandise displays and targeted mailings. Frequent special
promotions such as diamond remount events, clearance sales, "Vice President's
Day Events," and similar promotions are designed to increase traffic through
the Company's stores and generate an urgency for customers to make purchases.
These events vary from year to year and among stores. Publicized events are an
important part of the Company's marketing efforts, and the Company generates a
significant portion of its revenues during such events.
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<PAGE> 47
Policies which promote customer satisfaction and repeat business
include the following:
Return/Exchange Policy. The Company permits store personnel to choose
from a variety of return or exchange options to offer the customer, including a
90-day return policy or a 90-day exchange policy. Store personnel are
authorized to use their discretion within certain parameters in setting return
or exchange policies on individual transactions, and store managers and
supervisors are authorized to accept certain returns or exchanges outside these
parameters at their discretion. An increasing percentage of the Company's
sales have been made on a 90-day exchange or similar basis, which the Company
believes has favorably affected sales.
Diamond Warranties. The Company offers diamond warranties in
connection with purchases of diamond jewelry. Under its guarantee, the Company
agrees to replace any diamond lost from its mounting due to a design defect in
the item purchased. To keep a warranty in force, the customer must return to
the store once every four months to have the mounting checked by Company
personnel.
Diamond Trade-In/Trade-Up Policy. The Company's trade-in policy
allows customers to trade-in diamond and certain gemstone merchandise that was
purchased at a Company store and receive a credit of 100% of the original cost
of the merchandise towards a trade-in for any item of greater value. Customers
who do not have written verification but are trading in identifiable
Company-sold merchandise may be afforded a similar right. With respect to
trade-ins of non-Company merchandise, customers may receive a credit equal to a
negotiated amount.
Layaway Policy. Customers are allowed to put merchandise in layaway
for up to one year by making a small deposit (usually 10% to 20% of the
purchase price) and by making certain minimum, non-interest bearing payments
monthly to the Company. If the customer does not make the required minimum
payments, the item is returned to display. Layaway items may not be taken out
of the store by the customer until the item is fully paid for.
PURCHASING
The Company does not manufacture its merchandise. The Company
purchases substantially all of its inventory, including loose gems, directly
from prime suppliers located in the United States and abroad. The Company
utilizes approximately 100 vendors, primarily in the United States, Israel,
Italy and the Far East, who supply various jewelry products under U.S.
dollar-denominated agreements. During fiscal 1995, the Company's largest and
five largest suppliers accounted for approximately 14% and 37%, respectively,
of the merchandise purchased by the Company. The Company also has certain
subcontracting arrangements with jewelry finishers to set loose diamonds and
gemstones into rings and other jewelry, using styles established by the
Company. Management believes that the relationships the Company has
established with its suppliers and subcontractors are good. The Company has
not experienced any difficulty in obtaining satisfactory sources of supply and
believes that adequate alternative sources of supply exist for substantially
all types of merchandise sold in its stores.
The Company maintains a strict quality assurance program, with almost
all shipments from suppliers being counted or weighed and visually inspected
upon receipt at the Company's headquarters in Chicago, Illinois. On a regular
basis, the Company sends randomly-picked merchandise to independent smelters to
be assayed for gold content to assure that the merchandise is of the karat
represented by the vendor.
In fiscal 1995, the Company's average net monthly investment in
inventory (i.e., the total cost of inventory owned and paid for) was 71% of the
total cost of the Company's on-hand merchandise. Approximately 30% of the
Company's merchandise is obtained on consignment. The amount of consignment
merchandise has increased in recent years. For example, the average amount of
consignment merchandise per store has increased from $93,000 on January 31,
1994 to $109,000 on January 31, 1996. The Company is also generally granted
favorable exchange privileges which permit it to return or exchange certain
unsold merchandise for new products at any time. Those arrangements permit the
Company to structure its relationships with vendors to encourage their
participation in, and responsibility for, merchandise turnover and
profitability. These arrangements permit the Company to have more merchandise
available for sale in stores and reduce somewhat the Company's exposure to
changes in fashion trends and inventory obsolescence.
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<PAGE> 48
MANAGEMENT INFORMATION SYSTEMS
The Company utilizes customized management information systems
throughout its business to facilitate the design and implementation of selling
strategies and as an integral part of its financial and other operational
controls. In fiscal 1993, the Company completed the installation of its
current management information system, an IBM AS400-based system. The system
incorporates point-of-sale computers in its stores with a merchandise
management and purchase order management system and utilizes software
specifically designed for the jewelry industry, which the Company has
customized extensively to meet its needs. The information system has been
upgraded to support the Company's needs and further upgrading is scheduled to
support the Company's continued growth.
The Company uses the management information system to track each
individual item of merchandise from receipt to ultimate sale or return to the
vendor. As a result, management can closely monitor inventory by location,
sales, gross margin, inventory levels and turnover statistics, reallocating
inventory among stores when beneficial. This system also enables management to
review each store's and each employee's productivity and performance. Based on
the sales data, the Company tailors each store's inventory composition and
plans the Company's purchasing requirements accordingly. The system enables
the Company to manage its inventory at the store level, including the automatic
replenishment of merchandise no less frequently than twice a week.
The system also automatically provides a daily reconciliation of each
store's transactions for prompt investigation of discrepancies. The
point-of-sale computers are polled nightly by the headquarters system and
updated data is available at the beginning of the following day for use by
central office and store supervisory personnel, and for transfer into the
Company's accounting, merchandising, and other management information systems.
The Company's computer systems permit merchandisers to identify sales
trends at various levels of detail ranging from major category to the specific
stock keeping unit ("SKU"). The Company's best selling items are monitored
weekly (and more frequently during peak seasons) to assure that stores are
stocked with those items. The merchandising system permits replenishment of
items sold or transferred from a store on a next day basis. The Company
distributes merchandise from its central warehouse to stores at least twice per
week and during peak selling seasons, and the Company replenishes stores daily
to insure in-stock conditions. The merchandising system also identifies
overstock conditions of higher value SKU's to permit the prompt stock balancing
of those more expensive items to stores in which they have the highest
probability of selling.
The Company is now in the process of implementing, through its
point-of-sale system, the ability to capture and retain selected customer data
from each sale (name, address, phone, birthday, anniversaries, historical
purchases, etc.). The data is intended to be used by Company store managers
and sales associates in their efforts to contact customers and anticipate and
facilitate future add-on purchases by its customers. For example, a husband
who buys a diamond necklace for his wife's birthday may receive a mailing
approximately a year later suggesting a matching set of diamond earrings. The
Company believes that additional sales volume can be achieved by utilizing such
programming initiatives.
The Company recently introduced laptop computers to its supervisors in
the field who can now obtain up-to-date financial information on their stores
and download it on an as-needed basis from the Company's central computer
system. The information available via laptop includes, among other items,
store sales, gross profit, personnel costs, and sales associates' productivity
information.
Inventory Loss Prevention and Insurance. The Company undertakes
substantial efforts to safeguard its jewelry inventory from loss and theft,
including the use of security alarm systems and safes at each store and the
taking of daily inventory of higher value items. In addition, the Company's
inventory management and control system, which tracks each item in the
Company's inventory, provides a further check against loss or theft. During
fiscal 1995, in-store inventory shrinkage amounted to less than 1.0% of sales.
The Company has a full-time manager who directs the Company's loss prevention
efforts. The Company maintains insurance (subject to certain deductibles)
covering the risk of loss of merchandise in transit and at store premises
(whether owned or on consignment) in amounts that the Company believes are
reasonable and adequate for the types and amounts of merchandise carried by the
Company.
- 42 -
<PAGE> 49
COMPETITION
The jewelry business is fragmented and highly competitive. The
Company competes with national and regional jewelry chains and local
independently owned jewelry stores, especially those that operate in malls, as
well as with department stores, catalog showrooms, discounters, direct mail
suppliers and televised home shopping networks. Certain of the Company's
competitors are substantially larger and have greater financial resources than
the Company. The Company also believes that it competes for consumers'
discretionary spending dollars with retailers that offer merchandise other than
jewelry.
Management believes that the primary competitive factors affecting its
operations are store location and atmosphere, quality of sales personnel and
service, breadth and depth of merchandise offered, pricing, credit and
reputation. The Company emphasizes its merchandise selection, sales personnel,
store location and design and pricing in competing in its target market, which
is relatively less credit sensitive.
PROPERTIES
The Company operates 151 stores in 24 states as of April 30, 1996.
All of these stores are leased and all but one of the stores are located in
regional or super-regional malls. The Company's typical mall lease has an
initial term of 10 years plus the first partial lease year. Terms generally
include a minimum base rent, a percentage rent based on store sales and certain
other occupancy charges. All store leases that are subject to renewal in
fiscal 1996 have been renewed and of those subject to renewal in fiscal 1997,
all but three have been negotiated. The average remaining life of the leases
for the Company's stores is approximately six years. While there can be no
assurance, the Company expects to be generally able to renew these leases as
they expire.
The Company also leases approximately 16,700 square feet of office and
administrative space in Chicago, Illinois in an office building housing its
corporate headquarters, distribution functions and quality assurance
operations. This lease expires on May 13, 2002.
TRADEMARKS
Whitehall Co. Jewellers(R) and Lundstrom Jewelers(R) are registered
trademarks in the United States. The Company has filed an application to
register Marks Bros. Jewelers(TM) as a trademark in the United States.
EMPLOYEES
As of July 20, 1996, the Company had a total of 1,039 employees,
including 946 store level employees and 93 corporate level merchandising,
marketing and administrative employees. The Company usually hires a limited
number of temporary employees during each Christmas selling season. None of the
Company's employees are represented by a union. The Company believes that its
relations with its employees are good.
REGULATION
The Company's operations are affected by numerous federal and state
laws that impose disclosure and other requirements upon the origination,
servicing and enforcement of credit accounts, and limitations on the maximum
amount of finance charges that may be charged by a credit provider. Although
credit to the Company's customers is provided by third parties without recourse
to the Company based upon a customer's failure to pay, any restrictive change
in the regulation of credit, including the imposition of, or changes in,
interest rate ceilings, could adversely affect the cost or availability of
credit to the Company's customers and, consequently, the Company's results of
operations or financial condition.
In marketing to its customers, the Company compares many of its prices
to "reference prices." The Company's literature indicates to customers that
its reference price for an item is either the manufacturer's suggested retail
price or the Company's determination of the non- discounted price at which
comparable merchandise of like grade or quality is advertised or offered for
sale by competitive retailers and is not the Company's current selling price or
the price at which it formerly sold such item. Although the Company believes
that pricing comparisons are common in the jewelry business and that the
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<PAGE> 50
Company's practice is in compliance with applicable laws relating to trade
practices, there can be no assurance that this position would be upheld.
LEGAL PROCEEDINGS
The Company is involved in certain legal actions from time to time
arising in the ordinary course of business, but management believes that none
of these actions, either individually or in the aggregate, will have a material
adverse effect on the Company's results of operations or financial condition.
- 44 -
<PAGE> 51
THE RECAPITALIZATION
As part of the Recapitalization, the Company obtained a $44 million
secured credit facility (the "Bank Facility") consisting of a $29 million
revolving senior secured line of credit (including a $5 million letter of
credit subfacility) (the "New Revolver") and a $15 million senior secured term
loan (the "New Term Loan"), and a bank gold consignment facility (the "Gold
Consignment Facility") in an amount of up to $16 million. The following
summary of the material terms of the Bank Facility and the Gold Consignment
Facility does not purport to be complete and is subject to, and qualified in
its entirety by, reference to the provisions of the agreement (the "Bank
Agreement") governing the Bank Facility and the Gold Consignment Facility.
BANK FACILITY
The Bank Facility consist of the New Revolver and the New Term Loan.
The New Revolver is a five-year, revolving line of credit, providing for up to
$29 million in borrowings (the "Commitment Amount"). The Company may repay the
New Revolver, in whole or in part, at any time, and reborrow monies up to the
Commitment Amount. Available borrowings under the New Revolver are subject to
a borrowing base determined based on levels of inventory and accounts
receivable. The Company may also repay the entire outstanding balance and
terminate the Bank Agreement at any time.
The principal amount of the New Term Loan is $15 million. The New
Term Loan will mature and the Revolver will terminate in 2001. The New Term
Loan is payable in quarterly installments during each of the following periods,
in aggregate annual amounts as set forth below:
<TABLE>
<CAPTION>
QUARTERLY PAYMENT DATES IN THE PERIOD ANNUAL PAYMENTS
<S> <C>
July 31, 1996 - April 30, 1997 . . . . . . . . . . . . $1,000,000
July 31, 1997 - April 30, 1998 . . . . . . . . . . . . 2,000,000
July 31, 1998 - April 30, 1999 . . . . . . . . . . . . 3,000,000
July 31, 1999 - April 30, 2000 . . . . . . . . . . . . 4,000,000
July 31, 2000 - April 30, 2001 . . . . . . . . . . . . 5,000,000
</TABLE>
At the Company's option, the New Revolver and the New Term Loan bear
interest during the first two years at a rate per annum equal to (i) the base
rate as established and charged by the lender from time to time (the "Base
Rate") plus 0.5% or (ii) the reserve adjusted Eurodollar interbank offered rate
(the "LIBOR Rate") plus 2.5%. Thereafter, the New Revolver and the New Term
Loan will bear interest, at the Company's option, at the Base Rate or LIBOR
plus, in each case, an applicable margin that will fluctuate depending on the
Company's leverage ratio. Interest is to be calculated on the average
outstanding principal balance and shall be payable monthly (if based on the
Base Rate) or payable on the last day of each 1, 2 or 3 month interest period
applicable thereto or at maturity (if based on the LIBOR Rate).
The New Revolver and the New Term Loan are secured by a first priority
lien on all of the assets of the Company.
The Bank Agreement contains affirmative and negative covenants,
including restrictions on the Company's ability to (i) merge or consolidate,
(ii) divest or sell any guarantor entity, (iii) create liens on the Company's
assets, (iv) create or guaranty additional indebtedness, (v) pay dividends,
(vi) conduct business with related entities, (vii) make certain investments,
(viii) make acquisitions of entities or (ix) sell assets. In addition, the
Company is required to maintain a non-recourse credit program similar to its
current arrangement with Bank One. The Bank Agreement also includes various
financial covenants based on levels of funded debt, capital expenditures and
earnings before interest, taxes, depreciation and amortization.
The Bank Agreement contains event of default provisions, including,
among other things, failure to pay principal or interest on the New Revolver or
New Term Loan when due; failure to purchase or pay for or redeliver consigned
gold when due; insolvency or other bankruptcy events of the Company or its
subsidiaries; the occurrence of a material adverse change with respect to the
Company's business; default in the performance of covenants or other
agreements; default in the payment of other indebtedness or performance with
respect thereto; and breach of representations and warranties contained in the
Bank Agreement and certain other documents.
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<PAGE> 52
THE GOLD CONSIGNMENT FACILITY
The Gold Consignment Facility has a five-year initial commitment period.
Pursuant to the Gold Consignment Facility, the Company has the option either to
(a) sell up to $16 million or 39,000 troy ounces of fine gold to one or more
financial institutions, which will, in turn, consign the gold to the Company or
(b) borrow revolving loans limited to an amount based upon the value of gold
owned by the Company. The Gold Consignment Facility is secured by the gold
owned by the Company and the gold being consigned. The Gold Consignment
Facility is governed by the Bank Agreement and is subject to the same
financial, affirmative and negative covenants and default provisions applicable
to the Bank Facility. The Company bears the risk of physical loss, damage or
destruction of gold consigned to it.
Under the Gold Consignment Facility, the Company is required to pay a
consignment fee equal to either the Consignment Base Rate or the Consignment
Fixed Rate multiplied by the Fair Market Value of consigned gold outstanding.
"Consignment Base Rate" means a rate per annum determined by the bank from time
to time plus 2.5%. "Consignment Fixed Rate" means the rate per annum equal to
(a) the greater of (i) LIBOR minus the average of rates quoted to the bank as
the London Interbank Bullion Rates and (ii) zero, plus (b) 2.5%. "Fair Market
Value" means the Second London Fix. The consignment fee with respect to Base
Rate Amounts shall be payable monthly in arrears and the consignment fee with
respect to Fixed Rate Amounts shall be payable on the last day of each interest
period applicable thereto.
ESOP RESTRUCTURING
In 1988, the Company established the ESOP to acquire from certain
stockholders shares of the Company's Class B Common Stock for the benefit of
employees. The ESOP subsequently borrowed $70 million (the "ESOP Debt") from
the Company for the purpose of acquiring 27,000 shares of Class B Common Stock
(the "Class B Shares") from such stockholders. The group of stockholders from
whom the ESOP acquired shares included Hugh M. Patinkin and Matthew M.
Patinkin, who are affiliates of the Company. The vast majority of the proceeds
from such sale were paid to persons who are not currently affiliates of the
Company. See "Management."
The ESOP Debt and the ESOP's equity interest in the Company were
restructured as part of the Recapitalization as follows: (i) the ESOP
transferred to the Company 8,319 shares of Class B Common Stock in exchange for
the elimination of the ESOP Debt totaling approximately $33 million at January
31, 1996, (ii) the ESOP consented to the cancellation of the dividend
preference ($17.1 million) with respect to the shares of Class B Common Stock
allocated to the accounts of ESOP participants in exchange for the transfer
from the Company of 220,282 shares of Common Stock, (iii) each share of Class B
Common Stock owned by the ESOP was exchanged for approximately 35.4 shares of
Common Stock, (iv) all shares of Common Stock held by the ESOP are to be
allocated to each individual participant's accounts, (v) the Company was
relieved of any future obligation to make contributions to the ESOP, and (vi)
so long as the shares of Common Stock remain actively traded on a national
quotation service or a national stock exchange, the Company no longer has the
obligation to purchase shares of Common Stock distributed by the ESOP to
participants. The ESOP currently holds an aggregate of 843,887 shares of
Common Stock. Approximately 11,878 shares, 3,239 shares and 6,149 shares of
Common Stock are to be allocated to the ESOP accounts of John R. Desjardins,
Lynn D. Eisenheim and John J. Guarnaccia, respectively, who are the only
directors or executive officers who participate in the ESOP.
THE IPO
As part of the Recapitalization, the Company completed the IPO which generated
net proceeds to the Company of approximately $40.7 million.
- 46 -
<PAGE> 53
THE NEW NOTES AND RESALE SERIES A NOTES
The Series C Notes and Series D Notes will be issued under, and entitled
to the benefits of, the Indenture, dated as of April 15, 1996, between the
Company and Norwest Bank Minnesota, National Association, as trustee (the
"Trustee"), as amended or supplemented. See "The Exchange Offer--Conditions to
the Exchange Offer." The Old Notes were issued pursuant to the same Indenture.
The form and terms of the Series C Notes are the same in all material respects
as the form and terms of the Series A Notes and the form and terms of the
Series D Notes are the same in all material respects as the form and terms of
the Series B Notes, except that the New Notes will have been registered under
the Securities Act and hence will not bear legends restricting their transfer
pursuant to the Securities Act. The Series C Notes will evidence the same debt
as the Series A Notes (which they replace) and the Series D Notes will evidence
the same debt as the Series D Notes (which they replace). The following
summary of the material provisions of the Indenture does not purport to be
complete and is subject to, and qualified in its entirety by, reference to the
provisions of the Indenture, including the definitions of certain terms
contained therein and those terms made part of the Indenture by reference to
the Trust Indenture Act of 1939, as amended, as in effect on the date of the
Indenture. The definitions of certain capitalized terms used in the following
summary are set forth below under "--Certain Definitions." As used in this
Section, references to "Series C Notes" shall also mean and include the Resale
Series A Notes offered hereby, and "Notes" shall mean the New Notes (including
the Resale Series A Notes).
GENERAL
The Notes will be unsecured senior subordinated obligations of the
Company. The Notes will be issued only in registered form without coupons, in
denominations of $1,000 and integral multiples thereof. (Section 302)
Principal of, premium, if any, and interest on the Notes will be payable, and
the Notes will be transferable, at the corporate trust office or agency of the
Trustee in the City of Minneapolis, Minnesota maintained for such purposes
initially at Sixth and Marquette, Minneapolis, Minnesota 55479-0069. (Section
301) In addition, interest may be paid at the option of the Company by check
mailed to the person entitled thereto as shown on the security register.
(Section 307) No service charge will be made for any transfer, exchange or
redemption of Notes, except in certain circumstances for any tax or other
governmental charge that may be imposed in connection therewith. (Section 305)
MATURITY AND INTEREST
Series C Notes. The Series C Notes will mature on October 31, 2004.
Interest on the Series C Notes will accrue at the rate of 12.15% per annum and
will be payable quarterly on January 31, April 30, July 31 and October 31 in
each year, commencing July 31, 1996, to the holders of record of the Series C
Notes at the close of business on the January 15, April 15, July 15 or October
15 immediately preceding such interest payment date. Interest on the Series C
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the original date of issuance (the "Issue
Date"). Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
Series D Notes. The Series D Notes will mature on October 31, 2004.
Interest on the Series D Notes is payable quarterly on January 31, April 30,
July 31 and October 31 in each year, commencing July 31, 1996, to the holders
of record of the Series D Notes at the close of business on the January 15,
April 15, July 15 or October 15 immediately preceding such interest payment
date. Interest will accrue on the Series D Notes at the rate of (a) 15% per
annum, payable in cash plus, for subsequent periods commencing May 1, 1998, (b)
1% per annum (increasing in 1% increments per each subsequent year commencing
May 1, 1999), payable, at the option of the Company, in cash or by delivery of
additional Series D Notes. Interest on the Series D Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from the original date of issuance (the "Issue Date"). Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
MANDATORY REDEMPTION
Series C Notes. Quarterly installments of principal of the Series C
Notes in the amount of $855,000 will be mandatorily prepayable, commencing
July 31, 2001, through operation of a mandatory sinking fund.
Series D Notes. Quarterly installments of principal of the Series D
Notes in the amount of the Sinking Fund Dollar Amount (as defined) will be
mandatorily prepayable, commencing July 31, 2001, through operation of a
mandatory sinking fund. The "Sinking Fund Dollar Amount" means the quotient
obtained by dividing (a) the principal amount of Series D
- 47 -
<PAGE> 54
Notes Outstanding at July 31, 2001 by (b) 14. Assuming no interest payments on
Series D Notes are made by delivery of additional Series D Notes as described
above under "Maturity and Interest," the Company will be required to redeem
quarterly $571,000 principal amount of Series D Notes, commencing July 31,
2001, through operation of the mandatory sinking fund.
OPTIONAL REDEMPTION
Series C Notes. The Series C Notes will not be redeemable at the option
of the Company until July 31, 2001. The Series C Notes will be redeemable at
the option of the Company, in whole or in part, at any time on and after July
31, 2001 at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest, if any, to the
redemption date, if redeemed during the period indicated below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
-------- -------------
<S> <C>
July 31, 2001 - July 30, 2002 . . . . . . . . . . . . 106.00%
July 31, 2002 - July 30, 2003 . . . . . . . . . . . . 105.00%
July 31, 2003 - July 30, 2004 . . . . . . . . . . . . 104.00%
July 31, 2004 and thereafter . . . . . . . . . . . . . 100.00%
</TABLE>
Series D Notes. The Series D Notes will be redeemable at the option
of the Company, in whole or in part, at any time at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued
and unpaid interest, if any, to the redemption date, if redeemed during the
period indicated below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
-------- -------------
<S> <C>
July 31, 1996 - July 30, 1997 . . . . . . . . . . . . 112.00%
July 31, 1997 - July 30, 1998 . . . . . . . . . . . . 112.00%
July 31, 1998 - July 30, 1999 . . . . . . . . . . . . 110.00%
July 31, 1999 - July 30, 2000 . . . . . . . . . . . . 110.00%
July 31, 2000 - July 30, 2001 . . . . . . . . . . . . 109.00%
July 31, 2001 - July 30, 2002 . . . . . . . . . . . . 108.00%
July 31, 2002 - July 30, 2003 . . . . . . . . . . . . 107.00%
July 31, 2003 - July 30, 2004 . . . . . . . . . . . . 106.00%
July 31, 2004 and thereafter . . . . . . . . . . . . . 105.00%
</TABLE>
Selection and Notice. In the event that less than all of the Notes
are to be redeemed at any time, selection of such Notes for redemption will be
made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if the
Notes are not then listed on a national securities exchange, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate,
provided, however, that no Notes of a principal amount of $1,000 or less shall
be redeemed in part. Notice of redemption shall be mailed by first class mail
at least 30 but not more than 60 days before the redemption date to each holder
of Notes to be redeemed at its registered address. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note
in a principal amount equal to the unredeemed portion thereof will be issued in
the name of the holder thereof upon surrender for cancellation of the original
Note. On and after the redemption date, interest will cease to accrue on Notes
or portions thereof called for redemption unless the Company defaults in the
payment of the redemption price. (Sections 1105, 1106, 1108 and 1109)
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<PAGE> 55
SUBORDINATION
The payment of the principal of, premium, if any, and interest on the
Notes will be subordinated, to the extent set forth in the Indenture, in right
of payment to the prior payment in full in cash, Cash Equivalents or other form
of payment acceptable to the holders of all existing and future Senior
Indebtedness of the Company, which includes, without limitation, all
obligations under the Bank Credit Agreement. The Notes will be unsecured
senior subordinated indebtedness of the Company, ranking pari passu with all
other existing and future senior subordinated indebtedness of the Company and
senior to all future Subordinated Indebtedness of the Company. (Section 1401)
The Indenture provides that in the event of (a) any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding in connection therewith, relating to the
Company or its assets, or (b) any liquidation, dissolution or other winding-up
of the Company, whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or
other marshalling of assets or liabilities of the Company, whether voluntary or
involuntary and whether or not involving insolvency or bankruptcy (except a
distribution in connection with a consolidation of the Company with, or the
merger of the Company into, another corporation or the liquidation or
dissolution of the Company following conveyance, transfer or lease of its
properties and assets substantially as an entirety to another corporation upon
the terms and conditions described below under "--Merger, Sale of Assets,
Etc."), holders of all Senior Indebtedness of the Company shall be entitled to
receive payment in full in cash, Cash Equivalents or other form of payment
acceptable to the holders of Senior Indebtedness of all amounts due on or in
respect of all Senior Indebtedness, before the holders of the Notes are
entitled to receive any payment or distribution (except for certain permitted
equity or subordinated debt securities (the "Permitted Junior Securities") or
payments made pursuant to the provisions described under "--Defeasance or
Covenant Defeasance of Indenture") on account of the principal of, premium, if
any, and interest on the Notes. In the event that, notwithstanding the
foregoing, after an event described in clause (a), (b) or (c), the Trustee or
any holder of the Notes shall have received any payment or distribution of
assets of the Company of any kind or character (excluding Permitted Junior
Securities or payments made pursuant to the provisions described under
"--Defeasance or Covenant Defeasance of Indenture"), before all Senior
Indebtedness is paid in full or payment thereof provided for in cash, Cash
Equivalents or other form of payment acceptable to the holders of the Senior
Indebtedness, then such payment or distribution will be paid over or delivered
to the agent or agents for the Banks under the Bank Credit Agreement for the
benefit of holders of Senior Indebtedness for application to the payment of all
Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior
Indebtedness in full in cash, Cash Equivalents or other form of payment
acceptable to the holders of the Senior Indebtedness. (Section 1402)
During the continuance of any default in the payment of principal of,
premium, if any, or interest on any Designated Senior Indebtedness when due
(whether at final maturity, upon scheduled installment, acceleration or
otherwise) (a "Payment Default"), no payment or distribution of any assets of
the Company of any kind or character (other than Permitted Junior securities or
payments made pursuant to he provisions described under "--Defeasance or
Covenant Defeasance of Indenture") shall be made on account of the principal
of, premium, if any, and interest on the Notes unless and until such Payment
Default has been cured or waived or has ceased to exist or such Designated
Senior Indebtedness shall have been discharged or paid in full in cash, Cash
Equivalents or other form of payment acceptable to the holders of the Senior
Indebtedness. (Section 1403)
In addition, during the continuance of any other default with respect
to any Designated Senior Indebtedness pursuant to which the maturity thereof
may be accelerated (a "Non-payment Default"), after receipt by the Trustee from
a representative of holders of such Designated Senior Indebtedness of a written
notice of such Non-payment Default, no payment or distribution of any assets of
the Company of any kind or character (other than Permitted Junior Securities or
payments made pursuant to the provisions described under "--Defeasance or
Covenant Defeasance of Indenture") may be made by the Company on account of the
principal of, premium, if any, and interest on the Notes, including for the
redemption, purchase or other acquisition of Notes for the period specified
below (the "Payment Blockage Period").
The Payment Blockage Period shall commence upon the receipt of notice
of a Non-payment Default by the Trustee from a representative of holders of
Designated Senior Indebtedness stating that such notice is a payment blockage
notice pursuant to the Indenture and shall end on the earliest to occur of the
following events: (i) more than 179 days shall have elapsed since the receipt
of such notice (provided such Designated Senior Indebtedness as to which notice
was given shall not theretofore have been accelerated), (ii) the date on which
such default is cured or waived or ceases to exist (provided that no other
Non-payment Default has occurred and is then continuing after giving effect to
such cure or waiver), (iii) the
- 49 -
<PAGE> 56
date on which such Designated Senior Indebtedness is discharged or paid in full
in cash, Cash Equivalents or other form of payment acceptable to holders of the
Designated Senior Indebtedness or (iv) the date on which such Payment Blockage
Period shall have been terminated by written notice to the Company or the
Trustee from the representative of holders or Designated Senior Indebtedness
initiating such Payment Blockage Period, after which, in the case of clause
(i), (ii), (iii) or (iv), whichever was earlier, the Company shall promptly
resume making any and all required payments in respect of the Notes, including
any missed payments unless a Payment Default has occurred or the provisions of
Section 1402 of the Indenture are applicable. Only one Payment Blockage Period
with respect to the Notes may be commenced within any 360 consecutive day
period. No Non-payment Default that existed or was continuing on the date of
the commencement of any Payment Blockage Period with respect to the Designated
Senior Indebtedness initiating such Payment Blockage Period will be, or can be,
made the basis for the commencement of a subsequent Payment Blockage Period,
whether or not within a period of 360 consecutive days, unless such default has
been cured or waived for a period of not less than 90 consecutive days. In no
event will a Payment Blockage Period extend beyond 179 days from the date of
the receipt by the Trustee of the notice and there must be at least a 181
consecutive day period in any 360-day period during which no Payment Blockage
Period is in effect. (Section 1403)
If the Company fails to make any payment on the Notes when due or
within any applicable grace period, whether or not on account of the payment
blockage provisions referred to above, such failure would constitute an Event
of Default under the Indenture and would enable the holders of the Notes to
accelerate the maturity thereof. See "--Events of Default."
By reason of such subordination, in the event of liquidation,
receivership, reorganization or insolvency, creditors of the Company who are
holders of Senior Indebtedness may recover more, ratably, than the holders of
the Notes, and funds which would be otherwise payable to the holders of the
Notes will be paid to the holders of the Senior Indebtedness to the extent
necessary to pay the Senior Indebtedness in full, and the Company may be unable
to meet its obligations in full with respect to the Notes.
As of April 30, 1996, on a pro forma basis, after giving effect to
the transactions comprising the Recapitalization and the application of the
funds generated thereby, the amount of outstanding Senior Indebtedness of the
Company would have been approximately $19,519,000. See "The Recapitalization."
The amount of Senior Indebtedness outstanding will fluctuate from time to time
based upon, among other things, borrowings under the New Revolver. The
Indenture limits, but does not prohibit, the incurrence by the Company of
additional Indebtedness which is senior or pari passu in right of payment to
the Notes and prohibits the incurrence by the Company of Indebtedness which is
contractually subordinated in right of payment to any Senior Indebtedness of
the Company and senior in right of payment to the Notes.
CERTAIN COVENANTS
The Indenture contains the following covenants, among others:
Limitation on Consolidated Funded Debt. The Company will not permit,
as of the last day of any fiscal quarter, the ratio of (a) Consolidated Funded
Debt for such fiscal quarter to (b) Consolidated EBITDA for the four
consecutive fiscal quarters ending on such date to exceed the ratio set forth
opposite such date in the table below:
- 50 -
<PAGE> 57
<TABLE>
<CAPTION>
Fiscal Quarter Ending Ratio
--------------------- -----
<S> <C>
1/31/97 . . . . . . . . . . . . . . 5.28:1.0
4/30/97 . . . . . . . . . . . . . . 5.28:1.0
7/31/97 . . . . . . . . . . . . . . 5.16:1.0
10/31/97 . . . . . . . . . . . . . 5.04:1.0
1/31/98 . . . . . . . . . . . . . . 4.80:1.0
4/30/98 . . . . . . . . . . . . . . 4.56:1.0
7/31/98 . . . . . . . . . . . . . . 4.32:1.0
10/31/98 . . . . . . . . . . . . . 4.20:1.0
1/31/99 . . . . . . . . . . . . . . 3.84:1.0
4/30/99 . . . . . . . . . . . . . . 3.84:1.0
7/31/99 . . . . . . . . . . . . . . 3.72:1.0
10/31/99 and for each fiscal
quarter thereafter . . . . . . 3.60:1.0
</TABLE>
(Section 1010)
Limitation on Restricted Payments. The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly: (i)
declare or pay any dividend or make any other distribution or payment on or in
respect of Capital Stock of the Company or any payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
(other than dividends or distributions payable solely in Capital Stock (other
than Redeemable Capital Stock) or rights to purchase Capital Stock of the
Company (other than Redeemable Capital Stock)); (ii) purchase, redeem, defease
or otherwise acquire or retire for value, directly or indirectly, any Capital
Stock of the Company or any Affiliate of the Company (other than any such
Capital Stock of any Wholly Owned Restricted Subsidiary of the Company); (iii)
make any principal payment on, or purchase, defease, repurchase, redeem or
otherwise acquire or retire for value, prior to any scheduled maturity (unless
within one year of maturity), scheduled repayment, scheduled sinking fund
payment or other Stated Maturity, any Subordinated Indebtedness; (iv) make any
Investment (other than any Permitted Investment) in any person, including any
Unrestricted Subsidiary (other than in the Company, a Wholly Owned Restricted
Subsidiary of the Company or a person that becomes a Wholly Owned Restricted
Subsidiary as a result of such Investment); or (v) declare or pay any dividend
or make any other distribution on or in respect of any Capital Stock of any
Subsidiary to the direct or indirect holders (in their capacities as such) of
Capital Stock of the Subsidiary (other than with respect to Capital Stock held
by the Company or any of its Wholly Owned Restricted Subsidiaries) or any
purchase, redemption or other acquisition or retirement for value, of any
Capital Stock of any Subsidiary (other than any such Capital Stock held by the
Company or any Wholly Owned Restricted Subsidiary) (such payments, dividends,
distributions, purchases, defeasances, repurchases, redemptions, acquisitions,
retirements or Investments described in the preceding clauses (i) through (v)
are collectively referred to as "Restricted Payments"), (a) at any time during
the period ending April 30, 1998, and (b) thereafter only unless, at the time
of and after giving effect to the proposed Restricted Payment (the amount of
any such Restricted Payment, if other than in cash, being as determined by the
Board of Directors of the Company, whose determination shall be conclusive and
evidenced by a Board Resolution), (A) no Default or Event of Default shall have
occurred and be continuing and (B) the aggregate amount of all Restricted
Payments declared or made from and after May 1, 1998 would not exceed the sum
of (1) 10% of the aggregate Consolidated Net Income of the Company accrued on a
cumulative basis during the period (treated as one accounting period) beginning
on May 1, 1998 and ending on the last day of the fiscal quarter of the Company
immediately preceding the date of such proposed Restricted Payment (or, if such
aggregate cumulative Consolidated Net Income of the Company for such period
shall be a deficit, minus such deficit) plus (2) the aggregate net cash
proceeds received by the Company after the Issue Date from the issuance or sale
(other than to any of its Restricted Subsidiaries) of Capital Stock (excluding
Redeemable Capital Stock but including Capital Stock issued upon the conversion
of convertible Indebtedness or in exchange for outstanding Indebtedness (to the
extent such Indebtedness is originally sold for cash) or from the exercise of
options, warrants or rights to purchase Capital Stock (other than Redeemable
Capital Stock)) of the Company to any person (other than to a Restricted
Subsidiary of the Company) (except, in each case, to the extent such proceeds
are used to purchase, redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as set forth below), plus (3) in the case of the disposition or
repayment of any Investment constituting a Restricted Payment made after the
Issue Date, an amount equal to the lesser of the return of capital with respect
to such Investment and the cost of such Investment. For purposes of the
preceding clause (B)(2), the value of the aggregate net proceeds received by
the Company upon the issuance of Capital Stock, either upon the conversion of
convertible Indebtedness or in exchange for outstanding Indebtedness or upon
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<PAGE> 58
the exercise of options, warrants or rights will be the net cash proceeds
received upon the issuance of such Indebtedness, options, warrants or rights
plus the incremental amount received by the Company upon the conversion,
exchange or exercise thereof.
None of the foregoing provisions will prohibit: (i) the payment of any
dividend within 90 days after the date of its declaration, if at the date of
declaration such payment would be permitted by the foregoing paragraph (a);
(ii) the redemption, repurchase or other acquisition or retirement of any
shares of any class of Capital Stock of the Company or any Restricted
Subsidiary of the Company in exchange for (including any such exchange pursuant
to a conversion right or privilege in connection with which cash is paid in
lieu of fractional shares or scrip), or out of the net cash proceeds of, a
substantially concurrent issue and sale of other shares of Capital Stock (other
than Redeemable Capital Stock) of the Company to any person (other than to a
Restricted Subsidiary of the Company); provided, however, that such net cash
proceeds are excluded from clause (B)(2) of the preceding paragraph (a); or
(iii) so long as no Default or Event of Default shall have occurred and be
continuing, the making of a Restricted Payment in an aggregate amount not to
exceed $150,000 solely to redeem shares of the Company's Class B Common Stock.
(Section 1011)
Limitation on Liens. The Company will not and will not permit any
Restricted Subsidiary to create, incur, assume or suffer to exist any Lien of
any kind upon any of its property or assets, now owned or hereafter acquired,
to secure any Pari Passu Indebtedness or Subordinated Indebtedness unless prior
to or contemporaneously therewith the Notes are secured equally and ratably;
provided that (1) if such secured Indebtedness is Pari Passu Indebtedness, the
Lien securing such Pari Passu Indebtedness shall rank equally and ratably with
the Lien securing the Notes and (2) if such secured Indebtedness is
Subordinated Indebtedness, the Lien securing such Subordinated Indebtedness
shall be subordinate and junior to the Lien securing the Notes at least to the
same extent as such Subordinated Indebtedness is subordinated to the Notes.
(Section 1012)
Restriction on Transfer of Assets. The Company will not sell, convey,
transfer or otherwise dispose of its assets or property to any of its
Subsidiaries, except for (a) transactions pursuant to clause (ix), (xi) or
(xii) of the definition of "Permitted Investments"; (b) sales, conveyances,
transfers or other dispositions made in the ordinary course of business; and
(c) sales, conveyances, transfers or other dispositions of assets or property
made on and after the Issue Date not expressly included in subparagraph (a) or
(b) above; provided, however, that, after giving effect to any such sale,
conveyance, transfer or disposition made pursuant to this clause (c) the
aggregate book value of all assets or property sold, conveyed, transferred or
disposed of pursuant to this clause (c) during the period beginning on the
Issue Date and ending on the date of such sale, conveyance, transfer or
disposition shall not exceed $1,000,000. (Section 1016)
Financial Covenants. The Company will not permit Consolidated
Tangible Net Worth at any time during any fiscal year set forth in the table
below to be less than the amount set forth opposite such fiscal year in such
table:
<TABLE>
<CAPTION>
Fiscal Year Beginning February 1, Amount
--------------------------------- ------
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . ($7,000,000)
1997 . . . . . . . . . . . . . . . . . . . ($2,000,000)
1998 . . . . . . . . . . . . . . . . . . . $6,000,000
1999 . . . . . . . . . . . . . . . . . . . $12,000,000
2000 and fiscal years thereafter . . . . . $18,000,000
</TABLE>
The Company will not permit, for any period of four consecutive
quarters ending on any date set forth in the table below, the ratio of (a) the
sum of (i) Consolidated EBITDA for such period plus (ii) Consolidated Minimum
Store Rent for such fiscal year to (b) the sum of (i) Consolidated Minimum
Store Rent for such period plus (ii) Consolidated Cash Interest Expense for
such period, to be less than the ratio set forth opposite such period in such
table:
<TABLE>
<CAPTION>
Date Ratio
---- -----
<S> <C>
1/31/97 . . . . . . . . . . . . . . 1.15:1.0
4/30/97 . . . . . . . . . . . . . . 1.15:1.0
7/31/97 . . . . . . . . . . . . . . 1.15:1.0
</TABLE>
- 52 -
<PAGE> 59
<TABLE>
<S> <C>
10/31/97 . . . . . . . . . . . . . 1.15:1.0
1/31/98 . . . . . . . . . . . . . . 1.30:1.0
4/30/98 . . . . . . . . . . . . . . 1.30:1.0
7/31/98 . . . . . . . . . . . . . . 1.30:1.0
10/31/98 . . . . . . . . . . . . . 1.30:1.0
1/31/99 . . . . . . . . . . . . . . 1.50:1.0
4/30/99 . . . . . . . . . . . . . . 1.50:1.0
7/31/99 . . . . . . . . . . . . . . 1.50:1.0
10/31/99 . . . . . . . . . . . . . 1.50:1.0
1/31/2000 and thereafter . . . . . 1.60:1.0
</TABLE>
(Sections 1019 and 1020)
Limitation on Issuance and Sale of Capital Stock by Restricted
Subsidiaries. The Company (i) will not permit any of its Restricted
Subsidiaries to issue any Capital Stock (other than to the Company or a Wholly
Owned Restricted Subsidiary of the Company) and (ii) will not permit any person
(other than the Company or a Wholly Owned Restricted Subsidiary of the Company)
to own any Capital Stock of any Restricted Subsidiary of the Company.
Limitation on Transactions with Affiliates. The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
conduct any transactions among themselves or with any Affiliates of the
Company, other than transactions in the ordinary course of the Company's or
such Restricted Subsidiary's business, consistent with past practices, and upon
terms not materially less favorable to the Company or such Restricted
Subsidiary than the Company or such Restricted Subsidiary could have obtained
in a comparable arm's-length transaction with a party other than the Company,
such Restricted Subsidiary or such Affiliate. This covenant will not restrict
the Company from transactions provided for under agreements in existence on the
date of the Indenture and listed on a schedule thereto. (Section 1014)
Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries. The Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends, in
cash or otherwise, or make any other distributions on or in respect of its
Capital Stock or any other interest or participation in, or measured by, its
profits, (b) pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary of the Company, (c) make loans or advances to
the Company or any other Restricted Subsidiary of the Company, (d) transfer any
of its properties or assets to the Company or any other Restricted Subsidiary
of the Company, or (e) guarantee any Indebtedness of the Company or any other
Restricted Subsidiary of the Company, except for such encumbrances or
restrictions existing under or by reason of (i) any agreement or other
instrument of a person acquired by the Company or any Restricted Subsidiary of
the Company in existence at the time of such acquisition (but not created in
contemplation thereof), which encumbrance or restriction is not applicable to
any person, or the properties or assets of any person, other than the person,
or the property or assets of the person, so acquired, (ii) any encumbrance or
restriction in the Bank Credit Agreement or any other agreement as in effect on
the date of the Indenture and listed on a schedule thereto, and (iii) any
encumbrance or restriction pursuant to any agreement that extends, refinances,
renews or replaces any agreement described in clause (i) and (ii) above, which
is not materially more restrictive or less favorable to the holders of Notes
than those existing under the agreement being extended, refinanced, renewed or
replaced. (Section 1015)
Limitation on Certain Other Subordinated Indebtedness. The Company
will not issue, directly or indirectly, any Indebtedness which is subordinated
or junior in ranking in any respect to Senior Indebtedness unless such
Indebtedness is expressly pari passu with or subordinated in right of payment
to the Notes. (Section 1017)
Reporting Requirements. The Company will file, to the extent
permitted under the Exchange Act, with the Commission the annual reports,
quarterly reports and other documents required to be filed with the Commission
pursuant to Sections 13 and 15 of the Exchange Act, whether or not the Company
has a class of securities registered under the Exchange Act. The Company will
file with the Trustee and provide to each holder of Notes copies of such
reports and documents within 15 days after it files them with the Commission
or, if filing such documents by the Company with the Commission is not
permitted under the Exchange Act, within 15 days after it would otherwise have
been required to file such reports and documents if permitted, in each case at
the Company's cost. (Section 703)
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<PAGE> 60
MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Company will not, in any transaction
or series of transactions, merge or consolidate with or into, or sell, assign,
convey, transfer, lease or otherwise dispose of all or substantially all of its
properties and assets as an entirety to, any person or persons, and that the
Company will not permit any of its Restricted Subsidiaries to enter into any
such transaction or series of transactions if such transaction or series of
transactions, in the aggregate, would result in a sale, assignment, conveyance,
transfer, lease or other disposition of all or substantially all of the
properties and assets of the Company or of the Company and its Restricted
Subsidiaries, taken as a whole, to any other person or persons, unless at the
time and after giving effect thereto (i) either (A) (1) if the transaction or
transactions is a merger or consolidation involving the Company, the Company
shall be the surviving person of such merger or consolidation or (2) if the
transaction or transactions is a merger or consolidation involving a Restricted
Subsidiary of the Company, such Restricted Subsidiary shall be the surviving
person and such surviving person shall be a Restricted Subsidiary of the
Company or (B) (1) the person formed by such consolidation or into which the
Company or such Restricted Subsidiary is merged or to which the properties and
assets of the Company or such Restricted Subsidiary, as the case may be,
substantially as an entirety, are transferred (any such surviving person or
transferee person being the "Surviving Entity") shall be a corporation
organized and existing under the laws of the United States of America, any
state thereof or the District of Columbia and (2) in case of a transaction
involving the Company, the Surviving Entity shall expressly assume by a
supplemental indenture executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the Notes
and the Indenture, and the Indenture shall remain in full force and effect;
(ii) immediately before and immediately after giving effect to such transaction
or series of transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), no Default or Event
of Default shall have occurred and be continuing; and (iii) immediately after
giving effect to such transaction, the Surviving Entity shall have a
Consolidated Net Worth in an amount which is not less than the Consolidated Net
Worth of the Company or such Restricted Subsidiary, as the case may be,
immediately prior to such transaction; provided that a Wholly Owned Restricted
Subsidiary may consolidate with, or merge with or into, or convey, transfer or
lease all or substantially all its assets to, the Company or another Wholly
Owned Restricted Subsidiary. (Section 801)
In connection with any consolidation, merger, transfer, lease or other
disposition contemplated hereby, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance satisfactory to the Trustee,
an officers' certificate and an opinion of counsel, each stating that such
consolidation, merger, transfer, lease or other disposition and the
supplemental indenture, if any, in respect thereof comply with the requirements
under the Indenture. (Section 801)
Upon any consolidation or merger or any transfer of all or
substantially all of the assets of the Company in accordance with the
foregoing, in which the Company is not the continuing corporation, the
successor corporation formed by such a consolidation or into which the Company
is merged or to which such transfer is made, shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if such successor corporation had been
named as the Company therein. (Section 802)
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture with respect
to Notes of any series:
(i) default in the payment of the principal of, or premium, if
any, when due and payable, on any of the Notes (at its Stated Maturity, upon
optional redemption, required purchase or otherwise) of such series, and such
default continues for a period of one day;
(ii) default in the payment of an installment of interest on any of
the Notes of such series, when due and payable, and such default continues for
a period of five days;
(iii) failure by the Company or any Restricted Subsidiary to comply
with its obligations under "--Merger, Sale of Assets, Etc." above;
(iv) failure by the Company to perform or observe any other term,
covenant or agreement contained in the Notes or the Indenture (other than a
default specified in clause (i), (ii) or (iii) above) for a period of 20 days
after written
- 54 -
<PAGE> 61
notice of such failure requiring the Company to remedy the same shall have been
given (x) to the Company by the Trustee or (y) to the Company and the Trustee
by the holders of 25% in aggregate principal amount of all Notes then
outstanding;
(v) (A) default or defaults under one or more agreements,
instruments, mortgages, bonds, debentures or other evidences of Indebtedness
under which the Company or any Restricted Subsidiary of the Company then has
outstanding indebtedness in excess of $1,500,000, individually or in the
aggregate, and either (i) such Indebtedness is already due and payable in full
at maturity or (ii) such default or defaults have resulted in the acceleration
of the maturity of such Indebtedness and/or foreclosure on or liquidation of
any collateral securing payment of such Indebtedness;
(vi) one or more judgments, orders or decrees of any court or
regulatory or administrative agency of competent jurisdiction for the payment
of money in excess of $1,500,000, individually or in the aggregate, shall be
entered against the Company or any Restricted Subsidiary of the Company or any
of their respective properties and shall not have been discharged or fully
bonded, and either (1) any creditor shall have commenced an enforcement
proceeding upon such judgment (other than a judgment that is stayed by pending
appeal or otherwise) or (2) there shall have been a period of 60 days after the
date on which any period for appeal has expired and during which a stay of
enforcement of such judgment, order or decree, shall not be in effect;
(vii) certain events of bankruptcy, insolvency or reorganization
with respect to the Company or any Significant Subsidiary of the Company or one
or more Subsidiaries of the Company which, in the aggregate, would constitute a
Significant Subsidiary shall have occurred; or
(viii) any representation or warranty of the Company in the Indenture
or in any agreement pursuant to which a Holder of Notes shall have purchased
Notes on the Issue Date shall have proved to have been false in any material
respect upon the date when made or deemed to have been made. (Section 501)
If an Event of Default (other than as specified in clause (vii) above
with respect to the Company or any Significant Subsidiary (or one or more
Subsidiaries which, in the aggregate, would constitute a Significant
Subsidiary)) with respect to any series of Notes shall occur and be continuing,
the Trustee, by notice to the Company, or the holders of at least 25% in
aggregate principal amount of any series of Notes affected then outstanding, by
notice to the Trustee and the Company, may declare the principal of, premium,
if any, and accrued and unpaid interest, if any, on all of the outstanding
Notes of such series affected thereby due and payable immediately, upon which
declaration all amounts payable in respect of such Notes of such series shall
be immediately due and payable. If an Event of Default specified in clause
(vii) above with respect to the Company or any Significant Subsidiary (or one
or more Subsidiaries which, in the aggregate, would constitute a Significant
Subsidiary) occurs and is continuing, then the principal of, premium, if any,
and accrued and unpaid interest, if any, on all of the outstanding Notes shall
ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holder of Notes. (Section 502)
After a declaration of acceleration under the Indenture with respect
to any series of Notes (or both series of Notes, as the case may be), but
before a judgment or decree for payment of money due has been obtained by the
Trustee, the holders of greater than 75% in aggregate principal amount of the
outstanding Notes of such series (or all of the Notes, as the case may be), by
written notice to the Company and the Trustee, may rescind such declaration and
its consequences if: (a) the Company has paid or deposited with the Trustee a
sum sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements, and
advances of the Trustee, its agents and counsel, (ii) all overdue interest on
the Notes of such series then outstanding (or on all of the Notes, as the case
may be), (iii) the principal of and premium, if any, on any Notes outstanding
of such series (or of all Notes, as the case may be) which have become due
otherwise than by such declaration of acceleration and interest thereon at the
rate borne by the Notes of such series, and (iv) to the extent that payment of
such interest is lawful, interest upon overdue interest and overdue principal
at the rate borne by the Notes of such series which have become due otherwise
than by such declaration of acceleration; (b) the rescission would not conflict
with any judgment or decree of a court of competent jurisdiction; and (c) all
Events of Default, other than the non-payment of principal of, premium, if any,
and interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived. (Section 502)
The holders of not less than a majority in principal amount of the
outstanding Notes of each series affected (voting, in the event of both series
of Notes being affected substantially identically, as one class, in which case
such majority shall include the Holder of the Institutional Series B Notes),
may on behalf of the holders of all the Notes of such series waive any
- 55 -
<PAGE> 62
past defaults under the Indenture, except a default in the payment of the
principal of, premium, if any, or interest on any Note, or in respect of a
covenant or provision which under the Indenture cannot be modified or amended
without the consent of the holder of each Note affected. (Section 513)
No holder of any Notes of any series has any right to institute any
proceeding with respect to the Indenture or any remedy thereunder, unless the
holders of at least 25% in aggregate principal amount of the outstanding Notes
or such series have made written request, and offered reasonable indemnity, to
the Trustee to institute such proceeding within 30 days after receipt of such
notice and the Trustee, within such 30- day period, has not received directions
inconsistent with such written request by holders of a majority in aggregate
principal amount of the outstanding Notes of such series. Such limitations do
not apply, however, to a suit instituted by a holder of a Note for the
enforcement of the payment of the principal of, premium, if any, or interest
on, such Note on or after the respective due dates expressed in such Note.
(Sections 507 and 508)
During the existence of an Event of Default, the Trustee is required
to exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, whether or not an Event of Default shall occur and be continuing, the
Trustee under the Indenture is not under any obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
holders of the Notes unless such holders shall have offered to the Trustee
reasonable security or indemnity. Subject to certain provisions concerning the
rights of the Trustee, the holders of a majority in principal amount of the
outstanding Notes of any or both series affected, as the case may be (voting,
in the event of both series of Notes being affected substantially identically,
as one class, in which case such majority shall include the Holder or Holders
of the Institutional Series B Notes), have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee,
or exercising any trust or power conferred on the Trustee under the Indenture.
(Sections 602 and 512)
If a Default or an Event of Default occurs and is continuing and is
known to the Trustee, the Trustee shall mail to each holder of the Notes notice
of the Default or Event of Default within 10 days after such occurrence.
Except in the case of a Default or an Event of Default in payment of principal
of, premium, if any, or interest on any Notes, the Trustee may withhold the
notice to the holders of such Notes if a committee of its trust officers in
good faith determines that withholding the notice is in the interest of the
holders of the Notes. (Section 601)
The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company of its obligations under the
Indenture and as to any default in such performance. The Company is also
required to notify the Trustee within ten days of any event which is, or after
notice or lapse of time or both would become, an Event of Default. (Sections
1008 and 1009)
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the
obligations of the Company with respect to the outstanding Notes
("defeasance"). Such defeasance means that the Company shall be deemed to have
paid and discharged the entire Indebtedness represented by the then outstanding
Notes, except for (i) the rights of holders of outstanding Notes to receive
payment in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due, (ii) the Company's obligations to issue
temporary Notes, register the transfer or exchange of any Notes, replace
mutilated, destroyed, lost or stolen Notes and maintain an office or agency for
receipt of payments in respect of the Notes, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and (iv) the defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect
to terminate its obligations with respect to certain covenants that are set
forth in the Indenture, some of which are described under "--Certain Covenants"
above, and any subsequent failure to comply with such obligations shall not
constitute a Default or an Event of Default with respect to the Notes
("covenant defeasance"). (Sections 1301, 1302 and 1303)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust for the benefit of
the holders of the Notes, cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay the principal of, premium, if any,
and interest on the outstanding Notes to redemption or maturity, (ii) the
Company shall have delivered to the Trustee an opinion of counsel to the effect
that the holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of
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such defeasance or covenant defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as would have
been the case if such defeasance or covenant defeasance had not occurred (in
the case of defeasance, such opinion must refer to and be based upon a ruling
of the Internal Revenue Service or a change in applicable federal income tax
laws), (iii) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or, insofar as clause (ix) under the
first paragraph under "Events of Default" is concerned, at any time during the
period ending on the 91st day after the date of deposit, (iv) such defeasance
or covenant defeasance shall not cause the Trustee to have a conflicting
interest with respect to any of the Notes, (v) such defeasance or covenant
defeasance shall not result in a breach or violation of, or constitute a
default under, the Indenture or any material agreement or instrument to which
the Company or any Guarantor is a party or by which the Company or any
Guarantor is bound, (vi) the Company shall have delivered to the Trustee an
opinion of counsel to the effect that (A) the trust funds will not be subject
to any rights of holders of Senior Indebtedness, including, without
limitations, those arising under the Indenture and (B) after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (vii) the Company shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating that
all conditions precedent under the Indenture to either defeasance or covenant
defeasance, as the case may be, have been complied with and that no violations
under agreements governing any other outstanding Indebtedness would result,
(viii) the Company shall have delivered to the Trustee an officers' certificate
stating that the deposit was not made by the Company with intent of preferring
the holders of the Notes over the other creditors of the Company with the
intent of defeating, hindering or delaying or defrauding creditors of the
Company or others, (ix) if the Bank Credit Agreement is in effect, the Company
shall have delivered to the Trustee any required consent of the lenders under
the Bank Credit Agreement to such defeasance or covenant defeasance, as the
case may be, and (x) no event or condition shall exist that would prevent the
Company from making payments of the principal of (and premium, if any) or
interest on the Notes on the date of such deposit or at any time during the
period ending on the 91st day after the date of such deposit (it being
understood that this condition shall not be deemed satisfied until the
expiration of such period). (Section 1304)
SATISFACTION AND DISCHARGE
The Indenture will upon Company Request (as defined in the Indenture)
be discharged and will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when (i) either (a)
all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes which have been replaced or paid and Notes for which payment
has theretofore been deposited in trust or segregated and held in trust by the
Company and thereafter repaid to the Company or discharged from such trust)
have been delivered to the Trustee for cancellation or (b) all Notes not
theretofore delivered to the Trustee for cancellation have become due and
payable, and the Company has irrevocably deposited or caused to be deposited
with the Trustee funds in trust solely for the benefit of holders in an amount
in U.S. dollars sufficient to pay and discharge the entire Indebtedness on the
Notes not theretofore delivered to the Trustee for cancellation, for principal
of, premium, if any, and interest on the Notes to the date of deposit together
with irrevocable instructions from the Company directing the Trustee to apply
such funds to the payment thereof at maturity or redemption, as the case may
be, (ii) the making of such Company Request does not constitute a default under
the Indenture or any other material agreement to which the Company is a party
or by which it is bound, (iii) the Company has paid all other sums payable
under the Indenture by the Company, and (iv) the Company has delivered to the
Trustee an officers' certificate and an opinion of counsel stating that all
conditions precedent under the Indenture relating to the satisfaction and
discharge of the Indenture have been complied with. (Section 401)
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AMENDMENTS AND WAIVERS
From time to time, the Company, when authorized by a resolution of its
Board of Directors, and the Trustee may, without the consent of the holders of
any outstanding Notes, amend, waive or supplement the Indenture or the Notes
for certain specified purposes, including, among other things, curing
ambiguities, defects or inconsistencies, complying with the Trust Indentures
Act of 1939, adding any Subsidiary of the Company as a Guarantor or making any
change that does not adversely affect the rights of any holder; provided,
however, that the Company has delivered to the Trustee an opinion of counsel
stating that such change does not adversely affect the rights of any holder of
the Notes. Other amendments and modifications of the Indenture or the Notes
may be made by the Company and the Trustee with the consent of the holders of
not less than a majority of the principal amount of the outstanding Notes of
any or all series which are affected by the modification or amendment, as the
case may be (voting in the case of both series of Notes being affected
substantially identically, as one class, in which case such majority shall
include the Holder or Holders of the Institutional Series B Notes); provided,
however, that no such modification or amendment may, without the consent of the
holder of each outstanding Note affected thereby, (i) reduce the principal
amount of, extend the fixed maturity of or alter the redemption provisions of,
the Notes, (ii) change the currency in which the Notes or any premium or the
interest thereon is payable, (iii) reduce the percentage in principal amount of
outstanding Notes that must consent to an amendment, supplement or waiver or
consent to take any action under the Indenture, the Notes or any Guarantee,
(iv) impair the right to institute suit for the enforcement of any payment on
or with respect to the Notes, (v) waive a default in payment with respect to
the Notes, (vi) reduce or change the rate or time for payment of interest on
the Notes, or (vii) modify or change any provision of the Indenture affecting
the subordination of the Notes in a manner adverse to the holders of the Notes.
(Sections 901 and 902)
THE TRUSTEE
Norwest Bank Minnesota, National Association has been designated as
the Trustee under the Indenture and has been appointed by the Company as
Registrar and Paying Agent with regard to the Notes.
GOVERNING LAW
The Indenture and the Notes are governed by the laws of the State of
Illinois, without regard to the principles of conflicts of law. (Section 112)
CERTAIN DEFINITIONS
"Affiliate" means, with respect to any specified person, any other
person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person. For purposes of this
definition, "control" when used with respect to any person means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"Average Life to Stated Maturity" means, with respect to any
Indebtedness, as at any date of determination, the quotient obtained by
dividing (a) the sum of the products of (i) the number of years from such date
to the date or dates of each successive scheduled principal payment (including,
without limitation, any sinking fund requirements) of such Indebtedness
multiplied by (ii) the amount of each such principal payment by (b) the sum of
all such principal payments.
"Bank Credit Agreement" means (a) the Revolving Credit, Term Loan and
Gold Consignment Agreement among the Company, the Banks and The First National
Bank of Boston and Rhode Island Hospital Trust National Bank, as agents for the
Banks, as in effect on the Issue Date and as such agreement may be amended,
restated, supplemented or otherwise modified from time to time, and (b) any
credit agreement, loan agreement, note purchase agreement, indenture or other
agreement, document or instrument refinancing, refunding or otherwise replacing
such Agreement or any other agreement deemed a Bank Credit Agreement under
clause (a) or (b) hereof.
"Banks" means the lenders from time to time who are parties to the
Bank Credit Agreement.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in or other equivalents or interests in
(however designated) such person's capital stock or other equity interests or
participations,
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including general and limited partnership interests, and any rights (other than
debt securities convertible into capital stock), warrants or options
exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or
other amounts under a lease of (or other agreement conveying the right to use)
any property (whether real, personal or mixed) that is required to be
classified and accounted for as a capital lease obligation under GAAP; and, for
the purpose of the Indenture, the amount of such obligation at any date shall
be the capitalized amount thereof on the balance sheet at such date, determined
in accordance with GAAP consistently applied.
"Cash Equivalents" means, at any time : (i) any evidence of
Indebtedness with a maturity of 180 days or less issued, or directly and fully
guaranteed or insured, by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof); (ii) certificates of deposit,
time deposits and bankers' acceptances with a maturity of 180 days or less of
any financial institution that is a member of the Federal Reserve System having
combined capital and surplus and undivided profits of not less than
$500,000,000 and a Keefe Bank Watch Rating of B or better; (iii) commercial
paper with a maturity of 90 days or less issued by a corporation that is not an
Affiliate of the Company or a Subsidiary organized under the laws of any state
of the United States or the District of Columbia and rated at least A-1 by S&P
or at least P-1 by Moody's or at least an equivalent rating category of another
nationally recognized securities rating agency; and (iv) any money market or
other deposit accounts issued or offered by any domestic institution in the
business of accepting money market accounts or any commercial banking
institution described in clause (ii) above.
"Common Stock" means, with respect to any person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of, such person's common stock, whether
outstanding at the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common stock.
"Consignment Fees" means consignment fees on consigned precious metal
at the rates set forth in Section 5.2 of the Bank Credit Agreement.
"Consolidated Cash Interest Expense" means, with respect to the
Company and its Restricted Subsidiaries and for any particular fiscal period,
the amount of Consolidated Total Interest Expense which is paid or due to be
paid in cash during such period.
"Consolidated EBITDA" means, with respect to the Company and its
Restricted Subsidiaries and for any particular fiscal period, the consolidated
earnings (or loss) from operations of the Company and its Restricted
Subsidiaries for such period, after eliminating therefrom all extraordinary
nonrecurring items of income (including gains on the sale of assets and
earnings from the sale of discontinued business lines), and after all expenses
and other proper charges but before payment or provision for (a) any income
taxes, interest expenses or Consignment Fees for such period, (b) depreciation
for such period, (c) amortization for such period, and (d) all other noncash
charges for such period, all determined in accordance with generally accepted
accounting principles.
"Consolidated Funded Debt" shall mean, with respect to the Company and
its Restricted Subsidiaries and for any period, the average aggregate principal
amount outstanding during such period in respect of all Indebtedness of the
Company and its Restricted Subsidiaries pursuant to any agreement or instrument
to which the Company or any Restricted Subsidiary is a party relating to the
borrowing of money or the obtaining of credit (including, without limitation,
amounts outstanding under the Bank Credit Agreement, Indebtedness in respect of
the Notes and Indebtedness in respect of Capitalized Lease Obligations).
"Consolidated Minimum Store Rent" means, with respect to any fiscal
period, the aggregate amount of obligations of the Company and its Restricted
Subsidiaries during such period to make direct or indirect payment, whether as
rent or otherwise, for fixed or minimum rentals in respect of any leased retail
store locations.
"Consolidated Net Income" means, with respect to the Company and its
Restricted Subsidiaries and for any particular fiscal period, the consolidated
net income (or loss) of the Company and its Restricted Subsidiaries for such
period as determined in accordance with generally accepted accounting
principles consistently applied adjusted, to the extent
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included in calculating such net income, by excluding, without duplication (i)
all extraordinary gains or losses (net of fees and expenses relating to the
transaction giving rise thereto) and the non-recurring cumulative effect of
accounting changes, (ii) the portion of net income (or loss) of the Company and
its Restricted Subsidiaries allocable to minority interests and unconsolidated
Persons to the extent that cash dividends or distributions have not actually
been received by the Company or one of the Company's Restricted Subsidiaries,
(iii) net income (or loss) of any Person combined with the Company or one of
its Restricted Subsidiaries on a "pooling of interest" basis attributable to
any period prior to the date of combination, (iv) the net income of any
Restricted Subsidiary of the Company to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary of
that income is not at the time permitted, directly or indirectly, by operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulations applicable to such Restricted
Subsidiary or its stockholders.
"Consolidated Tangible Net Worth" means, the difference of (a)
Consolidated Total Assets minus (b) Consolidated Total Liabilities, and less
(c) the sum of:
(i) the total book value of all assets of the Company and
its Restricted Subsidiaries properly classified as intangible assets
under generally accepted accounting principles, including such items
as goodwill, the purchase price of acquired assets in excess of the
fair market value thereof, trademarks, trade names, service marks,
brand names, copyrights, patents and licenses, and rights with respect
to the foregoing, but excluding, whether or not so classified as
intangible assets, up to $4,000,000 in the aggregate of unamortized
transaction costs incurred by the Company and its Restricted
Subsidiaries in connection with the Indenture and the transactions
contemplated thereby to the extent included in Consolidated Total
Assets; plus
(ii) all amounts representing any write-up in the book
value of any assets of the Company or its Restricted Subsidiaries
resulting from a revaluation thereof subsequent to January 31, 1996;
plus
(iii) to the extent otherwise includable in the computation
of Consolidated Tangible Net Worth, any subscriptions receivable.
"Consolidated Total Assets" means, as of any date, all assets of the
Company and its Restricted Subsidiaries determined on a consolidated basis as
of such date in accordance with generally accepted accounting principles.
"Consolidated Total Interest Expense" means, for any fiscal period,
the aggregate amount of interest required to be paid or accrued by the Company
and its Restricted Subsidiaries during such period on all Indebtedness of the
Company and its Restricted Subsidiaries outstanding during all or any part of
such period, whether such interest was or is required to be reflected as an
item of expense or capitalized, including payments consisting of interest in
respect of Capitalized Lease Obligations and including commitment fees, agency
fees, facility fees, Consignment Fees, balance deficiency fees and similar fees
or expenses in connection with the borrowing of money.
"Consolidated Total Liabilities" means, as of any date, all
liabilities of the Company and its Restricted Subsidiaries determined on a
consolidated basis as of such date in accordance with generally accepted
accounting principles and all Indebtedness of the Company and its Restricted
Subsidiaries, whether or not so classified.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) all Senior Indebtedness
under the Bank Credit Agreement and (ii) any other Senior Indebtedness which,
at the time of determination, has an aggregate principal amount outstanding,
together with any commitments to lend additional amounts, of at least
$5,000,000 and is specifically designated by the Company, with the consent of
the agent for the Banks under the Bank Credit Agreement, in its sole
discretion, if such agreement is then in effect, in the instrument evidencing
such Senior Indebtedness or the agreement under which such Senior Indebtedness
arises as "Designated Senior Indebtedness."
"Event of Default" has the meaning set forth under "--Events of
Default" herein.
"GAAP" or "generally accepted accounting principles" means (i) when
used in Section 1010 (Limitation on Consolidated Funded Debt) and Sections 1019
and 1020 of the Indenture (Financial Covenants), whether directly or
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indirectly through reference to a capitalized term used therein, (A) principles
that are consistent with the principles promulgated or adopted by the Financial
Accounting Standards Board and its predecessors, in effect for the Company's
fiscal year ended on January 31, 1996, and (B) to the extent consistent with
such principles, the accounting practice of the Company reflected in its
financial statements for the year ended on January 31, 1996; provided, however,
that if any change in such principles promulgated by the Financial Accounting
Standards Board and its predecessors following January 31, 1996 would affect
(or would result in a change in the method of calculation of) any of the
covenants set forth in Sections 1010, 1019 and 1020 of the Indenture, or any
definition related thereto, then the Company and the holders of the Notes will
negotiate in good faith to amend all such covenants and definitions as would be
affected by such changes in such principles to the extent necessary to maintain
the economic terms of such covenants as in effect under the Indenture
immediately prior to giving effect to such changes in such principles, provided
further that, until the amendment of such covenants and definitions shall have
been agreed upon by the Company and the Trustee on behalf of the holders of the
Notes, the covenants and definitions in effect immediately prior to such
amendment shall remain in effect and any determination of compliance with any
covenant set forth in Sections 1010, 1019 and 1020 of the Indenture shall be
construed in accordance with generally accepted accounting principles as in
effect immediately prior to such amendment consistently applied, and (ii) when
used in general, other than as provided above, principles that are (A)
consistent with the principles promulgated or adopted by the Financial
Accounting Standards Board and its predecessors, as in effect from time to
time, and (B) consistently applied with past financial statements of the
Company adopting the same principles, provided that in each case referred to in
this definition of "GAAP" or "generally accepted accounting principles" a
certified public accountant would, insofar as the use of such accounting
principles is pertinent, be in a position to deliver an unqualified opinion
(other than a qualification regarding changes in generally accepted accounting
principles) as to financial statements in which such principles have been
properly applied.
"guarantee" means, as applied to any obligation, (i) a guarantee
(other than by endorsement of negotiable instruments for collection in the
ordinary course of business), direct or indirect, in any manner, of any part or
all of such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"Indebtedness" means all obligations, contingent and otherwise, that
in accordance with generally accepted accounting principles should be
classified upon the obligor's balance sheet as liabilities, or to which
reference should be made by footnotes thereto, including in any event and
whether or not so classified: (i) all debt and similar monetary obligations,
whether direct or indirect; (ii) all liabilities secured by any mortgage,
pledge, security interest, lien, charge or other encumbrance existing on
property owned or acquired subject thereto, whether or not the liability
secured thereby shall have been assumed; and (iii) all guarantees, endorsements
and other contingent obligations whether direct or indirect in respect of
indebtedness of others, including any obligation to supply funds to or in any
manner to invest in, directly or indirectly, the debtor, to purchase
indebtedness, or to assure the owner of indebtedness against loss, through an
agreement to purchase goods, supplied, or services for the purpose of enabling
the debtor to make payment of the indebtedness held by such owner or otherwise,
and the obligations to reimburse the issuer in respect of any letters of
credit.
"Institutional Series B Notes" shall mean the Series B Notes
authenticated and delivered to the initial Holder or Holders thereof (including
any Series B Notes authenticated and delivered in exchange for such Series B
Notes so authenticated and delivered), and such Series B Notes (and any Series
B Notes so authenticated and delivered in exchange therefor) shall constitute
Institutional Series B Notes if and only for so long as the initial Holder or
Holders of such Series B Notes (or any Series B Notes so authenticated and
delivered in exchange therefor) hold in the aggregate not less than 87.5% of
the aggregate outstanding principal amount of Series B Notes.
"Investment" means all expenditures made and all liabilities incurred
(contingently or otherwise) for the acquisition of stock or Indebtedness of, or
for loans, advances, capital contributions or transfers of property to, or in
respect of any guaranties (or other commitments as described under
Indebtedness), or obligations of, any Person. In determining the aggregate
amount of Investments outstanding at any particular date: (i) the amount of
any Investment represented by a guaranty shall be taken at not less than the
principal amount of the obligations guaranteed and still outstanding: (ii)
there shall be included as an Investment all interest accrued with respect to
Indebtedness constituting an Investment unless and until such interest is paid;
(iii) there shall be deducted in respect of each such Investment any amount
received as a return of capital (but only by repurchase, redemption,
retirement, repayment, liquidating dividend or liquidating distribution); (iv)
there shall not be deducted in respect of any Investment any amounts received
as earnings on such Investment, whether as
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dividends, interest or otherwise, except that accrued interest included as
provided in the foregoing clause (ii) may be deducted when paid; and (v) there
shall not be deducted from the aggregate amount of Investments any decrease in
the value thereof.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind. A person shall be deemed to own subject to a Lien any property which
such person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Pari Passu Indebtedness" means any Indebtedness of the Company that
is pari passu in right of payment to the Notes.
"Permitted Investment" means any of the following: (i) Investments by
the Company or any Wholly Owned Restricted Subsidiary of the Company in another
person, if as a result of such Investment such other person is merged or
consolidated with or into, or transfer or conveys all or substantially all of
its assets to the Company or such Wholly Owned Restricted Subsidiary; (ii)
Investments in short-term obligations of, or fully guaranteed by, the United
States of America; (iii) Investments in commercial paper rated "P-1" or better
by Moody's or "A-1" or better by S&P; (iv) Investments in certificates of
deposit issued by and time deposits with commercial banks (whether domestic or
foreign) having capital and surplus in excess of $100,000,000; (v) Investments
in any mutual fund organized under the Investment Company Act of 1940 or money
market fund organized under the laws of the United States of America or any
state thereof which invests only in instruments described in clause (ii), (iii)
or (iv) below; (vi) Investments representing Capital Stock or obligations
issued to the Company or any of its Restricted Subsidiaries in settlement of
claims against any other person by reason of a composition or readjustment of
debt or a reorganization of any debtor of the Company or of such Restricted
Subsidiary; (vii) Investments in Cash Equivalents; (viii) loans and advances to
employees and officers of the Company and its Restricted Subsidiaries made in
compliance with clause (ii) of the second sentence under the covenant
"--Limitations on Transactions with Affiliates" described above; (ix)
Investments by the Company or a Wholly Owned Restricted Subsidiary in the
Capital Stock of a Wholly Owned Restricted Subsidiary; (x) Investments in any
of the Notes; (xi) receivables owing to the Company or any Restricted
Subsidiary created in the ordinary course of business; and (xii) Investments in
any person in addition to that described in clauses (i) through (xi) of this
definition of "Permitted Investments" not to exceed $3,000,000 in the aggregate
at any time outstanding.
"person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any person, any and all
shares, interests, participations or other equivalents (however designated) of
such person's preferred or preference stock whether now outstanding or issued
after the Issue Date, and including, without limitation, all classes and series
of preferred or preference stock of such person.
"Redeemable Capital Stock" means any class or series of Capital Stock
that, either by its terms, by the terms of any security into which it is
convertible or exchangeable or by contract or otherwise, is, or upon the
happening of an event or passage of time would be, required to be redeemed
prior to any Stated Maturity of the Notes or is redeemable at the option of the
holder thereof at any time prior to any Stated Maturity of the Notes, or, at
the option of the holder thereof, is convertible into or exchangeable for debt
securities at any time prior to any Stated Maturity of the Notes.
"Restricted Payment" has the meaning set forth under "--Limitation on
Restricted Payments" covenant above.
"Restricted Subsidiary" means any Subsidiary of the Company other
than an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Corporation and its successors.
"Senior Indebtedness" means the principal of, premium, if any, and
interest on any Indebtedness of the Company, whether outstanding on the Issue
Date or thereafter created, incurred or assumed, unless, in the case of any
particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides
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that such Indebtedness shall not be senior in right of payment to the Notes.
Without limiting the generality of the foregoing, "Senior Indebtedness" shall
also include all obligations of the Company, whether outstanding on the Issue
Date or thereafter created, incurred or assumed, under or in respect of the
Bank Credit Agreement, whether for principal, interest (including interest
accruing after the filing of a petition initiating any proceeding under any
state, federal or foreign bankruptcy laws whether or not allowable in such
proceeding), reimbursement of amounts drawn under letters of credit issued or
arranged for pursuant thereto, obligations owed to the Banks with respect to
Interest Rate Protection Obligations incurred to satisfy the requirements of
the Bank Credit Agreement or otherwise and reimbursement of other amounts,
guarantees in respect thereof, and all charges, fees, indemnifications,
damages, penalties, expenses (including any post-petition expenses in any
state, federal or foreign bankruptcy proceeding) and other amounts or
liabilities payable by the Company or its Restricted Subsidiaries under the
Bank Credit Agreement. Notwithstanding the foregoing, "Senior Indebtedness"
shall not include (a) Indebtedness evidenced by the Notes, (b) Indebtedness
that is expressly subordinate or junior in right of payment to any Indebtedness
of the Company, (c) Indebtedness which, when incurred and without respect to
any election under Section I 1 1 1 (b) of Title 11, United States Code, is by
its terms without recourse to the Company, (d) any repurchase, redemption or
other obligation in respect of Redeemable Capital Stock, (e) to the extent it
might constitute Indebtedness, amounts owing for goods, materials or services
purchased in the ordinary course of business or consisting of trade payables or
other current liabilities (other than any current liabilities owing under the
Bank Credit Agreement or the current portion of any long-term Indebtedness
which would constitute Senior Indebtedness but for the operation of this clause
(e)), (f) to the extent it might constitute Indebtedness, amounts owed by the
Company for compensation to employees or for services rendered to the Company,
(g) to the extent it might constitute Indebtedness, any liability for federal,
state, local or other taxes owed or owing by the Company, (h) Indebtedness of
the Company to a Subsidiary of the Company or any other Affiliate of the
Company or any of such Affiliate's Subsidiaries and (i) that portion of any
Indebtedness which at the time of issuance is issued in violation of the
Indenture.
"series of Notes" or "Notes of any series" shall mean and refer to
Series A Notes and/or Series B Notes and/or Series C Notes and/or Series D
Notes.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which any principal of such Note or such installment of interest is due
and payable, and when used with respect to any other Indebtedness or any
installments of interest thereon, means any date specified in the instrument
governing such Indebtedness as the fixed date on which the principal of such
Indebtedness, or such installment of interest thereon, is due and payable.
"Subordinated Indebtedness" means, with respect to the Company,
Indebtedness of the Company which is expressly subordinated in right of payment
to the Notes pursuant to subordination provisions described in
"--Subordination," as appropriately modified to include the Notes as "Senior
Indebtedness" thereunder.
"Subsidiary" means, with respect to any person, (i) a corporation a
majority of whose Voting Stock is at the time, directly or indirectly, owned by
such person, by one or more Subsidiaries of such person or by such person and
one or more Subsidiaries of such person and (ii) any other person (other than a
corporation), including, without limitation, a joint venture or partnership, in
which such person, one or more Subsidiaries of such person or such person and
one or more Subsidiaries of such person, directly or indirectly, at the date of
determination thereof, has at least a majority ownership interest entitled to
vote in the election of directors, managers or trustees thereof (or other
person performing similar functions). For purposes of this definition, any
directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a
Subsidiary.
"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such by the Company (a) no portion of the Indebtedness or any
other obligation (contingent or otherwise) of which (i) is guaranteed by the
Company or any other Subsidiary of the Company, (ii) is recourse to or
obligates the Company or any other Subsidiary of the Company in any way or
(iii) subjects any property or asset of the Company or any other Subsidiary of
the Company, directly or indirectly, contingently or otherwise, to the
satisfaction thereof, (b) which has no Indebtedness or any other obligation
that, if in default in any respect (including a nonpayment default), would
Permit (upon notice, lapse of time or both) any holder of any other
Indebtedness of the Company or any Restricted Subsidiary to declare a default
on such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity, (c) with which the Company or any other
Subsidiary of the Company has no contract, agreement, arrangement,
understanding or is subject to an obligation of any kind, whether written or
oral, other than a transaction on terms no less favorable to the Company or any
other Subsidiary of the
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<PAGE> 70
Company than those which might be obtained at the time from persons at arm's
length who are not Affiliates of the Company, and (d) with which neither the
Company nor any other Subsidiary of the Company has any obligation (other than
by the terms of the Indenture) (i) to subscribe for additional shares of
Capital Stock or other equity interest therein or (ii) to maintain or preserve
such Subsidiary's financial condition or to cause such Subsidiary to achieve
certain levels of operating results. The Company may designate an Unrestricted
Subsidiary as a Restricted Subsidiary by written notice to the Trustee under
the Indenture; provided however, that the Company shall not be permitted to
designate any Unrestricted Subsidiary as a Restricted Subsidiary unless, after
giving effect to such designation, no Default or Event of Default would have
then occurred or be continuing. A designation of an Unrestricted Subsidiary as
a Restricted Subsidiary may not thereafter be rescinded.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any person (irrespective of whether or not, at the time, stock
of any other class or classes shall have, or might have, voting power by reason
of the happening of any contingency).
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary
of the Company of which 100% of the outstanding Capital Stock is owned by the
Company or another Wholly Owned Restricted Subsidiary of the Company. For
purposes of this definition, any directors' qualifying shares or investments by
foreign nationals mandated by applicable law shall be disregarded in
determining the ownership of a Restricted Subsidiary.
BOOK-ENTRY ONLY SYSTEM
The following information has been furnished by DTC for use in this
Prospectus. The Company does not take any responsibility for its accuracy or
completeness.
DTC will act as securities depository for the Notes. The Notes will
be registered in the name of Cede & Co. (DTC's partnership nominee). One
fully-registered Series C Note and Series D Note will be issued in the
aggregate issuance amount and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds
securities that its participants ("Participants") deposit with DTC. DTC also
facilitates the settlement among Participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities Notes. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations. DTC is owned by a number of its
Direct Participants and by the New York Stock Exchange, Inc., the American
Stock Exchange, Inc., and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others such as securities brokers
and dealers, banks, and trust companies that clear through or maintain a
custodial relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The Rules applicable to DTC and its Participants
are on file with the Commission.
Purchases of the Notes under the DTC system must be made by or through
Direct Participants, which will receive a credit for the Notes on DTC's
records. The ownership interest of each actual purchaser of each Note
("Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Direct or Indirect Participant through
which the Beneficial Owner entered into the transaction. Transfers of
ownership interests in the Notes are to be accomplished by entries made on the
books of Participants acting on behalf of Beneficial Owners. Except as
otherwise provided herein, Beneficial Owners will not receive Notes
representing their ownership interests in the Notes, except in the event that
use of the book-entry system for the Notes is discontinued.
To facilitate subsequent transfers, all Notes deposited by
Participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of the Notes with DTC and their registration in the
name of Cede & Co. effect no change in beneficial ownership. DTC has no
knowledge of the actual Beneficial Owners of the Notes; DTC's records reflect
only the identity of the Direct Participants to whose accounts such Notes are
credited, which may or may not be the Beneficial Owners. The Participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
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<PAGE> 71
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the
Notes. Under its usual procedures, DTC mails an Omnibus Proxy to the Trustee
as soon as possible after the record date. The Omnibus Proxy assigns Cede &
Co.'s consenting or voting rights to those Direct Participants to whose
accounts the Notes are credited on the record date (identified in a listing
attached to the Omnibus Proxy).
Payments with respect to the Notes will be made to DTC. DTC's
practice is to credit Direct Participants' accounts on payable date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on payable date. Payments
by Participants to Beneficial Owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts
of customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of DTC, the Trustee, or the Trust,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of note payments to DTC is the responsibility of the
Trustee, disbursement of such payments to Direct Participants shall be the
responsibility of DTC, and disbursement of such payments to the Beneficial
Owners shall be the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository
with respect to the Notes at any time by giving reasonable notice to the
Company or the Trustee. Under such circumstances, if a successor securities
depository is not obtained, Note certificates are required to be printed and
delivered.
The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository). In that event,
certificates representing the Notes will be printed and delivered.
THE COMPANY AND THE TRUSTEE WILL NOT HAVE ANY RESPONSIBILITY OR
OBLIGATION TO PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH
RESPECT TO THE ACCURACY OF THE RECORDS OF DTC, ITS NOMINEE OR ANY PARTICIPANT
WITH RESPECT TO ANY OWNERSHIP INTEREST IN THE NOTES, OR PAYMENTS TO OR THE
PROVIDING OF NOTICE FOR PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL
OWNERS.
As part of the Recapitalization, the Company completed a restructuring
of its outstanding indebtedness by utilizing the proceeds generated by: (i)
the Bank Facility; (ii) the IPO; (iii) the Gold Consignment Facility; and (iv)
the Offering. The Company used the funds generated by the Recapitalization
principally to repay in full all of the Company's outstanding indebtedness. In
addition, as part of the Recapitalization, the Company completed a
restructuring of its ESOP, as more fully described below. The following
summaries of the material terms of the Bank Facility, the Gold Consignment
Facility and the IPO do not purport to be complete and are subject to all of
the provisions of the respective governing agreements relating thereto.
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<PAGE> 72
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of
the Company's executive officers, certain significant employees and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
---- --- ----------------------------
<S> <C> <C>
Hugh M. Patinkin(1)(2) 45 Chairman, President and Chief Executive Officer and Director
John R. Desjardins(1) 45 Executive Vice President, Finance and Administration, Treasurer and Secretary
and Director
Matthew M. Patinkin(1)(2) 38 Executive Vice President, Store Operations and Director
Lynn D. Eisenheim(1) 44 Executive Vice President, Merchandising
John J. Guarnaccia 41 Senior Vice President, Operations
Vicky Lau 44 Senior Vice President, Merchandise
Rodney L. Goldstein 44 Director
Samuel B. Guren 49 Director
Norman J. Patinkin(2) 70 Director
Jack A. Smith 61 Director
</TABLE>
__________________________
(1) Executive officer.
(2) Messrs. Hugh and Matthew Patinkin are brothers. Norman J. Patinkin is
a first cousin, once removed, of Messrs. Hugh and Matthew Patinkin.
Mr. Hugh M. Patinkin has served as President and Chief Executive
Officer of the Company since 1989 and was elected its Chairman in February
1996. He has served as a director from 1979 to 1988 and from 1989 to the
present. He joined the Company as its Assistant Secretary in 1979. Prior
thereto he practiced law with the firm of Sidley & Austin. For information
concerning Mr. Patinkin's services to Double P Corp., see "Certain
Transactions--Other."
Mr. John R. Desjardins joined the Company in 1979 and has served as
Executive Vice President, Finance and Administration, Treasurer and Secretary
and as a director of the Company since 1989. Previously, he worked as a
certified public accountant with Deloitte & Touche L.L.P.
Mr. Matthew M. Patinkin joined the Company in 1979 and has served as
Executive Vice President, Store Operations and as a director of the Company
since 1989.
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<PAGE> 73
Mr. Lynn D. Eisenheim joined the Company in 1991 as its Executive Vice
President, Merchandising. He has 22 years of experience in the jewelry
business, having served with Zale Corporation (where he served as Executive
Vice President, Merchandising immediately prior to joining the Company) and
Service Merchandise Co.
Mr. John J. Guarnaccia joined the Company in 1980 and has served as
Senior Vice President, Operations of the Company since 1989. Mr. Guarnaccia
served as director of the Company from 1990 until July of 1996.
Ms. Vicky Lau has served as Senior Vice President, Merchandise since
1989. She previously served as its Vice President, Merchandise after joining
the Company in 1978 as its Merchandise Manager.
Mr. Rodney L. Goldstein has served as a director of the Company since
1989 and served as Chairman from 1989 to February of 1996. Mr. Goldstein is
the Managing Partner of Frontenac Company ("Frontenac"), a private equity
investment management partnership which he joined in 1981. Mr. Goldstein
serves on the Boards of Directors of Eagle River Interactive, Inc. and Platinum
Entertainment, Inc., as well as a number of privately-held companies.
Mr. Samuel B. Guren has served as a director of the Company since
1989. Mr. Guren is the Managing Partner of William Blair Venture Management
Company and a Managing Director of Robert W. Baird & Co. Incorporated. Mr.
Guren served as a Principal of William Blair & Company, L.L.C. from 1983 to
February of 1996. Mr. Guren serves on the Boards of Directors of a number of
privately-held companies.
Mr. Norman J. Patinkin has served as a director of the Company since
1989. He is the Chief Executive Officer of each of MC Club Services, Inc.
(since 1972), which primarily operates telemarketing service clubs for
corporations, S&S Marketing Corp. (since 1979), which operates motor clubs for
corporations, and Continental Associates, Inc. (since 1979), which operates
travel clubs for corporations.
Mr. Jack A. Smith has served as director of the Company since July
1996. Mr. Smith is Chairman of the Board and Chief Executive Officer
of The Sports Authority, a national sporting goods chain and publicly traded
company, which he founded in 1987. Prior to founding The Sports Authority,
Mr. Smith served as Chief Operating Officer of Herman's Sporting Goods and
held various executive management positions with major national
retailers, including Sears & Roebuck, Montgomery Ward and Jefferson Stores.
Mr.Smith serves on the Boards of Directors of various privately-held companies.
BOARD OF DIRECTORS
The business of the Company is managed under the direction of the
Company's Board of Directors. The Board of Directors is presently composed of
seven directors. The directors are divided into three classes. Messrs. H.
Patinkin, Guren and N. Patinkin comprise Class I, which class will stand for
election at the annual meeting of stockholders to be held in 1997. Messrs.
Desjardins and Smith comprise Class II, which class will stand for
election at the annual meeting of stockholders to be held in 1998. Messrs. M.
Patinkin and Goldstein comprise Class III, which class will stand for election
at the annual meeting of stockholders to be held in 1999.
The Company's Board of Directors has established an Audit Committee
and a Compensation Committee. The Audit Committee recommends the firm to be
appointed as independent accountants to audit financial statements and to
perform services related to the audit, reviews the scope and results of the
audit with the independent accountants, reviews with management and the
independent accountants the Company's year-end operating results and
considers the adequacy of the internal accounting procedures. The Audit
Committee consists of Messrs. Rodney L. Goldstein, Samuel B. Guren and Norman
J. Patinkin. The Compensation Committee, which consists of Rodney L.
Goldstein, Samuel B. Guren and Norman J. Patinkin, reviews and recommends the
compensation arrangements for all officers, approves such arrangements for
other senior level employees and administers, and takes such other action as
may be required in connection with certain compensation and incentive plans of
the Company (including the grant of stock options). The Company's Restated
By-Laws provide that the Compensation Committee shall be comprised of directors
who are not employees of the Company.
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<PAGE> 74
COMPENSATION OF DIRECTORS
Non-employee directors receive compensation of $6,250 per fiscal
quarter (with no separate fee per meeting of the Board of
Directors) and $500 per meeting of a committee thereof. Directors who are
officers or employees of the Company receive no compensation for serving as
directors. All directors are reimbursed for out-of-pocket expenses incurred in
connection with attendance at meetings of the Board of Directors and meetings
of committees of the Board of Directors.
The Company recently adopted the 1996 Long-Term Incentive Plan. See
"Management--Stock Plans." Pursuant to this plan, on the date of the closing
of the IPO (or, if later, on the date on which a person is first elected or
begins to serve as a non-employee director) each non-employee director (other
than Messrs. Goldstein, Blumenthal and Guren) will be granted a nonqualified
option to purchase 10,000 shares of Common Stock (a "Directors Option") which
will vest one-third each on the first, second and third anniversaries thereof.
The per share exercise price of such options will be equal to the fair market
value of the Common Stock on the date of grant of such option. Mr. Norman
Patinkin was granted a Directors Option on May 7, 1996, the date of the closing
of the IPO.
EXECUTIVE COMPENSATION
Summary Compensation. The following summary compensation table sets
forth certain information concerning compensation for services rendered in all
capacities awarded to, earned by or paid to the Company's Chief Executive
Officer and the other named executive officers during the year ended January
31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------------------------
SECURITIES
RESTRICTED STOCK UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS AWARDS (1) OPTIONS
--------------------------- ----------- ------ ----- ---------- -------
<S> <C> <C> <C> <C> <C>
Hugh M. Patinkin 1995 $255,000 $191,250 $223,576 228,337
President and Chief
Executive Officer
John R. Desjardins 1995 234,000 175,500 128,001 154,603
Executive Vice
President,
Finance and
Administration,
Treasurer and Secretary
Matthew M. Patinkin 1995 200,000 150,000 102,401 124,634
Executive Vice
President,
Store Operations
Lynn D. Eisenheim 1995 160,000 120,000 -- 69,040
Executive Vice
President,
Merchandising
- -------------------------------
</TABLE>
(1) Represents restricted stock awards (which are the only restricted
shares held by such executive officers) which became no longer subject
to forfeiture upon the consummation of the IPO. The value is
calculated by multiplying an assumed fair market value at January 31,
1996, based upon an independent appraisal at September 28, 1995 (the
date of award) by the number of restricted shares awarded. Dividends
will be payable on the shares if and to the extent paid on shares of
Common Stock generally.
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<PAGE> 75
General Information Regarding Options. The following tables show
information regarding stock options held by the executive officers named in the
Summary Compensation Table.
OPTION GRANTS IN YEAR ENDED JANUARY 31, 1996
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
UNDERLYING OPTIONS GRANT DATE
OPTIONS GRANTED TO EXERCISE EXPIRATION PRESENT
GRANTED(1) EMPLOYEES PRICE DATE VALUE $ (2)
---------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Hugh M. Patinkin . . . . 228,337 33.6% $0.99 9/28/2000 $136,277
John R. Desjardins . . . 154,603 22.7 0.90 5/31/2001 98,993
Matthew M. Patinkin . . . 124,634 18.3 0.99 9/28/2000 74,384
Lynn D. Eisenheim . . . . 69,040 10.1 0.90 5/31/2001 44,206
- ----------------------
</TABLE>
(1) These options became no longer subject to forfeiture upon the
consummation of the IPO and are currently fully vested.
(2) Option values computed using the Black-Scholes pricing formula. See
Note 12 of Notes to Financial Statements for a description of the assumptions
used.
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
JANUARY 31, 1996 JANUARY 31, 1996 (2)
------------------------- --------------------
UNEXERCISABLE(1)
----------------
<S> <C> <C>
Hugh M. Patinkin . . . . . . . . 228,337 $1,372,305
John R. Desjardins . . . . . . . 154,603 943,078
Matthew M. Patinkin . . . . . . . 124,634 749,050
Lynn D. Eisenheim . . . . . . . . 69,040 421,144
- --------------------
</TABLE>
(1) All such options became exercisable upon consummation of the IPO.
(2) Represents the aggregate dollar value of in-the-money, unexercised
options held at the end of the fiscal year, based on the difference between the
exercise price and $7.00. There was no quoted trading price for the Common
Stock as of January 31, 1996. The amount of $7.00 was used in measuring option
value, which amount represents the initial public offering price of the
Company's Common Stock in the IPO ($14.00 per share), reduced by (i) a 35%
discount for lack of marketability as of such date and (ii) a reduction of
$2.10 (being the amount of debt discount which was anticipated to be realized
upon consummation of the Recapitalization, divided by the weighted average
number of common shares and common share equivalents to be outstanding upon
such consummation).
MANAGEMENT BONUS PLAN
The Chief Executive Officer and each of the other executive officers
named in the Summary Compensation Table above are eligible to participate in
the Company's Management Bonus Plan. Under this bonus program each executive
officer is entitled to receive a bonus (not to exceed 100% of base salary for
fiscal 1996) based on the achievement by the Company of specified levels of
earnings before interest and taxes. Awards are determined by the Compensation
Committee.
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<PAGE> 76
STOCK PLANS
1995 Options and Restricted Stock Grants. In fiscal 1995 the Board of
Directors and stockholders of the Company approved the 1995 Executive Incentive
Stock Option Plan and the 1995 Incentive Stock Option Plan (the "1995 Plans").
Under the 1995 Plans, the Company may grant incentive stock options (the "1995
Options") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") to its executive officers and key employees. A
total of 693,098 shares of Common Stock may be issued under the 1995 Plans,
subject to adjustment in the event of a stock split, stock dividend or other
changes in capital structure. No grants may be made under the 1995 Plans after
ten years after the effective dates of the 1995 Plans.
The purposes of the 1995 Plans are to align the interests of the
Company's stockholders and the recipients of grants under the 1995 Plans by
increasing the proprietary interest of such recipients in the Company's growth
and success and to advance the interests of the Company by attracting and
retaining officers and other key employees.
The 1995 Executive Incentive Stock Option Plan is administered by the
Compensation Committee. The 1995 Incentive Stock Option Plan is administered
by the President of the Company, who is authorized to select eligible officers
and other key employees for participation in that plan.
In the case of options granted under the 1995 Plans, the purchase
price of shares of Common Stock may not be less than 100% of the fair market
value of such shares of Common Stock on the date of grant. The aggregate fair
market value (determined as of the date the option is granted) of the stock
with respect to which 1995 Options are exercisable for the first time by the
optionee in any calendar year (under the 1995 Plans and any other incentive
stock option plan of the Company) may not exceed $100,000. Options granted
under the 1995 Plans may not be exercised after ten years from the date of
grants. In the case of any eligible employee who owns or is deemed to own
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company, the exercise price of any 1995 Options granted
under the 1995 Plans may not be less than 110% of the fair market value of the
Common Stock on the date of grant, and the exercise period may not exceed five
years from the date of grant.
The number of shares currently subject to 1995 Options granted to the
executive officers of the Company are as follows: Mr. H. Patinkin (155,537
shares), Mr. Desjardins (142,603 shares), Mr. M. Patinkin (92,734 shares) and
Mr. Eisenheim (59,040 shares) and all executive officers as a group (449,914
shares). Such options may be exercised until the expiration date, which, in
the case of Messrs. H. Patinkin and M. Patinkin, is September 28, 2000, and, in
the case of Messrs. Desjardins and Eisenheim, is May 31, 2001. All options
granted to these four executive officers will be fully exercisable upon
consummation of the Offering. Options for 103,856 additional shares granted to
other employees are currently outstanding.
In fiscal 1995, the Company also made restricted stock grants, which
become no longer subject to forfeiture only upon the happening of the events
referred to above (including the consummation of the IPO) to the following
executive officers: Mr. H. Patinkin (249,268 shares), Mr. Desjardins (142,711
shares) and Mr. M. Patinkin (114,169 shares).
1996 Plan. In connection with the IPO, the Board of Directors and
stockholders of the Company approved the 1996 Long-Term Incentive Plan (the
"1996 Plan"). Under the 1996 Plan, the Company may grant incentive stock
options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), or nonqualified stock options. The 1996 Plan
also provides for the grant of stock appreciation rights ("SARs"), bonus stock
awards which are vested upon grant, stock awards which may be subject to a
restriction period and specified performance measures, and performance shares.
Performance shares are rights, contingent upon the attainment of performance
measures within a specified performance period, to receive one share of Common
Stock, which may be restricted, or the fair market value of such performance
share in cash. A total of 774,631 shares of Common Stock have been reserved
for issuance under the 1996 Plan, subject to adjustment in the event of a stock
split, stock dividend or other changes in capital structure. No grants may be
made under the 1996 Plan after ten years after its effective date. The 1996
Plan also provides for the automatic grants of stock options to non-employee
directors described above under the heading "--Compensation of Directors."
The purposes of the 1996 Plan are to align the interests of the
Company's stockholders and the recipients of grants under the 1996 Plan by
increasing the proprietary interest of such recipients in the Company's growth
and success and to
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<PAGE> 77
advance the interests of the Company by attracting and retaining officers and
other key employees and well-qualified independent directors.
The 1996 Plan is administered by the Compensation Committee. Subject
to the terms of the 1996 Plan, the Compensation Committee is authorized to
select eligible officers and other key employees for participation in the 1996
Plan and to determine the number of shares of Common Stock subject to the
awards granted thereunder, the exercise price, if any, the time and conditions
of exercise, and all other terms and conditions of such award.
The Compensation Committee may delegate some or all of its power and
authority under the 1996 Plan, to the Chief Executive Officer or other
executive officer of the Company as it deems appropriate; provided, however,
that the Compensation Committee may not delegate its power and authority with
regard to the selection for participation in the 1996 Plan of an officer or
other person subject to Section 16 of the Exchange Act or decisions concerning
the timing, pricing or amount of an option grant to such an officer or other
person.
In the case of options granted under the 1996 Plan, the purchase price
of shares of Common Stock will be determined by the Compensation Committee at
the time of grant, but may not be less than 100% of the fair market value of
such shares of Common Stock on the date of grant. The aggregate fair market
value (determined as of the date the option is granted) of the stock with
respect to which ISOs are exercisable for the first time by the optionee in any
calendar year (under the 1996 Plan and any other incentive stock option plan of
the Company) may not exceed $100,000. Options granted under the 1996 Plan may
not be exercised after ten years from the date of grants. In the case of any
eligible employee who owns or is deemed to own stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company, the
exercise price of any ISOs granted under the 1996 Plan may not be less than
110% of the fair market value of the Common Stock on the date of grant, and the
exercise period may not exceed five years from the date of grant. All stock
options will become immediately exercisable upon certain changes of control of
the Company or, in the case of the four executive officers, certain other
events for which they would receive payments under their severance agreements
described below.
The Compensation Committee made grants under the 1996 Plan, effective
upon the commencement of the IPO, of options to purchase Common Stock to
executive officers named in the Summary Compensation Table as follows: Mr. H.
Patinkin (312,835 shares), Mr. Desjardins (169,766 shares), Mr. M. Patinkin
(169,766 shares) and Mr. Eisenheim (32,173 shares). Each such stock option has
a per share exercise price equal to $14.00 (the initial public offering price),
will become exercisable in cumulative annual installments of 25% of the shares
subject to option beginning on the first anniversary of the date of grant, and
will expire ten years after the commencement date of the IPO (i.e. May 7, 2006).
The options granted to Mr. H. Patinkin and Mr. M. Patinkin are non-qualified
stock options. Of the options granted to Mr. Desjardins 28,550 are incentive
stock options, and 141,216 are nonqualified stock options. Substantially all of
the options granted to Mr. Eisenheim are incentive stock options. A grant was
made under the 1996 Plan, effective upon the commencement of the IPO, of
nonqualified options to purchase 10,000 shares of Common Stock with the same
exercise price to Mr. N. Patinkin, a non-employee director. A grant was made on
July 12, 1996 under the 1996 Plan of nonqualified options to purchase 10,000
shares of Common Stock to Mr. Smith. See "Management-- Compensation of
Directors." Additional grants of incentive stock options covering a total of
80,091 shares of Common Stock may be made to other employees or directors (of
which 22,676 options have been granted to employees as of August 1, 1996).
The Company intends to file a registration statement under the
Securities Act to register all shares of Common Stock issuable pursuant to the
1995 Options and the Company's 1996 Plan.
SEVERANCE AGREEMENTS
The Company has entered into severance agreements with its four
executive officers and 14 of its other management employees which provide for
certain payments after a "change of control." A "change of control" is defined
under these agreements to include (i) an acquisition by a third party
(excluding certain affiliates of the Company) of beneficial ownership of at
least 25% of the outstanding shares of Common Stock, (ii) a change in a
majority of the incumbent Board of Directors and (iii) merger, consolidation or
sale of substantially all of the Company's assets if the Company's shareholders
do not continue to own at least 60% of the equity of the surviving or resulting
entity. Pursuant to these agreements such employees will receive certain
payments and benefits if they terminate employment voluntarily six months after
a "change of control," or earlier if they terminate for "good reason," as
defined in such agreements (such as certain changes in duties, titles,
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<PAGE> 78
compensation, benefits or work locations) or if they are terminated by the
Company after a change of control, other than for "cause," as so defined. The
severance agreements for the four executive officers also provide for certain
payments absent a change of control if they terminate employment for "good
reason" or if they are terminated by the Company, other than for "cause". In
the case of the four executive officers, their payment will equal 2.5 times
(1.5 times if a change of control has not occurred) their highest salary plus
bonus over the five years preceding the change of control, together with
continuation of health and other insurance benefits for 30 months (18 months if
a change of control has not occurred). In the case of the other employees,
such payments will equal their highest salary plus bonus over the five years
preceding the change of control with continuation of health and other insurance
benefits for one year. The severance agreements also provide for payment of
bonus for any partial year worked at termination of employment equal to the
higher of (x) the employee's average bonus for the immediately preceding two
years and (y) 50% of the maximum bonus the employee could have earned in the
year employment terminates, pro rated for the portion of the year completed.
To the extent any payments to any of the four senior executives under these
agreements would constitute an "excess parachute payment" under Section
280G(b)(1) of the Internal Revenue Code of 1986, such payments will be "grossed
up" for any excise tax payable under such section, so that the amount retained
after paying all federal income taxes due would be the same as such person
would have retained if such section had not been applicable.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Recapitalization, Mr. Hugh M. Patinkin served as a member
of the Compensation Committee of the Board of Directors. Mr. Patinkin has not
participated in decisions regarding his own compensation and he did not
participate in decisions relating to the approval of the 1995 Plan. See
"Certain Transactions--Other" for a discussion of transactions involving Mr. H.
Patinkin and relatives of Mr. N. Patinkin.
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<PAGE> 79
CERTAIN TRANSACTIONS
REGISTRATION RIGHTS
Pursuant to the Second Amended and Restated Registration Agreement
(the "Registration Agreement"), dated as of May 7, 1996, the Company granted to
Frontenac Venture V Limited Partnership, Frontenac Diversified III Limited
Partnership, Continental Illinois Venture Corp., and William Blair Venture
Partners III Limited Partnership, Hugh M. Patinkin, Matthew M. Patinkin and
John R. Desjardins (executive officers of the Company) and certain related
persons (the "Purchasers") certain rights to require the Company to take action
to register under the Securities Act the sale of shares of Common Stock (the
"Registrable Shares") held by them. The number of such registrations which the
Company is obligated to effect is limited to four. The Registration Agreement
also provides that in the event the Company proposes to register any of its
securities under the Securities Act at any time or times, subject to certain
limitations, the Company will use its best efforts to include the Registrable
Shares in such registration upon the request of the Purchasers. The Company is
generally required to bear the expenses of all such registrations, except
underwriting discounts and commissions. The Company also has agreed to
indemnify the Purchasers and their controlling persons against certain
liabilities, including liabilities under the Securities Act. In addition, the
ESOP has the right to demand one registration with respect to the shares of
Common Stock it holds.
OTHER
The Company has from time to time purchased some jewelry merchandise
from MBM Co., an entity which as of January 31, 1996 was owned by a brother of
Messrs. Hugh and Matthew Patinkin and the children of Mr. Norman Patinkin. The
amounts purchased by the Company from MBM Co. in fiscal 1993, 1994 and 1995
were $34,000, $161,000 and $80,000, respectively. The Company believes that
the prices paid in these purchases were as favorable to the Company as those
generally available from third parties.
The Company provides certain office services to Double P Corp.,
including any of its affiliates ("Double P"), an owner and operator of
primarily mall-based snack food stores, in which Messrs. H. Patinkin,
Desjardins and M. Patinkin own a majority equity interest. For these services
Double P pays the Company $300 per month. Mr. H. Patinkin spends a limited
amount of time providing services to Double P. In two cases the Company and
Double P have negotiated jointly with a landlord with respect to spaces offered
by a landlord and then divided and separately leased portions of the space
offered. The terms of any such leases are approved by a majority of the
Company's outside directors, effective as of the consummation of the IPO.
See "The Recapitalization--ESOP Restructuring" for a description of
the restructuring of the Company's ESOP.
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<PAGE> 80
STOCK OWNERSHIP
The following table sets forth, as of the date hereof, the number and
percentage of outstanding shares of Common Stock beneficially owned by (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the executive officers named in the Summary Compensation Table and (iv)
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
OF COMMON STOCK(1)
NAME NUMBER PERCENT
---- ------ -------
<S> <C> <C>
Frontenac Venture V Limited Partnership(2)
135 S. LaSalle Street
Chicago, IL 60603 . . . . . . . . . . . . . . 712,247 8.5%
Frontenac Diversified III Limited Partnership(3)
135 S. LaSalle Street
Chicago, IL 60603 . . . . . . . . . . . . . . 325,425 3.9
Continental Illinois Venture Corp.
231 S. LaSalle Street
Chicago, IL 60697 . . . . . . . . . . . . . . 611,336 7.3
William Blair Venture Partners III
Limited Partnership(4)
222 West Adams
Chicago, IL 60606 . . . . . . . . . . . . . . 464,437 5.5
Hugh M. Patinkin*(5) . . . . . . . . . . . . . 714,591 8.4
Matthew M. Patinkin*(6) . . . . . . . . . . . . 450,853 5.3
John R. Desjardins*(7) . . . . . . . . . . . . 332,549 3.9
Lynn D. Eisenheim*(8) . . . . . . . . . . . . . 72,279 **
Rodney L. Goldstein+(2)(3) . . . . . . . . . . 1,037,672 12.4
Samuel B. Guren+(4) . . . . . . . . . . . . . . 464,437 5.5
Norman J. Patinkin(9) . . . . . . . . . . . . . 69,726 **
Jack A. Smith. . . . . . . . . . . . . . . . . -- --
U.S. Trust Fiduciary Services,
as trustee for the ESOP,
1300 Eye Street, N.W., Suite 1080 East
Washington, D.C. 20005(10) . . . . . . . . . . 843,887 10.1
All executive officers and directors
as a group (10 persons) . . . . . . . . . . 3,105,655 35.2
</TABLE>
_______________________
* The mailing address of each of these individuals is c/o the Company, 155
North Wacker Drive, Suite 500, Chicago, Illinois 60606.
+ The mailing address for Mr. Goldstein is c/o Frontenac Company, 135 S.
LaSalle Street, Chicago, IL 60603. The mailing address for Mr. Guren
is c/o Baird Capital Partners, 227 W. Monroe Street, Suite 2100, Chicago,
IL 60606.
** Less than 1%.
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<PAGE> 81
(1) Except as set forth in the footnotes to this table, the persons named
in the table above have sole voting and investment power with respect to all
shares shown as beneficially owned by them.
(2) Rodney L. Goldstein is a general partner of Frontenac Company, which
is the general partner of Frontenac Venture V Limited Partnership, and
accordingly, may be attributed beneficial ownership of the shares owned by
Frontenac Venture V Limited Partnership. Mr. Goldstein disclaims beneficial
ownership of such shares beyond his ownership interests in Frontenac Company.
Mr. Goldstein serves as Director of the Company as nominee of Frontenac Venture
V Limited Partnership.
(3) Frontenac Company is the general partner, and the Teachers' Retirement
System of the State of Illinois is the limited partner, of Frontenac
Diversified III Limited Partnership. Rodney L. Goldstein is a general partner
of Frontenac Company and, accordingly, may be attributed beneficial ownership
of the shares owned by Frontenac Diversified III Limited Partnership. Mr.
Goldstein disclaims beneficial ownership of such shares beyond his ownership
interests in Frontenac Company.
(4) Samuel B. Guren is the general partner of William Blair Venture
Management Company, which is the general partner of William Blair Venture
Partners III Limited Partnership, and accordingly, may be attributed beneficial
ownership of the shares owned by William Blair Venture Partners III Limited
Partnership. Mr. Guren disclaims beneficial ownership of such shares beyond
his ownership interest in William Blair Venture Partners III Limited
Partnership. Mr. Guren serves as a Director of the Company as nominee of
William Blair Venture Partners III Limited Partnership. None of these entities
have any other relationship with the Company.
(5) Includes 155,537 shares of Common Stock issuable pursuant to presently
exercisable stock options. Includes 206,035 beneficially owned by Hugh M.
Patinkin, which shares are held by Sheila C. Patinkin and Robert Bergman, as
Trustees of the Hugh M. Patinkin 1994 Family Trust U/A/D 11/18/94. Includes
23,378 shares held by Hugh M. Patinkin and Sheila C. Patinkin, as Trustees of
various trusts for the benefit of their children, all of which such shares are
subject to shared voting power by Hugh M. Patinkin and Sheila C. Patinkin.
Includes 11,122 shares held by Hugh M. Patinkin, Sheila C. Patinkin and Harold
Patinkin, as Trustees of various trusts for the benefit of the children of Hugh
M. Patinkin and Sheila C. Patinkin, all of which such shares are subject to
shared voting power by Hugh M. Patinkin, Sheila C. Patinkin and Harold
Patinkin. Includes 36,452 shares held by Hugh M. Patinkin, Mark A. Patinkin
and Matthew M. Patinkin, as Trustees of the Patinkin 1994 Grandchildren's Trust
U/A/D 11/18/94, with respect to which shares Hugh M. Patinkin, Mark A. Patinkin
and Matthew M. Patinkin share voting power.
(6) Includes 92,734 shares of Common Stock issuable pursuant to presently
exercisable stock options. Includes 114,235 shares beneficially owned by
Matthew M. Patinkin, which shares are held by Robin J. Patinkin and Debra
Soffer, as Trustees of the Matthew M. Patinkin 1994 Family Trust U/A/D/
12/19/94. Includes 16,648 shares held by Matthew M. Patinkin and Robin J.
Patinkin, as Trustees of various trusts for the benefit of their children, all
of which such shares are subject to shared voting power by Matthew M. Patinkin
and Robin J. Patinkin. Includes 8,855 shares held by Robin J. Patinkin, as
Trustee of various trusts for the benefit of the children of Matthew M.
Patinkin and Robin J. Patinkin, with respect to which shares Matthew M.
Patinkin disclaims beneficial ownership. Includes 36,452 shares held by
Matthew M. Patinkin, Hugh M. Patinkin and Mark A. Patinkin, as Trustees of the
Patinkin 1994 Grandchildren's Trust U/A/D 11/18/94, with respect to which
shares Matthew M. Patinkin, Hugh M. Patinkin and Mark A. Patinkin share voting
power.
(7) Includes 142,603 shares of Common Stock issuable pursuant to presently
exercisable stock options. Includes 22,283 shares beneficially owned by John
R. Desjardins, which shares are held by Cheryl Desjardins and Stephen Kendig,
as Trustees of the John R. Desjardins 1995 Family Trust U/A/D 12/28/95.
Shares beneficially owned by Mr. Desjardins include shares allocated to his
account in the ESOP (approximately 11,878 shares) as to which he has voting
power.
(8) Includes 59,040 shares of Common Stock issuable pursuant to presently
exercisable stock options. Shares beneficially owned by Mr. Eisenheim include
shares allocated to his account in the ESOP (approximately 3,239) as to which
he has voting power.
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<PAGE> 82
(9) Norman J. Patinkin's three children own an aggregate of 69,726 shares,
and accordingly, Norman J. Patinkin may be attributed beneficial ownership of
these shares. Mr. Patinkin disclaims beneficial ownership of all such 69,726
shares.
(10) The participants in the ESOP will have voting power with respect to
the shares held by the ESOP.
POSSIBLE LIMITATIONS ON THE COMPANY'S USE OF NET OPERATING LOSS CARRYFORWARDS
At February 1, 1996, the Company had $17.9 million of net operating
loss carryforwards for federal income tax purposes (the "NOLs"). See Note 6 of
Notes to Financial Statements. While these carryforwards are expected to
reduce future income tax payments, the benefits of such carryforwards have
already been recognized in the Company's balance sheets and results of
operations for fiscal 1995.
Section 382 of the Code limits the use of net operating losses and net
operating loss carryforwards following an "ownership change" which, in general,
is an increase by more than 50 percentage points of the percentage of stock of
a corporation owned, directly or indirectly, by those persons or groups of
persons each of which owns or is treated as owning at least five percent of
that corporation's stock ("Five-Percent Stockholders") over the lowest
percentage of stock of such corporation previously owned by each such
Five-Percent Stockholder at any time during a specified period of not more than
three years (without, in general, reducing an increase of any Five-Percent
Stockholder for decreases of other Five-Percent Stockholders). Subject to
special rules, all stockholders who, directly or indirectly, own less than 5%
of the stock of a corporation generally are treated as a single Five-Percent
Stockholder for this purpose.
As a result of the foregoing rules, changes in the direct or indirect
ownership of the stock of the Company as a result of the IPO are considered in
determining whether an ownership change occurred within the meaning of Section
382 on the date of the IPO. Although there can be no assurances as to any
position taken by the Internal Revenue Service in the future, the Company does
not believe that the IPO resulted in an ownership change of the Company. The
Company believes that immediately following the IPO the percentage point
increase of Five-Percent Stockholders was approximately 47%. The Company's
beliefs are based on certain assumptions, including assumptions as to factual
matters, as well as interpretations of law which the Internal Revenue Service
might challenge.
It is possible that future transactions involving the stock of the
Company (or rights to acquire such stock), when combined with the IPO and prior
transactions in such stock, could cause an ownership change under Section 382
resulting in restrictions on the Company's ability to utilize the NOLs during
the taxable years ending after the date of such ownership change.
The restrictions under Section 382, if applicable as a result of the
IPO or future transactions, would impose an annual limitation on the use of the
NOLs in any taxable year ending after the ownership change equal to the product
of the "long-term tax-exempt rate" announced by the Internal Revenue Service
from time to time (5.68% for May 1996) and the value of the stock of the Company
immediately before the ownership change, subject to certain adjustments. To
the extent the annual limitation exceeded the Company's taxable income in any
year, such excess could be carried forward to future years, subject to the
normal expiration date of the NOLs. The NOLs begin expiring in 2006.
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<PAGE> 83
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the principal United States federal
income tax consequences of acquiring, holding and disposing of Notes to
beneficial owners thereof ("holders"). This summary is based on the Internal
Revenue Code of 1986, as amended (the "Code"), legislative history,
administrative pronouncements, judicial decisions and final, temporary and
proposed Treasury Regulations, now in effect, all of which are subject to
change (possibly on a retroactive basis).
This summary discusses only the principal United States federal income
tax consequences to those holders holding Notes as capital assets within the
meaning of Section 1221 of the Code. It does not address all of the tax
consequences that may be relevant to a holder in light of the holder's
particular circumstances, to a holder subject to special rules, or to a holder
purchasing a Note in the secondary market.
This summary does not discuss any tax consequences to any holder who
is not, for United States federal income tax purposes, (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof or (iii) an estate or trust the income of which
is subject to United States federal income taxation regardless of its source.
Prospective investors are urged to consult their tax advisors with
regard to the application of United States federal income tax laws to their
particular situations as well as any tax consequences to them arising under the
laws of any state, local or foreign taxing jurisdiction. State, local and
foreign tax laws may differ substantially from the corresponding federal income
tax laws, and this discussion does not purport to describe any aspect of the
tax laws of any state, local or foreign jurisdiction.
THE EXCHANGE
An exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as a sale, exchange or other taxable event for federal
income tax purposes because the New Notes should not be considered to differ
materially in kind or extent from the Old Notes. As a result, no material
federal income tax consequences should result from an exchange of Old Notes for
New Notes pursuant to the Exchange Offer.
For federal income tax purposes, a New Note received by a beneficial
owner of an Old Note should be treated as a continuation of the Old Note in the
hands of such owner. For purposes of this discussion, references to a "Note"
shall mean, collectively, a New Note and the Old Note exchanged therefor
pursuant to the Exchange Offer, references to a "Series C Note" shall mean,
collectively, a Series A Note and the Series C Note exchanged therefor pursuant
to the Exchange Offer, and references to a "Series D Note" shall mean,
collectively, a Series B Note and the Series D Note exchanged therefor pursuant
to the Exchange Offer.
TREATMENT OF ADDITIONAL SERIES D NOTES
In general, interest on the Series D Notes will accrue at the rate of
(a) 15% per annum, payable in cash, plus (b) for certain subsequent periods 1%
per annum (increasing in 1% increments for each subsequent year) payable, at
the option of the Company, in cash or by delivery of additional Series D Notes
(such additional Notes, hereinafter "Additional Series D Notes"). See "The New
Notes -- Maturity and Interest," above. For federal income tax purposes, the
delivery of an Additional Series D Note in satisfaction of an obligation of the
Company to pay interest is not considered as payment on the Series D Note with
respect to which it was delivered, and each such Additional Series D Note is
aggregated with, and treated as part of, the original Series D Note. For
purposes of this discussion, a reference to a Series D Note generally means a
single Series D Note consisting of a holder's original Series D Note and all
Additional Series D Notes delivered with respect thereto. Any disposition
(including redemption) of some or all of such original Series D Note or
Additional Series D Notes should be treated as a disposition of a proportionate
amount of such single Series D Note (i.e, a proportionate amount of each
original Series D Note and Additional Series D Note) with the following rules
applied accordingly. Thus, for example, such treatment will apply to determine
gain or loss with respect to the portion disposed of or redeemed and, with
respect to the remaining portion, to determine the adjusted issue price
(described below), and tax basis. For this purpose, a payment of cash in
lieu of the delivery of an Additional Series D Note might
under certain circumstances be treated as a partial redemption of a
proportionate amount of such single Series D Note. See "--Certain Interest
on Series D Notes", below.
STATED INTEREST
Interest on the Notes that qualifies as "qualified stated interest", as
defined in Treasury Regulations, is includible in a holder's income as ordinary
interest income when actually or constructively received (if such holder uses
the cash method of accounting for federal income tax purposes) or when accrued
(if such holder uses an accrual method of accounting for federal income tax
purposes). All stated interest on the Series C Notes will constitute qualified
stated interest. Interest on the Series D Notes will constitute qualified
stated interest to the extent it is payable in cash at a rate of 15% per annum,
except to the extent such interest is payable on Additional Series D Notes
(hereinafter, "15% Cash Interest"). Other interest on the Series D Notes will
be taxable under the rules discussed below under "--Certain Interest on
Series D Notes". Solely for purposes of determining the extent to which cash
interest at a rate of 15% per annum is received on Additional Series D Notes
rather than on an original Series D Note, payments of principal on all Series D
Notes held by a holder will likely be treated as applied first to repay
Additional Series D Notes and thereafter to repay an original Series D Note
(with the result that cash interest at a 15% rate on Series D Notes will be
treated first as received on the amount of the original Series D Notes).
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<PAGE> 84
CERTAIN INTEREST ON SERIES D NOTES
Interest on the Series D Notes other than 15% Cash Interest (i.e.,
interest payable at the option of the Company in cash or in Additional Series D
Notes and interest payable in cash at a rate of 15% per annum on Additional
Series D Notes) (hereinafter, "Nonqualifying Interest") must be taken into
income by holders on a constant yield basis under rules governing the accrual
of "original issue discount," summarized below.
The amount of Nonqualifying Interest required to be taken into income
by a holder is determined as follows. First, the "yield to maturity" of the
Series D Note is determined. In general, and subject to the special rule
described below, the yield to maturity is the discount rate that, when used in
computing the present value of all interest and principal payments to be made
under the Series D Note through its date of maturity (including payments of 15%
Cash Interest) produces an amount equal to the issue price of the Series D
Note.
Second, the term of the Series D Note is divided into "accrual
periods." Accrual periods may be of any length and may vary in length over the
term of the Series D Note, provided that each accrual period is no longer than
one year and that each scheduled payment of principal or interest occurs either
on the final day of an accrual period or on the first day of an accrual period.
Third, the total amount of Nonqualifying Interest is allocated among
accrual periods. In general, the Nonqualifying Interest allocable to an
accrual period equals the product of the "adjusted issue price" of the Series D
Note at the beginning of the accrual period and the yield to maturity of the
Series D Note, less the amount of any 15% Cash Interest (i.e., qualified stated
interest) allocable to the accrual period. The adjusted issue price of a Series
D Note at the beginning of the first accrual period is its original principal
amount. Thereafter, the adjusted issue price of a Series D Note is generally
its original principal amount, increased by the amount of Nonqualifying
Interest previously includible in the gross income of any holder, and decreased
by the amount of any payment of cash previously made on the Series D Note other
than a payment of 15% Cash Interest (including cash payments of Nonqualifying
Interest and principal payments).
Fourth, the "daily portions" of Nonqualifying Interest are determined
by allocating to each day in an accrual period its ratable portion of the
Nonqualifying Interest allocable to the accrual period.
For purposes of the foregoing rules, the yield to maturity will be
determined on the issue date by assuming that, for all future periods, the
Company will exercise its option to pay interest in cash or by delivery of
Additional Series D Notes and its option to redeem the Series D Notes in a
manner that minimizes the yield to maturity on the Series D Notes. If at any
time the Company exercises its options contrary to such assumption, the yield
to maturity of the Series D Notes is redetermined at that time (treating the
adjusted issue price at that time as the issue price) by likewise assuming
that, for all future periods, the Company will exercise its options in a manner
that minimizes the yield to maturity of the Series D Notes. If, for purposes of
the foregoing, it is assumed that the Company will choose to deliver Additional
Series D Notes rather than making a cash payment of interest, and contrary to
such assumption the Company makes a cash payment of interest, such cash
payment generally will be treated as a redemption of a pro rata portion of the
single Series D Note deemed held by the holder. See "--Treatment of Additional
Series D Notes", above.
A holder includes in income in any taxable year the daily portions of
Nonqualifying Interest for each day during the taxable year that such holder
held the Series D Note. Under the constant yield method described above,
holders will be required to include Nonqualifying Interest in income in advance
of the receipt of cash attributable thereto (even to the extent the Company
does not exercise its option to pay interest by delivery of Additional Series D
Notes) and holders generally will be required to include in income increasingly
greater amounts of Nonqualifying Interest in successive accrual periods.
The Company will provide annual information statements to certain
holders of the Series D Notes and to the Internal Revenue Service stating the
amount of any Nonqualifying Interest (i.e. original issue discount)
attributable to such Series D Notes for each calendar year. The amount of any
Nonqualifying Interest set forth in such statement may not be accurate
as to a subsequent holder of a Series D Note (because, for example, of the
application of the rules discussed below relating to market discount and
premium) who will be required to make its own determination of whether it must
report in income a different amount of Nonqualifying Interest.
MARKET DISCOUNT
If a subsequent holder acquires a Note and has a tax basis in the Note
that is, in the case of a Series C Note, less than its principal amount or, in
the case of a Series D Note, less than its adjusted issue price (as defined
above), the amount of such difference is treated as "market discount" for
federal income tax purposes, unless such difference is less than a specified de
minimis amount.
Under the market discount rules of the Code, a holder is required to
treat any payment on a Note treated for tax purposes as a payment of
principal, or any gain on the sale, exchange, retirement or other disposition
of a Note, as ordinary income to the extent of the accrued market discount that
has not previously been included in income. In general, the amount of market
discount that has accrued is determined on a ratable basis. A holder may,
however, elect to determine the amount
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<PAGE> 85
of accrued market discount on a constant-yield-to-maturity basis. This
election is made on a bond-by-bond basis and is irrevocable. With respect to
Notes with market discount, a holder may not be allowed to deduct immediately a
portion of the interest expense on any indebtedness incurred or continued to
purchase or to carry such Notes. A holder may elect to include market discount
in income currently as it accrues, in which case the interest deferral rule set
forth in the preceding sentence will not apply. Such an election will apply to
all bonds acquired by the holder on or after the first day of the first taxable
year to which such election applies and is irrevocable without the consent of
the Internal Revenue Service. A holder's tax basis in a Note will be increased
by the amount of market discount included in such holder's income under such an
election.
PREMIUM AND ACQUISITION PREMIUM
A holder will be treated as having purchased a Note at a "premium" (or
"amortizable bond premium") if the holder's adjusted basis in the Note,
immediately after its purchase by such holder, exceeds its "stated redemption
price at maturity," which is generally all amounts payable on a Note other than
"qualified stated interest" (as described above). A holder may elect to
amortize such premium as an offset to qualified stated interest on the Note.
Because the stated redemption price at maturity of the Series D Notes depends
on whether certain interest is paid in cash or Additional Series D Notes, and
therefore is uncertain, the application of the foregoing rule is unclear in the
case of the Series D Notes.
To the extent a Note may be called by the Company prior to maturity and
after the holder has acquired it, the amount of amortizable bond premium is
determined with reference to either the amount payable at maturity or, if it
results in a smaller premium attributable to the period through the earlier
call date, with reference to the amount payable on the earlier call date. If
an election to amortize premium is made with respect to any Note, it will also
apply to certain other debt instruments of the holder. If the call does not
occur, a holder may elect to amortize the premium over the remaining term of
the Note or the portion thereof through the next call date.
If a holder purchases a Series D Note at a price greater than the
Series D Note's adjusted issue price (as described above) but not at a premium
under the rules described above (i.e., at an "acquisition premium"), the amount
of Nonqualifying Interest that the holder includes in gross income is reduced to
reflect the acquisition premium under rules set out in the Code and Treasury
Regulations thereunder.
SALE, EXCHANGE OR REDEMPTION OF NOTES
A holder generally recognizes gain or loss upon the sale, exchange or
redemption of a Note (or portion thereof) equal to the difference between the
amount realized upon such sale, exchange or redemption and the holder's
adjusted basis in the Note (or in the portion thereof sold, exchanged or
redeemed). Adjusted basis in a Note generally equals the holder's cost of the
Note, increased by Additional Interest (in the case of a Series D Note),
discount or market discount previously included in income with respect to a
Note, and reduced (but not below zero) by any payments of cash on the Note
other than payments of "qualified stated interest" (as described above), and by
any amortizable bond premium that the holder has taken into account. To the
extent attributable to accrued but unpaid qualified stated interest, the amount
realized by a holder is treated as a payment of interest. Any gain or loss is
capital gain or loss if the Note is held as a capital asset, except as provided
under "Market Discount" above. The excess of net long-term capital gains over
net short-term capital losses is taxed at a lower rate than ordinary income for
certain non-corporate taxpayers. The distinction between capital gain or loss
and ordinary income or loss is also relevant for purposes of, among other
things, limitations on the deductibility of capital losses.
BACKUP WITHHOLDING
A holder may be subject to backup withholding at a rate of 31% with
respect to interest paid on the Notes, unless such holder (a) is a corporation
or comes within certain other exempt categories and, when required,
demonstrates this fact or (b) provides a correct taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding
rules. A holder who does not provide the Company with the holder's correct
taxpayer identification number may be subject to penalties imposed by the
Internal Revenue Service. Any amount paid as backup withholding will be
creditable against the holder's tax liability.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS
NOT TAX ADVICE. ACCORDINGLY, EACH PERSON CONSIDERING THE ACQUISITION OF NEW
NOTES SHOULD CONSULT HIS, HER OR ITS OWN ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES TO HIM, HER OR IT OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
THE NEW NOTES INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND
FOREIGN TAX LAWS AND CHANGES IN APPLICABLE TAX LAWS.
- 79 -
<PAGE> 86
EXCHANGE OFFER DISTRIBUTION
With respect to resales of the New Notes, based on an interpretation
by the staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that any holder or beneficial owner (other than a
person that is an affiliate of the Company within the meaning of Rule 405 under
the Securities Act or a "broker" or "dealer" registered under the Exchange Act)
who exchanges Old Notes for New Notes in the ordinary course of business and
who is not participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in the
distribution of the New Notes, will be allowed to resell the New Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of New Notes a prospectus that satisfies the
requirements of Section 10 thereof. However, if any holder or beneficial owner
acquires New Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of New Notes, such holder or beneficial owner
cannot rely on the position of the staff of the Commission enunciated in Exxon
Capital Holdings Corporation (available April 13, 1988) or similar no-action
letters or any similar interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available.
As contemplated by the above no-action letters and the Placement
Agreement and the Note Agreement, each holder accepting the Exchange Offer is
required to represent to the Company in the Letter of Transmittal that (i) the
New Notes are to be acquired by the holder and any beneficial owners in the
ordinary course of business, (ii) the holder and any beneficial owners are not
engaging and do not intend to engage in the distribution of the New Notes,
(iii) neither the holder nor any beneficial owner is an affiliate of the
Company within the meaning of Rule 405 under the Securities Act, and (iv) the
holder and each beneficial owner acknowledge that if such holder or beneficial
owner participates in the Exchange Offer for the purpose of distributing the
New Notes, such holder or beneficial owner must comply with the registration
and prospectus delivery requirements of the Securities Act and cannot rely on
the above no-action letters.
Any broker or dealer registered under the Exchange Act (each a
"Broker-Dealer") who holds Old Notes that were acquired for its own account as
a result of market-making activities or other trading activities (other than
Old Notes acquired directly from the Company), may exchange such Old Notes for
New Notes pursuant to the Exchange Offer; however, such Broker-Dealer may be
deemed an underwriter within the meaning of the Securities Act and, therefore,
must deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of the New Notes received by it in the Exchange
Offer, which prospectus delivery requirement may be satisfied by the delivery
by such Broker-Dealer of this Prospectus. Any Broker-Dealer participating in
the Exchange Offer will be required to acknowledge that it will deliver a
prospectus in connection with any resales of New Notes received by it in the
Exchange Offer. However only Broker-Dealers who exchange Old Notes that were
acquired for their own account as a result of market-making activities or other
trading activities (other than Old Notes acquired directly from the Company),
may use this Prospectus to satisfy the prospectus delivery requirements of the
Securities Act. The delivery by a Broker-Dealer of a prospectus in connection
with resales of the New Notes shall not be deemed to be an admission by such
Broker-Dealer that it is an underwriter within the meaning of the Securities
Act.
INFORMATION CONCERNING SELLING NOTEHOLDER
AND PLAN OF DISTRIBUTION
The Registration Statement of which this Prospectus is a part also
covers $2,255,000 aggregate principal amount of the Company's Series A Notes
(the "Resale Series A Notes") to be sold hereunder by William Blair & Company,
L.L.C. (the "Selling Noteholder"). The Resale Series A Notes were acquired
from the Company by the Selling Noteholder in connection with the closing of
the Recapitalization on May 7, 1996. The Resale Series A Notes may be sold
from time to time by the Selling Noteholder directly to one or more purchasers,
at prices and at terms then prevailing or at prices related to the then current
market price or in negotiated transactions. The Selling Noteholder may also
engage other brokers or dealers to sell all or a portion of the Resale Series A
Notes, which broker/dealer may act as principal or as agent in such transaction
pursuant to this Prospectus. Brokers and dealers so engaged will receive
commissions or discounts from the Selling Noteholder in amounts to be
negotiated immediately prior to the sale. The Selling Noteholder and any
participating broker or dealer may be deemed to be an "underwriter" within the
meaning of the Securities Act of 1933, as amended, in connection with such
sales.
Purchasers of the Resale Series A Notes may exchange such Resale Series
A Notes for Series C Notes pursuant to the Exchange Offer made hereby, if
tender of such Resale Series A Notes for Series C Notes is made on or before
the Expiration Date.
The Selling Noteholder is a registered "broker" and "dealer" under the
Securities Exchange Act of 1934. The Selling Noteholder acted as the Company's
placement agent in connection with the Notes Offering, the Bank Facility and
the Gold Consignment Facility and was paid a fee by the Company in
consideration therefor. The Selling Noteholder also acted as a managing
underwriter in the Company's IPO, for which it received underwriting
compensation. See "The Recapitalization."
William Blair & Company, L.L.C. is affiliated with William Blair
Venture Partners III Limited Partnership, the holder of approximately 5.5% of
the outstanding shares of Common Stock of the Company. See "Stock Ownership."
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for
the Company by Sidley & Austin, Chicago, Illinois.
EXPERTS
The financial statements and financial statement schedule of the
Company as of January 31, 1995 and 1996 and for each of the three years in the
period ended January 31, 1996, appearing in this Prospectus and in the
Registration Statement mentioned below have been audited by Coopers & Lybrand
L.L.P., independent public accountants, as set forth in their reports thereon
appearing elsewhere in this Prospectus and in the Registration Statement, and
are included in reliance upon such reports given upon the authority of such
firm as experts in auditing and accounting.
- 80 -
<PAGE> 87
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act for the registration of the New Notes offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are contained in exhibits and
schedules to the Registration Statement as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the securities offered hereby, reference is made to the
Registration Statement, including the exhibits thereto, and financial
statements and notes filed as a part thereof. Statements made in this
Prospectus concerning the contents of any document referred to herein are not
necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
The Company is subject to the periodic reporting and other
informational requirements of the Exchange Act. The Registration Statement and
the exhibits thereto as well as the periodic reports, proxy statements and other
information filed by the Company with the Commission may be inspected at the
public reference facilities maintained by the Commission at Room 204, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New
York 10048, or on the Web site maintained by the Commission, which contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, the address of which
is http://www.sec.gov. Copies of such material can be obtained from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20459, at prescribed rates. As long as the Company is subject to such periodic
reporting and informational requirements, it will furnish all reports and other
information required thereby to the Commission, and will furnish copies of such
reports and other information to the Trustee. In the event the Company ceases to
be required to file periodic reports and other information with the Commission,
the Company is required under the Indenture, so long as the New Notes remain
outstanding, to file with the Commission and distribute to holders of New Notes
copies of the financial information that would have been contained in such
annual reports and quarterly reports that the Company would have been required
to file with the Commission pursuant to the Exchange Act. Such financial
information shall include annual reports containing financial statements and
notes thereto, together with an opinion thereon expressed by an independent
public accounting firm, management's discussion and analysis of financial
condition and results of operations as well as quarterly reports containing
unaudited financial statements for the first three quarters of each fiscal year.
- 81 -
<PAGE> 88
MARKS BROS. JEWELERS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Balance Sheets of the Company as of January 31, 1995 and 1996 . . . . . . . . . . . . . . . F-3
Statements of Operations of the Company for the years ended
January 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Stockholders' Equity (Deficit) of the Company
for the years ended January 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows of the Company for the years ended
January 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE> 89
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Marks Bros. Jewelers, Inc.
We have audited the accompanying balance sheets of Marks Bros. Jewelers,
Inc. (the "Company") as of January 31, 1995 and 1996 and the related statements
of operations, stockholders' equity (deficit) and cash flows for each of the
three years in the period ended January 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Marks Bros. Jewelers, Inc.
as of January 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended January 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, effective February 1,
1993, the Company changed its method of accounting for compensation expense
related to the Employee Stock Ownership Plan.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 27, 1996, except as to Note 14
which is as of May 7, 1996
F-2
<PAGE> 90
MARKS BROS. JEWELERS, INC.
BALANCE SHEETS
AS OF JANUARY 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
-------- --------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, net.......................................... $ 1,494 $ 1,169
Layaway receivables, net.......................................... 1,406 1,576
Merchandise inventories........................................... 46,054 55,401
Other current assets.............................................. 690 714
Deferred income taxes, net........................................ -- 817
-------- --------------
Total current assets.......................................... 49,644 59,677
Property and equipment, net......................................... 11,868 12,852
Deferred income taxes, net.......................................... -- 14,874
-------- --------------
Total assets.................................................. $ 61,512 $ 87,403
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Outstanding checks, net........................................... $ 2,511 $ 7,991
Revolver loan..................................................... 6,805 2,119
Current portion of term loan...................................... 6,400 7,938
Current portion of senior accreting notes......................... -- 1,908
Accounts payable.................................................. 6,006 9,037
Accrued payroll................................................... 1,988 2,324
Other accrued expenses............................................ 5,474 6,848
-------- --------------
Total current liabilities..................................... 29,184 38,165
Term loan, net of current portion................................... 26,600 18,662
Senior accreting notes, net of current portion...................... 44,733 47,819
Zero coupon notes................................................... 5,413 5,847
Subordinated Debt................................................... 20,855 23,598
Other long-term liabilities......................................... 1,305 1,170
-------- --------------
Total liabilities............................................. 128,090 135,261
-------- --------------
<CAPTION>
PRO FORMA
FOR
CONVERSION
(NOTE 2)
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Commitments and contingencies
Stockholders' equity (deficit):
Common stock , $.001 par value; 8,855,210 shares authorized;
2,053,629 shares and 2,559,793 shares issued and outstanding,
respectively (4,798,181 shares issued and outstanding on a pro
forma, for conversion basis, Note 2).......................... -- -- 5
Class B common stock $1.00 par value; 29,567 shares authorized;
26,229 and 26,026 shares issued and outstanding respectively
(101 shares issued and outstanding on a pro forma, for
conversion basis, Note 2)..................................... 30 30 --
Class C common stock $.001 par value; 39,371 shares authorized;
39,370 shares issued and outstanding; convertible 1 for 1 into
common stock (no shares issued and outstanding on a pro forma,
for conversion basis, Note 2)................................. -- -- --
Class D common stock $.001 par value; 60,000 shares authorized;
no shares issued and outstanding; convertible 1 for 1 into
common stock (no shares outstanding on a pro forma, for
conversion basis, Note 2)..................................... -- -- --
Additional paid-in capital...................................... 11,855 8,766 --
Accumulated deficit............................................. (31,645) (14,673) (24,934)
Treasury stock, (1,400,123 and 1,400,326 shares at cost,
respectively) (1,408,645 shares at cost, on a pro forma, for
conversion basis, Note 2)..................................... (20,270) (20,333) (22,929)
Deferred ESOP compensation...................................... (26,548) (21,648) --
-------- -------------- -----------
Total stockholders' equity (deficit), net................... (66,578) (47,858) $ (47,858)
-------- --------------
===========
Total liabilities and stockholders' equity (deficit)........ $ 61,512 $ 87,403
========= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 91
MARKS BROS. JEWELERS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales...................................................... $91,106 $106,683 $131,022
Cost of sales (including buying and occupancy expenses)........ 54,511 64,223 77,722
------- -------- --------
Gross profit.............................................. 36,595 42,460 53,300
Selling, general and administrative expenses................... 28,340 30,748 37,887
------- -------- --------
Income from operations.................................... 8,255 11,712 15,413
Interest expense, including deferred interest of $5,467, $6,685
and $8,171, respectively..................................... 8,920 10,594 12,314
Stock award expense............................................ -- -- 461
ESOP compensation expense...................................... 511 547 590
------- -------- --------
Income (loss) from continuing operations before income
taxes................................................... (1,176) 571 2,048
Income tax benefit............................................. -- -- 14,924
------- -------- --------
Income (loss) from continuing operations.................. (1,176) 571 16,972
Gain on disposal of discontinued operations.................... 2,700 -- --
------- -------- --------
Income before cumulative effect of change in accounting
for ESOP................................................ 1,524 571 16,972
Cumulative effect of change in accounting for ESOP............. (8,526) -- --
------- -------- --------
Net income (loss)......................................... $(7,002) $ 571 $ 16,972
======= ======== ========
Pro forma earnings per share (unaudited)....................... $ 3.02
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 92
MARKS BROS. JEWELERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JANUARY 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
CLASS
B ADDITIONAL DEFERRED
COMMON PAID-IN ACCUMULATED TREASURY ESOP
STOCK CAPITAL DEFICIT STOCK COMPENSATION
------ ---------- ----------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1993............... $ 30 $ 19,923 $ (25,214) $(20,173) $(44,200)
Net loss.................................. -- -- (7,002) -- --
Repurchase of ESOP shares................. -- -- -- (60) --
ESOP amortization......................... -- (3,952) -- -- 4,463
Cumulative effect of change in accounting
for ESOP................................ -- -- -- -- 8,526
--- ------- -------- -------- --------
Balance at January 31, 1994............... 30 15,971 (32,216) (20,233) (31,211)
--- ------- -------- -------- --------
Net income................................ -- -- 571 -- --
Repurchase of ESOP shares................. -- -- -- (37) --
ESOP amortization......................... -- (4,116) -- -- 4,663
--- ------- -------- -------- --------
Balance at January 31, 1995............... 30 11,855 (31,645) (20,270) (26,548)
--- ------- -------- -------- --------
Net income................................ -- -- 16,972 -- --
Repurchase of ESOP shares................. -- -- -- (63) --
ESOP amortization......................... -- (4,310) -- -- 4,900
Income tax effect of the difference
between the average fair market value
and the cost of the released shares..... -- 767 -- -- --
Issuance of stock awards.................. -- 454 -- -- --
--- ------- -------- -------- --------
Balance at January 31, 1996............... $ 30 $ 8,766 $ (14,673) $(20,333) $(21,648)
=== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 93
MARKS BROS. JEWELERS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (7002) $ 571 $ 16,972
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Cumulative effect of change in accounting for ESOP..... 8,526 -- --
Gain on disposal of discontinued operations............ (2,700) -- --
Depreciation and amortization.......................... 2,879 2,815 2,948
Stock award expense non-cash portion................... -- -- 454
ESOP compensation expense.............................. 511 547 590
Income tax benefit..................................... -- -- (14,924)
Interest on zero coupon notes.......................... 372 402 434
Interest on senior accreting notes..................... 2,985 3,860 4,994
Interest on subordinated debt.......................... 2,110 2,423 2,743
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net...... (405) 509 325
Decrease (increase) in layaway receivables, net...... 1,438 (112) (170)
(Increase) in merchandise inventories................ (9,337) (9,460) (9,347)
(Increase) decrease in other assets.................. (279) 239 (24)
(Decrease) increase in accounts payable.............. (529) 2,903 3,031
(Decrease) increase in accrued liabilities........... (3,226) (26) 1,575
--------- -------- ---------
Net cash (used in) provided by operating
activities...................................... (4,657) 4,671 9,601
--------- -------- ---------
Cash flows from investing activities:
Capital expenditures...................................... (3,466) (3,974) (3,932)
Proceeds from assets sold................................. -- 30 --
Proceeds from disposal of discontinued operations......... 2,910 -- --
--------- -------- ---------
Net cash used in investing activities............. (556) (3,944) (3,932)
--------- -------- ---------
Cash flows from financing activities:
Borrowings on revolver loan............................... 99,766 99,159 127,109
Repayment of revolver loan................................ (108,127) (98,993) (131,795)
Repayment of term loan.................................... (4,500) (2,500) (6,400)
Proceeds from subordinated debt borrowings................ 600 -- --
Repurchase of ESOP shares................................. (60) (37) (63)
Increase in outstanding checks, net....................... 867 1,644 5,480
--------- -------- ---------
Net cash used in financing activities............. (11,454) (727) (5,669)
--------- -------- ---------
Net decrease in cash and cash equivalents................... (16,667) -- --
Cash and cash equivalents at beginning of year.............. 16,667 -- --
--------- -------- ---------
Cash and cash equivalents at end of year.................... $ -- $ -- $ --
========= ======== =========
Supplemental disclosure of cash flow information:
Interest paid during the year............................. $ 4,484 $ 3,814 $ 3,891
Income taxes paid during the year......................... -- 347 64
Non-cash financing activity:
Tax effect of compensation expense........................ -- -- $ 767
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 94
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF OPERATIONS
The financial statements of Marks Bros. Jewelers, Inc. (the "Company")
include the results of the Company's chain of specialty retail fine jewelry
stores. The Company operates exclusively in one business segment, specialty
retail jewelry. The Company has a national presence with 146 stores located in
24 states operating in regional or super-regional shopping malls.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts for the years ended January 31, 1994 and 1995 were
reclassified to conform to the current year presentation.
Accounts Receivable
Accounts receivable is shown net of the allowance for doubtful accounts of
$505,000 and $565,000 as of January 31, 1995 and 1996, respectively.
Layaway Receivables, Net
Layaway receivables include those sales to customers under the Company's
layaway policies which have not been fully collected as of the end of the year.
Layaway receivables are net of customer payments received to date and net of an
estimate for those layaway sales which the Company anticipates will never be
consummated. This estimate is based on the Company's historical calculation of
layaway sales that will never be completed. While it is reasonably possible that
the estimate will change, it is the Company's expectation that the financial
impact will not be significant in the near term.
Merchandise Inventories
Merchandise inventories are stated principally at the lower of average cost
or market. The Company also obtains merchandise from vendors under various
consignment agreements. This consigned inventory and related contingent
obligations are not reflected in the Company's financial statements. At the time
of sale, the Company records the purchase liability in accounts payable and the
related cost of merchandise in cost of sales.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable earnings. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.
F-7
<PAGE> 95
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Furniture and fixtures are depreciated on a straight-line
basis over estimated useful lives ranging from five to ten years. Leasehold
improvements are amortized on a straight-line basis over the lesser of the
remaining lease term or ten years.
Upon retirement or disposition of property and equipment, the applicable
cost and accumulated depreciation are removed from the accounts and any
resulting gains or losses are included in the results of operations.
Long Lived Assets
Effective February 1, 1995 the Company adopted Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long Lived Assets
and for Long Lived Asset to be Disposed Of."
When facts and circumstances indicate potential impairment, the Company
evaluates the recoverability of long lived asset carrying values, using
estimates of undiscounted future cash flows over remaining asset lives. When
impairment is indicated, any impairment loss is measured by the excess of
carrying values over fair values.
Outstanding Checks
Outstanding checks are stated net of store cash balances, of which cash
balances were approximately $940,000 and $639,000, as of January 31, 1995 and
1996, respectively.
Interest Rate Cap Agreements
The Company entered into interest rate cap agreements which required
prepayments by the Company. The Company is amortizing the cost of these caps
over the contracted period on a straight-line basis as interest expense.
Pro Forma, For Conversion, Balance Sheet
The amounts shown in the pro forma, for conversion, stockholders' equity
(deficit) information as of January 31, 1996 reflect (i) the restructuring of
the Company's ESOP as discussed in the Recapitalization within the Registration
Statement, (ii) the conversion of all of the shares of Class C Common Stock into
shares of Common Stock, and (iii) the elimination of the Company's shares of
Class D Common Stock (all of which are authorized and unissued).
Pro Forma Earnings Per Share
The Company has disclosed a pro forma earnings per share in the Statements
of Operations. This has been calculated as net income for the year ending
January 31, 1996 divided by the weighted average number of shares outstanding
after the Conversion (5,610,738).
Employee Stock Ownership Plan
The Company adopted the American Institute of Certified Public Accountants
Statement of Position (SOP) No. 93-6 "Employers' Accounting for Employee Stock
Ownership Plans," as of February 1, 1993. The cumulative effect of this change
in accounting for compensation expense related to the ESOP as calculated under
the transition rules of the SOP, for years prior to the year ending January 31,
1994, was $8,526,000 as reflected in the Statement of Operations for the year
ended January 31, 1994. This amount represents the cost
F-8
<PAGE> 96
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of shares allocated prior to February 1, 1993 in excess of expense recognized
under the Company's historical method.
Effective February 1, 1993, the Company recognizes compensation expense
related to the ESOP based on the estimated fair value of the shares committed to
be released to the ESOP participants' accounts for the year then ending with the
difference between fair value and original cost of the ESOP shares recorded as a
reduction of additional paid-in-capital.
Store Preopening Expense
Expenses associated with the opening of new store locations are expensed in
the period such costs are incurred.
Lease Expense
The Company leases office facilities and all retail stores. Certain leases
require increasing annual minimum lease payments over the term of the lease.
Minimum lease expense under these agreements is recognized on a straight-line
basis over the terms of the respective leases.
Virtually all leases covering retail stores provide for additional
contingent rentals based on a percentage of sales. These costs are expensed in
the period incurred.
Stock Based Compensation
The Company accounts for stock based compensation under the basis of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and will continue to do so in the future. However, the disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" will be adopted during the first quarter of the
year ending January 31, 1997.
Cash and Cash Equivalents
For the purpose of the statements of cash flows, the Company considers all
temporary cash investments purchased with a maturity of three months or less to
be cash equivalents.
3. FINANCING ARRANGEMENTS
Revolver Loan
The Revolver Credit Facility is available through May 31, 1997 up to a
maximum of $15,000,000, of which $13,974,000 is available for general corporate
purposes and is limited by a borrowing base computed based on the value of the
Company's inventory and layaway receivables. The remaining $1,026,000 is
available for certain specific purposes as defined in the agreement. Each year,
between December 10 and February 28, the Revolver Loan balance must be paid down
for 30 consecutive days to a scheduled limit, (the Clean Down Limit), as defined
in the Credit Agreement. The Company met the clean down requirement of
$7,000,000 during the 30-day period commencing on December 10, 1995. A
commitment fee of 0.5% per annum on the unused portion of the commitment is
payable quarterly.
Interest expense on revolver borrowings, payable quarterly, was $361,000,
$488,000, and $701,000 with weighted average interest rates of 7.8%, 9.1% and
10.6%, in the years ending January 31, 1994, 1995 and 1996, respectively.
Term Loan
Interest expense on Term Loan borrowings, payable quarterly, before
considering the interest hedge agreements described below, was $2,987,000,
$3,279,000 and $3,485,000, with weighted average interest rates of approximately
7.8%, 9.1% and 10.6% in the years ending January 31, 1994, 1995 and 1996,
respectively.
F-9
<PAGE> 97
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. FINANCING ARRANGEMENTS (CONTINUED)
Senior Accreting Notes
The Company may elect to add the quarterly interest accruals to the
principal of the Senior Accreting Notes in lieu of making cash interest
payments. Principal payment of the Senior Accreting Notes in the amount of
$1,908,000 is due on September 15, 1996. The payment due on September 15, 1996
must be paid with the proceeds of Externally Raised Capital (as defined in the
Credit Agreement), unless the Company has, by that date, used $10,000,000 of
Externally Raised Capital to prepay the Senior Accreting Notes. The balance of
the principal along with any accreted interest is due on May 31, 1997. Subject
to the Company's ability to refinance the entire amount of senior debt or to
obtain Externally Raised Capital, the amount due under the Senior Accreting
Notes could be reduced by up to $564,000.
Mandatory repayments of the Senior Accreting Notes will be required as a
result of the sale of assets outside of the ordinary course of business or from
Externally Raised Capital. On April 30 and December 15 of each year, mandatory
prepayments are required out of excess cash flow, if any, as defined in the
Credit Agreement. No repayments were required as of January 31, 1994, 1995 and
1996.
Interest expense on the Senior Accreting Notes, which was added to the
existing principal balance during the years ending January 31, 1994, 1995 and
1996, was $2,985,000, $3,860,000 and $4,994,000, respectively, with a weighted
average interest rate of approximately 7.8%, 9.1% and 11.0%, respectively.
Interest on the Revolver Loan, Term Loan and Senior Accreting Notes are
payable at a base rate (the higher of Citibank's publicly announced base rate or
certificate of deposit rate) plus 1.75%. The base rate at January 31, 1994, 1995
and 1996 was 6.0%, 8.5% and 8.5%, respectively.
Zero Coupon Notes
As part of the compensation to the Bank Group for the refinancing of the
Company's debt, the Company issued $6,000,000 of Zero Coupon Notes due May 31,
1997. The balance sheets as of January 31, 1995 and 1996, reflect the net
carrying value of the Notes of $5,413,000 and $5,847,000, respectively. The
original issue discount of $1,707,000 is being amortized as interest expense
recognizing a 7.8% yield to maturity on June 1, 1996. Interest will begin
accruing on the $6,000,000 principal on June 1, 1996, at base rate plus 1.75%.
Interest expense on the note was $372,000, $402,000 and $434,000 during fiscal
1994, 1995 and 1996, respectively.
The Company may, at its option, redeem the Zero Coupon Notes at redemption
prices determined based on the amount and timing of repayments or refinancing of
the Company's other obligations to the Bank Group. In the event the Zero Coupon
Notes have not been redeemed in cash or canceled prior to May 31, 1997, or if
there has been an event of default, as defined by the Revolving Credit and Term
Loan Agreement, then the Bank Group may elect to accelerate the maturity of the
Notes or exchange the Notes for 20% of the fully diluted Common equity of the
Company by converting their Notes into shares of the Company's Class D common
stock.
Subordinated Debt
In the year ending January 31, 1990, the Company assumed a $10,000,000
subordinated note. The holder of the subordinated note received warrants that
entitled the holder to purchase 177,887 shares of Common Stock reserved for
issuance at a price of $.001 per share. The warrants can be exercised at the
option of the holder until their expiration on November 6, 1999. The
subordinated debt is reduced by the unamortized discount related to these
warrants.
Subsequent to the refinancing of the Company's debt, all principal and
interest payments of the subordinated debt will be due on May 31, 2002. The
interest rate on the debt is 12.5%. If, prior to May 31, 1997, the Company is
sold in a public or private offering at or above a defined price per share, then
a fee equivalent to 1.3% per annum of the subordinated debt from February 1,
1993 to the date of the sale of the
F-10
<PAGE> 98
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. FINANCING ARRANGEMENTS (CONTINUED)
Company will be added to the subordinated debt. In addition, the interest rate
on the debt will be increased, under certain circumstances, to 13.75% as of the
date of the sale.
The holder of the subordinated note also provided a facility with up to
$3.5 million of additional subordinated debt available to the Company on
substantially the same terms as the subordinated note. As of January 31, 1996,
the Company has borrowed $600,000 under this credit facility. Interest accrues
on any outstanding principal amount at the rate of 13.75%. The obligation to
make term loans to the Company under the agreement terminates on the earliest of
December 31, 1996 or the occurrence of certain events as set forth in the
agreement. Borrowings under this subordinated debt facility may be used to repay
the long-term obligations due on September 15, 1996 under the Credit Agreement
as Externally Raised Capital.
Interest payments on the subordinated debt are deferred by adding the
interest to the outstanding principal balance. Interest expense on the
subordinated debt was $2,110,000, $2,423,000 and $2,743,000 in the years ending
January 31, 1994, 1995 and 1996, respectively.
The owner of the subordinated debt also owns 134,351 shares of Common Stock
and 2,362 shares of Class C Common Stock.
The Company and the owner of the subordinated debt reached an agreement
whereby the Company has the option to repurchase all notes, including all
interest thereon, at any time before May 1, 1996 at the face value of
$10,600,000. If the repurchase is made after May 1, 1996 and before May 31,
1997, the repurchase price is $10,600,000 plus an interest charge of 12.5% (per
annum). In consideration for this discount the Company has relinquished its
ability to borrow under the above credit facility.
Interest Rate Caps
During fiscal 1994, the Company entered into certain interest rate cap
agreements with various banks to cap the cost of a portion of its floating rate
debt. In exchange for $600,000 paid to the banks, the maximum interest rate on
approximately $40,800,000 of the Company's debt shall not exceed 9.75% through
December 31, 1996. To the extent the variable interest rate exceeds 9.75% on
this amount of debt, the banks will remit the difference to the Company
quarterly.
Interest income recognized on these agreements was approximately $31,000
and $343,000 in the years ending January 31, 1995 and 1996. There was no
interest income recognized in the year ending January 31, 1994.
Maturities of Credit Agreement Obligations
Future payments under the Credit Agreement, excluding the Revolver Loan,
for amounts in current and non-current liabilities in the balance sheet as of
January 31, 1996, are as follows:
<TABLE>
<CAPTION>
SENIOR
SUBORDINATED TERM ACCRETING ZERO
DEBT LOAN NOTES COUPON TOTAL
------------ ------- --------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
September 15, 1996................... $ -- $ 738 $ 1,908 $ -- $ 2,646
January 31, 1997..................... -- 7,200 -- -- 7,200
May 31, 1997......................... -- 18,662 47,819 5,847 72,328
May 31, 2002......................... 23,598 23,598
------------ ------- --------- ------ --------
Total........................... $ 23,598 $26,600 $ 49,727 $5,847 $105,772
========= ======= ======= ====== ========
</TABLE>
The $738,000 and $1,908,000 amounts due on September 15, 1996, must be paid
with the proceeds of Externally Raised Capital.
Under the Credit Agreement, the Bank Group has a collateral interest in all
cash and cash equivalents, accounts receivable, inventories, certain property
and equipment, and the ESOP loan. The Credit Agreement
F-11
<PAGE> 99
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. FINANCING ARRANGEMENTS (CONTINUED)
contains certain restrictions on capital expenditures, payment of dividends and
assumption of additional debt and requires the Company to maintain specified
minimum levels of certain financial measures, including interest coverage ratio,
fixed charge ratio and certain balance sheet measures. The Credit Agreement also
provides that a material adverse change in the operations of the Company
constitutes an event of default.
The September 15, 1996 maturities must be paid with the proceeds of
Externally Raised Capital. The Company must either refinance the debt, and/or
recapitalize the Company, to meet its scheduled debt repayment, although there
is no assurance that it can do so. The Company's current refinancing plans and
equity offering are discussed in the Subsequent Events note.
4. COMMON STOCK
Following are the number of shares authorized, issued and outstanding for
each of the Company's classes of common stock as of January 31:
<TABLE>
<CAPTION>
ISSUED AND
AUTHORIZED ISSUED TREASURY OUTSTANDING
---------- --------- --------- -----------
<S> <C> <C> <C> <C>
Common stock (par value $.001):
January 31, 1994......................... 8,855,210 3,450,415 1,396,785 2,053,629
------- ------- ------ ------
January 31, 1995......................... 8,855,210 3,450,415 1,396,785 2,053,629
Issuance of stock awards................. -- 506,164 -- 506,164
------- ------- ------ ------
January 31, 1996......................... 8,855,210 3,956,578 1,396,785 2,559,793
======= ======= ====== ======
Class B (par value $1.00):
January 31, 1994......................... 29,567 29,567 3,218 26,349
Repurchase of ESOP shares................ -- -- 120 (120)
------- ------- ------ ------
January 31, 1995......................... 29,567 29,567 3,338 26,229
------- ------- ------ ------
Repurchase of ESOP shares................ -- -- 203 (203)
------- ------- ------ ------
January 31, 1996......................... 29,567 29,567 3,541 26,026
======= ======= ====== ======
Class C (par value $.001):
January 31, 1994......................... 39,371 39,370 -- 39,370
======= ======= ====== ======
January 31, 1995......................... 39,371 39,370 -- 39,370
======= ======= ====== ======
January 31, 1996......................... 39,371 39,370 -- 39,370
======= ======= ====== ======
Class D (par value $.001):
January 31, 1994......................... 60,000 -- -- --
======= ======= ====== ======
January 31, 1995......................... 60,000 -- -- --
======= ======= ====== ======
January 31, 1996......................... 60,000 -- -- --
======= ======= ====== ======
</TABLE>
Each share of Class B Common Stock has a cumulative dividend preference of
$130 per share for an eight year period that began on March 4, 1988. As of
January 31, 1996 and 1995, dividends in arrears on Class B Common Stock total
$17,124,000 and $13,740,000 respectively, none of which had been declared or
accrued as of that date. Class B shares have a liquidation preference for any
unpaid cumulative dividends. The cumulative dividend provisions of the Class B
Common Stock provide that as of any date, the maximum aggregate unpaid
cumulative dividends payable by the Company on Class B Common Stock will not
exceed the then outstanding principal balance of the ESOP loans.
Class C Common Stock is convertible on a one for one basis at the option of
the shareholder into shares of Common Stock. Class C shares have a liquidation
preference, after payment of the Class B cumulative dividend preference, in the
amount of $254 per share plus any dividends declared but unpaid on the Class C
F-12
<PAGE> 100
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. COMMON STOCK (CONTINUED)
shares. As of January 31, 1995 and 1996, the total liquidation preference on
Class C shares is approximately $10,000,000.
The Company has authorized 60,000 shares of Class D Common Stock, none of
which has been issued. Each share is entitled to one vote and is convertible
into an equivalent number of shares of Common Stock at the option of the holder.
Each share of Common Stock and Class B Common Stock is entitled to one
vote, each share of Class C Common Stock is entitled to the number of votes
equal to the number of shares of Common Stock into which it is convertible.
5. EMPLOYEE STOCK OWNERSHIP PLAN
In 1988, the Company established an Employee Stock Ownership Plan, which is
a noncontributory plan established to acquire shares of the Company's Class B
Common Stock for the benefit, effectively, of all employees. In 1988, the ESOP
borrowed $70,000,000 from the Company on substantially the same terms as the
Company's borrowings of the same amount from the Bank Group. The ESOP purchased
27,000 shares of Class B Common Stock from existing stockholders for
$70,000,000.
The Company is required to make contributions to the ESOP up to the maximum
permitted by Internal Revenue Service regulation as determined based on eligible
participants' salaries. This contribution is an integral factor in the
calculation of shares committed to be released each period by the ESOP. The ESOP
is required to make mandatory repayments of its debt to the Company from the
proceeds of any permitted additional amounts the ESOP receives from the Company
as contributions or dividend payments.
During the years ending January 31, 1994, 1995 and 1996, the Company
recognized $511,000, $547,000 and $590,000, respectively, in compensation
expense based on the estimated fair value of shares committed to be released for
the year then ending. The excess of the cost of the ESOP shares allocated to
participants over estimated fair value of $3,952,000, $4,116,000 and $4,310,000,
during the years ending January 31, 1994, 1995 and 1996, respectively, has been
recorded as a reduction of additional paid-in capital. As of January 31, 1996,
16,791 shares have been released to the ESOP participants, 1,890 are committed
to be released, and 8,319 shares are held in suspense for the benefit of the
ESOP participants. The estimated fair value of the unearned ESOP shares, as of
January 31, 1996, was approximately $2,596,000. The number of shares allocated
to each participant is based on the participant's compensation in relation to
that of all participants.
In the event of death, disability or retirement, a participant (or
beneficiary) in the ESOP may receive his account balance as soon as practicable.
If the participant terminates employment with the Company for any other reason,
he may choose to receive his account after the last day of the fifth year
following his termination date. Shares of Class B Common Stock distributed from
the ESOP to participants may be offered to the Company at the then fair market
value. However, substantially all shares allocated to terminated participants'
accounts cannot be distributed until the term loan has been fully repaid. During
the years ending January 31, 1995 and 1996, the Company repurchased shares from
the ESOP participants at a total purchase price of approximately $37,000 and
$63,000, respectively.
F-13
<PAGE> 101
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. INCOME TAXES
The types of temporary differences between the tax basis of assets and
liabilities and their financial reporting amounts that give rise to a
significant portion of the deferred tax asset and deferred tax liability and
their approximate tax effects are as follows, as of the years ending January 31:
<TABLE>
<CAPTION>
1995 1996
--------------------- --------------------
TEMPORARY TAX TEMPORARY TAX
DIFFERENCE EFFECT DIFFERENCE EFFECT
--------- -------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Merchandise inventories.............................. $ 544 $ 201 $ 809 $ 299
Property and equipment, net.......................... 374 138 410 152
Accrued rent......................................... 1,125 416 1,173 434
Long term debt....................................... 18,436 6,821 19,384 7,172
Other................................................ 2,498 924 1,996 739
Net operating loss carryforwards..................... 17,700 6,549 17,883 6,617
AMT credit carryforward.............................. 552 552 552 552
--------- -------- --------- -------
41,229 15,601 42,207 15,965
Valuation allowance.................................. (39,883) (15,104) -- --
--------- -------- --------- -------
Total deferred tax asset........................ 1,346 497 42,207 15,965
--------- -------- --------- -------
Layaway receivable................................... 1,346 497 597 221
Other liability...................................... -- -- 142 53
--------- -------- --------- -------
Total deferred tax liability.................... (1,346) (497) (739) (274)
--------- -------- --------- -------
Net deferred tax asset/liability................ $ -- $ -- $41,468 $15,691
======== ======== ======== =======
</TABLE>
The net current and non-current components of deferred income taxes
recognized in the balance sheet at January 31, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
Net current assets......................................................... $ 817
Net non-current assets..................................................... 14,874
-------
$15,691
=======
</TABLE>
Net operating loss carryforwards of $17,700,000 and $17,883,000 in the
years ending January 31, 1995 and 1996, respectively, begin expiring in 2006.
Section 382 of the Internal Revenue Code of 1986 limits the use of net operating
losses and net operating loss carryforwards following an ownership change. The
restrictions under Section 382, if applicable, would impose an annual limitation
on the use of the net operating loss carryforwards in any taxable year ending
after the ownership change.
Effective January 31, 1996, the Company has reversed its valuation
allowance and recognized a net deferred tax asset of $15,691,000. Realization of
the asset is dependent on generating sufficient taxable income prior to the
expiration of the loss carryforward and other deferred tax costs. Although
realization is not assured, the Company believes it is more likely than not that
all of the deferred tax asset will be realized. The amount of the asset
considered realizable, however, could be reduced in the near term if the
estimates of future taxable income during the carryforward period are reduced.
F-14
<PAGE> 102
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. INCOME TAXES (CONTINUED)
The income tax expense (benefit) for the years ending January 31, consists
of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current expense................................................ -- -- --
Deferred tax benefit........................................... -- -- $(14,924)
--- --- --------
Total income tax expense (benefit).............................
-- -- $(14,924)
=== === ========
</TABLE>
Of the $15,691,000 income tax benefit recognized in the year ending January
31, 1996, approximately $14,924,000 has been credited to the income statement as
an income tax benefit. The remaining $767,000 has been credited to additional
paid in capital, as it relates to the tax effect of the difference between the
average fair market value and the cost of the released shares.
The provision for income taxes on income differs from the statutory tax
expense computed by applying the federal corporate tax rate of 34% as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ------- --------
<S> <C> <C> <C>
Taxes (benefit) computed at statutory rate............... $(400) $ 194 $ 696
Deferred tax asset valuation allowance................... 400 860 (15,104)
ESOP tax benefit......................................... -- (1,083) (602)
Deferred state tax expense............................... -- 18 47
Other.................................................... -- 11 39
----- ------- --------
$-- $ -- $(14,924)
===== ======= ========
</TABLE>
7. INVENTORY
As of January 31, merchandise inventories consist of:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials..................................................... $ 2,572 $ 2,944
Finished goods inventory.......................................... 43,482 52,457
------- -------
$46,054 $55,401
======= =======
</TABLE>
Raw materials primarily consist of diamonds, precious gems, semi-precious
gems and gold. There was no work-in-progress at January 31, 1995 and 1996.
Included within finished goods inventory are allowances for inventory shrink,
scrap, and miscellaneous costs of $1,564,000 and $1,263,000 for the years ending
January 31, 1995 and 1996, respectively. As of January 31, 1995 and 1996,
consignment inventories held by the Company that are not included in its balance
sheets are $14,219,000 and $15,940,000, respectively.
F-15
<PAGE> 103
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. PROPERTY AND EQUIPMENT
Property and equipment includes the following as of January 31:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures............................................ $21,462 $23,261
Leasehold improvements............................................ 8,435 9,894
------- -------
Property and equipment............................................ 29,897 33,155
Less: Accumulated depreciation and amortization................... 18,029 20,303
------- -------
Property and equipment, net....................................... $11,868 $12,852
======= =======
</TABLE>
9. COMMITMENTS
The Company leases office facilities and all retail stores, generally under
noncancelable agreements for periods ranging from 7 to 13 years. Most leases
require the payment of taxes, insurance and maintenance costs.
Future minimum rentals under noncancelable operating leases as of January
31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JANUARY 31 AMOUNT
----------------------------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
1997................................................................... $ 7,174
1998................................................................... 6,848
1999................................................................... 6,232
2000................................................................... 5,392
Thereafter............................................................. 19,501
-----------
....................................................................... $ 45,147
===========
</TABLE>
Total rental expense for all operating leases is as follows, for the years
ending January 31:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Rental expense:
Minimum................................................... $6,400 $6,951 $8,044
Rentals based on sales.................................... 579 760 1,135
------ ------ ------
$6,979 $7,711 $9,179
====== ====== ======
</TABLE>
10. DISCONTINUED OPERATIONS AND RELATED PARTY TRANSACTIONS
On January 31, 1992, the Company entered into an agreement with MBM
Company, Inc., an entity affiliated with two of the Company's directors at that
time, to oversee the winding up and liquidation of the Company's Direct
Marketing Division.
During fiscal 1994, the Company received additional proceeds related to the
sale of MBM Company, Inc. of approximately $2,910,000, of which $2,700,000 was
recorded as a gain on disposal of discontinued operations in the prior fiscal
year. The Company purchased $34,000, $161,000 and $80,000 of inventory from MBM
during the years ending January 31, 1994, 1995 and 1996, respectively.
Certain members of senior management are active investors in a business
that operates retail snack food stores. This related entity reimburses the
Company a set amount each month for certain incidental expenses
F-16
<PAGE> 104
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. DISCONTINUED OPERATIONS AND RELATED PARTY TRANSACTIONS (CONTINUED)
including postage, delivery, telephone, and other administrative expenses. Such
amounts were approximately $2,000, $4,000 and $4,000 during the years ending
January 31, 1994, 1995 and 1996, respectively.
11. LONG-TERM LIABILITIES
Included in long-term liabilities at January 31, 1995 and 1996 are
$1,080,000 and $1,002,000, respectively, of deferred lease costs.
12. STOCK PLANS
On September 8, 1993, the Company authorized an Incentive Stock
Compensation Award (Plan) for certain members of the Company's management
("Management"). The Award, if completely earned, would result in the issuance of
the equivalent of up to 1,141,684 shares of the Company's Common Stock. The
number of shares issued to Management is governed by the fully diluted market
value of the Company's shares. Under the Plan, awards occur if the Company
publicly offers its shares, is liquidated, or is sold, among other things.
Concurrent with the adoption the Incentive Stock Compensation Award, the Company
terminated the Incentive Stock Compensation Plan which was originally effective
on November 6, 1989. No expense has been recorded in connection with either Plan
as no shares were issued. The 1993 plan was terminated on September 28, 1995.
On September 28, 1995, the Company authorized 693,098 Incentive Stock
Options to be granted to certain members of the Company's management. Options
for 688,228 were issued at exercise prices ranging from $0.90 to $0.99 per
share. These prices are greater than or equal to the fair market value at the
date of grant, as determined by an independent third party valuation. The
options allow the holders to purchase common stock within a period ranging from
five years to five years and eight months, at a fixed price. No expense was
recorded in connection with these options.
On September 28, 1995, the Company granted 506,148 shares of Restricted
Stock to certain members of the Company's management. During 1995, the Company
recognized $461,000 in compensation expense relating to the issuance of these
shares. This amount represents the fair market value of the shares at the grant
date, as determined by an independent third party valuation.
Both the Incentive Stock Option plan and the Restricted Stock plan include
vesting requirements related to the participants' termination of employment with
the Company. Options and shares granted under the plans are subject to
forfeiture based on, among other things, the nature and timing of the
termination of employment. In particular, forfeitures may result if employment
is terminated prior to certain Triggering Events. Triggering Events are defined
in the respective plan agreements.
The Company has employed an independent third party to value the Incentive
Stock Options using the Black-Scholes pricing formula. The risk free interest
rate used was 6.1%, and the present value of the underlying asset was $0.90 per
share, being the fair market value of the stock at the date of the grant. The
volatility of a stock is a measure of the uncertainty of the returns provided by
the stock. As a general rule, the higher the stock price volatility, the greater
the value of the options to purchase the underlying stock. Volatility is
measured by computing the standard deviation of the annualized continuously
compounded rate of return of the stock. In the case of the Company, which does
not have publicly traded common stock, it was not possible to compute stock
price volatility based on historic rates. Instead, it was necessary to examine
the volatility of historic returns of comparable publicly traded companies.
Historic returns were used as an approximation for expected returns. The
volatility calculations for the comparable publicly traded companies were then
adjusted to arrive at a volatility figure for the Company. These modifications
included adjustments for company specific characteristics such as financial
leverage, operating leverage, the overall size of the business, working capital,
and other financial and qualitative characteristics.
F-17
<PAGE> 105
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. STOCK PLANS (CONTINUED)
Changes in options under the Plan during the year ended January 31, 1996,
the first year such options were granted, were as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE EXERCISE
OPTIONS PRICE OF OPTIONS
--------- -------------------------
<S> <C> <C>
Options outstanding at January 31, 1995....... -- --
Options outstanding at January 31, 1996....... 680,470 $ 0.94
Options exercisable at January 31, 1996....... 680,470 $ 0.94
Options granted during the current year....... 688,228 $ 0.94
Options exercised during the current year..... -- --
Options forfeited during the current year..... 7,758 $ 0.90
Options expired during the current year....... -- --
</TABLE>
Note: For the options outstanding at January 31, 1996, the exercise prices
range from $0.90 to $0.99. The weighted-average remaining contractual life of
these options at January 31, 1996 is 5 years.
The following compares the weighted average fair value of options at their
grant date with the weighted average exercise price of these options. The
options are classified between those which were issued at an exercise price
equal to the market price and those for which the exercise price was greater
than the market price. There were no options issued at an exercise price lower
than the market price. There were no options outstanding prior to February 1,
1995.
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
FAIR-VALUE OF EXERCISE PRICE OF GRANT
OPTIONS AT GRANT DATE OPTIONS AT GRANT DATE DATE
--------------------- --------------------- -------
<S> <C> <C> <C>
Exercise price = market price at grant date... $0.64 $0.90 9/28/95
Exercise price > market price at grant date..... $0.60 $0.99 9/28/95
</TABLE>
13. EMPLOYMENT AGREEMENTS
On September 8, 1993, the Company entered into amended employment
agreements with certain members of senior management. The employment agreements
as amended provide for, among other things, a term of employment through January
31, 1996 with automatic one year renewals, salary, bonus plan and other benefits
and an Incentive Stock Compensation Plan.
14. SUBSEQUENT EVENTS
The Company completed an initial public offering (the "Offering") on May 7,
1996. The Company issued 3,269,500 shares of Common Stock giving effect to the
stock split described below. In connection with the Offering, all of the
outstanding shares of Class C Common Stock were converted into an equal number
of shares of Common Stock on a share for share basis. In addition, the
outstanding warrants for 177,887 shares of Common Stock were exercised.
Simultaneous with the completion of the Offering, the Company completed a
recapitalization (the "Recapitalization"). The Recapitalization consisted of:
(i) a $44 million secured revolving credit facility, consisting of a
$29 million revolving line of credit and a $15 million term loan;
F-18
<PAGE> 106
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
14. SUBSEQUENT EVENTS (CONTINUED)
(ii) approximately $20 million of senior subordinated notes due 2004;
and
(iii) the sale of $15 million of gold in its inventory to a financial
institution and consignment of such gold to the Company under the terms of
a Consignment Agreement. The facility has an availability of up to $16
million.
The Company used the proceeds of the Offering together with the funds
generated by the Recapitalization, including the Gold Consignment, to repay all
of the Company's bank indebtedness and subordinated debt outstanding as of
January 31, 1996, and for general corporate purposes. The repayment utilized a
debt discount of approximately $17.4 million based on the January 31, 1996
balances of outstanding debt.
The $17.4 million of debt discount consists of the following:
(i) $0.6 million on the Senior Accreting Notes, which expires on May 31,
1996;
(ii) $3.8 million on the Zero Coupon Note, which expires on May 31,
1996; and
(iii) $13 million on the Senior Subordinated debt.
Pursuant to an agreement with the Marks Bros. Inc. Employee Stock Ownership
Trust, the Company restructured its Employee Stock Ownership Plan ("ESOP")
simultaneous with the completion of the Offering and the Recapitalization. The
Company canceled the remaining unamortized portion of the ESOP debt owed to the
Company. In the settlement of the debt, the trustee transferred to the Company
8,319 shares of Class B Common Stock that were being held in suspense by the
ESOP. The Company transferred to the ESOP 220,282 shares of Common Stock in
exchange for the ESOP's cancellation of the accumulated dividend preference and
other preferences associated with the shares of Class B Common Stock. The ESOP
exchanged the 17,607 of allocated Class B shares for 623,619 shares of Common
Stock of the Company. Approximately 100 shares of Class B Common Stock,
currently held by former employees, remain outstanding. All shares of Class B
Common Stock transferred to the Company and the shares held in treasury were
subsequently canceled. The restructuring will result in an elimination of the
deferred ESOP compensation equity account, and eliminate the future annual
allocation of shares and the related compensation expense in the Company income
statement in years subsequent to January 31, 1996. It is expected that no
compensation expense will be recognized in the year ending January 31, 1997 as a
result of this transaction.
The financial statements have been revised to give effect to a stock split
of the shares of Common Stock of approximately 35.4-for-1. The shares of Class B
Common Stock have not been affected by the split.
The Company has adopted a new Long-Term Equity Incentive Plan. Options
granted under this plan will have a term of not more than ten years and an
exercise price not less than the market price at the date of grant.
Concurrent with the Offering, the Company: (i) eliminated the 60,000 shares
of Class D Common Stock authorized and unissued at January 31, 1996; and (ii)
converted into 1,394,521 shares of Common Stock the 39,370 shares of Class C
Common Stock authorized, issued and outstanding at January 31, 1996.
F-19
<PAGE> 107
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with
the offering described in this Registration Statement. All such amounts (other
than the Commission registration fee) are estimated.
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Commission registration fee $ 7,675.00
Printing and engraving expenses 10,000.00
Legal fees and expenses 30,000.00
Accounting fees and expenses 20,000.00
Blue Sky fees and expenses (including legal fees and expenses) 5,000.00
Exchange Agent fees and expenses 10,000.00
Miscellaneous 5,000.00
-----------
Total $ 87,675.00
===========
</TABLE>
- -------------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and the Company's Charter and
By-Laws provide for indemnification of the Company's directors and officers for
liabilities and expenses that they may incur in such capacities. In general,
directors and officers are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the Company, and, with respect to any criminal action or
proceeding, actions that the indemnitee had no reasonable cause to believe were
unlawful. Reference is made to the Company's Charter and By-Laws filed as
Exhibits 3.1 and 3.2 hereto, respectively.
The Placement Agreement provides that the placement agent is obligated
to indemnify directors, officers and controlling persons of the Company against
liabilities under the Securities Act relating to misstatements or omissions
with respect to information relating to the placement agent provided by the
placement agent for use in the offering memorandum relating to the offering of
Old Notes.
The Underwriting Agreement, dated May 1, 1996, among the Company, the
Underwriters named therein and the Selling Stockholders named therein, provides
that the Underwriters are obligated, under certain circumstances to indemnify
directors, officers and controlling persons of the Company against certain
liabilities, including liabilities under the Securities Act.
The Company has purchased directors and officers liability insurance
which provides coverage against certain liabilities, including liabilities
under the Securities Act.
Rodney L. Goldstein, Daniel H. Blumenthal and Samuel B. Guren are each
covered by agreements with Frontenac Venture V Limited Partnership, Bank of
America Illinois and William Blair Venture Partners III, respectively, which
provide indemnification for such persons against certain liabilities that may
arise by reason of their status as a director of certain entities, including
the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On May 7, 1996, the Company issued and sold (a) $12,000,000 aggregate
principal amount of Series A Senior Subordinated Notes Due 2004 (herein
referred to as the Series A Notes) at an aggregate purchase price of 100% of
the principal amount thereof and (b) $8,000,000 aggregate principal amount of
Series B Senior Subordinated Notes Due 2004 (herein referred to as the Series B
Notes) at an aggregate purchase price of 100% of the principal amount thereof.
Such sales were made to "accredited investors" as defined in Regulation D
promulgated under the Securities Act and were made in
II-1
<PAGE> 108
reliance upon an exemption from registration as an exempt private placement
under Section 4(2) of the Securities Act. No underwriters were involved in
such transactions. William Blair & Company, L.L.C. acted as placement agent in
connection with sales of Series A Notes and received a fee in the amount of
$434,000.
In connection with the restructuring of the Company's ESOP, on May 7,
1996 shares of Common Stock of the Company were exchanged for outstanding
shares of Class B Common Stock of the Company. See "The Recapitalization --
ESOP Restructuring." Such transactions were made in reliance upon an exemption
from the registration provisions of the Securities Act set forth in Section
4(2) thereof relative to sales by an issuer not involving any public offering
or the rules and regulations thereunder and the exemption provided under
Section 3(a)(9) of the Securities Act for exchanges of securities of the same
issuer. On April 10, 1996, the four executive officers of the Company
exercised options to acquire shares of Common Stock from the Company for
$123,453 in cash. Such sales were made pursuant to the exemptions under such
Section 4(2) and Rule 701 promulgated under the Securities Act. No
underwriters were involved in any of the transactions discussed in this
paragraph.
On May 7, 1996, Frontenac Diversified III Limited Partnership
exercised a warrant to purchase 177,887 shares of Common Stock for an aggregate
exercise price of $1,779 in cash. Such sale was made in reliance upon an
exemption from the registration provision of the Securities Act set forth in
Section 4(2) thereof relative to sales by an issuer not involving any public
offering, or the rules and regulations thereunder. No underwriters were
involved in such transaction.
II-2
<PAGE> 109
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
3.1 -- Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1 (Commission File No. 333-1794) (the "Common Stock Registration
Statement"))
3.2 -- Restated By-Laws of the Company (incorporated by reference to Exhibit 3.2 of the Common Stock Registration
Statement)
4.1 -- Stockholders Rights Plan
4.2 -- Certificate of Designations of Series A Junior Participating Preferred Stock (incorporated by reference to
Exhibit 4.2 of the Common Stock Registration Statement)
*4.3 -- Indenture governing the Notes dated as of April 15, 1996 between the Company and Norwest Bank Minnesota, National
Association, as Trustee
4.4 -- Form of First Supplemental Indenture to the Indenture
*4.5 -- Form of Series A Notes (included in Exhibit 4.3 to this Registration Statement)
*4.6 -- Form of Series B Notes (included in Exhibit 4.3 to this Registration Statement)
*4.7 -- Form of Series C Notes (included in Exhibit 4.3 to this Registration Statement)
*4.8 -- Form of Series D Notes (included in Exhibit 4.3 to this Registration Statement)
5.1 -- Opinion of Sidley & Austin
10.1 -- Second Amended and Restated Registration Agreement
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; Letter Agreement re: Incentive Stock Option
dated October 5, 1995 between the Company and John J. Guarnaccia (incorporated by reference to Exhibit 10.2 of
the Common Stock Registration Statement)
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, respectively (incorporated by reference to Exhibit 10.3 of
the Common Stock Registration Statement)
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, respectively (incorporated by reference to Exhibit 10.4 of
the Common Stock Registration Statement)
10.5 -- Form of the Company's 1995 Executive Incentive Stock Option Plan (incorporated by reference to Exhibit 10.5 of
the Common Stock Registration Statement)
10.6 -- Letter Agreement re: Incentive Stock Option between the Company and Lynn D. Eisenheim (incorporated by reference
to Exhibit 10.6 of the Common Stock Registration Statement)
</TABLE>
II-3
<PAGE> 110
<TABLE>
<S> <C> <C>
10.7 -- Form of the Company's 1996 Long-Term Incentive Plan
++10.8 -- Amended and Restated Private Label Revolving Credit Plan
Agreement, dated May 31, 1996, between the Company and Bank
One, Dayton NA
10.9 -- Lease dated May 14, 1992 between the Company and New York Life
Insurance Company relating to the Company's corporate
headquarters (incorporated by reference to Exhibit 10.9 of the
Common Stock Registration Statement)
*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 Agents for the Banks,
governing the Bank Facility and the Gold Consignment Facility
*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,
respectively
*10.12 -- ESOP Restructuring Agreement, dated as of March 29, 1996,
between the Company and the Marks Bros. Jewelers, Inc.
Employee Stock Ownership Trust
12.1 -- Computation of ratio of earnings to fixed charges
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Sidley & Austin (included in Exhibit 5.1)
24.1 -- Powers of Attorney (certain powers of attorney were included
in the signature page of this Registration Statement)
25.1 -- Statement of Eligibility of Trustee on Form T-1 of Norwest
Bank Minnesota, National Association
99.1 -- Letter of Transmittal
99.2 -- Notice of Guaranteed Delivery
99.3 -- Letter from Registered Holders to Clients
99.4 -- Letters to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees
</TABLE>
______________________________________________________________
* Previously filed
++ Confidential material appearing in this exhibit was omitted and filed
separately with the Securities and Exchange Commission on August 1, 1996 in
accordance with Rule 406 promulgated under the Securities Act of 1933, as
amended, ("Rule 406").
II-4
<PAGE> 111
(b) FINANCIAL STATEMENT SCHEDULES:
Report of Independent Public Accountants
Schedule II -- Valuation and Qualifying Accounts
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.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to provisions described in Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
<PAGE> 112
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this amendment to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in Chicago,
Illinois on July 31, 1996.
MARKS BROS. JEWELERS, INC.
By: /s/ John R. Desjardins
-----------------------------------------------
John R. Desjardins
Executive Vice President,
Finance and Administration
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendement to registration statement has been signed on July 31, 1996 by
the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
- --------- --------
<S> <C>
* Chairman, President and Chief Executive Officer (principal
- -------------------------------------------- executive officer) and Director
Hugh M. Patinkin
Executive Vice President, Finance and Administration, and
- -------------------------------------------- Treasurer (principal financial and accounting officer) and Director
John R. Desjardins
* Director
- --------------------------------------------
Matthew M. Patinkin
* Director
- --------------------------------------------
Rodney L. Goldstein
* Director
- --------------------------------------------
Samuel B. Guren
* Director
- -------------------------------------------
Norman J. Patinkin
* Director
- -------------------------------------------
Jack A. Smith
* By: /s/ John R. Desjardins
-----------------------------
John R. Desjardins
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 113
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
3.1 -- Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1 (Commission File No.
333-1794) (the "Common Stock Registration Statement"))
3.2 -- Restated By-Laws of the Company (incorporated by reference to
Exhibit 3.2 of the Common Stock Registration Statement)
4.1 -- Stockholders Rights Plan
4.2 -- Certificate of Designations of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 4.2 of
the Common Stock Registration Statement)
*4.3 -- Indenture governing the Notes dated as of April 15, 1996
between the Company and Norwest Bank Minnesota, National
Association, as Trustee
4.4 -- Form of First Supplemental Indenture to the Indenture
*4.5 -- Form of Series A Notes (included in Exhibit 4.3 to this
Registration Statement)
*4.6 -- Form of Series B Notes (included in Exhibit 4.3 to this
Registration Statement)
*4.7 -- Form of Series C Notes (included in Exhibit 4.3 to this
Registration Statement)
*4.8 -- Form of Series D Notes (included in Exhibit 4.3 to this
Registration Statement)
5.1 -- Opinion of Sidley & Austin
10.1 -- Second Amended and Restated Registration Agreement
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;
Letter Agreement re: Incentive Stock Option dated October 5,
1995 between the Company and John J. Guarnaccia (incorporated
by reference to Exhibit 10.2 of the Common Stock Registration
Statement)
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, respectively
(incorporated by reference to Exhibit 10.3 of the Common
Stock Registration Statement)
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, respectively
(incorporated by reference to Exhibit 10.4 of the Common
Stock Registration Statement)
10.5 -- Form of the Company's 1995 Executive Incentive Stock Option
Plan (incorporated by reference to Exhibit 10.5 of the Common
Stock Registration Statement)
10.6 -- Letter Agreement re: Incentive Stock Option between the
Company and Lynn D. Eisenheim (incorporated by reference to
Exhibit 10.6 of the Common Stock Registration Statement)
10.7 -- Form of the Company's 1996 Long-Term Incentive Plan
++10.8 -- Amended and Restated Private Label Revolving Credit Plan
Agreement, dated May 31, 1996, between the Company and Bank
One, Dayton NA
</TABLE>
II-7
<PAGE> 114
<TABLE>
<S> <C> <C>
10.9 -- Lease dated May 14, 1992 between the Company and New York Life Insurance Company relating to the Company's
corporate headquarters (incorporated by reference to Exhibit 10.9 of the Common Stock Registration Statement)
*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 Agents
for the Banks, governing the Bank Facility and the Gold Consignment Facility
*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, respectively
*10.12 -- ESOP Restructuring Agreement, dated as of March 29, 1996, between the Company and the Marks Bros. Jewelers, Inc.
Employee Stock Ownership Trust
12.1 -- Computation of ratio of earnings to fixed charges
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Sidley & Austin (included in Exhibit 5.1)
24.1 -- Powers of Attorney (certain powers of attorney were included in the signature page of this Registration
Statement)
25.1 -- Statement of Eligibility of Trustee on Form T-1 of Norwest Bank Minnesota, National Association
99.1 -- Letter of Transmittal
99.2 -- Notice of Guaranteed Delivery
99.3 -- Letter from Registered Holders to Clients
99.4 -- Letters to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees
</TABLE>
______________________________________________________________
* Previously filed
++ Confidential material appearing in this exhibit was omitted and filed
separately with the Securities and Exchange Commission on August 1, 1996 in
accordance with Rule 406 promulgated under the Securities Act of 1933, as
amended, ("Rule 406").
II-8
<PAGE> 1
EXHIBIT 4.1
- --------------------------------------------------------------------------------
STOCKHOLDERS RIGHTS AGREEMENT
DATED AS OF MAY 1, 1996
BETWEEN
MARKS BROS. JEWELERS, INC.
AND
THE FIRST NATIONAL BANK OF BOSTON
AS RIGHTS AGENT
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
PAGE
Section 1. Certain Definitions............................................. 1
Section 2. Appointment of Rights Agent..................................... 7
Section 3. Issuance of Rights Certificates................................. 7
Section 4. Form of Rights Certificates..................................... 10
Section 5. Countersignature and Registration............................... 11
Section 6. Transfer, Split Up, Combination and
Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or
Stolen Rights Certificates................................. 12
Section 7. Exercise of Rights; Exercise Price;
Expiration Date of Rights.................................. 12
Section 8. Cancellation and Destruction of Rights
Certificates............................................... 15
Section 9. Reservation and Availability of
Preferred Shares........................................... 15
Section 10. Record Date of Preferred Share Ownership....................... 17
Section 11. Adjustment of Exercise Price, Number
and Kind of Shares and Number
of Rights.................................................. 17
Section 12. Certificate of Adjusted Exercise
Price or Number of Shares.................................. 25
Section 13. Consolidation, Merger or Sale or Transfer
of Assets or Earning Power................................. 25
Section 14. Fractional Rights and Fractional Shares........................ 29
Section 15. Rights of Action............................................... 30
Section 16. Agreements of Holders of Rights................................ 31
Section 17. Rights Certificate Holder Not Deemed a
Stockholder............................................... 31
Section 18. Concerning the Rights Agent.................................... 32
Section 19. Merger or Consolidation of the Rights
Agent..................................................... 32
Section 20. Duties of the Rights Agent..................................... 33
Section 21. Resignation or Removal of the Rights
Agent..................................................... 35
Section 22. Issuance of New Rights Certificates............................ 36
Section 23. Redemption..................................................... 37
Section 24. Exchange....................................................... 39
Section 25. Notice to Holders of Rights Certificates
of Certain Events......................................... 40
Section 26. Other Notices.................................................. 41
Section 27. Supplements and Amendments..................................... 42
Section 28. Successors..................................................... 43
Section 29. Certain Determinations and Actions
by the Board.............................................. 43
Section 30. Benefits of this Agreement..................................... 43
Section 31. Severability................................................... 44
Section 32. Governing Law.................................................. 44
Section 33. Counterparts................................................... 44
Section 34. Descriptive Headings........................................... 44
-i-
<PAGE> 3
Exhibit A - Form of Certificate of Designations of
Series A Junior Participating Preferred
Stock ........................................................ A-1
Exhibit B - Form of Rights Certificate ................................... B-1
Exhibit C - Summary of Rights to Purchase Shares of
Series A Junior Participating Preferred
Stock ........................................................ C-1
-ii-
<PAGE> 4
STOCKHOLDERS RIGHTS AGREEMENT
Stockholders Rights Agreement dated as of May 1, 1996 (this
"Agreement") between Marks Bros. Jewelers, Inc., a Delaware corporation (the
"Company"), and The First National Bank of Boston (the "Rights Agent").
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company desires to provide all
stockholders of the Company with the opportunity to benefit from the long-term
prospects and value of the Company and to ensure that all such stockholders
receive fair and equal treatment in the event of any proposed takeover of the
Company; and
WHEREAS, on April 1, 1996, the Board of Directors of the Company
authorized and declared a dividend of one preferred stock purchase right
(individually a "Right" and collectively the "Rights") for each share of Common
Stock (as hereinafter defined) of the Company and a dividend of 35.42083833
Rights for each share of Class B Common Stock, $1.00 par value per share (the
"Class B Common Stock"), of the Company, in each case outstanding at the Close
of Business on the effective date of the Company's initial public offering
registration statement, file no. 333-1794 (the "Record Date"), each Right
representing the right to purchase one one-hundredth of a Preferred Share (as
hereinafter defined) upon the terms and subject to the conditions herein after
set forth, and contemplates that one Right will be issued with respect to each
share of Common Stock and a Proportionate Number of Rights will be issued with
respect to each share of Class B Common Stock, in each case which shall become
outstanding after the Record Date and prior to the earlier of the Redemption
Date and the Final Expiration Date (as such terms are hereinafter defined),
including any shares of Common Stock issued by reason of the exercise of any
option, warrant, right (other than the Rights) or conversion or exchange
privilege contained in any option, warrant, right (other than the Rights) or
convertible or exchangeable security issued by the Company prior to the
Distribution Date, unless the Board (as hereinafter defined) shall expressly
provide to the contrary at the time of issuance of any such option, warrant,
right or convertible or exchangeable security.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
SECTION 1. CERTAIN DEFINITIONS. For all purposes of this Agreement,
unless the context otherwise requires, the following terms shall have the
respective meanings set forth below:
(a) "Acquiring Person" shall mean any Person who or which, together
with all Affiliates and Associates of such Person,
<PAGE> 5
shall be the Beneficial Owner of 15% or more of the shares of Common Stock of
the Company then outstanding, but shall not include (i) the Company, (ii) any
Subsidiary of the Company, (iii) any employee benefit plan or other compensation
program or arrangement of the Company or of any such Subsidiary, (iv) any Person
holding such shares of Common Stock for or pursuant to the terms of any such
plan, program or arrangement, (v) Hugh M. Patinkin, John R. Desjardins, Matthew
M. Patinkin, and each Affiliate and Associate thereof, and (vi) Frontenac
Venture V Limited Partnership, and each Affiliate and Associate thereof
(together, "Frontenac"), provided that, Frontenac shall be considered an
Acquiring Person if Frontenac shall be the Beneficial Owner of more than 30% of
the shares of Common Stock of the Company then outstanding prior to the
consummation of the Offering, such percentage ownership to be adjusted downward
to be the sum of the percentage as to which Frontenac is the Beneficial Owner
immediately after the consummation of the Offering plus 2% (the Persons
specified in clauses (i) through (vi) being hereinafter collectively called
"Exempt Persons"). Notwithstanding the preceding sentence, no Person shall
become an "Acquiring Person" as the result of an acquisition by the Company of
shares of its Common Stock which, by reason of reducing the number of its then
outstanding shares of Common Stock, increases the percentage of its then
outstanding shares of Common Stock Beneficially Owned by such Person to 15% or
more, or, in the case of Frontenac, increases the percentage of its then
outstanding shares of Common Stock Beneficially Owned by Frontenac to the
applicable percentage (as provided in (vi) above) or above; provided, however,
that if such Person shall, after such purchase by the Company, become the
Beneficial Owner of any additional shares of Common Stock of the Company, then
such Person shall be deemed to be an "Acquiring Person." Notwithstanding the
foregoing, if the Board of Directors of the Company determines in good faith
that a Person who would otherwise be an "Acquiring Person," as defined pursuant
to the foregoing provisions of this paragraph (a), has become such
inadvertently, and such Person divests as promptly as practicable a sufficient
number of shares of Common Stock so that such Person would no longer be an
"Acquiring Person," as defined pursuant to the foregoing provisions of this
paragraph (a), then such Person shall not be deemed to be an "Acquiring Person"
for any purpose of this Agreement.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2, as in effect on the date of this
Agreement, under the Exchange Act; provided, however, that no director or
officer of the Company shall be deemed an Affiliate or Associate of any other
director or officer of the Company solely as a result of his or her being a
director or officer of the Company.
-2-
<PAGE> 6
(c) "Beneficial Owner" (including the terms "Beneficially Own" and
"Beneficial Ownership"), when used with respect to any Person, shall be deemed
to include any securities which:
(i) such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly (determined as provided in Rule
13d-3, as in effect on the date of this Agreement, under the Exchange Act);
(ii) such Person or any of such Person's Affiliates or Associates,
directly or indirectly, has:
(A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time or upon the satisfaction
of any conditions, or both) pursuant to any written or oral agreement,
arrangement or understanding (other than customary agreements with and
among underwriters and selling group members with respect to a bona
fide public offering of securities), upon the exercise of any options,
warrants, rights (other than the Rights) or conversion or exchange
privileges or otherwise; provided, however, that a Person shall not be
deemed the Beneficial Owner of, or to Beneficially Own: (I) securities
tendered pursuant to a tender or exchange offer made by or on behalf of
such Person or any of such Person's Affiliates or Associates until such
tendered securities are accepted for purchase or exchange or (II)
securities issuable upon exercise of the Rights at any time prior to
the Distribution Date; or
(B) the right to vote pursuant to any written or oral agreement,
arrangement or understanding; provided, however, that a Person shall
not be deemed the Beneficial Owner of, or to Beneficially Own, any
security otherwise subject to this item (B) if such agreement,
arrangement or understanding to vote (I) arises solely from a revocable
proxy or consent given to such Person or any of such Person's
Affiliates or Associates in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
rules and regulations under the Exchange Act and (II) is not also then
reportable by such Person on Schedule 13D (or any comparable or
successor report then in effect) under the Exchange Act; or
(C) the right to dispose of pursuant to any written or oral
agreement, arrangement or understanding (other than customary
agreements with and among underwriters and selling group members with
respect to a bona fide public offering of securities); or
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(iii) are beneficially owned, directly or indirectly, by any other
Person with which such Person or any of such Person's Affiliates or
Associates has any written or oral agreement, arrangement or understanding
(other than customary agreements with and among underwriters and selling
group members with respect to a bona fide public offering of securities)
for the purpose of acquiring, holding, voting (except to the extent
contemplated by the proviso to item (B) of subparagraph (ii) of the first
paragraph of this definition) or disposing of any securities of the
Company.
Notwithstanding the first paragraph of this definition, no director or
officer of the Company shall be deemed to be the "Beneficial Owner" of, or to
"Beneficially Own," shares of Common Stock or other securities of the Company
beneficially owned by any other director or officer of the Company solely as a
result of his or her being a director or officer of the Company.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Business Day" shall mean any day other than a Saturday, a Sunday
or a day on which banking institutions in the State of Illinois are authorized
or obligated by law or executive order to close.
(f) "Certificate of Designations" shall mean the Certificate of
Designations for the Preferred Shares in substantially the form attached hereto
as Exhibit A.
(g) "Close of Business" on any given date shall mean 5:00 P.M.,
Chicago time, on such date or, if such date is not a Business Day, then 5:00
P.M., Chicago time, on the next succeeding Business Day.
(h) "Common Stock," when used with reference to the Company, shall
mean the Common Stock, $.001 par value, of the Company. "Common Stock," when
used with reference to any Person other than the Company, shall mean the capital
stock with the greatest voting power (or the other equity securities or equity
interests having the power to control or direct management) of such Person or,
if such Person is a Subsidiary of another Person, of the Person which ultimately
controls such first-mentioned Person and which has issued and outstanding such
capital stock, equity securities or equity interests.
(i) "Disinterested Director" shall mean (i) any member of the Board,
while such a member, who is not a Restricted Person, or a representative or
nominee of a Restricted Person, and was a member of the Board prior to the date
of this Agreement and (ii) any individual who subsequently becomes a member of
the Board and is not a Restricted Person, or a representative or nominee of a
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Restricted Person, if such individual's nomination for election or election to
the Board is recommended or approved by a majority of the Disinterested
Directors then in office.
(j) "Distribution Date" shall have the meaning set forth in Section
3(a).
(k) "Equivalent Preferred Shares" shall have the meaning set forth in
Section 11(b).
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
in effect on the date of this Agreement.
(m) "Exchange Rate" shall have the meaning set forth in Section 24(a).
(n) "Exempt Persons" shall have the meaning set forth in the
definition of "Acquiring Person."
(o) "Exercise Price" shall have the meaning set forth in Section 7(b).
(p) "Fair Market Value" shall have the meaning and be determined as
set forth in Section 11(d).
(q) "Final Expiration Date" shall have the meaning set forth in
Section 7(a).
(r) "Interested Stockholder" shall mean any Restricted Person or any
Affiliate or Associate of any other Person in which such Restricted Person has
an interest, or any Person acting, directly or indirectly, on behalf of or in
concert with any such Restricted Person.
(s) "NASDAQ" shall have the meaning set forth in Section 9(c).
(t) "Permitted Offer" shall mean any tender or exchange offer for all
of the outstanding shares of Common Stock of the Company at a price and on terms
determined, prior to the purchase of shares under such tender or exchange offer,
by at least a majority of the members of the Board who are Disinterested
Directors and who are not officers of the Company to be appropriate (taking into
account all factors which such Disinterested Directors deem relevant, including,
without limitation, prices reasonably obtainable if the Company or its assets
were sold on an orderly basis designed to realize maximum value) and otherwise
in the best interests of the Company and its stockholders (other than the Person
or any Affiliate or Associate thereof on whose behalf or for whose benefit such
tender or exchange offer is being made).
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(u) "Person" shall mean any individual, firm, corporation,
partnership or other entity, and shall include any successor (by merger or
otherwise) of any of the foregoing.
(v) "Preferred Shares" shall mean the Series A Junior Participating
Preferred Stock of the Preferred Stock, which series shall have the powers,
preferences and other rights set forth in the Certificate of Designations.
(w) "Preferred Stock," when used with reference to the Company, shall
mean the Preferred Stock, $.001 par value, of the Company.
(x) "Principal Party" shall have the meaning set forth in Section
13(e).
(y) "Record Date" shall have the meaning set forth in the second
recital clause of this Agreement.
(z) "Redemption Date" shall have the meaning set forth in Section
7(a).
(aa) "Redemption Price" shall have the meaning set forth in Section
23(a).
(bb) "Restricted Person" shall mean an Acquiring Person or any
Affiliate or Associate of an Acquiring Person.
(cc) "Rights" shall have the meaning set forth in the second recital
clause of this Agreement.
(dd) "Rights Certificates" shall mean the certificates evidencing the
Rights after the Distribution Date.
(ee) "Section 11(a)(ii) Event" shall mean any event described in
Section 11(a)(ii).
(ff) "Section 13 Event" shall mean any transaction described in
Section 13(a).
(gg) "Securities Act" shall mean the Securities Act of 1933, as
amended from time to time.
(hh) "Security" shall have the meaning set forth in Section 11(d).
(ii) "Share Acquisition Date" shall mean the first date on which there
shall be a public announcement (which shall include, without limitation, any
press release or publicly available filing with the Securities and Exchange
Commission or any other federal or state governmental authority or agency) by
the Company or an Acquiring Person that an Acquiring Person has become such.
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<PAGE> 10
(jj) "Stock" shall have the meaning set forth in Section 11(d).
(kk) "Subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the voting power or the other equity securities or
equity interests having the power to control or direct management) is owned,
directly or indirectly, by such Person.
(ll) "Summary of Rights" shall mean the Summary of Rights to Purchase
shares of Series A Junior Participating Preferred Stock in substantially the
form attached hereto as Exhibit C.
(mm) "Trading Day" shall have the meaning set forth in Section
11(d)(i).
(nn) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
SECTION 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints
the Rights Agent to act as agent for the Company and the holders of the Rights
(which holders, as provided in Section 3, shall, prior to the Distribution Date,
also be the holders of the Common Stock and the Class B Common Stock of the
Company) in accordance with the terms and conditions of this Agreement. The
Rights Agent hereby accepts such appointment. The Company may from time to time
appoint such Co-Rights Agents as it may deem necessary or desirable. In the
event the Company appoints one or more Co-Rights Agents, the respective
obligations and duties of the Rights Agent and of any Co-Rights Agent shall be
as the Company shall specify in writing. The Rights Agent shall have no duty to
supervise, and shall not be liable for the acts or omissions of, any Co-Rights
Agent.
SECTION 3. ISSUANCE OF RIGHTS CERTIFICATES.
(a) Until the earliest of (i) the Close of Business on the 10th
Business Day after the Share Acquisition Date (or, if the Share Acquisition Date
shall have occurred prior to the Record Date, the Close of Business on the 10th
Business Day after the Record Date) or (ii) the Close of Business on the 10th
Business Day (or, anything in Section 27 to the contrary notwithstanding, such
other Business Day as may be determined by action of the Board prior to the
occurrence of any Section 11(a)(ii) Event) after the date of the commencement by
any Person (other than an Exempt Person) of, or the first public announcement of
the intention of any Person (other than an Exempt Person) to commence, a tender
or exchange offer if, upon the consummation thereof, such Person would be the
Beneficial Owner of 15% or more of the shares of Common Stock of the Company
then outstanding (the earliest of the dates specified clauses (i) and (ii) being
hereinafter called the "Distribution Date"), the Rights shall be evidenced and
be transferable only as provided in Section 3(b). As soon as
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<PAGE> 11
practicable after the Distribution Date or, in the case of any shares of Common
Stock of the Company which are issued or otherwise become outstanding after the
Distribution Date and prior to the earlier of the Redemption Date and the Final
Expiration Date, including any shares of Common Stock issued by reason of the
exercise of any option, warrant, right (other than the Rights) or conversion or
exchange privilege contained in any option, warrant, right (other than the
Rights) or convertible or exchangeable security issued by the Company prior to
the Distribution Date, unless the Board shall have expressly provided to the
contrary at the time of issuance of any such option, warrant, right or
convertible or exchangeable security, simultaneously with the issuance of stock
certificates for such shares of Common Stock, the Company shall prepare and
execute, the Rights Agent shall countersign and the Company shall deliver or
cause to be delivered (or the Rights Agent shall, if requested, deliver), by
first-class mail, postage prepaid, to each record holder of shares of Common
Stock of the Company and Class B Common Stock as of the Close of Business on the
Distribution Date or, in the case of shares of Common Stock issued or otherwise
becoming outstanding after the Distribution Date (unless otherwise provided with
respect thereto as aforesaid), to each record holder of the shares of Common
Stock so being issued or becoming outstanding at the time of such occurrence, at
its last address shown on the registry books of the transfer agent for the
Common Stock of the Company, one or more Rights Certificates evidencing one
Right for each share of Common Stock of the Company so held, issued or becoming
outstanding. As of and after the Distribution Date, the Rights shall be
evidenced solely by the Rights Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the
Company shall send a copy of the Summary of Rights, by first-class mail, postage
prepaid, to each record holder of shares of Common Stock and Class B Common
Stock of the Company as of the Close of Business on the Record Date, at its last
address shown on the registry books of the transfer agent for the Common Stock
and Class B Common Stock of the Company. Until the Distribution Date: no Rights
Certificates shall be issued; each stock certificate for shares of Common Stock
and Class B Common Stock of the Company outstanding as of the Record Date, until
the earliest of the Distribution Date, the Redemption Date and the Final
Expiration Date, shall be deemed also to constitute a certificate for the Rights
associated with the shares represented thereby, together with a copy of the
Summary of Rights attached thereto; and the registered holder of such shares
shall also be the registered holder of the associated Rights. Until the
earliest of the Distribution Date, the Redemption Date and the Final Expiration
Date, the surrender for transfer of any such stock certificate, with or without
a copy of the Summary of Rights attached thereto, shall also constitute the
transfer of the Rights associated with the shares of Common Stock and Class B
Common Stock represented thereby.
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<PAGE> 12
(c) Any stock certificate for shares of Common Stock or Class B Common
Stock of the Company which shall be delivered by or on behalf of the Company
(including, without limitation, stock certificates for shares of Common Stock
which are reacquired by the Company and then transferred) after the Record Date
and prior to the earliest of the Distribution Date, the Redemption Date and the
Final Expiration Date shall have impressed, printed or written thereon, or
otherwise affixed thereto, the following legend:
"This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in the Stockholders Rights Agreement dated as
of May 1, 1996 (the "Rights Agreement") between Marks Bros. Jewelers, Inc.
(the "Company") and The First National Bank of Boston, as Rights Agent, the
terms, provisions and conditions of which are incorporated herein by
reference and made a part hereof. The Rights Agreement is on file at the
principal office of the Company and the principal office of such Rights
Agent, and the Company will mail to the holder of this certificate a copy
without charge after receipt of a written request therefor. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will be
evidenced by separate certificates and will no longer be evidenced by this
certificate. The Rights (i) may be redeemed at a redemption price (subject
to adjustment) $.01 per Right or (ii) under certain circumstances, may be
exchanged, in whole or in part, for shares of Common Stock of the Company
at an exchange rate (subject to adjustment) of one share of Common Stock
per Right, all as set forth in the Rights Agreement. Under certain
circumstances, as set forth in the Rights Agreement, Rights Beneficially
Owned by a Restricted Person (as such terms are defined in the Rights
Agreement), or by specified transferees from a Restricted Person, shall be
or become void."
Each stock certificate containing the foregoing legend, until the
earliest of the Distribution Date, the Redemption Date and the Final Expiration
Date, shall be deemed also to constitute a certificate for the Rights associated
with the shares represented thereby, and the registered holder of such shares
shall also be the registered holder of the associated Rights. Until the
earliest of the Distribution Date, the Redemption Date and the Final Expiration
Date, the surrender for transfer of any such stock certificate shall also
constitute the transfer of the Rights associated with the shares of Common Stock
or Class B Common Stock represented thereby. The omission of the foregoing
legend shall not in any manner whatsoever affect the application or
interpretation of Section 7(d).
(d) In the event that the Company shall reacquire any shares of its
Common Stock or Class B Common Stock after the Record Date and prior to the
Distribution Date, the Rights associated with
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such shares shall be deemed cancelled and retired, the Company not being
entitled to exercise any Rights associated with shares of its Common Stock or
Class B Common Stock which are no longer outstanding.
SECTION 4. FORM OF RIGHTS CERTIFICATES.
(a) The Rights Certificates (including the Form of Election to
Purchase and Certification of Status and the Form of Assignment and
Certification of Status to be set forth on the reverse side thereof) shall be in
substantially the form attached hereto as Exhibit B and may have such marks of
identification or designation and such legends, summaries or endorsements set
forth thereon as the Company may deem appropriate and are not inconsistent with
the provisions of this Agreement, or as may be required to conform to customary
practice or to comply with any applicable law or any rule or regulation made
pursuant thereto or with any rule or regulation of any stock exchange on which
the Rights may from time to time be listed. Subject to Sections 11 and 22, the
Rights Certificates, whenever distributed, shall be dated as of the Record Date
(or, in the case of Rights with respect to shares of Common Stock issued or
becoming outstanding after the Record Date, the same date as the stock
certificate evidencing such shares), shall (if the Company shall so require)
indicate the date of countersignature by the Rights Agent and shall entitle the
holders thereof to purchase such number of one one-hundredths of a Preferred
Share at the Exercise Price as shall be set forth therein, but the number of
such one one-hundredths of a Preferred Share and the Exercise Price shall be
subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section
22 that represents Rights Beneficially Owned by: (i) a Restricted Person, (ii) a
transferee from a Restricted Person who becomes a transferee after the Acquiring
Person becomes such or (iii) a transferee from a Restricted Person who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from such Acquiring Person (or any Affiliate or Associate
thereof) to holders of equity interests in such Acquiring Person (or any such
Affiliate or Associate) or to any Person with whom such Acquiring Person (or any
such Affiliate or Associate) has any continuing written or oral agreement,
arrangement or understanding regarding the transferred Rights or (B) a transfer
which the Board has determined is part of a plan, arrangement or understanding
which has as a primary purpose or effect the avoidance of Section 7(d), and any
Rights Certificate issued pursuant to Section 6, 11 or 22 upon the transfer,
exchange, replacement or adjustment of any other Rights Certificate referred to
in this sentence, shall have deleted therefrom the second sentence of the legend
on the Form of Rights Certificate attached hereto as Exhibit B and, in lieu
thereof, shall contain the following two sentences:
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<PAGE> 14
"The Rights represented by this Rights Certificate are or were
Beneficially Owned by a Restricted Person (as such term is defined in such
Agreement). This Rights Certificate and the Rights represented hereby
shall be or become void under the circumstances specified in Section 7(d)
of such Agreement."
The Company shall give prompt written notice to the Rights Agent after
becoming aware of the existence and identity of any Restricted Person. The
failure to insert the foregoing sentences on any such Rights Certificate or any
defect therein shall not in any manner whatsoever affect the application or
interpretation of Section 7(d). The Company shall specify to the Rights Agent
in writing which Rights Certificates are to be so legended.
SECTION 5. COUNTERSIGNATURE AND REGISTRATION.
(a) The Rights Certificates shall be executed on behalf of the Company
by its Chairman of the Board, its President, any of its Vice Presidents or its
Treasurer, either manually or by facsimile signature, and shall have affixed
thereto the Company's seal or a facsimile thereof attested by its Secretary or
any of its Assistant Secretaries, either manually or by facsimile signature.
The Rights Certificates shall be manually countersigned by an authorized
signatory of the Rights Agent and shall not be valid or obligatory for any
purpose unless so countersigned. In case any officer of the Company who shall
have executed any Rights Certificate or who shall have attested the Company's
seal thereon shall cease to be such officer of the Company before such Rights
Certificate shall have been countersigned by an authorized signatory of the
Rights Agent and issued and delivered by or on behalf of the Company, such
Rights Certificate, nevertheless, may be countersigned by the Rights Agent and
issued and delivered by or on behalf of the Company with the same force and
effect as though the individual who executed such Rights Certificate or who
attested the Company's seal thereon had not ceased to be such officer; and any
Rights Certificate may be executed on behalf of the Company and the Company's
seal may be attested by any individual who, at the actual date of such execution
or attestation, shall be a proper officer of the Company, although at the date
of execution of this Rights Agreement such person was not such an officer.
(b) After the Distribution Date, the Rights Agent shall keep or cause
to be kept, at its principal office, books for registration and transfer of the
Rights Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Rights Certificates, the number of
Rights evidenced on its face by each Rights Certificate, the date of each Rights
Certificate and (if required by the Company) the date of countersignature by the
Rights Agent.
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<PAGE> 15
SECTION 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHTS
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES.
(a) Subject to Sections 4(b), 7(d) and 14, at any time after the Close
of Business on the Distribution Date and prior to the Close of Business on the
earlier of the Redemption Date and the Final Expiration Date, any Rights
Certificate (other than any Rights Certificate which shall have been exchanged
pursuant to Section 24) may be transferred, split up, combined or exchanged for
one or more other Rights Certificates, entitling the registered holder to
purchase the same number of one one-hundredths of a Preferred Share (or after a
Triggering Event, the securities, cash and other property purchasable in lieu
thereof) as the Rights Certificate or Rights Certificates surrendered entitled
such registered holder to purchase. Any registered holder desiring to transfer,
split up, combine or exchange one or more Rights Certificates shall make such
request in a writing delivered to the Rights Agent, and shall surrender the
Rights Certificates to be transferred, split up, combined or exchanged, with the
Form of Assignment and Certification of Status on the reverse side thereof duly
executed, together with such signature guarantees and other documentation as the
Rights Agent may reasonably request, at the principal office of the Rights
Agent. Thereupon the Company shall prepare and execute, the Rights Agent shall
countersign and the Company shall deliver or cause to be delivered (or the
Rights Agent shall, if requested, deliver) to the person entitled thereto one or
more Rights Certificates as so requested. The Company may require payment of a
sum sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer, split up, combination or exchange of Rights
Certificates and reimbursement to the Company and the Rights Agent of all
reasonable expenses incidental thereto.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in the case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them or, in the case of
mutilation, upon surrender to the Rights Agent of the mutilated Rights
Certificate, and, at the Company's request, reimbursement to the Company and the
Rights Agent of all reasonable expenses incidental thereto, the Company shall
prepare and execute, the Rights Agent shall countersign and the Company shall
deliver or cause to be delivered (or the Rights Agent shall, if requested,
deliver) to the registered holder thereof a new Rights Certificate of like tenor
in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated.
SECTION 7. EXERCISE OF RIGHTS; EXERCISE PRICE; EXPIRATION DATE OF
RIGHTS.
(a) Subject to Section 7(d), the registered holder of any Rights
Certificate may exercise the Rights evidenced thereby
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<PAGE> 16
(except as otherwise provided herein), in whole or in part, at any time after
the Distribution Date and prior to the earliest of (i) the Close of Business on
the tenth anniversary of the Record Date (the "Final Expiration Date"), (ii) the
time at which the Rights are redeemed as provided in Section 23 (the "Redemption
Date") and (iii) the time at which such Rights are exchanged as provided in
Section 24, upon surrender of such Rights Certificate, with the Form of Election
to Purchase and Certification of Status on the reverse side thereof duly
executed, together with such signature guarantees and other documentation as the
Rights Agent may reasonably request, to the Rights Agent at its principal
office, accompanied by payment (as provided in subsection (c) of this Section 7)
of the Exercise Price for each one one-hundredth of a Preferred Share (or after
a Triggering Event, the securities, cash and other property purchasable in lieu
thereof) as to which the surrendered Rights are then being exercised.
(b) The price (the "Exercise Price") for each one one- hundredth of a
Preferred Share purchased upon exercise of the Rights shall initially be $52.00
shall be subject to adjustment from time to time as provided in Sections 11 and
13 and shall be payable in lawful money of the United States of America in
accordance with subsection (c) of this Section 7.
(c) Upon receipt of a Rights Certificate representing then exercisable
Rights, with the Form of Election to Purchase and Certification of Status on the
reverse side thereof duly executed, together with such signature guarantees and
other documentation as the Rights Agent may reasonably request, accompanied by
payment of the Exercise Price for the number of one one-hundredths of a
Preferred Share (or after a Triggering Event, the securities, cash and other
property purchasable in lieu thereof) being purchased, plus the amount of any
applicable transfer tax (as determined by the Rights Agent) required to be paid
by the holder of such Rights Certificate in accordance with Section 9, by
certified or cashier's check or money order payable to the order of the Company,
the Rights Agent shall, subject to the terms and conditions of this Agreement,
thereupon promptly (i) requisition from any transfer agent for the Preferred
Shares (or, if the Rights Agent is such a transfer agent, make available) stock
certificates for the number of one one-hundredths of a Preferred Share being
purchased, the Company hereby irrevocably authorizing any such transfer agent to
comply with all such requests, (ii) if the Company shall have elected to deposit
the Preferred Shares issuable upon exercise of the Rights with a depository
agent, requisition from the depository agent depository receipts for the number
of one one-hundredths of a Preferred Share being purchased (in which case stock
certificates for the Preferred Shares represented by such depository receipts
shall be deposited by the transfer agent for the Preferred Shares with the
depository agent), the Company hereby irrevocably authorizing any such
depository agent to comply with all such requests, (iii) after a Triggering
Event, requisition or obtain from the appropriate Person or Persons such
securities, cash and
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<PAGE> 17
other property as may then be purchasable in lieu of Preferred Shares, the
Company hereby irrevocably authorizing all such requests, (iv) when appropriate,
requisition from the Company the amount of cash to be paid in lieu of the
issuance of any fractional share in accordance with Section 14 and (v) promptly
after receipt of such stock certificates, depository receipts, securities, cash
and/or other property, cause the same to be delivered to or upon the order of
the registered holder of such Rights Certificate, registered (when appropriate)
in such name or names as may be designated by such registered holder.
(d) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of any Section 11(a)(ii) Event, any Rights
Beneficially Owned by: (i) a Restricted Person, (ii) a transferee from a
Restricted Person who becomes a transferee after the Acquiring Person becomes
such or (iii) a transferee from a Restricted Person who becomes a transferee
prior to or concurrently with the Acquiring Person becoming such and receives
such Rights pursuant to either (A) a transfer (whether or not for consideration)
from such Acquiring Person (or any Affiliate or Associate thereof) to holders of
equity interests in such Acquiring Person (or any such Associate or Affiliate)
or to any Person with whom such Acquiring Person (or any such Associate or
Affiliate) has any continuing written or oral agreement, arrangement or
understanding regarding the transferred Rights or (B) a transfer which the Board
has determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect the avoidance of this Section 7(d) shall be or become
void without any further action; and no holder of such Rights shall have any
rights whatsoever with respect to such Rights, whether under any provision of
this Agreement or otherwise, from and after such first occurrence. The Company
shall use all reasonable efforts to ensure that the provisions of this Section
7(d) and Section 4(b) are complied with, but shall have no liability to any
holder of the Rights Certificates or to any other Person as a result of the
Company's failure to make any applicable finding or determination with respect
to any Restricted Person, or any transferee therefrom.
(e) Notwithstanding subsection (a) of this Section 7, a Right may be
exercised by the holder thereof on or after the Distribution Date and prior to
the receipt of the associated Rights Certificate by notifying the Rights Agent
in writing and furnishing to the Rights Agent such information and evidence as
to such election as the Rights Agent may reasonably request; provided, however,
that the Rights Agent shall not be required to take any of the actions specified
in subsection (c) of this Section 7 until such holder shall have fully satisfied
the applicable requirements specified therein.
(f) Neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to any Rights or Rights Certificate upon the
purported exercise or transfer thereof unless the registered holder thereof
shall have (i) completed and
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signed the Certification of Status following the Form of Election to Purchase or
the Form of Assignment, as the case may be, set forth on the reverse side of the
Rights Certificate surrendered for such exercise or transfer and (ii) provided
such additional evidence as to the identity of the Beneficial Owner (or former
Beneficial Owner) thereof or the Affiliates or Associates thereof as the Company
shall reasonably request.
(g) In case the registered holder of any Rights Certificate shall
exercise less than all of the Rights evidenced thereby, then, subject to the
provisions of Section 14, a new Rights Certificate evidencing the Rights
remaining unexercised shall be prepared and executed by the Company and
countersigned and delivered by the Rights Agent to the registered holder of such
surrendered Rights Certificate or to such registered holder's duly authorized
assigns.
SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form
or, if surrendered to the Rights Agent, shall be cancelled by it; and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
this Agreement. The Company shall deliver to the Rights Agent for cancellation,
and the Rights Agent shall cancel, any other Rights Certificate purchased or
reacquired by the Company otherwise than upon the exercise thereof. The Rights
Agent shall deliver all cancelled Rights Certificates to the Company or shall,
at the written request of the Company, destroy such cancelled Rights
Certificates and deliver a certificate of the destruction thereof to the
Company.
SECTION 9. RESERVATION AND AVAILABILITY OF PREFERRED SHARES.
(a) The Company covenants and agrees that it will cause to be reserved
and kept available out of its authorized and unissued Preferred Shares, or any
authorized and issued Preferred Shares held in its treasury, the number of
Preferred Shares required to permit the exercise in full of all outstanding
Rights.
(b) The Company covenants and agrees that it will take all such action
as may be necessary to ensure that all Preferred Shares delivered upon exercise
of the Rights shall, at the time of delivery of the stock certificates therefor
in accordance with Section 7(c) (including the receipt of payment of the
Exercise Price), be duly and validly authorized and issued and fully paid and
nonassessable.
(c) The Company covenants and agrees that it will use its best efforts
to cause, from and after such time as the Rights shall become exercisable, all
Preferred Shares issued or reserved
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<PAGE> 19
for issuance to be listed, upon official notice of issuance, on the principal
national securities exchange, if any, on which its Common Stock is listed or, if
the principal market for Common Stock is not on any national securities
exchange, to be eligible for quotation on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") or any successor thereto or other
comparable quotation system.
(d) The Company covenants and agrees that it will use its best efforts
to (i) file, as soon as practicable after the occurrence of any Section
11(a)(ii) Event for which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iv),
or as soon as required by law after the Distribution Date, as the case may be, a
registration statement on an appropriate form under the Securities Act with
respect to the securities purchasable upon exercise of the Rights, (ii) cause
such registration statement to become effective as soon as practicable after
such filing and (iii) cause such registration statement to remain effective
(with a prospectus which at all times meets the requirements of the Securities
Act) until the earliest of (A) the date as of which the Rights are no longer
exercisable for such securities, (B) the Redemption Date and (C) the Final
Expiration Date. The Company further covenants and agrees that it will take
such action as may be appropriate under, and which will ensure compliance with,
the securities or "blue sky" laws of such jurisdictions as may be necessary or
appropriate in connection with the exercisability of the Rights. The Company
may temporarily suspend, for not more than 90 days after the applicable date
specified in the first sentence of this subsection (d), the exercisability of
the Rights in order to prepare and file such registration statement and permit
it to become effective and to complete such securities or "blue sky" law action.
Upon such suspension, the Company shall issue a public announcement stating that
the exercisability of the Rights has been temporarily suspended, and the Company
shall also issue a public announcement at such time as the suspension shall no
longer be in effect. Failure of the Company to notify the Rights Agent of any
such suspension shall not affect the effectiveness thereof. Notwithstanding any
provision of this Agreement to the contrary, the Rights shall not be exercisable
in any jurisdiction unless the requisite qualification or exemption in such
jurisdiction shall have been effected. Until otherwise notified in writing by
the Company, the Rights Agent may assume that each purported exercise of the
Rights is permitted by this Agreement and by applicable law, and the Rights
Agent shall not be liable for acting in reliance upon such assumption.
(e) The Company covenants and agrees that, subject to Section 6, it
will pay when due and payable any and all federal and state original issue or
transfer taxes and charges which may be payable in respect of the issuance or
delivery of the Rights or the Rights Certificates or of any stock certificate
for Preferred Shares issued upon exercise of the Rights. The Company shall
not,
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<PAGE> 20
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of any Rights Certificate to a Person other than, or
the issuance of any stock certificate for Preferred Shares upon exercise of any
of the Rights represented by such Rights Certificate in a name other than, the
registered holder of such Rights Certificate or to issue or deliver any Rights
Certificate or stock certificate for Preferred Shares upon such transfer or
exercise until any such tax shall have been paid (any such tax being payable by
the holder of such Rights Certificate at the time of surrender thereof) or until
it has been established to the Company's reasonable satisfaction that no such
tax is due.
(f) After a Triggering Event, the provisions of this Section 9 shall
apply, to the extent applicable and appropriate, to all shares of capital stock
and other securities then purchasable upon exercise of the Rights.
SECTION 10. RECORD DATE OF PREFERRED SHARE OWNERSHIP. The Person in
whose name any stock certificate for Preferred Shares is issued upon exercise of
any of the Rights shall for all purposes be deemed to have become the holder of
record of the Preferred Shares represented thereby on, and such stock
certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered to the Rights Agent with proper
payment of the Exercise Price (and all applicable transfer taxes, if any);
provided, however, that if the date of such surrender and payment shall be a
date upon which the registry books of the transfer agent for the Preferred
Shares are closed, such Person shall be deemed to have become the record holder
of such Preferred Shares on, and such stock certificate shall be dated, the next
succeeding Business Day on which such registry books are open.
SECTION 11. ADJUSTMENT OF EXERCISE PRICE, NUMBER AND KIND OF SHARES
AND NUMBER OF RIGHTS. The Exercise Price, the number and kind of shares of
capital stock for which each Right is exercisable and the number of Rights
outstanding are subject to adjustment from time to time as provided in this
Section 11.
(a) (i) In the event that the Company shall at any time after the date
of this Agreement (A) declare a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares into a greater
number of Preferred Shares, (C) combine or consolidate the outstanding Preferred
Shares into a smaller number of Preferred Shares or (D) issue any shares of
capital stock of any class in a reclassification of the Preferred Shares
(including any such reclassification in connection with a combination or merger
in which the Company is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a) and in Section 7(d), the Exercise Price
in effect at the Close of Business on the record date for such dividend or at
the effective time of such subdivision, combination, consolidation or
reclassification, and the number and kind of shares of capital stock issuable
upon exercise of the Rights at such date or time,
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<PAGE> 21
shall be proportionately adjusted so that the registered holder of each Right
exercised after such date or time shall be entitled to receive the aggregate
number and kind of shares of capital stock which, if such Right had been
exercised immediately prior to such date or time and at a time when the registry
books of the transfer agent for the Preferred Shares were open, such registered
holder would have been entitled to receive by reason of such dividend,
subdivision, combination, consolidation or reclassification; provided, however,
that in no event shall the consideration to be paid upon the exercise of one
Right be less than the aggregate par value of the shares of capital stock of the
Company issuable upon the exercise thereof. If an event shall occur which would
require an adjustment under both this paragraph (i) and paragraph (ii) of this
subsection (a), the adjustment provided for in this paragraph (i) shall be in
addition to, and shall be made prior to, any adjustment required pursuant to
such paragraph (ii).
(ii) Subject to Section 24, in the event that any Person, either alone
or together with its Affiliates and Associates, shall become an Acquiring
Person, then, in such case and promptly following such occurrence, proper
provision shall be made so that the registered holder of each Right, except
as otherwise provided in Section 7(d), shall thereafter have the right to
receive, upon exercise thereof and payment of an amount equal to the
product determined by multiplying the then current Exercise Price by the
number of one one-hundredths of a Preferred Share for which such Right was
exercisable immediately prior to such occurrence, in accordance with this
Agreement, in lieu of Preferred Shares, the number of shares of Common
Stock determined dividing such product by 50% of the Fair Market Value
(determined as provided in subsection (d) of this Section 11) of one share
of Common Stock on the date of such occurrence.
(iii) In the event that there shall not be sufficient authorized and
unissued or treasury shares of Common Stock to permit the exercise in full
of the Rights in accordance with paragraph (ii) of this subsection (a), the
Company shall take all necessary action to authorize and reserve for
issuance such number of additional shares of Common Stock as may from time
to time be required to be issued upon the exercise in full of all
outstanding Rights and, if necessary, shall use its best efforts to obtain
stockholder approval thereof. Notwithstanding the preceding sentence, if
at least a majority of the Disinterested Directors shall determine that
such action is necessary or appropriate and is not contrary to the best
interests of the holders of the Rights, such Disinterested Directors may
cause the Company, in lieu of issuing shares of Common Stock in accordance
with such paragraph (ii), to distribute, or if a sufficient number of
shares of Common Stock cannot be issued for such purpose in accordance with
the provisions hereof, the Company shall distribute, upon the exercise of
each Right, cash, debt
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<PAGE> 22
securities, Preferred Shares, other shares of Preferred Stock, other
property or any combination thereof having an aggregate Fair Market Value
(determined as provided in subsection (d) of this Section 11) equal to the
Fair Market Value (as so determined) of the number of shares of Common
Stock which otherwise would have been issuable pursuant to such paragraph
(ii). Any such decision by a majority of the Disinterested Directors must
be made and publicly announced within 30 days after the occurrence of any
Section 11(a)(ii) Event.
(b) In the event that the Company shall fix a record date for the
making of any distribution to all registered holders of Preferred Shares of
options, warrants or rights entitling them (for a period expiring not later than
45 calendar days after such record date) to subscribe for or purchase Preferred
Shares (or shares of capital stock of any class of the Company having the same
(or more favorable) powers, preferences and rights as the Preferred Shares
("Equivalent Preferred Shares"), or securities convertible into or exchangeable
for Preferred Shares or Equivalent Preferred Shares, at a price per Preferred
Share or per Equivalent Preferred Share (or having a conversion or exchange
price per share, in the case of securities convertible into or exchangeable for
Preferred Shares or Equivalent Preferred Shares) less than the Fair Market Value
(determined as provided in subsection (d) of this Section 11) of one Preferred
Share on such record date, the Exercise Price to be in effect after such record
date shall be determined by multiplying the Exercise Price in effect immediately
prior to such record date by a fraction, the numerator of which shall be the
number of Preferred Shares outstanding on such record date, plus the number of
Preferred Shares which the aggregate offering price of the total number of
Preferred Shares and/or Equivalent Preferred Shares so to be offered (and/or the
aggregate initial conversion or exchange price, in the case of convertible or
exchangeable securities so to be offered) would purchase at such Fair Market
Value, and the denominator of which shall be the number of Preferred Shares
outstanding on such record date, plus the total number of Preferred Shares
and/or Equivalent Preferred Shares so to be offered (and/or into or for which
the convertible or exchangeable securities so to be offered are initially
convertible or exchangeable); provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
the exercise thereof. In case all or part of such subscription price may be
paid in a form other than cash, the value of such non-cash consideration shall
be its Fair Market Value (determined as provided in such subsection (d)).
Preferred Shares owned by or held for the account of the Company shall not be
deemed outstanding for the purpose of any computation provided for in this
subsection (b). The adjustment required by this subsection (b) shall be made
successively whenever such a record date is fixed; and in the event that such
distribution is not so made, the Exercise Price shall be adjusted to the
Exercise Price which would have been in effect if such record date had not been
fixed.
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<PAGE> 23
(c) In the event that the Company shall fix a record date for the
making of any distribution to all registered holders of Preferred Shares
(including any such distribution made in connection with a combination or merger
in which the Company is the continuing or surviving corporation) of cash (other
than a regular quarterly cash dividend), options, warrants, rights (other than
those referred to in subsection (b) of this Section 11), securities, evidences
of indebtedness or other property (excluding any dividend payable in Preferred
Shares, but including any dividend payable in other shares of capital stock),
the Exercise Price to be in effect after such record date shall be determined by
multiplying the Exercise Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the Fair Market Value (determined
as provided in subsection (d) of this Section 11) of one one-hundredth of a
Preferred Share on such record date, less the Fair Market Value (as so
determined) of the cash, options, warrants, rights, securities, evidences of
indebtedness or other property so to be distributed and properly attributable to
one one-hundredth of a Preferred Share, and the denominator of which shall be
such Fair Market Value of one one-hundredth of a Preferred Share; provided,
however, that in no event shall the consideration to be paid upon the exercise
of one Right be less than the aggregate par value of the shares of capital stock
of the Company issuable upon the exercise thereof. The adjustment required by
this subsection (c) shall be made successively whenever such a record date is
fixed; and in the event that such distribution is not so made, the Exercise
Price shall be adjusted to the Exercise Price which would have been in effect if
such record date had not been fixed.
(d) For the purpose of any computation required under this Agreement,
"Fair Market Value," when used with respect to Preferred Shares or shares of
Common Stock or other capital stock of any class (collectively, a "Stock"), to
any option, warrant, right or other security or evidence of indebtedness
(collectively, a "Security") or to any other property, shall be determined as
provided in this subsection (d):
(i) In the case of any Stock or Security which is publicly traded, the
Fair Market Value on any date shall be deemed to be the average of the
daily closing prices per share of such Stock or per unit of such Security
for the 30 consecutive Trading Days immediately prior to such date;
provided, however, that in the event that the Fair Market Value per share
of any Stock is determined during a period commencing after the public
announcement by its issuer of (A) a dividend or distribution on such Stock
payable in shares of such Stock or securities convertible into or
exchangeable for shares of such Stock or (B) a subdivision, combination,
consolidation or reclassification of such Stock, and ending prior to the
expiration of the 30 Trading Days after the ex-dividend date for such
dividend or distribution, or the record date for such subdivision,
combination, consolidation or
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<PAGE> 24
reclassification, then, in each such case, the Fair Market Value of such
Stock shall be properly adjusted to take into account "ex-dividend"
trading. The closing price for each day shall be the last sale price,
regular way, or, in case no such sale shall take place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if such Stock or Security is not listed or admitted to trading
on the New York Stock Exchange, as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted
to trading on the principal national securities exchange on which such
Stock or Security is listed or admitted to trading; or if such Stock or
Security is not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the
last quoted high bid and low asked prices in the over-the-counter market,
as reported by NASDAQ or any other similar system then in use; or if on any
such day no bid for such Stock or Security is quoted by any such
organization, the average of the closing bid and asked prices, as furnished
by a professional market maker making a market in such Stock or Security
selected by the Board. If during any relevant period no market maker is
making a market in such Stock or Security, its Fair Market Value on a
specified date shall be determined reasonably and with utmost good faith to
the holders of the Rights by the Board; provided, however, that if at the
time of such determination there shall be an Acquiring Person, the Fair
Market Value of such Stock or Security on such date shall be determined by
a nationally recognized investment banking firm selected by the Board,
which determination shall be described in a statement filed with the Rights
Agent and shall be binding on the Company, the Rights Agent and the holders
of the Rights. The term "Trading Day" shall mean a day on which the
principal national securities exchange on which such Stock or Security is
listed or admitted to trading is open for the transaction of business or,
if such Stock or Security is not listed or admitted to trading on any
national securities exchange, a Business Day.
(ii) In the case of any Stock or Security which is not publicly
traded, the Fair Market Value on any date shall be the fair value per share
of such Stock or per unit of such Security as determined reasonably and
with utmost good faith to the holders of the Rights by the Board; provided,
however, that if at the time of such determination there shall be an
Acquiring Person, the Fair Market Value of such Stock or Security on such
date shall be determined by a nationally recognized investment banking firm
selected by the Board, which determination shall be described in a
statement filed with the Rights Agent and shall be binding on the Company,
the Rights Agent and the holders of the Rights.
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<PAGE> 25
(iii) In the case of any property which is not a Stock or a Security,
the Fair Market Value on any date shall be determined reasonably and with
utmost good faith to the holders of Rights by the Board; provided, however,
that if at the time of such determination there shall be an Acquiring
Person, the Fair Market Value of such property on such date shall be
determined by a nationally recognized investment banking firm selected by
the Board, which determination shall be described in a statement filed with
the Rights Agent and shall be binding on the Company, the Rights Agent and
the holders of the Rights.
(e) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Exercise
Price then in effect; provided, however, that any adjustments which by reason of
this subsection (e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest whole cent, to the nearest one
ten-thousandth of a share of Common Stock or other capital stock of any class
(other than Preferred Shares) or to the nearest one one-millionth of a Preferred
Share, as the case may be. Notwithstanding the first sentence of this
subsection (e), any adjustment required by this Section 11 shall be made no
later than the earliest of (i) three years after the date of the occurrence
requiring such adjustment, (ii) the Redemption Date and (iii) the Final
Expiration Date.
(f) If as a result of an adjustment required by any Triggering Event
the holder of any Rights thereafter exercised shall become entitled to receive
any shares of capital stock of any class of the Company (other than Preferred
Shares), the number of such other shares so receivable upon exercise of any
Rights shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as reasonably possible to the provisions with respect to
the Preferred Shares contained in this Section 11, and the provisions of
Sections 7, 9, 10, 13 and 14 with respect to the Preferred Shares shall apply on
like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Exercise Price hereunder shall evidence the right to
purchase, at the adjusted Exercise Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised the option provided in
subsection (i) of this Section 11, upon each adjustment of the Exercise Price as
a result of the calculations required by subsection (b) or (c) of this Section
11, each Right outstanding immediately prior to the making of such Exercise
Price adjustment shall thereafter evidence the right to purchase, at the
adjusted
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<PAGE> 26
Exercise Price, the number of one one-hundredths of a Preferred Share
(calculated to the nearest one one-millionth) determined by (i) multiplying the
number of one one-hundredths of a Preferred Share purchasable upon exercise of
such Right immediately prior to such adjustment by the Exercise Price in effect
immediately prior to such adjustment and (ii) dividing the product so obtained
by the Exercise Price in effect immediately after such adjustment.
(i) The Company may elect, on or after the date on which any
adjustment of the Exercise Price is required to be made hereunder, to adjust the
number of Rights outstanding in substitution for making an adjustment in the
number of one one-hundredths of a Preferred Share purchasable upon exercise of
each Right. Each Right outstanding after such an adjustment in the number of
Rights shall be exercisable for the same number of one one-hundredths of a
Preferred Share as such Right was exercisable for immediately prior to such
adjustment; but each Right held of record prior to such adjustment shall become
the number of Rights (calculated to the nearest one ten-thousandth) determined
by dividing the Exercise Price in effect immediately prior to the occurrence
requiring the adjustment of the Exercise Price by the Exercise Price in effect
immediately after such adjustment of the Exercise Price. The Company shall make
a prompt public announcement of its election to adjust the number of Rights
outstanding, indicating the record date for the adjustment and, if known at the
time of such announcement, the amount of the adjustment to be made. Such record
date may be the date on which the Exercise Price is required to be adjusted or
any day thereafter, unless the Rights Certificates shall have been issued, in
which case such record date shall be at least 10 days after the date of such
public announcement. If the Rights Certificates shall have been issued, upon
each adjustment of the number of Rights outstanding pursuant to this subsection
(i), the Company shall, as promptly as practicable, cause to be distributed to
each registered holder of the Rights Certificates on such record date Rights
Certificates evidencing, subject to Section 14, the additional Rights to which
such registered holder shall be entitled as a result of such adjustment; or, at
its option, the Company shall cause to be distributed to each such registered
holder, in substitution and replacement for the Rights Certificates held by such
registered holder prior to the date of such adjustment, but only upon surrender
thereof (if so required by the Company), new Rights Certificates evidencing all
the Rights to which such registered holder shall be entitled after such
adjustment. Rights Certificates so distributed shall be executed and
countersigned in the manner provided in Section 5 (and may designate, at the
option of the Company, the adjusted Exercise Price) and shall be registered in
the names of the registered holders of the Rights Certificates on the record
date specified in the aforesaid public announcement.
(j) Irrespective of any adjustment or change in the Exercise Price or
the number of one one-hundredths of a Preferred
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<PAGE> 27
Share issuable upon exercise of the Rights, the Rights Certificates theretofore
and thereafter issued may continue to designate the Exercise Price and the
number of one one-hundredths of a Preferred Share which were designated in the
Rights Certificates originally issued hereunder.
(k) Before taking any action which would cause an adjustment reducing
the Exercise Price below one one-hundredth of the then par value, if any, of the
Preferred Shares issuable upon exercise of the Rights, the Company shall take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Exercise Price.
(l) In any case in which this Section 11 shall require an adjustment
of the Exercise Price effective as of the record date for a particular event,
the Company may elect to defer until the occurrence of such event the issuing to
the holder of any Rights exercised after such record date of the Preferred
Shares (and/or the other shares of capital stock, securities or other property
of the Company, if any) issuable upon such exercise in excess of the Preferred
Shares (and/or the other shares of capital stock, securities or other property
of the Company, if any) issuable upon such exercise on the basis of the Exercise
Price in effect immediately prior to such adjustment; provided, however, that
the Company shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such excess upon the
occurrence of such event.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Board shall be entitled to make reductions in the Exercise Price, in addition to
the adjustments expressly required by this Section 11, as and to the extent that
the Board, in its sole discretion, shall determine to be advisable in order that
any dividend on the Preferred Shares payable in Preferred Shares, any
subdivision, combination or consolidation of the Preferred Shares (by
reclassification or otherwise than by payment of dividends in Preferred Shares)
into a greater or lesser number of Preferred Shares, any issuance of Preferred
Shares solely for cash at less than the Fair Market Value thereof, any issuance
solely for cash of Preferred Shares or securities which by their terms are
convertible into or exchangeable for Preferred Shares or any issuance of
options, warrants, rights, securities, evidences of indebtedness or other
property subject to subsection (b) or (c) of this Section 11, hereafter made by
the Company to the holders of the Preferred Shares, shall not be taxable to such
holders.
(n) In the event that the Company shall at any time after the date of
this Agreement and prior to the Distribution Date (i) declare a dividend on its
outstanding shares of Common Stock payable in shares of Common Stock or (ii)
effect a subdivision, combination or consolidation of its outstanding shares of
Common Stock (by reclassification or otherwise than by payment of
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<PAGE> 28
dividends in shares of Common Stock) into a greater or lesser number of shares
of Common Stock, then, in each such case: (i) the number of one one-hundredths
of a Preferred Share purchasable after such event upon proper exercise of each
Right shall be determined by multiplying the number of one one-hundredths of a
Preferred Share so purchasable immediately prior to such event by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event; and (ii)
each share of Common Stock outstanding immediately after such event shall have
issued with respect to it the same number of Rights which each share of Common
Stock outstanding immediately prior to such event had issued with respect to it.
The adjustment required by this subsection (n) shall be made successively
whenever such a dividend is declared or such a subdivision, combination or
consolidation is effected.
(o) Except as permitted by Sections 23 and 27, the Company covenants
and agrees that, after the Distribution Date, it will not take, or permit any of
its Subsidiaries to take, any action if at the time such action would be taken
it is reasonably foreseeable that such action would eliminate or substantially
diminish the benefits intended to be afforded by the Rights.
SECTION 12. CERTIFICATE OF ADJUSTED EXERCISE PRICE OR NUMBER OF
SHARES. Whenever any adjustment shall be required by Section 11, 13 or 23(g),
the Company shall promptly (a) prepare a certificate setting forth such
adjustment and a brief statement of the facts requiring such adjustment, (b)
file with the Rights Agent and with each transfer agent for the Preferred Shares
or the Common Stock of the Company a copy of such certificate and (c) mail a
brief summary thereof to each registered holder of the Rights in accordance with
Section 26. The Rights Agent shall be fully protected in relying on any such
certificate and on any adjustment described therein and shall not be deemed to
have knowledge of any such adjustment unless and until it shall have received
such certificate.
SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR
EARNING POWER.
(a) In the event that, on or after the occurrence of any Section
11(a)(ii) Event, directly or indirectly: (i) the Company shall consolidate
with, or merge with and into, any Interested Stockholder or, if in such
consolidation or merger all holders of the Common Stock of the Company are not
treated the same, any other Person (other than a wholly-owned Subsidiary of the
Company in a transaction not prohibited by Section 11(o)), so that the Company
shall not be the continuing or surviving corporation, (ii) any Interested
Stockholder or, if in such merger all holders of the Common Stock of the Company
are not treated the same, any other Person (other than a wholly-owned Subsidiary
of the Company in a
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<PAGE> 29
transaction not prohibited by Section 11(o)) shall merge with and into the
Company, so that the Company shall be the continuing or surviving corporation,
and in connection with such merger either (A) all or part of the outstanding
shares of Common Stock of the Company shall be converted or changed into or
exchanged for capital stock or other securities of any other Person (or the
Company), cash and/or other property or (B) such shares of Common Stock shall
remain outstanding, unconverted and unchanged, or (iii) the Company shall sell
or otherwise transfer (or one or more of its Subsidiaries shall sell or
otherwise transfer), in one or a series of related transactions, assets or
earning power aggregating 50% or more of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any Interested Stockholder
or, if in such transaction or transactions the holders of the Common Stock of
the Company are not treated the same, any other Person or Persons (other than
the Company or one or more of its wholly-owned Subsidiaries in one or more
transactions, each of which is not prohibited by Section 11(o)), then, in each
such case, proper provision shall be made so that (w) the registered holder of
each Right, except as otherwise provided in Section 7(d), shall thereafter have
the right to receive, upon exercise thereof and payment of an amount equal to
the product determined by multiplying the then current Exercise Price by the
number of one one-hundredths of a Preferred Share for which such Right is then
exercisable, in accordance with this Agreement, in lieu of Preferred Shares, the
number of freely tradable shares (which shall be duly authorized, validly
issued, fully paid and non-assessable) of Common Stock of the Principal Party
or, in the case of a merger described in clause (ii) of this sentence in which
the Common Stock of the Company shall remain outstanding, unconverted and
unchanged, of the Company, free and clear of all rights of call or first
refusal, liens, encumbrances or other adverse claims, determined by dividing
such product by 50% of the Fair Market Value (determined as provided in Section
11(d)) of the shares of Common Stock of such Principal Party (or, if
appropriate, the Company) on the date of consummation of such Section 13 Event;
(x) such Principal Party shall thereafter be liable for, and shall assume, by
reason of the consummation of such Section 13 Event, all the obligations and
duties of the Company under this Agreement; (y) the term "Company" shall
thereafter be deemed to refer to such Principal Party, it being specifically
intended that the provisions of Section 11 shall apply to such Principal Party;
and (z) such Principal Party shall take such steps (including, but not limited
to, the reservation of a sufficient number of its shares of Common Stock to
permit exercise of all outstanding Rights in accordance with this subsection (a)
and the distribution of cash, debt securities, shares and other property in
accordance with Section 11(a)(iv))in connection with the consummation of such
Section 13 Event as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably possible, in relation to the
shares of Common Stock thereafter deliverable upon exercise of the Rights.
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(b) After the Distribution Date, the Company shall not consolidate or
merge with any other Person (other than a wholly-owned Subsidiary of the Company
in a transaction not prohibited by Section 11(o)), or sell or otherwise transfer
(or permit one or more of its Subsidiaries to sell or otherwise transfer), in
one or a series of related transactions, assets or earning power aggregating 50%
or more of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person or Persons (other than the Company or one
or more of its wholly-owned Subsidiaries in one or more transactions, each of
which is not prohibited by Section 11(o)), if (i) at the time of or immediately
after the consummation of such transaction there are any options, warrants,
rights, conversion or exchange privileges or securities outstanding or any
written or oral agreements, arrangements or understandings (including provisions
contained in the Company's Certificate of Incorporation or By-laws) in effect
which, as a result of the consummation of such transaction, would eliminate or
substantially diminish the benefits intended to be afforded by the Rights, or
(ii) prior to, at the time of or immediately after the consummation of such
transaction the stockholders of the Person who constitutes, or would constitute,
the Principal Party for the purpose of subsection (a) of this Section 13 shall
have received a distribution of Rights previously owned by such Person or any of
its Affiliates or Associates.
(c) The Company shall not consummate any Section 13 Event unless prior
thereto (i) the Principal Party shall have a sufficient number of authorized
shares of its Common Stock which have not been issued or reserved for issuance
to permit the exercise in full of the Rights in accordance with this Section 13
and (ii) the Company, the Principal Party and each other Person who may become
the Principal Party as a result of the consummation of such Section 13 Event
shall have executed and delivered to the Rights Agent a supplemental agreement
providing (x) for the implementation of all the terms and conditions set forth
in this Section 13 and (y) that, as soon as practicable after the date of such
Section 13 Event, the Principal Party, at its own expense, shall:
(A) prepare and file a registration statement on an appropriate
form under the Securities Act with respect to the Rights and the
securities purchasable upon exercise thereof, and use its best efforts
to cause such registration statement to become effective as soon as
practicable after such filing and to remain effective (with a
prospectus which at all times meets the requirements of the Securities
Act) until the earliest of the date as of which the Rights are no
longer exercisable for such securities, the Redemption Date and the
Final Expiration Date;
(B) use its best efforts to qualify or register the Rights and
the securities purchasable upon exercise
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thereof under the securities or "blue sky" laws of such jurisdictions
as may be necessary or appropriate in connection with the
exercisability of the Rights;
(C) use its best efforts to list (or continue the listing of) the
Rights and the securities purchasable upon exercise thereof on a
national securities exchange or to meet the eligibility requirements
for quotation on NASDAQ; and
(D) deliver to the registered holders of the Rights historical
financial statements for the Principal Party and each of its
Affiliates complying in all material respects with the requirements
for registration of securities on Form 10 under the Exchange Act.
(d) Notwithstanding anything in this Agreement to the contrary,
Section 13 shall not apply to a transaction described in clause (i) or (ii) of
subsection (a) thereof if (i) such transaction is consummated with a Person or
Persons who acquired their shares of Common Stock of the Company pursuant to a
Permitted Offer, (ii) the price per share of Common Stock of the Company
provided in such transaction shall not be less than the price per share of
Common Stock of the Company paid to all holders whose shares were purchased
pursuant to such Permitted Offer and (iii) the form of consideration being
offered to the remaining holders of the Common Stock of the Company pursuant to
such transaction is the same as the form of consideration paid pursuant to such
Permitted Offer. Upon consummation of any transaction authorized by this
subsection (d), all Rights shall expire.
(e) "Principal Party" shall mean: in the case of any transaction
described in clause (i) or (ii) of subsection (a) of this Section 13, the Person
which is the issuer of the securities into which shares of Common Stock of the
Company are being converted or changed in such transaction or, if there shall be
more than one such issuer, the issuer having shares of Common Stock with the
greatest aggregate market value; or if no securities are being issued in such
transaction for shares of Common Stock of the Company, the Person which is the
other party to such transaction or, if there shall be more than one such Person,
the Person having shares of Common Stock with the greatest aggregate market
value; and in the case of any transaction described in clause (iii) of such
subsection (a), the Person which is the party receiving the greatest portion of
the assets or earning power sold or otherwise transferred pursuant to such
transaction or transactions; provided, however, that in any such case (i) if the
shares of Common Stock of such Person shall not at the time of the consummation
of such transaction have been continuously registered under Section 12 of the
Exchange Act during the immediately preceding 12-month period, and such Person
shall be a direct or indirect Subsidiary or Affiliate of another Person the
shares of Common Stock of which shall have been so registered, "Principal Party"
shall mean such
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other Person; and (ii) if such Person shall be a direct or indirect Subsidiary
or Affiliate of more than one other Person, the shares of Common Stock of two or
more of which shall have been so registered, "Principal Party" shall mean
whichever of such other Persons shall have Common Stock with the greatest
aggregate market value; and (iii) if such Person shall be owned, directly or
indirectly, by a joint venture formed by two or more Persons which are not
owned, directly or indirectly, by the same Person, the rules set forth in
clauses (i) and (ii) of this proviso shall apply to each chain of ownership of
any joint venturer as though such joint venture were a "Subsidiary" of all of
such joint venturers, and the Principal Party in each such chain shall bear the
obligations and duties set forth in this Section 13 in the same proportion as
their direct or indirect ownership interest in such Person bears to the total of
such ownership interests.
(f) If, in the case of any transaction described in clause (iii) of
subsection (a) of this Section 13, the Person or Persons to whom assets or
earning power are sold or otherwise transferred are individuals, then, in lieu
of any other payment or distribution required by this Section 13, and the
Company shall require as a condition to such transaction that, such Person or
Persons shall pay to each holder of a Rights Certificate, upon its surrender to
the Rights Agent and in exchange therefor (without requiring any payment by such
holder), cash in the amount determined by multiplying the then current Exercise
Price by the number of one one-hundredths of a Preferred Share for which a Right
is then exercisable.
(g) In no event shall the Rights Agent have any obligations or duties
in respect of any Section 13 Event, except as expressly set forth in this
Agreement. The Rights Agent may rely, and shall be fully protected in relying
upon, a certificate of the Company stating that the provisions of this Section
13 have been fulfilled. The prior written consent of the Rights Agent shall be
required in connection with any supplemental agreement which alters or impairs
the rights, obligations, duties or immunities of the Rights Agent hereunder.
(h) The provisions of this Section 13 shall similarly apply to
successive consolidations, mergers, sales or other transfers. In the event that
any Section 13 Event shall occur at any time after the occurrence of any Section
11(a)(ii) Event, the Rights which have not been theretofore exercised shall
thereafter be exercisable in the manner described in this Section 13.
SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractional Rights or to
distribute Rights Certificates which evidence fractional Rights. If the Company
shall determine not to issued fractional Rights, the Company shall pay, in lieu
of issuing fractional Rights, to the registered holders of the Rights with
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respect to which fractional Rights would otherwise be issuable an amount in cash
equal to the same fraction of the Fair Market Value (determined as provided in
Section 11(d) for the Trading Day immediately prior to the date on which such
fractional Rights would otherwise have been issued) of one Right.
(b) The Company shall not be required to issue fractional Preferred
Shares (other than fractions which are multiples of one one-hundredth of a
Preferred Share) upon exercise of the Rights or to distribute stock certificates
which evidence fractional Preferred Shares (other than fractions which are
multiples of one one-hundredth of a Preferred Share). If the Company shall
determine not to issue fractional Preferred Shares that are not multiples of one
one-hundredth of a Preferred Share, the Company shall pay to the registered
holders of the Rights Certificates at the time Rights represented thereby are
exercised, in lieu of such fractional Preferred Shares, an amount in cash equal
to the same fraction of the Fair Market Value (determined as provided in Section
11(d) for the Trading Day immediately prior to the date of such exercise) of one
one-hundredth of a Preferred Share.
(c) Each holder of a Right, by accepting the same, expressly waives
such holder's right to receive or exercise any fractional Right or to receive
any fractional Preferred Share upon the exercise of such Right (except as
provided in this Section 14).
SECTION 15. RIGHTS OF ACTION. All rights of action in respect of
this Agreement, other than rights of action which the Rights Agent may have
under Sections 18 and 20, are vested in the registered holders of the Rights
Certificates (or, prior to the Distribution Date, the registered holders of the
Common Stock of the Company); and the registered holder of any Rights
Certificate (or, prior to the Distribution Date, of any stock certificate for
shares of such Common Stock), without the consent of the Rights Agent or of the
holder of any other Rights Certificate (or, prior to the Distribution Date, of
any other stock certificate for shares of Common Stock), may, on such registered
holder's own behalf and for such registered holder's own benefit, enforce, and
may institute and maintain any suit, action or proceeding against the Company to
enforce, or otherwise act in respect of, such registered holder's right to
exercise the Rights evidenced by such Rights Certificate (or, prior to the
Distribution Date, such stock certificate) in the manner provided in such Rights
Certificate and in this Agreement. Without limiting the generality of the
foregoing or any remedies available to the holders of the Rights, it is
specifically acknowledged that the registered holders of the Rights would not
have an adequate remedy at law for any breach of this Agreement and will be
entitled to specific performance of the obligations and duties under, and
injunctive relief against any actual or threatened violations of the obligations
and duties of any Person subject to, this Agreement.
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SECTION 16. AGREEMENTS OF HOLDERS OF RIGHTS. Each holder of a Right,
by accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights shall be transferable
only simultaneously and together with the transfer of shares of Common Stock or
Class B Common Stock of the Company;
(b) after the Distribution Date, the Rights Certificates shall be
transferable on the registry books of the Rights Agent only if surrendered at
the principal office of the Rights Agent, with the Form of Assignment and
Certification of Status on the reverse side thereof duly executed, together with
such signature guarantees and other documentation as the Rights Agent may
reasonably request;
(c) subject to Sections 6 and 7(d), the Company and the Rights Agent
may deem and treat the Person in whose name any Rights Certificate (or, prior to
the Distribution Date, any stock certificate for Common Stock of the Company) is
registered as the absolute owner thereof and of the Rights represented thereby
(notwithstanding any notations of ownership or other writing on such Rights
Certificate or stock certificate made by anyone other than the Company or the
Rights Agent) for all purposes whatsoever, and neither the Company nor the
Rights Agent shall be affected by any notice to the contrary; and
(d) neither the Company nor the Rights Agent shall have any liability
to any holder of a Right or to any other Person because of its inability to
perform any of its obligations or duties under this Agreement by reason of any
applicable law, any preliminary or permanent injunction or other order, decree
or ruling issued by a court of competent jurisdiction or by a governmental,
regulatory or administrative agency or commission or any rule, regulation or
executive order promulgated or enacted by any such governmental authority
prohibiting or otherwise restraining performance of any such obligation or duty;
provided, however, that the Company shall use its best efforts to have any such
injunction, order, decree or ruling lifted or otherwise overturned as soon as
reasonably possible.
SECTION 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No
holder, as such, of any Rights Certificate shall be entitled to vote, to receive
dividends or other distributions on or to exercise any preemptive rights with
respect to, or shall be deemed for any other purpose to be the holder of, the
Preferred Shares or other shares of capital stock of any class of the Company
which may at the time be issuable upon exercise of the Rights represented
thereby; nor shall anything contained herein or in any Rights Certificate be
construed to confer upon the holder of any Rights Certificate, as such, any of
the rights of a stockholder of the Company, or any right to vote for the
election of directors or
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upon any other matter submitted to stockholders at any meeting thereof, to give
or withhold consent to any corporate action, to receive notice of meetings or
other actions affecting stockholders (except as provided in Section 25) or to
receive dividends, subscription rights or other distributions, until the Rights
represented by such Rights Certificate shall have been exercised, in whole or in
part, in accordance with the provisions hereof.
SECTION 18. CONCERNING THE RIGHTS AGENT.
(a) The Company covenants and agrees to pay to the Rights Agent
reasonable compensation for all services rendered by it hereunder and, from time
to time on the written request of the Rights Agent, to reimburse it for all
reasonable expenses and counsel fees incurred in connection with the acceptance
and administration of this Agreement and the performance of its obligations and
duties hereunder. The Company also covenants and agrees to indemnify the Rights
Agent for, and to hold it harmless against, any loss, liability or expense,
incurred without negligence, bad faith or willful misconduct on its part, for
any action taken, suffered or omitted by it in connection with the acceptance
and administration of this Agreement and the performance of its obligations and
duties hereunder, including the costs and expenses of defending against any
claim of liability arising therefrom, directly or indirectly.
(b) The Rights Agent shall be protected and shall incur no liability
for, or in respect of, any action taken, suffered or omitted by it in connection
with its administration of this Agreement in reliance upon any Rights
Certificate, stock certificate for Preferred Shares, Common Stock or other
shares of capital stock of the Company, instrument of assignment or transfer,
power of attorney, endorsement, affidavit, notice, direction, consent,
certificate, statement or other paper or document believed by it to be genuine
and to be executed and, where necessary, verified or acknowledged by the proper
Person or Persons.
SECTION 19. MERGER OR CONSOLIDATION OF THE RIGHTS AGENT.
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the stockholder services or corporate trust business of the Rights Agent or any
successor Rights Agent, shall be the successor to the Rights Agent under this
Agreement without the execution or filing of any paper or any further act on the
part of any of the parties hereto, provided that such corporation would be
eligible for appointment as successor Rights Agent under Section 21. In case at
the time any successor Rights Agent shall succeed to the agency created by this
Agreement any of the Rights Certificates countersigned by its predecessor Rights
Agent shall not have been
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delivered, such successor Rights Agent may adopt the countersignature of its
predecessor Rights Agent and deliver the Rights Certificates so countersigned;
or in case at such time any of the Rights Certificates shall not have been
countersigned, such successor Rights Agent may countersign such Rights
Certificates either in the name of its predecessor Rights Agent or in the name
of such successor Rights Agent; and in all such cases, such Rights Certificates
shall have the full force and effect provided therein and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver the Rights Certificates so countersigned; or in case at
such time any of the Rights Certificates shall not have been countersigned, the
Rights Agent may countersign such Rights Certificates either in its prior name
or in its changed name; and in all such cases, such Rights Certificates shall
have the full force and effect provided therein and in this Agreement.
SECTION 20. DUTIES OF THE RIGHTS AGENT. The Rights Agent undertakes
the obligations and duties imposed by this Agreement upon the following terms
and conditions, by all of which the Company and the holders of the Rights
Certificates (or, prior to the Distribution Date, the stock certificates for
Common Stock of the Company), by accepting the same, shall be bound, and no
implied obligations or duties shall be read into this Agreement against the
Rights Agent:
(a) the Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the written opinion of such legal counsel shall be
full and complete authorization and protection to the Rights Agent as to any
action taken, suffered or omitted by it in good faith and in accordance with
such opinion;
(b) whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking, suffering or omitting any
action hereunder, such fact or matter (unless other evidence in respect thereof
be herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate executed by any one of the Chairman of the Board,
the President, any Vice President, the Treasurer or the Secretary of the Company
and delivered to the Rights Agent; and such certificate shall be full and
complete authorization and protection to the Rights Agent as to any action
taken, suffered or omitted by it in good faith in reliance upon such
certificate;
(c) the Rights Agent shall be liable hereunder to the Company and any
other Person only for its own negligence, bad faith or willful misconduct;
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(d) the Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Rights
Certificates (except its countersignature thereon) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only;
(e) the Rights Agent shall not be responsible for the validity of this
Agreement or the execution and delivery hereof (except for its due execution
hereof) or for the validity or execution of any Rights Certificate (except for
its countersignature thereon); nor shall the Rights Agent be responsible for any
breach by the Company of any covenant or condition contained in this Agreement
or in any Rights Certificate; nor shall the Rights Agent be responsible for any
change in the exercisability of the Rights (including Rights becoming void
pursuant to Section 7(d)), for any adjustment or change (or for the manner or
method of determining same) in the terms of the Rights (including any adjustment
or change in the Exercise Price or in the number or kind of shares, securities
or other property issuable upon the exercise thereof) required by Section 11,
13, 23 or 24 or for ascertaining the existence of facts which would require any
such change or adjustment (except with respect to the exercise of Rights
evidenced by Rights Certificates after actual notice, in the manner provided in
Section 12, that such change or adjustment is required); nor shall the Rights
Agent by any act hereunder be deemed to have made any representation or warranty
as to the authorization or reservation of any Preferred Shares or shares of
Common Stock to be issued pursuant to this Agreement or any Rights Certificate
or as to whether any Preferred Shares or shares of Common Stock will, when
issued, be validly authorized and issued and fully paid and nonassessable;
(f) the Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further acts, instruments and assurances as may reasonably be required by the
Rights Agent for the carrying out or performing by the Rights Agent of the
provisions of this Agreement;
(g) the Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its obligations and duties
hereunder from any one of the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company, and to apply to such
officers for advice or instructions in connection with its obligations and
duties; and the Rights Agent shall not be liable for any action taken, suffered
or omitted by it in good faith and in accordance with the written instructions
of any such officer or for any delay in acting while waiting for such
instructions;
(h) the Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in
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the Rights or in any other securities of the Company (including the Preferred
Shares and its Common Stock) or become pecuniarily interested in any transaction
in which the Company (or any of its Subsidiaries) may be interested, or contract
with or lend money to the Company (or any of its Subsidiaries), and may
otherwise act as fully and freely as though it were not the Rights Agent under
this Agreement; and nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company, any of its Subsidiaries or any other
entity;
(i) the Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any of its obligations or duties hereunder
either directly or by or through its attorneys or agents, and the Rights Agent
shall not be answerable or accountable for any act, default, neglect or
misconduct of any such attorney or agent or for any loss to the Company
resulting from any such act, default, neglect or misconduct, provided the Rights
Agent exercised reasonable care in the selection and continued employment of
such attorney or agent;
(j) if, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the Form of Certification of Status
attached to the Form of Election to Purchase or the Form of Assignment, as the
case may be, has either not been completed or indicates an affirmative response
to Question 1 and/or 2 thereof, the Rights Agent shall not take any further
action with respect to the requested exercise or transfer without first
consulting with the Company; and
(k) no provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its obligations or duties or in the exercise of its rights
or powers hereunder if there shall be reasonable grounds for believing that
repayment of such funds or adequate indemnification against such risk or
liability is not reasonably assured.
SECTION 21. RESIGNATION OR REMOVAL OF THE RIGHTS AGENT. The Rights
Agent or any successor Rights Agent may resign and be discharged from its
obligations and duties under this Agreement upon 30 days' prior notice to the
Company and to each transfer agent for the Preferred Shares and for the Common
Stock and Class B Common Stock of the Company, sent by registered or certified
mail, postage prepaid, and to each registered holder of the Rights Certificates,
sent by first-class mail, postage prepaid. The Company may remove the Rights
Agent or any successor Rights Agent upon 30 days' prior notice to the Rights
Agent or successor Rights Agent, as the case may be, and to each transfer agent
for the Preferred Shares and for the Common Stock and Class B Common Stock of
the Company, sent by registered or certified mail, postage prepaid, and to each
registered holder of the Rights Certificates, sent by first-class mail, postage
prepaid. If the Rights Agent or any successor Rights Agent shall resign or be
removed or shall
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otherwise become incapable of acting, the Company shall appoint a successor
Rights Agent. If the Company shall fail to make such appointment within 30 days
after giving notice of such removal or after receiving notice of such
resignation or incapacity, either from the resigning or incapacitated Rights
Agent or from the registered holder of any Rights Certificate (who shall, with
such notice, submit its Rights Certificate for inspection by the Company), then
the incumbent Rights Agent or the registered holder of any Rights Certificate
may apply to any court of competent jurisdiction for the appointment of a
successor Rights Agent. Any successor Rights Agent, whether appointed by the
Company or by such a court, shall be (a) a corporation organized and doing
business under the laws of the United States of America, the State of Delaware,
the State of New York or the State of Illinois (or of any other state so long as
such corporation is authorized to do business as a banking institution in the
State of Delaware, the State of New York or the State of Illinois), be in good
standing under the laws of the jurisdiction of its incorporation, have an office
in the State of Delaware, the State of New York or the State of Illinois, be
authorized under such laws to exercise corporate trust or stock transfer powers,
be subject to supervision or examination by federal or state authority and have
at the time of its appointment as Rights Agent a combined capital and surplus of
at least $50,000,000 or (b) an affiliate of a corporation described in clause
(a) of this sentence. After its appointment, the successor Rights Agent shall
be vested with the same rights, powers, obligations, duties and immunities as if
it had been originally named as Rights Agent without further act or deed; but
the predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent for
the Preferred Shares and for the Common Stock of the Company, and mail notice
thereof to the registered holders of the Rights Certificates. Failure to give
any notice provided for in this Section 21, however, or any defect therein,
shall not affect the legality or validity of the resignation or removal of the
Rights Agent or any successor Rights Agent or the appointment of any successor
thereto.
SECTION 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any
provision of this Agreement or of the Rights Certificates to the contrary, the
Company may, at its option, issue new Rights Certificates evidencing the Rights
in such form as may be approved by the Board to reflect any adjustment or change
in the Exercise Price or in the number or kind of shares, securities or other
property issuable upon exercise of the Rights in accordance with the provisions
of this Agreement; provided, however, that (a) no such Rights Certificates shall
be issued if, and to the extent that, the Company shall be advised by counsel
that such issuance could create a significant risk of material adverse tax
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consequences to the Company or to the Persons to whom such Rights Certificates
would be issued and (b) no such Rights Certificates shall be issued if, and to
the extent that, appropriate adjustment shall otherwise have been made in lieu
of the issuance thereof.
SECTION 23. REDEMPTION.
(a) The Board may, at its option, at any time prior to the earliest of
(i) the Close of Business on the 10th Business Day after the Share Acquisition
Date (or, if the Share Acquisition Date shall have occurred prior to the Record
Date, the Close of Business on the 10th Business Day after the Record Date),
(ii) the occurrence of any Section 13 Event and (iii) the Final Expiration Date,
redeem all, but not less than all, of the then outstanding Rights at a
redemption price of $.01 per Right, adjusted as provided in subsection (g) of
this Section 23 (such redemption price being hereinafter called the "Redemption
Price"); provided, however, that if the Board shall authorize the redemption of
the Rights at a time at which there is an Acquiring Person, there must be
Disinterested Directors then in office and such authorization shall require the
concurrence of at least a majority of such Disinterested Directors.
(b) In addition to the right of redemption reserved in the first
sentence of subsection (a) of this Section 23, if there shall be Disinterested
Directors then in office, the Board may redeem, with the concurrence of at least
a majority of the Disinterested Directors, all, but not less than all, of the
then outstanding Rights at the Redemption Price after the Share Acquisition
Date, but prior to the occurrence of any Section 13 Event, if either (i) the
Person who is an Acquiring Person shall have transferred or otherwise disposed
of (either alone or together with its Affiliates and Associates) such number of
shares of Common Stock of the Company, in one or a series of related
transactions not directly or indirectly involving the Company or any of its
Subsidiaries or the occurrence of any Section 13 Event, as shall result in such
Person thereafter being a Beneficial Owner of less than 10% of the then
outstanding shares of Common Stock of the Company, and after such transfer or
other disposition there is no other Acquiring Person, or (ii) in connection with
any Section 13 Event which shall not involve an Interested Stockholder and in
which all holders of the Common Stock of the Company are treated the same.
(c) Notwithstanding any other provision of this Agreement, the Rights
shall not be exercisable after the first occurrence of any Section 11(a)(ii)
Event until such time as the Company's right of redemption under this Section 23
shall have expired.
(d) In considering whether to redeem the Rights, the Board and the
Disinterested Directors may consider the best long-term and short-term interests
of the Company and its stockholders,
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including, without limitation, the effects of the redemption of the Rights upon
employees, creditors, suppliers and customers of the Company or of its
Subsidiaries and upon the communities in which offices or other establishments
of the Company and such Subsidiaries are located and all other pertinent
factors. The redemption of the Rights by the Board may be made effective at
such time, on such basis and with such conditions as the Board, in its sole
discretion, may establish.
(e) Immediately after action by the Board directing the redemption of
the Rights pursuant to subsection (a) or (b) of this Section 23, and without any
further action and without any notice, the right to exercise the Rights shall
terminate, and thereafter each registered holder of the Rights shall only be
entitled to receive the Redemption Price therefor. The Company shall give prompt
written notice to the Rights Agent and prompt public notice to the holders of
the Rights of any such redemption; provided, however, that the failure to give,
or any defect in, any such notice shall not affect the validity of such
redemption. Within 10 days after action by the Board directing the redemption
of the Rights, the Company shall mail (or cause the Rights Agent to mail) a
notice of redemption to each registered holder of the then outstanding Rights,
at its last address appearing on the registry books of the Rights Agent or,
prior to the Distribution Date, on the registry books of the transfer agent for
the Common Stock of the Company. Any notice which is mailed in the manner
provided in this subsection (e) shall be deemed given, whether or not received
by the registered holder to whom sent. Each notice of redemption shall state
the method by which payment of the Redemption Price is to be made. Neither the
Company nor any of its Affiliates or Associates may at any time redeem, acquire
or purchase for value any Rights other than in the manner set forth in this
Section 23 and Section 24 or in connection with any purchase of outstanding
shares of its Common Stock prior to the Distribution Date.
(f) The Company may, at its option, pay the Redemption Price in cash,
shares of Common Stock (based on its Fair Market Value (determined as provided
in Section 11(d)) as of the date of redemption) or any other form of
consideration deemed appropriate by the Board.
(g) In the event that the Company shall at any time after the date of
this Agreement (i) declare a dividend on its outstanding shares of Common Stock
payable in shares of Common Stock or (ii) effect a subdivision, combination or
consolidation of its outstanding shares of Common Stock (by reclassification or
otherwise than by payment of dividends in shares of Common Stock) into a greater
or lesser number of shares of Common Stock, then, in each such case, the
Redemption Price after such event shall equal the Redemption Price in effect
immediately prior to such event multiplied by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding immediately prior to
such event and the denominator of which shall be the number of
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shares of Common Stock outstanding immediately after such event; provided,
however, that such adjustment shall be made only if the amount of the Redemption
Price would be reduced or increased by at least $.001 per Right.
SECTION 24. EXCHANGE.
(a) The Board may, at its option, at any time on or after the
occurrence of any Section 11(a)(ii) Event, exchange all or any part of the then
outstanding and exercisable Rights (which shall not include any Rights which
have become void pursuant to Section 7(d)) for shares of Common Stock of the
Company at an exchange rate of one share of Common Stock per Right,
appropriately adjusted to reflect any event specified in clauses (A) through
(D), inclusive, of the first sentence of Section 11(a)(i) or in Section 11(n)
occurring after the date hereof (such exchange rate being hereinafter called the
"Exchange Rate"); provided, however, that the Board shall not be authorized to
effect such an exchange at any time after any Person (other than an Exempt
Person), together with the Affiliates and Associates of such Person, shall have
become the Beneficial Owner of 50% or more of the then outstanding shares of
Common Stock of the Company.
(b) Immediately after action by the Board directing the exchange of
any Rights pursuant to subsection (a) of this Section 24, and without any
further action and without any notice, the right to exercise such Rights shall
terminate, and thereafter each registered holder of such Rights shall only be
entitled to receive the number of shares of Common Stock of the Company which
shall equal the number of such Rights held by such registered holder multiplied
by the Exchange Rate then in effect. The Company shall give prompt written
notice to the Rights Agent and prompt public notice to the holders of the Rights
of any such exchange; provided, however, that the failure to give, or any defect
in, any such notice shall not affect the validity of such exchange. Within 10
days after action by the Board directing the exchange of any Rights, the Company
shall mail (or cause the Rights Agent to mail) a notice of exchange to each
registered holder of such Rights, at its last address appearing on the registry
books of the Rights Agent or, prior to the Distribution Date, on the registry
books of the transfer agent for the Common Stock of the Company. Any notice
which is mailed in the manner provided in this subsection (b) shall be deemed
given, whether or not received by the registered holder to whom sent. Each
notice of exchange shall state the method by which the exchange of shares of
Common Stock for Rights will be effected and, in the event of any partial
exchange, the number of Rights which will be exchanged. Any partial exchange
shall be effected pro rata among the registered holders of the Rights based upon
the number of Rights held (excluding Rights which shall have become void
pursuant to Section 7(d)); and, in such case, a new Rights Certificate
evidencing the Rights not being exchanged shall be prepared and executed by the
Company and countersigned and
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delivered by the Rights Agent to the registered holder of such Rights.
(c) In any exchange pursuant to this Section 24, the Company, at its
option, may substitute Preferred Shares (or Equivalent Preferred Shares) for
shares of Common Stock in effecting an exchange for Rights, at the initial rate
of one one-hundredth of a Preferred Share (or Equivalent Preferred Share) for
each share of Common Stock, appropriately adjusted to reflect any adjustments in
the voting rights of the Preferred Shares pursuant to the Certificate of
Designations attached hereto as Exhibit A, so that the fractional Preferred
Share delivered in lieu of each share of Common Stock shall have the same voting
rights as one share of Common Stock.
(d) In the event that there shall not be sufficient authorized and
unissued or treasury shares of Common Stock or Preferred Shares (or Equivalent
Preferred Shares) to permit the exchange of Rights directed by the Board, the
Company shall take all necessary action to authorize and reserve for issuance
such number of additional shares of Common Stock or Preferred Shares (or
Equivalent Preferred Shares) as may be required for issuance upon such exchange
and, if necessary, shall use its best efforts to obtain stockholder approval
thereof.
(e) The Company shall not be required to issue fractional shares of
Common Stock in exchange for Rights or to distribute stock certificates which
evidence fractional shares of Common Stock. If the Company shall determine not
to issue fractional shares of Common Stock, the Company shall pay to the
registered holders of the Rights with respect to which such fractional shares
would otherwise be issuable an amount in cash equal to the same fraction of the
Fair Market Value (determined as provided in Section 11(d) for the Trading Day
immediately prior to the date of such exchange) of one share of Common Stock.
SECTION 25. NOTICE TO HOLDERS OF RIGHTS CERTIFICATES OF CERTAIN
EVENTS.
(a) In the event that at any time after the Distribution Date, the
Company shall propose: (i) to pay any dividend payable in shares of capital
stock of any class of the Company to the holders of Preferred Shares or to make
any other cash distribution to the holders of Preferred Shares (other than a
regular quarterly cash dividend); (ii) to effect any reclassification of the
Preferred Shares (other than a reclassification involving only the subdivision
of the outstanding Preferred Shares); (iii) to make any distribution to the
holders of Preferred Shares described in subsection (b) or (c) of Section 11;
(iv) to effect any Section 13 Event; (v) to pay any dividend on its shares of
Common Stock payable in shares of Common Stock or to effect a subdivision,
combination or consolidation of its outstanding shares of Common Stock (by
reclassification or otherwise than by payment of
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dividends in shares of Common Stock); or (vi) to effect the liquidation,
dissolution or winding up of the Company; then, in each such case, the Company
shall give to the Rights Agent and each registered holder of the Rights, in the
manner provided in Section 26, written notice of such proposed action, which
shall specify the record date for such stock dividend or distribution or the
date on which such reclassification, Section 13 Event, liquidation, dissolution
or winding up is expected to occur (and the date for participation therein by
the holders of the Common Stock and/or Preferred Shares if any such date is to
be fixed). Such notice shall be given, in the case of any action described in
clause (i) or (iii) of the preceding sentence, at least 10 days prior to the
record date and, in the case of any other such action, at least 20 days prior to
the date of taking of such proposed action or the date for participation therein
by the holders of Preferred Shares, whichever shall be the earlier.
(b) In case any Section 11(a)(ii) Event shall occur, the Company
shall, as soon as practicable thereafter, give to the Rights Agent and each
registered holder of the Rights, in the manner provided in Section 26, written
notice of the occurrence thereof, which notice shall describe such occurrence
and its consequences in reasonable detail.
SECTION 26. OTHER NOTICES. Except as otherwise provided herein,
notices or demands authorized by this Agreement to be given or made by the
Rights Agent or by the registered holder of any Rights, Rights Certificate or
stock certificate for shares of Common Stock or Class B Common Stock of the
Company to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address shall be
filed in writing with the Rights Agent) as follows:
Marks Bros. Jewelers, Inc.
155 N. Wacker Drive, Suite 500
Chicago, Illinois 60606
Attention: President
Except as otherwise provided herein, notices or demands authorized by
this Agreement to be given or made by the Company or by the registered holder of
any Rights, Rights Certificate or stock certificate for shares of Common Stock
or Class B Common Stock of the Company to or on the Rights Agent shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address shall be filed in writing with the Company) as
follows:
______________________
______________________
______________________
Attention: ______________________
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<PAGE> 45
Except as otherwise provided herein, notices or demands authorized by
this Agreement to be given or made by the Company or the Rights Agent to the
registered holder of any Rights, Rights Certificate or stock certificate for
shares of Common Stock of the Company shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed to such holder at its last
address appearing on the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the transfer agent for the Common
Stock and the Class B Common Stock of the Company.
SECTION 27. SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution
Date, but subject to the last sentence of this Section 27, the Company and the
Rights Agent, if so directed in writing by the Company, shall supplement or
amend any term, provision or condition of this Agreement, without the approval
of the registered holders of the stock certificates representing the Common
Stock, the Class B Common Stock and the Rights. From and after the Distribution
Date, but subject to the last sentence of this Section 27, the Company and the
Rights Agent, if so directed in writing by the Company, shall supplement or
amend this Agreement, without the approval of the registered holders of the
Rights (however represented), in order: (a) to cure any ambiguity, (b) to
correct or supplement any term, provision or condition of this Agreement which
may be defective or inconsistent with any other term, provision or condition
hereof, (c) to shorten or lengthen any time period specified herein (except that
if any such shortening or lengthening is authorized by the Board at a time at
which there is an Acquiring Person, there must be Disinterested Directors then
in office and any such shortening or lengthening shall require the concurrence
of at least a majority of such Disinterested Directors) or (d) to change or
supplement one or more of the terms, provisions or conditions hereof in any
manner which the Company may deem necessary or desirable and which shall not
adversely affect, as determined by the Board (with the concurrence of at least a
majority of the Disinterested Directors), the interests of the holders (other
than any Restricted Person or the transferees therefrom specified in Section
7(d) of the Rights (however represented); provided, however, that this Agreement
may not be supplemented or amended pursuant to clause (c) of this sentence (i)
to lengthen any time period (except as permitted by Section 3(a)(ii)) unless (A)
approved by at least a majority of the Disinterested Directors and (B) such
lengthening is for the purpose of protecting, enhancing or clarifying the rights
of, and/or the benefits to, the holders (other than any Restricted Person or the
transferees therefrom specified in Section 7(d)) of the Rights or (ii) to
lengthen any time period relating to when the Rights may be redeemed if at such
time the Rights are not then redeemable. Upon the delivery of a certificate
from an appropriate officer of the Company stating that the proposed supplement
or amendment is in compliance with the terms of this Section 27, the Rights
Agent shall execute such supplement or amendment; provided, however, that the
Rights Agent shall not be required to execute any supplement or amendment which
affects any of the Rights Agent's rights, powers,
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<PAGE> 46
obligations, duties or immunities under this Agreement without its consent. On
and after the Distribution Date, no supplement or amendment shall be made which
changes the Exercise Price, the number of one one-hundredths of a Preferred
Share for which a Right is exercisable, the Redemption Price or the Final
Expiration Date. Prior to the Distribution Date, the interests of the holders
of the Rights shall be deemed coincident with the interests of the holders of
the Common Stock and Class B Common Stock of the Company.
SECTION 28. SUCCESSORS. All of the terms, provisions and conditions
of this Agreement by or for the benefit of the Company or the Rights Agent shall
bind and inure to the benefit of their respective successors and assigns.
SECTION 29. CERTAIN DETERMINATIONS AND ACTIONS BY THE BOARD. For all
purposes of this Agreement, any calculation of the number of shares of Common
Stock outstanding at any particular time, including the determination of the
percentage of such outstanding shares of which any Person is the Beneficial
Owner, shall be made in accordance with the last sentence of Rule
13d-3(d)(1)(i), as in effect on the date hereof, under the Exchange Act. The
Board (or, as and when set forth herein, the Disinterested Directors) shall have
the exclusive power and authority to interpret this Agreement and to exercise
all rights and powers specifically granted to the Board or to the Company, or as
may be necessary or advisable in the administration of this Agreement,
including, without limitation, the right and power to make all determinations
deemed necessary or advisable for such administration, including, without
limitation, a determination to redeem or not to redeem the Rights, to exchange
or not to exchange the Rights or to supplement or amend this Agreement. All
such calculations, determinations, interpretations and exercises (including, for
purposes of clause (b) below, all omissions with respect to the foregoing) which
are done or made by the Board (or the Disinterested Directors) in good faith
shall (a) be final, conclusive and binding on the Company, the Rights Agent, the
holders of the Rights and all other Persons and (b) not subject any director
(including any Disinterested Director) to any liability to the holders of the
Rights or to any other Person.
SECTION 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any Person other than the Company, the Rights
Agent and the registered holders of the Rights Certificates (and, prior to the
Distribution Date, the registered holders of the stock certificates for the
Common Stock and Class B Common Stock of the Company) any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date, the
registered holders of the stock certificates for the Common Stock and Class B
Common Stock of the Company).
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<PAGE> 47
SECTION 31. SEVERABILITY. If any term, provision or condition of
this Agreement shall be held by a court of competent jurisdiction or other
lawful authority to be invalid, void or unenforceable, the remaining terms,
provisions, and conditions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated; provided,
however, that if any such term, provision or condition is held by such court or
authority to be invalid, void or unenforceable and the Board (with the
concurrence of at least a majority of the Disinterested Directors then in
office) shall determine in good faith that severing the same from this Agreement
would adversely affect the purposes or effect of this Agreement, the right of
redemption set forth in Section 23 shall be reinstated and shall not expire
until the Close of Business on the 10th day following the date of such
determination by the Board.
SECTION 32. GOVERNING LAW. This Agreement and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely within such State.
SECTION 33. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall for all purposes be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
SECTION 34. DESCRIPTIVE HEADINGS. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
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<PAGE> 48
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
MARKS BROS. JEWELERS, INC.
By: Hugh M. Patinkin
----------------------------
(Corporate Seal) Hugh M. Patinkin
Chairman, President and
Chief Executive
Attest:
By: John R. Desjardins
------------------
John R. Desjardins
Secretary
THE FIRST NATIONAL BANK OF BOSTON
By: Lori L. Chamoun
-------------------------
(Corporate Seal) Name: Lori L. Chamoun
Title: Director, Client Services
Attest:
By: William J. Chouinard
---------------------------
Name: William J. Chouinard
Title: Senior Account Administrator
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<PAGE> 49
EXHIBIT A
FORM OF
CERTIFICATE OF DESIGNATIONS
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
MARKS BROS. JEWELERS, INC.
(Pursuant to Section 151 of the
General Corporation Law of the State of Delaware)
-----------------------------
Marks Bros. Jewelers, Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify that, pursuant to authority conferred upon its Board of Directors
by its Restated Certificate of Incorporation, and by the provisions of Section
151 of the General Corporation Law of the State of Delaware, the following
resolution was adopted by its Board of Directors at a meeting duly called and
held on April 1, 1996:
RESOLVED, that, pursuant to the authority conferred upon the Board of
Directors of the Corporation (the "Board") by the provisions of the Restated
Certificate of Incorporation of the Corporation and by the provisions of Section
151 of the General Corporation Law of the State of Delaware, there is hereby
created a series of Preferred Stock of the Corporation, which series shall have
the following powers, designations, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations or
restrictions thereof, in addition to those set forth in the Restated Certificate
of Incorporation of the Corporation:
Section 1. Designation of Series; Number of Shares. The series of
Preferred Stock established hereby shall be designated the "Series A Junior
Participating Preferred Stock" (the "Series A Preferred Stock") and the
authorized number of shares constituting the Series A Preferred Stock shall be
309,183. Such number of authorized shares may be increased or decreased, from
time to time, by resolution of the Board; provided, however, that no such
decrease shall reduce the number of authorized shares of the Series A Preferred
Stock to a number less than the number of shares of the Series A Preferred Stock
then outstanding, plus the number of shares of the Series A Preferred Stock then
reserved for issuance upon the exercise of any outstanding options, warrants or
rights or the exercise of any conversion or exchange privilege contained in any
outstanding security issued by the Corporation.
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<PAGE> 50
Section 2. Dividends and Distributions.
(a) Subject to the rights of the holders of shares of any other series
of the Preferred Stock (or shares of any other class of capital stock of the
Corporation) ranking senior to the Series A Preferred Stock with respect to
dividends, the holders of shares of the Series A Preferred Stock, in preference
to the holders of shares of Common Stock and of any other class of capital stock
of the Corporation ranking junior to the Series A Preferred Stock with respect
to dividends, shall be entitled to receive, when, as and if declared by the
Board out of funds legally available therefor, quarterly dividends payable in
cash on the first day of March, June, September, and December in each year (each
such date being a "Dividend Payment Date"), commencing on the first Dividend
Payment Date after the initial issuance of a share or fractional share of the
Series A Preferred Stock, in an amount per share (rounded to the nearest whole
cent) equal to 100 times the aggregate per share amount of all cash dividends,
plus 100 times the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions (other than a dividend payable in shares of
Common Stock or a distribution in connection with the subdivision of the
outstanding shares of Common Stock, by reclassification or otherwise), declared
on the Common Stock since the immediately preceding Dividend Payment Date or,
with respect to the first Dividend Payment Date, since the initial issuance of a
share or fractional share of the Series A Preferred Stock. The multiple of 100
(the "Dividend Multiple") set forth in the preceding sentence shall be adjusted
from time to time as hereinafter provided in this paragraph (a). In the event
that the Corporation shall at any time after the effective date of this
Certificate of Designations (i) declare or pay any dividend on the Common Stock
payable in shares of Common Stock or (ii) effect a subdivision, combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then, in each such case, the
Dividend Multiple thereafter applicable to the determination of the amount of
dividends per share which the holders of shares of the Series A Preferred Stock
shall be entitled to receive shall be the Dividend Multiple in effect
immediately prior to such event multiplied by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding immediately after such
event and the denominator of which shall be the number of shares of Common Stock
that were outstanding immediately prior to such event.
(b) The Board shall declare, out of funds legally available therefor,
a dividend or distribution on the Series A Preferred Stock, as provided in
paragraph (a) of this Section 2, immediately after it has declared a dividend or
distribution on the Common Stock (other than a dividend payable in shares of
Common Stock).
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<PAGE> 51
(c) Dividends shall begin to accrue and be cumulative on the
outstanding shares of the Series A Preferred Stock from the Dividend Payment
Date next preceding the date of issuance of such shares, unless such date of
issuance shall be prior to the record date for the first Dividend Payment Date,
in which case dividends on such shares shall begin to accrue and be cumulative
from the date of issuance of such shares, or unless such date of issuance shall
be after the close of business on the record date with respect to any Dividend
Payment Date and on or prior to such Dividend Payment Date, in which case
dividends on such shares shall begin to accrue and be cumulative from such
Dividend Payment Date. Accrued but unpaid dividends shall not bear interest.
Dividends paid on shares of the Series A Preferred Stock in an amount less than
the total amount of dividends then accrued shall be allocated pro rata among
such shares. The Board may fix a record date for the determination of the
holders of shares of the Series A Preferred Stock entitled to receive payment of
any dividend or distribution declared thereon, which record date shall be not
more than the number of days prior to the date fixed for such payment permitted
by applicable law.
Section 3. Voting Rights. In addition to any other voting rights
required by applicable law, the holders of shares of the Series A Preferred
Stock shall have the following voting rights:
(a) Each share of the Series A Preferred Stock shall entitle the
holder thereof to 100 votes on all matters submitted to a vote of the
stockholders of the Corporation. The multiple of 100 (the "Voting Multiple")
set forth in the preceding sentence shall be adjusted from time to time as
hereinafter provided in this paragraph (a). In the event that the Corporation
shall at any time after the effective date of this Certificate of Designations
(i) declare or pay any dividend on the Common Stock payable in shares of Common
Stock or (ii) effect a subdivision, combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then, in each such case, the Voting Multiple
thereafter applicable to the determination of the number of votes per share to
which the holders of shares of the Series A Preferred Stock shall be entitled
shall be the Voting Multiple in effect immediately prior to such event
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock outstanding immediately after such event and the denominator of
which shall be the number of shares of Common Stock that were outstanding
immediately prior to such event.
(b) Except as otherwise provided in this Certificate of Designations,
in any other Certificate of Designations establishing another series of the
Preferred Stock (or any series of any other class of capital stock of the
Corporation) or by applicable law, the holders of the Series A Preferred Stock,
the holders of the
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<PAGE> 52
Common Stock and the holders of any other class of capital stock of the
Corporation having general voting rights shall vote together as a single class
on all matters submitted to a vote of the stockholders of the Corporation.
(c) Except as otherwise provided in this Certificate of Designations
or by applicable law, the holders of the Series A Preferred Stock shall have no
special voting rights and their consent shall not be required (except to the
extent provided in paragraph (b) of this Section 3) for the taking of any
corporate action.
Section 4. Certain Restrictions.
(a) Whenever dividends or other distributions payable on the Series A
Preferred Stock as provided in Section 2 are in arrears, thereafter and until
all accrued and unpaid dividends and distributions, whether or not declared, on
outstanding shares of the Series A Preferred Stock shall have been paid in full,
the Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on any
shares of any class of capital stock of the Corporation ranking junior
(either as to dividends or upon liquidation, dissolution or winding up of
the Corporation) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any
shares of any class of capital stock of the Corporation ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up of
the Corporation) with the Series A Preferred Stock, except dividends paid
ratably on the Series A Preferred Stock and all such parity stock on which
dividends are accrued and unpaid in proportion to the total amounts to
which the holders of all such shares are then entitled;
(iii) redeem, purchase or otherwise acquire for consideration any
shares of any class of capital stock of the Corporation ranking junior
(either as to dividends or upon liquidation, dissolution or winding up of
the Corporation) to the Series A Preferred Stock, except that the
Corporation may at any time redeem, purchase or otherwise acquire any
shares of such junior stock in exchange for other shares of any class of
capital stock of the Corporation ranking junior (both as to dividends and
upon dissolution, liquidation or winding up of the Corporation) to the
Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of the
Series A Preferred Stock or any shares of any class of capital stock of the
Corporation ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up of the Corporation) with the Series
A Preferred
A-4
<PAGE> 53
Stock, or redeem any shares of such parity stock, except in accordance
with a purchase offer made in writing or by publication (as determined by
the Board) to the holders of all such shares upon such terms and conditions
as the Board, after taking into consideration the respective annual
dividend rates and the other relative powers, preferences and rights of the
respective series and classes of such shares, shall determine in good faith
will result in fair and equitable treatment among the respective holders of
shares of all such series and classes.
(b) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of any class of
capital stock of the Corporation unless the Corporation could, under paragraph
(a) of this Section 4, purchase or otherwise acquire such shares at such time
and in such manner.
Section 5. Reacquired Shares. Any shares of the Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after such purchase or
acquisition. All such canceled shares shall thereupon become authorized and
unissued shares of Preferred Stock and may be reissued as part of any new series
of the Preferred Stock, subject to the conditions and restrictions on issuance
set forth in the Certificate of Incorporation of the Corporation, as amended
from time to time, in any other Certificate of Designations establishing another
series of the Preferred Stock (or any series of any other class of capital stock
of the Corporation) or in any applicable law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation (whether voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made (a) to the holders of shares of any
class of capital stock of the Corporation ranking junior (either as to dividends
or upon liquidation, dissolution or winding up of the Corporation) to the Series
A Preferred Stock unless, prior thereto, the holder of each outstanding share of
the Series A Preferred Stock shall have received an amount equal to the accrued
and unpaid dividends and distributions thereon, whether or not declared, to the
date of such payment, plus an amount equal to an aggregate amount, subject to
adjustment as hereinafter provided in this Section 6, equal to 100 times the
aggregate per share amount to be distributed to the holders of the Common Stock
or (b) to the holders of shares of any class of capital stock of the Corporation
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up of the Corporation) with the Series A Preferred Stock, except
distributions made ratably on the Series A Preferred Stock and all such parity
stock in proportion to the total amounts to which the holders of all such shares
are entitled upon such liquidation, dissolution or winding up. In the event
that the Corporation shall at any time after the effective date of this
Certificate of
A-5
<PAGE> 54
Designations (a) declare or pay any dividend on the Common Stock payable in
shares of Common Stock or (b) effect a subdivision, combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then, in each such case, the aggregate amount
per share which the holders of shares of the Series A Preferred Stock shall
thereafter be entitled to receive pursuant to clause (a)(ii) of the preceding
sentence shall be the aggregate amount per share in effect pursuant to such
clause immediately prior to such event multiplied by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding immediately
after such event and the denominator of which shall be the number of shares of
Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In the event that the
Corporation shall be a party to any consolidation, merger, combination or other
transaction in which the outstanding shares of Common Stock are converted or
changed into or exchanged for other capital stock, securities, cash or other
property, or any combination thereof, then, in each such case, each share of the
Series A Preferred Stock shall at the same time be similarly converted or
changed into or exchanged for an aggregate amount, subject to adjustment as
hereinafter provided in this Section 7, equal to 100 times the aggregate amount
of capital stock, securities, cash and/or other property (payable in kind), as
the case may be, into which or for which each share of Common Stock is being
converted or changed or exchanged. In the event that the Corporation shall at
any time after the effective date of this Certificate of Designations (a)
declare or pay any dividend on the Common Stock payable in shares of Common
Stock or (ii) effect a subdivision, combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then, in each such case, the aggregate amount per
share which the holders of shares of the Series A Preferred Stock shall
thereafter be entitled to receive pursuant to the preceding sentence shall be
the aggregate amount per share in effect pursuant to such sentence immediately
prior to such event multiplied by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which shall be the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 8. No Redemption. The shares of the Series A Preferred Stock
shall not be redeemable at any time.
Section 9. Rank. Unless otherwise provided in the Certificate of
Designations establishing another series of the Preferred Stock after the
effective date of this Certificate of Designations, the Series A Preferred Stock
shall rank, as to the
A-6
<PAGE> 55
payment of dividends and the making of any other distribution of assets of the
Corporation, senior to the Common Stock, but junior to all other series of the
Preferred Stock.
Section 10. Amendments. The Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences and rights of the Series A Preferred Stock so as
to adversely affect any thereof without the affirmative vote of the holders of
at least two-thirds of the outstanding shares of the Series A Preferred Stock,
voting separately as a single class.
Section 11. Fractional Shares. Fractional shares of the Series A
Preferred Stock may be issued, but, unless the Board shall otherwise determine,
only in multiples of one one-hundredth of a share. The holder of any fractional
share of the Series A Preferred Stock shall be entitled to receive dividends,
participate in distributions, exercise voting rights and have the benefit of all
other powers, preferences and rights relating to the Series A Preferred Stock in
the same proportion as such fractional share bears to a whole share.
IN WITNESS WHEREOF, Corporation has caused this Certificate of
Designations to be executed and attested by its duly authorized officers this
__day of____________, 1996.
MARKS BROS. JEWELERS, INC.
By:
__________________________
(Corporate Seal) Name:
Title:
Attest:
By:
________________________
Name:
Title:
A-7
<PAGE> 56
EXHIBIT B
FORM
OF
RIGHTS CERTIFICATE
CERTIFICATE NO. R- _________ RIGHTS
_______ Aggregate Number of
Shares of Series A Junior
Participated Preferred Stock
Initially Purchasable
NOT EXERCISABLE AFTER _______________, 2006 OR EARLIER IF
REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO
REDEMPTION, AT THE OPTION OF MARKS BROS. JEWELERS, INC., AT
$.01 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE
STOCKHOLDERS RIGHTS AGREEMENT HEREINAFTER MENTIONED. UNDER
CERTAIN CIRCUMSTANCES DESCRIBED IN SUCH AGREEMENT, RIGHTS
BENEFICIALLY OWNED BY A RESTRICTED PERSON (AS SUCH TERM IS
DEFINED IN SUCH AGREEMENT), OR BY SPECIFIED TRANSFEREES FROM
A RESTRICTED PERSON, SHALL BE OR BECOME VOID.
B-1
<PAGE> 57
RIGHTS CERTIFICATE
MARKS BROS. JEWELERS, INC.
This certifies that _________________________, or registered assigns,
is the registered owner of the number of Rights set forth above, each of which
entitles the owner, subject to the terms, provisions and conditions of the
Stockholders Rights Agreement dated as of May 1, 1996 (the "Rights Agreement")
between Marks Bros. Jewelers, Inc., a Delaware corporation (the "Company"), and
The First National Bank of Boston (the "Rights Agent"), to purchase from the
Company at any time after the Distribution Date and prior to the Close of
Business on ___________, 2006, at the principal office of the Rights Agent or
its successor as Rights Agent, one one-hundredth of a fully paid and
nonassessable share of Series A Junior Participating Preferred Stock, $.001 par
value (the "Preferred Shares"), of the Company at a price (the "Exercise Price")
of $52 per one one-hundredth of a Preferred Share, upon presentation and
surrender of this Rights Certificate with the Form of Election to Purchase and
the related Form of Certification of Status duly executed, together with such
signature guarantees and other documentation as the Rights Agent may reasonably
request. The number of Rights evidenced by this Rights Certificate (as well as
the number of one one-hundredths of a Preferred Share which may be purchased
upon the exercise of each Right) set forth above, and the Exercise Price set
forth above, are the numbers and the Exercise Price as of ________________,
based on the Preferred Shares as constituted on such date. As provided in the
Rights Agreement, such number of Rights (and/or such number of one
one-hundredths of a Preferred Share) and such Exercise Price are subject to
change and adjustment upon the happening of certain events specified in the
Rights Agreement. Capitalized terms not defined herein have the respective
meanings specified in the Rights Agreement.
From and after the first occurrence of any Section 11(a)(ii) Event, if
the Rights evidenced by this Rights Certificate are Beneficially Owned by (i) a
Restricted Person, (ii) a transferee from a Restricted Person who becomes a
transferee after the Acquiring Person becomes such or (iii) under certain
circumstances specified in the Rights Agreement, a transferee from a Restricted
Person who becomes a transferee prior to or concurrently with the Acquiring
Person becoming such, such Rights shall be or become void, and no holder hereof
shall have any rights whatsoever with respect to such Rights.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
incorporated herein by reference and made a part hereof, to which Rights
Agreement reference is hereby made for a full description of the rights, powers,
obligations,
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<PAGE> 58
duties and immunities hereunder of the Company, the Rights Agent and the holders
of the Rights Certificates. Under the circumstances set forth in the Rights
Agreement, the exercisability of the Rights represented hereby may be
temporarily suspended. The Rights Agreement is on file at the principal office
of the Company and at the principal office of the Rights Agent, and a copy will
be provided upon written request to the Secretary of the Company.
Upon surrender at the principal office of the Rights Agent, this
Rights Certificate, with or without other Rights Certificates, may be exchanged
for one or more Rights Certificates of like tenor and date evidencing Rights
entitling the holder to purchase the same aggregate number of one one-hundredths
of a Preferred Share as the Rights evidenced by the Rights Certificates so
surrendered. If this Rights Certificate shall be exercised in part, the holder
hereof shall be entitled to receive, upon surrender hereof, one or more Rights
Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Rights Certificate (i) may be redeemed, at the direction of
the Board, at a redemption price (subject to adjustment) of $.01 per Right
(payable in cash, shares of Common Stock of the Company or any other form of
consideration deemed appropriate by the Board) or (ii) under certain
circumstances, may be exchanged, in whole or in part, at the direction of the
Board, for shares of Common Stock of the Company or Preferred Shares at an
exchange rate (subject to adjustment) of one share of Common Stock or one
one-hundredth of a Preferred Share per Right.
No fractional Preferred Share will be issued upon the exercise of any
Rights represented hereby (other than fractions which are a multiple of one
one-hundredth of a Preferred Share), but in lieu thereof a cash payment will be
made as provided in the Rights Agreement.
No holder, as such, of this Rights Certificate shall be entitled to
vote, to receive dividends or other distributions on or to exercise any
preemptive rights with respect to, or shall be deemed for any other purpose to
be the holder of, the Preferred Shares or other shares of capital stock of any
class of the Company which may at any time be issuable upon exercise hereof; nor
shall anything contained herein or in the Rights Agreement be construed to
confer upon the holder hereof, as such, any of the rights of a stockholder of
the Company, or any right to vote for the election of directors or upon any
other matter submitted to stockholders at any meeting thereof, to give or
withhold consent to any corporate action, to receive notice of meetings or other
actions affecting stockholders (except as provided in the Rights Agreement) or
to receive dividends, subscription rights or other distributions, until the
Rights evidenced by this Rights Certificate shall have been exercised, in whole
or in part, in accordance with the provisions of the Rights Agreement.
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<PAGE> 59
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
B-4
<PAGE> 60
IN WITNESS WHEREOF, this Rights Certificate has been executed by the
Company by the duly authorized facsimile signature of a proper officer of the
Company and a facsimile of its corporate seal has been imprinted hereon and duly
attested by the duly authorized facsimile signature of a proper officer of the
Company.
Dated as of _______________, ____.
MARKS BROS. JEWELERS, INC.
(Corporate Seal) By:
____________________________
Name:
Title:
ATTEST:
______________________________
Name:
Title:
Countersigned:
_______________________________________,
as Rights Agent
By____________________________
Authorized Signature
B-5
<PAGE> 61
[REVERSE SIDE OF RIGHTS CERTIFICATE]
FORM OF ELECTION TO PURCHASE
(To be executed by the registered holder
if such holder desires to exercise Rights
represented by this Rights Certificate)
To Marks Bros. Jewelers, Inc.:
The undersigned hereby irrevocably elects to exercise __________ Rights
represented by this Rights Certificate to purchase the Preferred Shares (or
other securities, cash or property) issuable upon the exercise of such Rights
and requests that certificates for such Preferred Shares be issued in the name
of:
Please insert social security
or other identifying number: ____________________
________________________________________________________________
(Please print name and address)
________________________________________________________________
If such number of Rights shall not be all the Rights represented by this Rights
Certificate, a new Rights Certificate for the remaining unexercised Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number: ____________________
________________________________________________________________
(Please print name and address)
________________________________________________________________
Dated: _______________, 19__
_______________________________________
Signature
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<PAGE> 62
Signature Guaranteed: ________________________________
Signatures must be guaranteed by a participant in a recognized
Signature Guaranty Medallion Program.
CERTIFICATION OF STATUS
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) this Rights Certificate
/ / is
/ / is not
being exercised by or on behalf of a Person who is or was a Restricted Person
(as such term is defined in the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, it
/ / did
/ / did not
acquire, directly or indirectly, the Rights evidenced by this Rights
Certificate from any Person who is, was or subsequently became a Restricted
Person.
_______________________________________
Signature
Date: _______________, 19__
B-7
<PAGE> 63
NOTICE
The signature(s) on the foregoing Form of Election to Purchase and
Certification of Status must correspond to the name written upon the face of
this Rights Certificate in every particular, without alteration or enlargement
or any change whatsoever.
In the event the Certification of Status set forth above is not
completed, the Company will deem the Beneficial Owner of the Rights represented
by this Rights Certificate to be a Restricted Person (as such term is defined in
the Rights Agreement), will not honor the Election to Purchase and will affix a
legend to such effect on this Rights Certificate and on any Rights Certificates
issued in exchange for this Rights Certificate.
B-8
<PAGE> 64
[Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer this Rights Certificate)
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _________________________________________________________________
________________________________________________________________
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _________________________
Attorney, to transfer the within Rights Certificate on the books of the
within-named Company, with full power of substitution.
Dated: _______________, 19__
_______________________________________
Signature
Signature Guaranteed: ________________________________
Signatures must be guaranteed by a participant in a recognized
Signature Guaranty Medallion Program.
B-9
<PAGE> 65
CERTIFICATION OF STATUS
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Rights Certificate
[ ] is
[ ] is not
being sold, assigned or transferred by or on behalf of a Person who is or was a
Restricted Person (as such term is defined in the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the
undersigned, it
[ ] did
[ ] did not
acquire, directly or indirectly the Rights evidenced by this Rights Certificate
from any Person who is, was or subsequently became a Restricted Person.
_______________________________________
Signature
Date: _______________, 19__
B-10
<PAGE> 66
NOTICE
The signature(s) on the foregoing Form of Assignment and Certification
of Status must correspond to the name written upon the face of this Rights
Certificate in every particular, without alteration or enlargement or any change
whatsoever.
In the event the Certification of Status set forth above is not
completed, the Company will deem the Beneficial Owner of the Rights represented
by this Rights Certificate to be a Restricted Person (as such term is defined in
the Rights Agreement), will not honor the Assignment and will affix a legend to
such effect on this Rights Certificate and any Rights Certificates issued in
exchange for this Rights Certificate.
B-11
<PAGE> 67
EXHIBIT C
SUMMARY OF RIGHTS TO PURCHASE
SHARES OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
On April 1, 1996, the Board of Directors (the "Board") of Marks Bros.
Jewelers, Inc., a Delaware corporation (the "Corporation"), declared a dividend
of one preferred stock purchase right (a "Right") for each outstanding share of
Common Stock, $.001 par value (the "Common Stock"), of the Corporation. The
dividend is payable on the effective date of the Corporation's initial public
offering registration statement, file no. 333-1794 (the "Record Date") to the
holders of record of the Common Stock at the Close of Business on such date.
Each Right entitles the holder thereof (except as described below) to purchase
from the Corporation one one-hundredth of a share of the Series A Junior
Participating Preferred Stock, $.001 par value (the "Preferred Shares"), of the
Corporation at a price (the "Exercise Price") of $____ per one one-hundredth of
a Preferred Share, subject to adjustment. The terms of the Rights are set
forth in the Stockholders Rights Agreement dated as of May 1, 1996 (the "Rights
Agreement") between the Corporation and The First National Bank of Boston, as
Rights Agent (the "Rights Agent"). Capitalized terms not defined herein have
the respective meanings specified in the Rights Agreement.
DISTRIBUTION DATE; TRANSFER OF RIGHTS
Initially, the Rights associated with the Common Stock outstanding as of
the Record Date will be evidenced solely by the stock certificates for such
Common Stock. The Rights will separate from the Common Stock upon the earliest
to occur of (i) 10 Business Days after the first public announcement that any
Person (other than an Exempt Person (as hereinafter defined)) has become an
Acquiring Person (as hereinafter defined) and (ii) 10 Business Days (or such
other Business Day as may be determined by action of the Board prior to the
time that any Person shall become an Acquiring Person (as hereinafter defined)
after the commencement by any Person (other than an Exempt Person) of, or the
first public announcement of its intention to commence, a tender or exchange
offer if, upon the consummation thereof, such Person would be the Beneficial
Owner of 15% or more of the outstanding shares of Common Stock (the earliest of
the dates specified in clauses (i) and (ii) being hereinafter called the
"Distribution Date"). After the Distribution Date, the Rights will be evidenced
solely by separate certificates and will trade independently from the Common
Stock.
An "Acquiring Person" is any Person who or which, together with its
Affiliates and Associates, has acquired 15% or
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<PAGE> 68
more of the shares of Common Stock then outstanding, but does not include (i)
the Corporation, (ii) any Subsidiary of the Corporation, (iii) any employee
benefit plan or other compensation program or arrangement of the Corporation or
of any such Subsidiary or (iv) any Person holding shares of Common Stock for or
pursuant to the terms of any such plan, program or arrangement (the Persons
specified in clauses (i) through (iv) being herein collectively called "Exempt
Persons"). Notwithstanding the foregoing, if the Board of Directors of the
Corporation determines in good faith that a Person who would otherwise be an
"Acquiring Person," has become so inadvertently, and such Person divests as
promptly as practicable a sufficient number of shares of Common Stock so that
such Person would no longer be an "Acquiring Person," then such Person shall not
be deemed to be an "Acquiring Person."
A "Disinterested Director" is (i) any member of the Board who is not a
Restricted Person (as hereinafter defined), or a representative or nominee of a
Restricted Person, and was a member of the Board prior to the date of the Rights
Agreement and (ii) any individual who subsequently becomes a member of the Board
and is not a Restricted Person, or a representative or nominee of a Restricted
Person, and whose nomination for election to the Board is recommended or
approved by a majority of the Disinterested Directors then in office. A
"Restricted Person" is an Acquiring Person or any Affiliate or Associate
thereof.
The Rights Agreement provides that, until the Distribution Date (or
the earlier redemption or expiration of the Rights), the Rights may be
transferred only with the associated shares of Common Stock. Until the
Distribution Date (or the earlier redemption or expiration of the Rights), stock
certificates for Common Stock issued after the Record Date, either upon transfer
of outstanding shares or original issuance of additional shares of Common Stock,
will contain a legend incorporating the Rights Agreement by reference. Until
the Distribution Date (or the earlier redemption or expiration of the Rights),
the surrender for transfer of any stock certificate for shares of Common Stock,
with or without such legend and whether or not a copy of this Summary of Rights
is attached thereto, will also constitute the transfer of the Rights associated
with the shares of Common Stock represented by such stock certificate.
As soon as practicable after the Distribution Date, separate
certificates evidencing the Rights ("Rights Certificates") will be mailed to the
holders of record of the Common Stock as of the Close of Business on the
Distribution Date, which thereafter will constitute the sole evidence of the
Rights. Each share of Common Stock issued by the Corporation after the Record
Date and prior to the earlier redemption or expiration of the Rights, including
any shares of Common Stock issued by reason of the exercise of any option,
warrant, right (other than the Rights) or conversion or exchange privilege
(however evidenced) issued by the
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<PAGE> 69
Corporation prior to the Distribution Date, will be accompanied by a Right
(unless the Board expressly provides to the contrary at the time of issuance of
any such option, warrant, right or privilege), and Rights Certificates
evidencing such Rights will be issued at the same time as the stock certificates
for the associated shares of Common Stock.
The Rights are not exercisable until the Distribution Date. Moreover,
the time when the Rights may be exercised is restricted as described in the next
paragraph. The Rights will expire on the tenth anniversary of the Record Date
(the "Final Expiration Date"), unless the Final Expiration Date is extended or
unless the Rights are earlier redeemed or exchanged by the Corporation, in each
case as described below.
EXERCISE OF RIGHTS UNDER CERTAIN CIRCUMSTANCES
In the event that any Person becomes an Acquiring Person, proper
provision will be made so that the registered holder of each Right (other than
Rights Beneficially Owned as described in the next sentence) will thereafter
have the right to receive, upon exercise thereof, the number of shares of Common
Stock which, at the time of the occurrence of such event, will have a market
value equal to two times the then current Exercise Price. After the first
occurrence of either of the events described in the preceding sentence, all
Rights which are, or (under certain circumstances specified in the Rights
Agreement) were, Beneficially Owned by a Restricted Person or specified
transferees therefrom will be or become void. Under no circumstances may a
Right be exercised after the occurrence of either such event unless the
Corporation's right to redeem the Rights (as described below) has expired.
If, on or after the date on which any Person has become an Acquiring
Person, any of the following transactions occur: (i) the Corporation merges
into or consolidates with an Interested Stockholder (as hereinafter defined) or,
unless all holders of the Corporation's outstanding shares of Common Stock are
treated the same, another Person (with limited designated exceptions); (ii) an
Interested Stockholder or, unless all holders of the Corporation's outstanding
shares of Common Stock are treated the same, another Person (with limited
designated exceptions) merges into the Corporation and either (A) all or part of
the outstanding shares of Common Stock of the Corporation are converted into
capital stock or other securities of any other Person (or the Corporation), cash
and/or other property or (B) such shares remain outstanding, unconverted and
unchanged; or (iii) the Corporation sells or transfers 50% or more of its
consolidated assets or earning power to an Interested Stockholder (as
hereinafter defined) or, unless all holders of the Corporation's outstanding
shares of Common Stock are treated the same, another Person (with limited
designated exceptions); proper provision will be made so that the registered
holder of each Right (other than Rights which have become void)
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<PAGE> 70
will thereafter have the right (the "Flip-Over Right") to receive, upon exercise
thereof, the number of common shares of the acquiror (or of another Person
affiliated therewith) which, at the time of consummation of such transaction,
will have a market value equal to two times the then current Exercise Price. An
"Interested Stockholder" is any Restricted Person or any Affiliate or Associate
of any other Person in which such Restricted Person has an interest, or any
Person acting, directly or indirectly, on behalf of or in concert with any such
Restricted Person.
ADJUSTMENTS TO EXERCISE PRICE AND STOCK PURCHASABLE UPON EXERCISE
The Exercise Price payable, the number and kind of shares of capital
stock issuable upon exercise of the Rights and the number of Rights outstanding
are subject to adjustment from time to time to prevent dilution (i) in the event
of a dividend payable in Preferred Shares on, or a subdivision, combination or
reclassification of, the Preferred Shares, (ii) upon the grant to the holders of
the Preferred Shares of certain options, warrants or rights to subscribe for or
purchase Preferred Shares at a price, or securities convertible into or
exchangeable for Preferred Shares with a conversion or exchange price, less than
the then Fair Market Value of the Preferred Shares or (iii) upon the
distribution to the holders of the Preferred Shares of cash, securities,
evidences of indebtedness or other property (other than a regular quarterly cash
dividend or a dividend payable in Preferred Shares) or options, warrants or
rights (other than those referred to in clause (ii) above).
The number of outstanding Rights and the number of one one-hundredths
of a Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a dividend on the Common Stock payable in shares of
Common Stock or a subdivision, combination or reclassification of the Common
Stock occurring, in any such case, prior to the Distribution Date.
With certain specified exceptions, no adjustment in the Exercise Price
will be made until the cumulative adjustments required equal at least 1% of the
Exercise Price. The Corporation is not required to issue fractional Preferred
Shares (other than fractions which are multiples of one one-hundredth of a
Preferred Share), but in lieu thereof the Corporation would be required to make
a cash payment based on the Fair Market Value of the Preferred Shares on the
trading day immediately preceding the date of exercise.
TERMS OF PREFERRED SHARES
The Preferred Shares receivable upon exercise of the Rights will not
be redeemable. Each Preferred Share will entitle the holder thereof to receive
a preferential quarterly dividend equal to 100 times the aggregate per share
amount of all cash
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<PAGE> 71
dividends, plus 100 times the aggregate per share amount (payable in kind) of
all non-cash dividends and other distributions (other than in shares of Common
Stock), declared on the Common Stock during such quarter, adjusted to give
effect to any dividend on the Common Stock payable in shares of Common Stock or
any subdivision, combination or reclassification of the Common Stock (a
"Dilution Event"). Each Preferred Share will entitle the holder thereof to 100
votes on all matters submitted to a vote of the stockholders of the Corporation,
voting together as a single class with the holders of the Common Stock and the
holders of any other class of capital stock having general voting rights,
adjusted to give effect to any Dilution Event. In the event of liquidation of
the Corporation, the holder of each Preferred Share will be entitled to receive
a preferential liquidation payment equal to 100 times the aggregate per share
amount to be distributed to the holders of the Common Stock, adjusted to give
effect to any Dilution Event, plus an amount equal to accrued and unpaid
dividends and distributions on such Preferred Share, whether or not declared, to
the date of such payment. In the event of any merger, consolidation or other
transaction in which the outstanding shares of Common Stock of the Corporation
are exchanged for or converted into other capital stock, securities, cash and/or
other property, each Preferred Share will be similarly exchanged or converted
into 100 times the per share amount applicable to the Common Stock, adjusted to
give effect to any Dilution Event.
Because of the nature of the dividend, voting, liquidation and other
rights accorded to each Preferred Share, the value of the one one-hundredth of a
Preferred Share receivable upon the exercise of each Right should approximate
the value of one share of Common Stock.
REDEMPTION OF RIGHTS
At any time prior to the earliest of (i) 10 Business Days after the
first public announcement that any Person (other than an Exempt Person) has
become an Acquiring Person, (ii) the occurrence of any transaction which permits
the exercise of the Flip-Over Right and (iii) the Final Expiration Date, the
Board may redeem the Rights in whole, but not in part, at the redemption price
of $.01 per Right, adjusted to give effect to any Dilution Event (the
"Redemption Price"). The redemption of the Rights may be made effective at such
time, on such basis and with such conditions as the Board, in its sole
discretion, may establish. After the redemption period has expired, the
Corporation's right of redemption may be reinstated, under the circumstances
specified in the Rights Agreement, which include the concurrence of at least a
majority of the Disinterested Directors, if either (i) the Person who became an
Acquiring Person shall reduce, in one or a series of related transactions not
involving the Corporation or any Subsidiary or the occurrence of any transaction
which permits the exercise of the Flip-Over Right, its Beneficial Ownership of
the
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<PAGE> 72
outstanding shares of Common Stock to less than 10% of such outstanding shares
or (ii) in connection with any transaction which permits the exercise of the
Flip-Over Right, which does not involve an Interested Stockholder and in which
all holders of the Common Stock are treated the same. Immediately after action
by the Board directing the redemption of the Rights, the option to exercise the
Rights will terminate, and thereafter each registered holder of the Rights will
only be entitled to receive the Redemption Price therefor.
EXCHANGE OF RIGHTS
At any time after any Person has become an Acquiring Person and prior
to the time that any Person (other than an Exempt Person), together with its
Affiliates and Associates, has become the Beneficial Owner of 50% or more of the
outstanding shares of Common Stock, the Board may direct that all or any part of
the outstanding Rights (other than Rights which have become void) be exchanged
for shares of Common Stock at the exchange rate of one share of Common Stock (or
one one-hundredth of a Preferred Share or of another share of capital stock of
the Corporation having equivalent rights, preferences and privileges) per Right,
adjusted to give effect to any Dilution Event.
AMENDMENT OF THE RIGHTS AND THE RIGHTS AGREEMENT
Prior to the Distribution Date, the terms of the Rights and the Rights
Agreement may be supplemented or amended by the Board in any manner. From and
after the Distribution Date, the Rights may be supplemented or amended by the
Board, without the approval of the holders of the Rights, in certain respects
which do not adversely affect, as determined by the Board (with the concurrence
of at least a majority of the Disinterested Directors), the interests of such
holders; provided, however, that the Rights Agreement cannot be amended to
lengthen (i) any time period unless (A) such lengthening is approved by at least
a majority of the Disinterested Directors and (B) such lengthening is for the
benefit of the holders of the Rights or (ii) any time period relating to when
the Rights may be redeemed if at such time the Rights are not then redeemable.
MISCELLANEOUS
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Corporation, including, without limitation, the
right to vote or to receive dividends.
A copy of the Rights Agreement is available free of charge from the
Corporation. This summary description of the Rights does not purport to be
complete and is qualified in its entirety by reference to the Rights Agreement,
which is hereby incorporated herein by reference.
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<PAGE> 1
EXHIBIT 4.4
================================================================================
FIRST SUPPLEMENTAL INDENTURE
__________
MARKS BROS. JEWELERS, INC.
TO
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
TRUSTEE
DATED AS OF JULY __, 1996
__________________
PROVIDING FOR THE ISSUANCE OF NEW SERIES C
SENIOR SUBORDINATED NOTES DUE 2004
AND NEW SERIES D SENIOR SUBORDINATED NOTES DUE 2004
AND ADDING CERTAIN DEFINITIONS
_________________
SUPPLEMENTAL TO
INDENTURE DATED AS OF APRIL 15, 1996
OF
MARKS BROS. JEWELERS, INC.
================================================================================
<PAGE> 2
MARKS BROS. JEWELERS, INC.
FIRST SUPPLEMENTAL INDENTURE
DATED AS OF JULY __, 1996
_______________
TABLE OF CONTENTS
_______________
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE ONE
AMENDMENTS TO ORIGINAL INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
SECTION 1.01. Amendment of Section 101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
SECTION 1.02. Addition of Sections 206, 207, 208 and 209 . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3-
SECTION 1.03. Amendment of Section 301 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
SECTION 1.04. Addition of Section 312 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
SECTION 1.05. Amendment of Section 512 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
SECTION 1.06. Amendment of Section 513 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
SECTION 1.07. Addition of Section 612 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
SECTION 1.08. Amendment of Section 702 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
SECTION 1.09. Addition of Section 704 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
SECTION 1.10. Amendment of Section 902 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
ARTICLE TWO
THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
SECTION 2.01. Trustee Not Responsible for Validity or Recitals . . . . . . . . . . . . . . . . . . . . . . . . . -14-
SECTION 2.02. Duties, Responsibilities and Liabilities of Trustee . . . . . . . . . . . . . . . . . . . . . . . . -14-
ARTICLE THREE
MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
SECTION 3.01. Provisions of Original Indenture Deemed Incorporated . . . . . . . . . . . . . . . . . . . . . . . -14-
SECTION 3.02. Benefits Restricted to Parties and Holders of Notes . . . . . . . . . . . . . . . . . . . . . . . . -14-
SECTION 3.03. Successors and Assigns of Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
SECTION 3.04. Headings and Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
SECTION 3.05. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
</TABLE>
<PAGE> 3
Reconciliation and Tie Between Trust Indenture Act of 1939
and Indenture, dated as of April 15, 1996
<TABLE>
<CAPTION>
Trust Indenture Act Section Indenture Section
- --------------------------- -----------------
<S> <C>
Section 310 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 608
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 608
(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 608
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 607, 609
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
Section 311 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 612
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 612
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
Section 312 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 701
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 704
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 701
Section 313 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702, 106
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702
Section 314 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703, 1008
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Section 315 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602, 601
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602
(d)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602
(d)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602
(d)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 514
Section 316 (a)(last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 ("Outstanding")
(a) (1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 502, 512
(a) (1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513
(a) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104(d)
Section 317 (a) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503
(a) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1003
Section 318 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
- ---------------
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture.
</TABLE>
-2-
<PAGE> 4
This FIRST SUPPLEMENTAL INDENTURE dated as of the __ day of
July, 1996 between MARKS BROS. JEWELERS, INC., a corporation duly organized and
existing under the laws of the State of Delaware (the "Company"), having its
principal office at 155 North Wacker Drive, Chicago, Illinois 60606, and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association,
as trustee (the "Trustee"), having its principal office at Sixth and Marquette,
Minneapolis, Minnesota 55479.
W I T N E S S E T H:
WHEREAS, the Company and the Trustee have heretofore executed
and delivered an Indenture dated as of April 15, 1996 (the "Original
Indenture," the Original Indenture as supplemented by this First Supplemental
Indenture being hereinafter called the "Indenture") providing, among other
things, for the issuance from time to time of the Company's unsecured
debentures, notes or other evidences of indebtedness (the "Notes") in one or
more series;
WHEREAS, there is currently issued and outstanding under the
Indenture the following two series of Notes (respectively, the "Series A
Securities" and the "Series B Securities"; and, collectively, the "Existing
Notes"):
<TABLE>
<CAPTION>
Name of Series Principal Amount Outstanding
-------------- ----------------------------
<S> <C>
Series A Senior $12,000,000
Subordinated Notes
due October 31, 2004
Series B Senior $ 8,000,000
Subordinated Notes
due October 31, 2004
</TABLE>
WHEREAS, the Company desires to offer and issue under the
Indenture two new series of Notes (the "New Notes") in exchange for the
Existing Notes, as more fully hereinafter described;
WHEREAS, the Company has duly authorized the creation of an
issue of Series C Senior Subordinated Notes due 2004 (herein called the "Series
C Securities"), of substantially the tenor and amount hereinafter set forth,
and to provide therefor the Company has duly authorized the execution and
delivery of this First Supplemental Indenture;
WHEREAS, the Company has duly authorized the creation of an
issue of Series D Senior Subordinated Notes due 2004 (herein called the "Series
D Securities"), of substantially the tenor and amount hereinafter set forth,
and to provide therefor the Company has duly authorized the execution and
delivery of this First Supplemental Indenture;
WHEREAS, Section 902 of the Original Indenture provides that
the Company and the Trustee may enter into a supplemental indenture, with the
consent of the Holders of not less than a majority in principal amount of the
"Outstanding Notes" (as defined in the Original Indenture), of each series
affected, for the purpose of changing in any manner any provisions of the
Original Indenture;
<PAGE> 5
WHEREAS, the holders of not less than a majority in principal
amount of the Notes outstanding as of 5:00 p.m., New York City time, on July
___, 1996, the record date for such purpose, have consented to this First
Supplemental Indenture; and
WHEREAS, all acts and things necessary to make this First
Supplemental Indenture a valid agreement in accordance with its terms have been
done;
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of
the Existing Notes and any other Notes hereafter issued under the Indenture by
the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of the respective Holders from time to time of the Notes,
as follows:
ARTICLE ONE
AMENDMENTS TO ORIGINAL INDENTURE
SECTION 1.01. Amendment of Section 101.
(a) The following definitions are inserted in Section 101
of the Original Indenture in the proper alphabetical location:
""Effective Registration" means that the Company shall have
(i) commenced a Registered Exchange Offer for the Series A Securities
and/or the Series B Securities pursuant to an effective Registration
Statement under the Securities Act or (ii) filed and caused to become
effective a Senior Notes Shelf Registration under the Securities Act
for the sale of the Series A Securities and/or the Series B Securities
by the Holders."
""Registered Exchange Offer" means a proposed offer pursuant
to a Registration Statement pursuant to which the Company offers in
exchange for the Series A Securities a duly authorized series of
senior subordinated debt securities having terms in all material
respects identical to those of the Series A Securities, and/or a
proposed offer pursuant to a Registration Statement pursuant to which
the Company offers in exchange for the Series B Securities a duly
authorized series of senior subordinated debt securities having terms
in all material respects identical to those of the Series B
Securities."
""Registration Statement" shall have the meaning given such
term in each of (i) Section 16 of that certain Placement Agent
Agreement, dated as of May 7, 1996, between the Company and William
Blair & Company, L.L.C., as the placement agent thereunder and (ii)
Section 8.6 of that certain Note Agreement Re: $8,000,000 Series B
Senior Subordinated Notes Due October 31, 2004, dated as of April 15,
1996, among the Company and the Purchasers parties thereto."
""Senior Notes Shelf Registration" means a proposed offer
pursuant to a registration statement or an appropriate form under the
Securities Act relating to the offer and sale of Notes
-2-
<PAGE> 6
by the holders thereof from time to time without restrictions or
limitations under the Securities Act in accordance with the methods of
distribution set forth in such registration statement and Rule 415
under the Securities Act."
""Series A Security" and "Series A Securities" have the
meaning stated in the second recital of the First Supplemental
Indenture and more particularly mean any Series A Securities
authenticated and delivered under this Indenture."
""Series B Security" and "Series B Securities" have the
meaning stated in the second recital of the First Supplemental
Indenture and more particularly mean any Series B Securities
authenticated and delivered under this Indenture, including without
limitation any Series B Security constituting a Secondary Note."
""Series C Security" and "Series C Securities" have the
meaning stated in the fourth recital of the First Supplemental
Indenture and more particularly mean any Series C Securities
authenticated and delivered under this Indenture."
""Series D Security" and "Series D Securities" have the
meaning stated in the fifth recital of the First Supplemental
Indenture and more particularly mean any Series D Securities
authenticated and delivered under this Indenture, including without
limitation any Series D Security constituting a Secondary Note."
(b) The Original Indenture is hereby amended to strike
the definition of "Series A Note" now contained therein and to substitute the
following therefor:
""Series A Note" and "Series A Notes" means collectively the
Series A Securities and the Series C Securities treated as a single
series for all purposes under this Indenture, except with respect to
any amendment or supplement to the Indenture that treats the Series A
Securities and the Series C Securities materially differently."
(c) The Original Indenture is hereby amended to strike
the definition of "Series B Note" now contained therein and to substitute the
following therefor:
""Series B Note" and "Series B Notes" means collectively the
Series B Securities and the Series D Securities treated as a single
series for all purposes under this Indenture, except with respect to
any amendment or supplement to the Indenture that treats the Series B
Securities and the Series D Securities materially differently."
SECTION 1.02. Addition of Sections 206, 207, 208 and 209.
The Original Indenture is hereby amended to add the following Sections 206,
207, 208 and 209 immediately following Section 205:
"Section 206. Form of Face of Series C Security.
-3-
<PAGE> 7
MARKS BROS. JEWELERS, INC.
Series C Senior Subordinated Note due 2004
No. _______ $_____________
CUSIP 570698 AD 2
Marks Bros. Jewelers, Inc., a Delaware corporation (herein
called the "Company," which term includes any successor person under
the Indenture hereinafter referred to), for value received, hereby
promises to pay to _________ or registered assigns, the principal sum
of _________ Dollars on October 31, 2004 at the office or agency of
the Company referred to below, and to pay interest thereon on July 31,
1996 and quarterly thereafter on October 31, January 31, April 30 and
July 31 in each year, from the Issue Date, or from the most recent
Interest Payment Date to which interest has been paid or duly provided
for, at the rate of 12.15% per annum, until the principal hereof is
paid or duly provided for. The interest so payable, and punctually
paid or duly provided for, on any Interest Payment Date will, as
provided in such Indenture, be paid to the person in whose name this
Series C Note (or one or more Predecessor Notes) is registered at the
close of business on the Regular Record Date for such interest, which
shall be the January 15, April 15, July 15 or October 15 (whether or
not a Business Day), as the case may be, next preceding such Interest
Payment Date. Interest shall be computed on the basis of a 360-day
year of twelve 30-day months. Any such interest not so punctually
paid or duly provided for shall forthwith cease to be payable to the
Holder on such Regular Record Date, and such defaulted interest, and
(to the extent lawful) interest on such defaulted interest at the rate
borne by the Series C Notes, may be paid to the person in whose name
this Series C Note (or one or more Predecessor Notes) is registered at
the close of business on a Special Record Date for the payment of such
Defaulted Interest to be fixed by the Trustee, notice whereof shall be
given to Holders of Series C Notes not less than ten days prior to
such Special Record Date, or may be paid at any time in any other
lawful manner not inconsistent with the requirements of any securities
exchange on which the Series C Notes may be listed, and upon such
notice as may be required by such exchange, all as more fully provided
in said Indenture. Payment of the principal of (and premium, if any)
and interest on this Series C Note will be made at the office or
agency of the Company maintained for that purpose in the City of
Chicago, or at such other office or agency of the Company as may be
maintained for such purpose, in such coin or currency of the United
States of America as at the time of payment is legal tender for
payment of public and private debts; provided, however, that payment
of interest (a) may be made at the option of the Company by check
mailed to the address of the person entitled thereto as such address
shall appear on the Note Register or (b) by wire transfer of
immediately available funds to the account of any Holder in whose name
not less than $100,000 principal amount of Series C Notes is
registered on the Note Register as previously designated by such
person.
Reference is hereby made to the further provisions of
this Series C Note set forth on the reverse hereof, which further
provisions shall for all purposes have the same effect as if set forth
at this place.
Unless the certificate of authentication hereon has
been duly executed by the Trustee referred to on the reverse hereof by
manual signature, this Series C Note shall not be entitled to any
benefit under the Indenture, or be valid or obligatory for any
purpose.
IN WITNESS WHEREOF, the Company has caused this
instrument to be duly executed under its corporate seal.
MARKS BROS. JEWELERS, INC.
By _________________________________
Attest:
________________
Authorized Signature"
-4-
<PAGE> 8
"Section 207. Form of Reverse of Series C Security.
This Series C Note is one of a duly authorized issue of
securities of the Company designated as its Series C Senior
Subordinated Notes due 2004 (herein called the "Series C Notes"),
limited, together with the duly authorized issue of securities of the
Company designated as its Series A Senior Subordinated Notes due 2004
(the "Series A Securities"; and, together with the Series C Notes, the
"Series A Notes") (except as otherwise provided in the Indenture
referred to below) in aggregate principal amount to $12,000,000, which
may be issued under an indenture (herein called the "Indenture") dated
as of April 15, 1996 between the Company and Norwest Bank Minneapolis,
National Association, as trustee (herein called the "Trustee," which
term includes any successor trustee under the Indenture), to which
Indenture and all indentures supplemental thereto reference is hereby
made for a statement of the respective rights, limitations of rights,
duties, obligations and immunities thereunder of the Company, the
Trustee and the Holders of the Series A Notes, and of the terms upon
which the Series A Notes are, and are to be, authenticated and
delivered. The Indenture also governs the terms of two duly
authorized issues of securities of the Company designated as its
Series B Senior Subordinated Notes due 2004 (the "Series B
Securities") and its Series D Senior Subordinated Notes due 2004 (the
"Series D Securities; and, together with the Series B Securities, the
"Series B Notes") limited in aggregate principal amount to $8,000,000.
The Series A Notes and Series B Notes are sometimes herein
collectively referred to as the "Notes."
The Series C Notes are, to the extent and in the manner
provided in the Indenture, subordinate and subject in right of payment
to the prior payment in full of all Senior Indebtedness of the
Company, whether outstanding on the date of the Indenture or
thereafter created, incurred, assumed or guaranteed. Each Holder of
this Series C Note, by accepting the same, (a) agrees to and shall be
bound by the provisions of Article Fourteen of the Indenture, (b)
authorizes and directs the Trustee on his behalf to take such action
as may be necessary or appropriate to effectuate the subordination as
provided in the Indenture and (c) appoints the Trustee his
attorney-in-fact for such purpose.
Subject to the provisions of Article Fourteen of the
Indenture, the Series A Notes are subject to redemption upon not less
than 30 nor more than 60 days' notice, in amounts of $1,000 or an
integral multiple of $1,000 (a) at any time on or after July 31, 2001,
as a whole or in part, at the election of the Company and (b) in part
on July 31, 2001 and on each October 31, January 31, April 30 and July
31 thereafter to and including July 31, 2004 for the Sinking Fund
provided for in the Indenture upon payment of the Redemption Price,
which shall consist of (i) 100% of the principal amount of the Series
C Notes so redeemed in case of a redemption for said Sinking Fund or
the applicable percentage of the principal amount of the Series C
Notes so redeemed set forth below in the case of any other such
redemption:
If redeemed during the period set forth below,
<TABLE>
<CAPTION>
PERIOD PERCENTAGE
------ ----------
<S> <C>
July 31, 2001 - July 30, 2002 . . . . . . . . . . . . 106.00%
July 31, 2002 - July 30, 2003 . . . . . . . . . . . . 105.00%
July 31, 2003 - July 30, 2004 . . . . . . . . . . . . 104.00%
July 31, 2004 and thereafter . . . . . . . . . . . . . 100.00%
</TABLE>
plus, in each case, (ii) any interest accrued on the Series C Notes so
redeemed to the Redemption Date.
In the case of any redemption of Series C Notes, interest
installments whose Stated Maturity is on or prior to the Redemption
Date will be payable to the Holders of such Series C Notes, or one or
more Predecessor Notes, of record at the close of business on the
relevant Regular Record Date referred to on the face hereof. Series C
Notes (or portions thereof) for whose redemption and payment
provision is made in accordance with the Indenture shall cease to bear
interest from and after the Redemption Date.
In the event of redemption of this Series C Note in part only,
a new Series C Note or Series C Notes for the unredeemed portion
hereof shall be issued in the name of the Holder hereof upon the
cancellation hereof.
-5-
<PAGE> 9
If an Event of Default shall occur and be continuing, the
principal of all the Series C Notes may be declared due and payable in
the manner and with the effect provided in the Indenture.
The Indenture contains provisions for defeasance at any time
of (a) the entire indebtedness of the Company on this Series C Note
and (b) certain restrictive covenants and the related Defaults and
Events of Default, upon compliance by the Company with certain
conditions set forth therein, which provisions apply to this Series C
Note.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders under the
Indenture at any time by the Company and the Trustee with the consent
of the Holders of not less than a majority in principal amount of the
Outstanding Notes of each series which is affected by the modification
or amendment (voting, in the case of both series of Notes being
affected substantially identically, as one class, in which case such
majority shall include the Holder or Holders of the Institutional
Series B Notes). The Indenture also contains provisions permitting
the Holders of not less than a majority in principal amount of the
Outstanding Notes of each series affected (voting, in the case of both
series of Notes being affected substantially identically, as one
class, in which case such majority shall include the Holder or Holders
of the Institutional Series B Notes), on behalf of the Holders of such
series of Notes, to waive compliance by the Company with certain
provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by or on
behalf of the Holder of this Series C Note shall be conclusive and
binding upon such Holder and upon all future Holders of this Series C
Note and of any Series C Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof whether or not
notation of such consent or waiver is made upon this Series C Note.
No reference herein to the Indenture and no provision of this
Series C Note or of the Indenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the
principal of (and premium, if any) and interest on this Series C Note
at the times, place and rate, and in the coin or currency, herein
prescribed.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Series C Note is
registerable on the Note Register of the Company, upon surrender of
this Series C Note for registration of transfer at the office or
agency of the Company maintained for such purpose in Chicago, duly
endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Note Registrar duly executed
by, the Holder hereof or his attorney duly authorized in writing, and
thereupon one or more new Series C Notes, of authorized denominations
and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
The Series C Notes are issuable only in registered form
without coupons in denominations of $1,000 and any integral multiple
thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Series C Notes are exchangeable for
a like aggregate principal amount of Series C Notes of a different
authorized denomination, as requested by the Holder surrendering the
same.
No service charge shall be made for any registration of
transfer or exchange of Series C Notes, but the Company may require
payment of a sum sufficient to pay all documentary, stamp or similar
issue or transfer taxes or other governmental charges payable in
connection therewith.
Prior to the time of due presentment of this Series C Note for
registration of transfer, the Company, the Trustee and any agent of
the Company or the Trustee may treat the person in whose name this
Series C Note is registered as the owner hereof for all purposes,
whether or not this Series C Note be overdue, and neither the Company,
the Trustee nor any agent shall be affected by notice to the contrary.
All terms not otherwise defined herein shall have the meanings
assigned to them in the Indenture.
This Series C Note shall be governed by and construed in
accordance with the laws of the State of Illinois, without regard to
the conflict-of-laws rules thereof."
-6-
<PAGE> 10
"Section 208. Form of Face of Series D Security.
THIS NOTE IS ISSUED WITH "ORIGINAL ISSUE DISCOUNT." THIS NOTE WAS
ISSUED ON JULY ___, 1996 FOR AN ISSUE PRICE OF $___________. ASSUMING
THAT THE COMPANY DOES NOT EXERCISE ITS RIGHT TO ISSUE ADDITIONAL NOTES
IN LIEU OF CASH INTEREST PAYMENTS AT EACH OPPORTUNITY, THE TOTAL
AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $___________ FOR EACH $1,000
PRINCIPAL AMOUNT, AND THE YIELD TO MATURITY ON THE ISSUE DATE IS
____%, COMPOUNDED SEMI-ANNUALLY.
MARKS BROS. JEWELERS, INC.
Series D Senior Subordinated Note due 2004
No. _______ $_____________
CUSIP 570698 AE 0
Marks Bros. Jewelers, Inc., a Delaware corporation
(herein called the "Company," which term includes any successor person
under the Indenture hereinafter referred to), for value received,
hereby promises to pay to _________ or registered assigns, the
principal sum of _________ Dollars on October 31, 2004 at the office
or agency of the Company referred to below, and to pay interest
thereon (a) at the rate of 15.0% per annum, payable in cash (the "Cash
Interest"), plus, for years or portions thereof commencing on or after
May 1, 1998, (b) additional interest (the "Additional Interest")
initially at the rate of 1.0% per annum, with the rate of such
Additional Interest to increase in 1.0% per annum increments per each
subsequent year commencing May 1, 1999, such Cash Interest and
Additional Interest to be paid on July 31, 1996 and quarterly
thereafter on October 31, January 31, April 30 and July 31 in each
year, from the Issue Date, or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, until the
principal hereof is paid or duly provided for.
The Company may, at its option and in its sole
discretion, in lieu of the payment in whole or in part of the
Additional Interest in cash, pay such Additional Interest through the
issuance of additional Series D Notes ("Secondary Notes") in a
principal amount equal to the amount of such Additional Interest,
rounded to the nearest whole dollar. The Company shall notify the
Trustee or an authenticating agent of such election not less than 10
nor more than 45 days prior to the Regular Record Date for an Interest
Payment Date on which Secondary Notes will be issued. On such
Interest Payment Date the Trustee or authenticating agent shall
authenticate Secondary Notes for original issuance to the Holders of
Series B Notes on the preceding Regular Record Date, as shown by the
records of the Note Registrar, in the amount required to pay such
Additional Interest. Notwithstanding any other provision of this
paragraph or such Indenture to the contrary, the Company shall pay
cash in lieu of issuing Secondary Notes in any denomination of less
than $1,000 (which shall be determined with respect to the aggregate
amount of Series B Notes held by each Holder as shown by the records
of the Note Registrar) unless the Company is prohibited from making
such payments pursuant to Article Fourteen of such Indenture.
Any such Secondary Notes shall be governed by the
Indenture and shall be subject to the same terms as this Series D Note
(except, as the case may be, with respect to the title, issuance date
and aggregate principal amount). The term "Series B Notes" shall
include the Secondary Notes that may be issued under such Indenture.
Interest payable pursuant to this Series D Note, and
punctually paid or duly provided for, on any Interest Payment Date
will, as provided in such Indenture, be paid to the person in whose
name this Series D Note (or one or more Predecessor Notes) is
registered at the close of business on the Regular Record Date for
such interest, which shall be the January 15, April 15, July 15 or
October 15 (whether or not a Business Day), as the case may be, next
preceding such Interest Payment Date. Interest shall be computed on
the basis of a 360-day year of twelve 30-day months. Any such
interest not so punctually paid or duly provided for shall forthwith
cease to be payable to the Holder on such Regular Record Date, and
such defaulted interest, and (to the extent lawful) interest on such
defaulted interest at the rate borne by the Series D Notes, may be
paid to the person in whose name this Series D Note (or one or more
Predecessor Notes) is registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest to be fixed by
the Trustee, notice whereof shall be given to Holders of Series D
Notes not less than ten days prior to such Special Record Date, or may
be paid at any time in any other
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<PAGE> 11
lawful manner not inconsistent with the requirements of any securities
exchange on which the Series D Notes may be listed, and upon such
notice as may be required by such exchange, all as more fully provided
in said Indenture. Payment of the principal of (and premium, if any)
and interest on this Series D Note will be made at the office or
agency of the Company maintained for that purpose in the City of
Chicago, or at such other office or agency of the Company as may be
maintained for such purpose, in such coin or currency of the United
States of America as at the time of payment is legal tender for
payment of public and private debts; provided, however, that payment
of interest shall be made by the Company by wire transfer of
immediately available funds to the account of any Holder in whose name
not less than $100,000 principal amount of Series D Notes is
registered on the Note Register as previously designated by such
person.
Reference is hereby made to the further provisions of
this Series D Note set forth on the reverse hereof, which further
provisions shall for all purposes have the same effect as if set forth
at this place.
Unless the certificate of authentication hereon has
been duly executed by the Trustee referred to on the reverse hereof by
manual signature, this Series D Note shall not be entitled to any
benefit under the Indenture, or be valid or obligatory for any
purpose.
IN WITNESS WHEREOF, the Company has caused this
instrument to be duly executed under its corporate seal.
MARKS BROS. JEWELERS, INC.
By ____________________________
Attest:
________________
Authorized Signature"
"Section 209. Form of Reverse of Series D Security.
This Series D Note is one of a duly authorized issue of
securities of the Company designated as its Series D Senior
Subordinated Notes due 2004 (herein called the "Series D Notes"),
limited, together with the duly authorized issue of securities of the
Company designated as its Series B Senior Subordinated Notes due 2004
(the "Series B Securities"; and, together with the Series D Notes, the
"Series B Notes") (except as otherwise provided in the Indenture
referred to below) in aggregate principal amount to $8,000,000, which
may be issued under an indenture (herein called the "Indenture") dated
as of April 15, 1996 between the Company and Norwest Bank Minnesota,
National Association, as trustee (herein called the "Trustee," which
term includes any successor trustee under the Indenture), to which
Indenture and all indentures supplemental thereto reference is hereby
made for a statement of the respective rights, limitations of rights,
duties, obligations and immunities thereunder of the Company, the
Trustee and the Holders of the Series B Notes, and of the terms upon
which the Notes are, and are to be, authenticated and delivered. The
Indenture also governs the terms of two duly authorized issues of
securities of the Company designated as its Series A Senior
Subordinated Notes due 2004 (the "Series A Securities") and its Series
C Senior Subordinated Notes due 2004 (the "Series C Securities; and,
together with the Series A Securities, the "Series A Notes") limited
in aggregate principal amount to $12,000,000. The Series A Notes and
Series B Notes are sometimes herein collectively referred to as the
"Notes."
The Series D Notes are, to the extent and in the manner
provided in the Indenture, subordinate and subject in right of payment
to the prior payment in full of all Senior Indebtedness of the
Company, whether outstanding on the date of the Indenture or
thereafter created, incurred, assumed or guaranteed. Each Holder of
this Series D Note, by accepting the same, (a) agrees to and shall be
bound by the provisions of Article Fourteen of the Indenture, (b)
authorizes and directs the Trustee on his behalf to take such action
as may be necessary or appropriate to effectuate the subordination as
provided in the Indenture and (c) appoints the Trustee his
attorney-in-fact for such purpose.
Subject to the provisions of Article Fourteen of the
Indenture, the Series B Notes are subject to redemption upon not less
than 30 nor more than 60 days' notice, in amounts of $1,000 or an
integral multiple of
-8-
<PAGE> 12
$1,000 (a) at any time on or after the Issue Date, as a whole or in
part, at the election of the Company and (b) in part on July 31, 2001
and on each October 31, January 31, April 30 and July 31 thereafter to
and including July 31, 2004 for the Sinking Fund provided for in the
Indenture upon payment of the Redemption Price, which shall consist of
(i) 100% of the principal amount of the Notes so redeemed in case of a
redemption for said Sinking Fund or the applicable percentage of the
principal amount of the Notes so redeemed set forth below in the case
of any other such redemption:
If redeemed during the period set forth below,
<TABLE>
<CAPTION>
PERIOD PERCENTAGE
------ ----------
<S> <C>
July 31, 1996 - July 30, 1997 . . . . . . . . . . . . 112%
July 31, 1997 - July 30, 1998 . . . . . . . . . . . . 112%
July 31, 1998 - July 30, 1999 . . . . . . . . . . . . 110%
July 31, 1999 - July 30, 2000 . . . . . . . . . . . . 110%
July 31, 2000 - July 30, 2001 . . . . . . . . . . . . 109%
July 31, 2001 - July 30, 2002 . . . . . . . . . . . . 108%
July 31, 2002 - July 30, 2003 . . . . . . . . . . . . 107%
July 31, 2003 - July 30, 2004 . . . . . . . . . . . . 106%
July 31, 2004 and thereafter . . . . . . . . . . . . . 105%
</TABLE>
plus, in each case, (ii) any interest accrued on the Series D Notes so
redeemed to the Redemption Date (which interest so accrued shall be
paid solely by cash).
In the case of any redemption of Series D Notes, interest
installments whose Stated Maturity is on or prior to the Redemption
Date will be payable to the Holders of such Series D Notes, or one or
more Predecessor Notes, of record at the close of business on the
relevant Regular Record Date referred to on the face hereof. Notes
(or portions thereof) for whose redemption and payment provision is
made in accordance with the Indenture shall cease to bear interest
from and after the Redemption Date.
In the event of redemption of this Series D Note in part only,
a new Series D Note or Series D Notes for the unredeemed portion
hereof shall be issued in the name of the Holder hereof upon the
cancellation hereof.
If an Event of Default shall occur and be continuing, the
principal of all the Series D Notes may be declared due and payable in
the manner and with the effect provided in the Indenture.
The Indenture contains provisions for defeasance at any time
of (a) the entire indebtedness of the Company on this Series D Note
and (b) certain restrictive covenants and the related Defaults and
Events of Default, upon compliance by the Company with certain
conditions set forth therein, which provisions apply to this Series D
Note.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders under the
Indenture at any time by the Company and the Trustee with the consent
of the Holders of not less than a majority in principal amount of the
Outstanding Notes of each series which is affected by the modification
or amendment (voting, in the case of both series of Notes being
affected substantially identically, as one class, in which case such
majority shall include the Holder or Holders of the Institutional
Series B Notes). The Indenture also contains provisions permitting
the Holders of not less than a majority in principal amount of the
Outstanding Notes of each series affected (voting, in the case of both
series of Notes being affected substantially identically, as one
class, in which case such majority shall include the Holder or Holders
of the Institutional Series B Notes), on behalf of the Holders of such
series of Notes, to waive compliance by the Company with certain
provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by or on
behalf of the Holder of this Series D Note shall be conclusive and
binding upon such Holder and upon all future Holders of this Series D
Note and of any Series D Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof whether or not
notation of such consent or waiver is made upon this Series D Note.
-9-
<PAGE> 13
No reference herein to the Indenture and no provision of this
Series D Note or of the Indenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the
principal of (and premium, if any) and interest on this Series D Note
at the times, place and rate, and in the coin or currency, herein
prescribed.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Series D Note is
registerable on the Note Register of the Company, upon surrender of
this Series D Note for registration of transfer at the office or
agency of the Company maintained for such purpose in Chicago, duly
endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Note Registrar duly executed
by, the Holder hereof or his attorney duly authorized in writing, and
thereupon one or more new Series D Notes, of authorized denominations
and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
The Series D Notes are issuable only in registered form
without coupons in denominations of $1,000 and any integral multiple
thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Series D Notes are exchangeable for
a like aggregate principal amount of Series D Notes of a different
authorized denomination, as requested by the Holder surrendering the
same.
No service charge shall be made for any registration of
transfer or exchange of Series D Notes, but the Company may require
payment of a sum sufficient to pay all documentary, stamp or similar
issue or transfer taxes or other governmental charges payable in
connection therewith.
Prior to the time of due presentment of this Series D Note for
registration of transfer, the Company, the Trustee and any agent of
the Company or the Trustee may treat the person in whose name this
Series D Note is registered as the owner hereof for all purposes,
whether or not this Series D Note be overdue, and neither the Company,
the Trustee nor any agent shall be affected by notice to the contrary.
All terms not otherwise defined herein shall have the meanings
assigned to them in the Indenture.
This Series D Note shall be governed by and construed in
accordance with the laws of the State of Illinois, without regard to
the conflict-of-laws rules thereof."
SECTION 1.03. Amendment of Section 301. Section 301 of the
Original Indenture is hereby amended by striking the first four paragraphs
thereof and replacing the following therefor:
"The aggregate principal amount of Notes which may be
authenticated and delivered under this Indenture is limited to
$20,000,000, of which $12,000,000 shall be authenticated and delivered
as Series A Notes and $8,000,000 shall be authenticated and delivered
as Series B Notes, and except for Notes authenticated and delivered
upon registration of transfer of, or in exchange for, or in lieu of,
other Notes pursuant to Section 303, 304, 305, 306, 906 or 1108, and
Series B Securities and Series D Securities delivered in payment of
Additional Interest as set forth below.
The Series A Securities shall be known and designated as the
"Series A Senior Subordinated Notes due 2004" of the Company, and the
Series C Securities shall be known and designated as the "Series C
Senior Subordinated Notes due 2004" of the Company. The Stated
Maturity of the Series A Notes shall be October 31, 2004, and they
shall bear interest at the rate of 12.15% per annum from the Issue
Date, or from the most recent Interest Payment Date to which interest
has been paid or duly provided for, payable on July 31, 1996 and
quarterly thereafter on October 31, January 31, April 30 and July 31
in each year, until the principal hereof is paid or duly provided for.
The Series B Securities shall be known and designated as the
"Series B Senior Subordinated Notes due 2004" of the Company, and the
Series D Securities shall be known and
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<PAGE> 14
designated as the "Series D Senior Subordinated Notes due 2004" of the
Company. The Stated Maturity of the Series B Notes shall be October
31, 2004, and they shall bear interest at the rate of (a) 15.0% per
annum, payable in cash (the "Cash Interest"), plus, for years or
portions thereof commencing on or after May 1, 1998, (b) additional
interest (the "Additional Interest") initially at the rate of 1.0% per
annum, with the rate of such Additional Interest to increase in 1.0%
per annum increments per each subsequent year commencing May 1, 1999,
such Cash Interest and Additional Interest to be paid on July 31, 1996
and quarterly thereafter on October 31, January 31, April 30 and July
31 in each year, from the Issue Date, or from the most recent Interest
Payment Date to which interest has been paid or duly provided for,
until the principal hereof is paid or duly provided for.
The Company may, at its option and in its sole discretion, (i)
in lieu of the payment in whole or in part of the Additional Interest
with respect to Series B Securities in cash, pay such Additional
Interest through the issuance of additional Series B Securities, and
(ii) in lieu of the payment in whole or in part of the Additional
Interest with respect to Series D Securities in cash, pay such
Additional Interest through the issuance of additional Series D
Securities (such Series B Securities and Series D Securities issued as
Additional Interest are herein collectively referred to as the
"Secondary Notes"), in each case in a principal amount equal to the
amount of such Additional Interest, rounded to the nearest whole
dollar. The Company shall notify the Trustee or an authenticating
agent of such election not less than 10 nor more than 45 days prior to
the Regular Record Date for an Interest Payment Date on which
Secondary Notes will be issued. On such Interest Payment Date the
Trustee or authenticating agent shall authenticate Secondary Notes for
original issuance to the Holders of Notes on the preceding Regular
Record Date, as shown by the records of the Note Registrar, in the
amount required to pay such Additional Interest. Notwithstanding any
other provision of this Indenture to the contrary, the Company shall
pay cash in lieu of issuing Secondary Notes in any denomination of
less than $1,000 (which shall be determined with respect to the
aggregate amount of Notes held by each Holder as shown by the records
of the Note Registrar) unless the Company is prohibited from making
such payments pursuant to Article Fourteen of this Indenture."
SECTION 1.04. Addition of Section 312. The Original
Indenture is hereby amended to add the following Section 312 immediately
following Section 311:
"Section 312. Effective Registration.
In the event that the Company has an Effective Registration,
the Company shall notify the Trustee within three (3) days after the
Effective Date. If the Effective Registration involves a Senior Notes
Shelf Registration, the Company shall cause to be delivered to the
Trustee certificates for the Series A Securities and Series B
Securities without legends and the Trustee shall authenticate and
deliver certificated Series A Securities and Series B Securities
without legends to Holders presenting their certificated Series A
Securities or Series B Securities, respectively, for exchange, or to
transferees of the Series A Securities or Series B Securities,
respectively, covered by the Senior Notes Shelf Registration. If the
Effective Registration is with respect to a Registered Exchange Offer
for the Series A Securities, the Trustee shall notify the Holders of
receipt of such notice and, after receipt of a written order of the
Company (signed as specified in Section 303 hereof) for the
authentication and delivery of Series C Securities and a properly
completed letter of transmittal or other requested documents from a
Holder as specified in the exchange offer documents, shall exchange
such Holder's Series A Securities for Series C Securities upon the
-11-
<PAGE> 15
terms set forth in the exchange offer documents. If the Effective
Registration is with respect to a Registered Exchange Offer for the
Series B Securities, the Trustee shall notify the Holders of receipt
of such notice and, after receipt of a written order of the Company
(signed as specified in Section 303 hereof) for the authentication and
delivery of Series D Securities and a properly completed letter of
transmittal or other requested documents from a Holder as specified in
the exchange offer documents, shall exchange such Holder's Series B
Securities for Series D Securities upon the terms set forth in the
exchange offer documents."
SECTION 1.05. Addition of Section 612. The Original
Indenture is hereby amended to add the following Section 612 immediately
following Section 611:
"Section 612. Preferential Collection of Claims Against
Company.
The Trustee shall comply with TIA Section 311(a), excluding
any creditor relationship listed in TIA Section 311(b). A Trustee who
has resigned or been removed shall be subject to TIA Section 311(a) to
the extent indicated therein."
SECTION 1.06. Amendment of Section 702. Section 702 of the
Original Indenture is hereby amended by adding the following sentence and
paragraph at the end thereof:
"The Trustee also shall comply with TIA Section 313(b).
A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock
exchange upon which any series of Notes are listed, with the
Commission and also with the Company. The Company will notify the
Trustee when any series of Notes are listed on any stock exchange."
SECTION 1.07. Addition of Section 704. The Original
Indenture is hereby amended to add the following Section 704 immediately
following Section 703.
"Section 704. Preservation of Information; Communication to
Holders.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the
names and addresses of Holders. If the Trustee is not the Note
Registrar, the Company shall promptly furnish to the Trustee on or
before each semi-annual interest payment date and at such other times
as the Trustee may request in writing a list in such form and as of
such date as the Trustee may reasonably require of the names and
addresses of the Holders.
Holders may communicate pursuant to TIA Section 312(b) with
other Holders with respect to their rights under this Indenture or the
Notes."
-12-
<PAGE> 16
ARTICLE TWO
THE TRUSTEE
SECTION 2.01. Trustee Not Responsible for Validity or
Recitals. The Trustee shall not be responsible in any manner whatsoever for or
in respect of the validity or sufficiency of this First Supplemental Indenture
or the due execution hereof by the Company, or for or in respect of the
recitals and statements contained herein, all of which recitals and statements
are made solely by the Company.
SECTION 2.02. Duties, Responsibilities and Liabilities of
Trustee. Except as herein otherwise expressly provided, no duties,
responsibilities or liabilities are assumed, or shall be construed to be
assumed, by the Trustee by reason of this First Supplemental Indenture other
than as set forth in the Original Indenture; and this First Supplemental
Indenture is executed and accepted on behalf of the Trustee subject to all the
terms and conditions set forth in the Original Indenture as fully to all
intents as if the same were herein set forth at length.
ARTICLE THREE
MISCELLANEOUS PROVISIONS
SECTION 3.01. Provisions of Original Indenture Deemed
Incorporated. Except as herein otherwise expressly provided, all of the
provisions, definitions, terms and conditions of the Original Indenture shall
be deemed to be incorporated in, and made a part of, this First Supplemental
Indenture; the Original Indenture is in all respects hereby ratified and
confirmed; and the Original Indenture and this First Supplemental Indenture
shall be read, taken and construed as one and the same instrument.
SECTION 3.02. Benefits Restricted to Parties and Holders of
Notes. Nothing in this First Supplemental Indenture is intended, or shall be
construed, to give to any person or corporation other than the parties hereto
and the Holders of Notes issued and to be issued under the Indenture any legal
or equitable right, remedy or claim under or in respect of this First
Supplemental Indenture, or under any covenant, condition or provision herein
contained, all the covenants, conditions and provisions of this First
Supplemental Indenture being intended to be, and being, for the sole and
exclusive benefit of the parties hereto and of the Holders of Notes issued and
to be issued under the Indenture.
SECTION 3.03. Successors and Assigns of Company. All
covenants and agreements in this First Supplemental Indenture by the Company
shall bind and inure to the benefit of its successors and assigns, whether so
expressed or not.
SECTION 3.04. Headings and Table of Contents. Article and
Section headings herein, the Table of Contents and the Reconciliation and Tie
Between Trust Indenture Act of 1939 and Indenture, dated as of April 15, 1996,
are inserted for convenience of reference only and shall not be deemed to be a
part hereof.
SECTION 3.05. Counterparts. This First Supplemental
Indenture may be executed in any number of counterparts, each of which when so
executed shall be deemed to be an original; but all such counterparts shall
together constitute but one and the same instrument.
-13-
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have caused this First
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
above written.
MARKS BROS. JEWELERS, INC.
By:________________________________
Name:
Title:
(Corporate Seal)
Attest:
____________________________
Name:
Title:
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Trustee
By:______________________________
Name:
Title:
-14-
<PAGE> 1
EXHIBIT 5.1
[SIDLEY & AUSTIN LETTERHEAD]
August 1, 1996
Marks Bros. Jewelers, Inc.
155 North Wacker Drive
Suite 500
Chicago, Illinois 60606
Re: Series C Senior Subordinated Notes Due 2004 and
Series D Senior Subordinated Notes Due 20004
Dear Ladies and Gentlemen:
We refer to the Registration Statement on Form S-1 (the
"Registration Statement") filed by Marks Bros. Jewelers, Inc., a Delaware
corporation (the "Company"), with the Securities and Exchange Commission under
the Securities Act of 1933, as amended (the "Securities Act"), relating to the
registration of $12,000,000 aggregate principal amount of the Company's Series
C Senior Subordinated Notes Due 2004 (the "Series C Notes"), $8,000,000
aggregate principal amount of the Company's Series D Senior Subordinated Notes
Due 2004 (the "Series D Notes," and together with the Series C Notes, the "Debt
Securities"), and $2,255,000 aggregate principal amount of the Company's Series
A Senior Subordinated Notes Due 2004 (the "Resale Series A Notes"). The Debt
Securities are to be issued, and the Resale Series A Notes were issued, under
the Indenture (as it is to be supplemented, the "Indenture") dated as of April
15, 1996 as it is to be supplemented by the First Supplemental Indenture (the
"First Supplemental Indenture") between the Company and Norwest Bank Minnesota,
National Association, as trustee (the "Trustee"). The Company intends to
offer, upon the terms and subject to the
<PAGE> 2
[SIDLEY & AUSTIN LETTERHEAD]
Marks Bros. Jewelers, Inc.
August 1, 1996
Page 2
conditions set forth in the Registration Statement, to exchange (the "Exchange
Offer") (i) $1,000 principal amount of the Series C Notes for each $1,000
principal amount of the Company's outstanding Series A Senior Subordinated Notes
Due 2004 (the "Series A Notes"), of which $12,000,000 aggregate principal amount
is outstanding, and (ii) $1,000 principal amount of the Series D Notes for each
$1,000 principal amount outstanding of the Company's Series B Senior
Subordinated Notes Due 2004 (the "Series B Notes," and, together with the Series
A Notes, the "Old Notes"). The Resale Series A Notes are being registered under
the Securites Act for resale by the selling notholder (the "Selling Noteholder")
named in the Registration Statement.
We are familiar with the proceedings to date with respect to the
proposed issuance and delivery of the Debt Securities and the resale of the
Resale Series A Notes and have examined such records, documents and questions of
law, and satisfied ourselves as to such matters of fact, as we have considered
relevant and necessary as a basis for our opinion.
Based on the foregoing, we are of the opinion that:
1. The Company is duly incorporated and validly existing under the
laws of the State of Delaware.
2. All necessary action has been taken by the Company's Board of
Directors to authorize the issuance of the Debt Securities, and no action
by the stockholders of the Company is required.
3. The Resale Series A Notes are legally issued and binding
obligations of the Company (except to the extent enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer or other similar laws affecting the enforcement of
creditors' rights generally and by the effect of general principles of
equity, regardless of whether enforceability is considered in a proceeding
in equity or at law).
<PAGE> 3
[SIDLEY & AUSTIN LETTERHEAD]
Marks Bros. Jewelers, Inc.
August 1, 1996
Page 3
4. The Debt Securities issued upon acceptance of the Exchange Offer
will be legally issued and binding obligations of the Company (except to
the extent enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other
similar laws affecting the enforcement of creditors' rights generally and
by the effect of general principles of equity, regardless of whether
enforceability is considered in a proceeding in equity or at law) when
(i) the First Supplemental Indenture shall have been executed, delivered
and shall have become effective, (ii) the Registration Statement, as
finally amended, shall have become effective under the Securities Act and
the Indenture shall have been qualified under the Trust Indenture Act of
1939, as amended, and (ii) such Debt Securities shall have been duly
executed and authenticated as provided in the Indenture and shall have
been duly delivered to the holders of the Old Notes in accordance with
the terms and conditions of the Exchange Offer.
We do not find it necessary for the purposes of this opinion to cover,
and accordingly we express no opinion as to, the application of the securities
or blue sky laws of the various states to the offer and exchange of the Debt
Securities.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to all references to our firm included in or made a
part of the Registration Statement.
Very truly yours,
SIDLEY & AUSTIN
<PAGE> 1
EXHIBIT 10.1
[Execution Copy]
SECOND AMENDED AND RESTATED
REGISTRATION AGREEMENT
THIS SECOND AMENDED AND RESTATED REGISTRATION AGREEMENT (this
"Agreement"), dated as of May 1, 1996, is by and among Marks Bros. Jewelers,
Inc., a Delaware corporation (the "Corporation"); the persons and entities
identified on Schedule 1 hereto attached (the "Old Investors"); the persons and
entities identified on Schedule 2 hereto attached (the "New Investors"); the
persons and entities identified on Schedule 3 hereto attached (the "Warrant
Holders"); the persons and entities identified on Schedule 4 hereto attached
(the "Managers"); and the persons and entities identified on Schedule 5
attached hereto (the "Zero Coupon Note Holders").
WITNESSETH:
WHEREAS, the Corporation, the Old Investors, the New Investors, the
Warrant Holders, the Managers and the Zero Coupon Note Holders are parties to
that certain Amended and Restated Registration Agreement dated as of November
16, 1990, as amended October 31, 1992 (as heretofore amended, the "Registration
Agreement"), pursuant to which the Corporation granted certain securities
registration rights to the Old Investors, the New Investors, the Warrant
Holders, the Managers and the Zero Coupon Note Holders;
WHEREAS, in connection with the initial public offering of common stock of
the Corporation, the parties to the Registration Agreement desire to amend and
restate the Registration Agreement in its entirety.
NOW THEREFORE, in consideration of the mutual promises, covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Definitions. As used in this Agreement:
(a) "Class C Registrable Shares" means, at any time, (i) shares of Common
Stock then outstanding which were issued upon conversion of Class C Shares,
(ii) shares of Common Stock then issuable upon conversion of Class C Shares,
(iii) shares of Common Stock then outstanding which were issued as, or upon
conversion or exercise of other securities issued as, a dividend or other
distribution with respect to or in replacement of other Class C
Registrable Shares or the Class C Shares and (iv) shares of Common Stock
then issuable upon conversion or exercise of other securities which were issued
as a dividend or other distribution with respect to or in replacement of other
Class C
<PAGE> 2
Registrable Shares or the Class C Shares; provided, however, that Class
C Registrable Shares shall not include any shares the sale of which has been
registered pursuant to the Securities Act or which have been sold pursuant to
Rule 144 promulgated by the Commission under the Securities Act. For purposes
of this Agreement, a Person will be deemed to be a holder of Class C
Registrable Shares whenever such Person has the right to acquire such Class C
Registrable Shares (by conversion or otherwise, but disregarding any legal
restrictions upon the exercise of such right), whether or not such acquisition
has actually been effected.
(b) "Class C Shares" means shares of the Class C Common Stock of the
Corporation.
(c) "Commission" means the Securities and Exchange Commission.
(d) "Common Registrable Shares" means, at any time, shares of Common
Stock, other than Class C Registrable Shares and Class D Registrable Shares,
then outstanding and owned or held by Investors who are not Managers; provided,
however, that Common Registrable Shares shall not include any shares the sale
of which has been registered pursuant to the Securities Act or which have been
sold pursuant to Rule 144 promulgated by the Commission under the Securities
Act.
(e) "Demand Registration" has the meaning ascribed to it in Section 2(a)
of this Agreement.
(f) "ESOP Demand Registration" means a registration of securities of the
Corporation requested by the ESOP Trust under the ESOP Registration Agreement.
(g) "ESOP Registration Agreement" means the Registration Agreement to be
entered into between the Corporation and Marks Bros. Jewelers, Inc. Employee
Stock Ownership Trust (the "ESOP Trust"), forming a part of the Marks Bros.
Jewelers, Inc. Employee Stock Ownership Plan (the "ESOP") in substantially the
form attached hereto as Exhibit A.
(h) "Common Stock" means the Common Stock of the Corporation.
(i) "Investor Registrable Shares" means Common Registrable Shares, Class C
Registrable Shares, Warrant Registrable Shares and Class D Registrable Shares;
provided, however, that Class D Registrable Shares shall be deemed not to be
Investor Registrable Shares for any of the following:
(i) for purposes of determining holders of Investor
Registrable Shares entitled to initiate a
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<PAGE> 3
registration under paragraph 2 hereof (but Class D
Registrable Shares shall be Investor Registrable Shares for
purposes of determining which holders of Investor Registrable
Shares shall have rights to participate in such a
registration to the extent set forth in paragraph 2);
(ii) for purposes of determining holders of "a majority
of the Registrable Shares being sold" under subparagraph
5(g);
(iii) for purposes of determining "holders of a
majority of the Registrable Shares being registered" under
subparagraph 5(k);
(iv) for purposes of determining "holders of a majority
of the Registrable Shares being registered" under
subparagraph 5(n);
(v) for purposes of determining "one counsel chosen by
the holders of a majority of the Investor Registrable Shares
requested to be registered" under subparagraph 6(b);
(vi) for purposes of determining holders of "a majority
of the Investor Registrable Shares requested to be
registered" under paragraph 9;
(vii) for purposes of determining "holders of at least
66-2/3% of the Investor Registrable Shares" under paragraph
12; or
(viii) for purposes of determining "holders of at least
66-2/3% of the Investor Registrable Shares" in each of the
three sentences of paragraph 14.
(j) "Investors" means the Old Investors, the New Investors and the Zero
Coupon Note Holders.
(k) "Management Demand Registration" has the meaning ascribed to it in
Section 2(f) of this Agreement.
(l) "Management Registrable Shares" means, at any time, shares of Common
Stock, other than Class C Registrable Shares and Class D Registrable Shares,
then outstanding and owned or held by the Managers; provided, however, that
Management Registrable Shares shall not include any shares the sale of which
has been registered pursuant to the Securities Act or which have been sold
pursuant to Rule 144 promulgated by the Commission under the Securities Act.
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<PAGE> 4
(m) "Merger" means the merger of MHC with and into the Corporation
pursuant to the Merger Agreement.
(n) "Merger Agreement" means that certain Merger Agreement dated as of the
November 6, 1989 by and between the Corporation and MHC.
(o) "MHC" means Marks Holding Corporation, a Delaware corporation.
(p) "Overallotment Option" has the meaning ascribed to it in Section 3(e)
of this Agreement.
(q) "Person" means a natural person, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity or any department, agency or political
subdivision thereof.
(r) "Piggyback Registration" has the meaning ascribed to it in Section
3(a) of this Agreement.
(s) "Registrable Shares" means Investor Registrable Shares and Management
Registrable Shares.
(t) "Registration Expenses" has the meaning ascribed to it in Section 6 of
this Agreement.
(u) "Securities Act" means the Securities Act of 1933, as amended.
(v) "Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(w) "Warrant Registrable Shares" means, at any time, (i) shares of Common
Stock then outstanding which were issued upon exercise of the Warrants, (ii)
shares of Common Stock then issuable upon exercise of the Warrants, (iii)
shares of Common Stock then outstanding which were issued as, or upon the
conversion or exercise of other securities issued as, a dividend or other
distribution with respect to or in replacement of other Warrant Registrable
Shares or the Warrants and (iv) shares of Common Stock then issuable as a
dividend or other distribution with respect to or in replacement of other
Warrant Registrable Shares or the Warrants; provided, however, that Warrant
Registrable Shares shall not include any shares the sale of which has been
registered pursuant to the Securities Act or which have been sold pursuant to
Rule 144 promulgated by the Commission under the Securities Act. For purposes
of this Agreement, a Person will be deemed to be a holder of Warrant
Registrable Shares whenever such Person has the right to acquire such Warrant
Registrable Shares (by conversion or otherwise, but disregarding
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<PAGE> 5
any legal restrictions upon the exercise of such right), whether or not such
acquisition has actually been effected.
(x) "Warrants" means, at any time, (i) warrants to purchase shares of
Common Stock issued to the Warrant Holders in connection with, or in exchange
for warrants to purchase shares of common stock of MHC exchanged in, the Merger
(the "Initial Warrants") and (ii) warrants to purchase shares of Common Stock
issued pursuant to the terms and provisions of paragraphs 11 or 12 of the
Initial Warrants or any other Warrants issued at any time.
(y) "Restated Credit Agreement" means that certain Restated and Amended
Revolving Credit and Term Loan Agreement dated as of October 31, 1992 by and
among the Corporation, Citibank, N.A., as agent, and the banks signatory
thereto, as amended, modified or supplemented from time to time in accordance
with the terms thereof.
(z) "Zero Coupon Note Holders" means, at any time of determination
thereof, the holders of any Zero Coupon Notes then outstanding.
(aa) "Zero Coupon Notes" has the meaning ascribed to it in the Restated
Credit Agreement as in effect as of the date hereof.
(bb) "Class D Shares" means shares of the Class D Common Stock of the
Corporation.
(cc) "Class D Registrable Shares" means, at any time, (i) shares of
Common Stock then outstanding which were issued upon conversion of Class D
Shares, (ii) shares of Common Stock then issuable upon conversion of Class D
Shares, (iii) shares of Common Stock then outstanding which were issued as, or
upon the conversion or exercise of other securities issued as, a dividend or
other distribution with respect to or in replacement of other Class D
Registrable Shares or the Class D Shares, and (iv) shares of Common Stock then
issuable upon conversion or exercise of other securities which were issued as a
dividend or other distribution with respect to or in replacement of other Class
D Registrable Shares or the Class D Shares; provided, however, that Class D
Registrable Shares shall not include any shares the sale of which has been
registered pursuant to the Securities Act or which have been sold pursuant to
Rule 144 promulgated by the Commission under the Securities Act. For purposes
of this Agreement, a Person will be deemed to be a holder of a Class D
Registrable Share whenever such Person has the right to acquire such Class D
Registrable Share (by conversion or otherwise, but disregarding any legal (but
not contractual) restrictions upon the exercise of such right), whether or not
such acquisition has actually been effected.
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<PAGE> 6
(dd) "Note and Warrant Purchase Agreement" means that certain Note and
Warrant Purchase Agreement dated as of November 6, 1989 among the Corporation,
Marks Holdings Corporation and Harris Trust and Savings Bank, not individually,
but solely as Master Trustee for the Teachers' Retirement System of the State
of Illinois, as amended by that certain Amendment No. 1 thereto dated as of
October 31, 1992, as amended, modified or supplemented from time to time in
accordance with the terms thereof.
2. Demand Registrations.
(a) Requests for Registration. The holders of at least 66-2/3% of the
then outstanding Investor Registrable Shares at any time may request
registration under the Securities Act of all or part of their Investor
Registrable Shares on Form S-1 or any similar long-form registration (a
"Long-Form Registration") or, if available, on Form S-2 or S-3 or any similar
short-form registration; provided, however, that notwithstanding anything to
the contrary contained herein, so long as the Primary Note (as defined in the
Note and Warrant Purchase Agreement) remains outstanding, without the prior
written consent of the holder or holders of at least 66-2/3% of the aggregate
principal amount of the Primary Note then outstanding, the Corporation will not
register any equity securities of the Corporation in connection with an
underwritten public offering (other than registrations of securities to be sold
by the Corporation), unless, and to the extent that, the managing underwriter
of such offering, which underwriter shall be reasonably acceptable to the
Purchaser (as defined in the Note and Warrant Purchase Agreement), delivers to
the Purchaser its written opinion that the Corporation cannot sell for its own
account more than the number of equity securities that the Corporation intends
to sell in such offering without adversely affecting the offering or the
offering or market price of such securities and that the sale of equity
securities in such offering by Persons other than the Corporation would not
have an adverse effect on the offering or the offering or market price of such
securities. Within ten business days after receipt of any requests pursuant to
this paragraph 2(a), the Corporation will give written notice of such request
to all other holders of Investor Registrable Shares and will include in such
registration all Investor Registrable Shares with respect to which the
Corporation has received written requests for inclusion therein within 15 days
after the receipt of the Corporation's notice. All registrations requested
pursuant to this paragraph 2(a) are referred to herein as "Demand
Registrations."
(b) Demand Registrations. A maximum of two Demand Registrations may be
requested by the holders of Investor Registrable Shares pursuant to paragraph
2(a); provided, however, that the aggregate offering value of the Investor
Registrable Shares requested to be registered in any such Demand Registration
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<PAGE> 7
must be reasonably expected to equal at least $750,000. A registration will
not count as one of the permitted Demand Registrations until it has become
effective and will not count as one of the permitted Demand Registrations
unless the holders of the Investor Registrable Shares initially requesting such
registration are able to register and sell at least 90% of the Investor
Registrable Shares requested to be included in such Demand Registration;
provided that, in any event, the Corporation will pay all Registration Expenses
in connection with any registration initiated as a Demand Registration
requested hereunder.
(c) Pre-emption. The Corporation will have the right to pre-empt any
Demand Registration with a primary registration by delivering written notice of
such intention to the holders of Investor Registrable Shares who have requested
such Demand Registration within fourteen days after the Corporation has
received a request for such registration. In the ensuing primary registration,
the holders of Investor Registrable Shares will have such piggyback
registration rights as are set forth in paragraph 3 hereof. Upon the
Corporation's pre-emption of a requested Demand Registration, such requested
registration will not count as one of the permitted Demand Registrations.
(d) Priority on Demand Registrations. If a Demand Registration is an
underwritten public offering and the managing underwriters advise the
Corporation in writing that in their opinion the number of Registrable Shares
and other securities requested to be included exceeds the number of Registrable
Shares and other securities which can be sold in such offering, the Corporation
will include in such registration, prior to the inclusion of any securities
which are not Registrable Shares, (i) first, the number of Investor Registrable
Shares requested to be included which in the opinion of such underwriters can
be sold, pro rata among the respective holders on the basis of the number of
Investor Registrable Shares owned or deemed owned by such holders, with further
successive pro rata allocations among the holders of Investor Registrable
Shares if any such holder of Investor Registrable Shares has requested the
registration of less than all such Investor Registrable Shares it is entitled
to register; and (ii) second, if all of the Investor Registrable Shares
requested to be registered pursuant to such registration are included in such
registration, the number of Management Registrable Shares requested to be
included in such registration which in the opinion of such underwriters can be
sold, pro rata among the respective holders on the basis of the number of
Management Registrable Shares owned or deemed to be owned, with further
successive pro rata allocations among the holders of Management Registrable
Shares if any holder of Management Registrable Shares requests the registration
of less Management Registrable Shares than such holder is entitled to have
registered.
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<PAGE> 8
(e) Restrictions on Registrations. The Corporation will not be obligated
to effect any Long-Form Registration within six months after the effective date
of a previous Long-Form Registration. The Corporation may postpone for up to,
but not longer than, three months the filing or the effectiveness of a
registration statement for a Demand Registration if the Corporation reasonably
believes that such Demand Registration might have a material adverse effect on
any proposal or plan by the Corporation or any of its subsidiaries to engage in
any acquisition of assets (other than in the ordinary course of business) or
any merger, consolidation, tender offer or other significant transactions.
(f) Requests for Registration by Managers. The holders of at least
66-2/3% of the then outstanding Management Registrable Shares at any time may
request registration under the Securities Act of all or part of their
Management Registrable Shares on any Long Form Registration or, if available,
on Form S-2 or S-3 or any similar short-form registration. Within ten business
days after receipt of any requests pursuant to this paragraph 2(f), the
Corporation will give written notice of such request to all other holders of
Management Registrable Shares and to holders of Investors Registrable Shares
and will include in such registration all Management Registrable Shares with
respect to which the Corporation has received written requests for inclusion
therein within 15 days after the receipt of the Corporation's notice. All
registrations requested pursuant to this paragraph 2(f) are referred to herein
as "Management Demand Registrations."
(g) Demand Registrations. A maximum of two Management Demand
Registrations may be requested by the holders of Management Registrable Shares
pursuant to paragraph 2(f); provided, however, that the aggregate offering
value of the Management Registrable Shares requested to be registered in any
such Management Demand Registration must be reasonably expected to equal at
least $750,000. A registration will not count as one of the permitted
Management Demand Registrations until it has become effective and will not
count as one of the permitted Management Demand Registrations unless the
holders of the Management Registrable Shares initially requesting such
registration are able to register and sell at least 90% of the Management
Registrable Shares requested to be included in such Registration; provided
that, in any event, the Corporation will pay all Registration Expenses in
connection with any registration initiated as a Management Demand Registration
requested hereunder.
(h) Pre-emption by the Corporation. The Corporation will have the right
to pre-empt any Management Demand Registration with a primary registration by
delivering written notice of such intention to the holders of Management
Registrable
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<PAGE> 9
Shares who have requested such Management Demand Registration within fourteen
days after the Corporation has received a request for such registration. In
the ensuing primary registration, the holders of Management Registrable Shares
will have such piggyback registration rights as are set forth in paragraph 3
hereof. Upon the Corporation's pre-emption of a requested Management Demand
Registration, such requested registration will not count as one of the
permitted Management Registrations.
(i) Pre-emption by the Holders of Investor Registrable Shares. Subject to
paragraph 2(c), the holders of at least 66-2/3% of the then outstanding
Investors Registrable Shares will have the right to pre-empt any Management
Demand Registration with a Demand Registration by delivering written notice of
such intention to Hugh M. Patinkin (or to such other Manager as is designated
by holders of 66-2/3% of the Management Registrable Shares from time to time)
within fourteen days after the Corporation has sent notice to the holders of
Investor Registrable Shares of such request for such Management Demand
Registration. In the ensuing Demand Registration, the holders of Management
Registrable Shares will have such piggyback registration rights as are set
forth in paragraphs 2(d) and 3 hereof, as the case may be. Upon pre-emption of
a requested Management Demand Registration by the holders of Investor
Registrable Shares as provided in paragraph 2(i), such requested registration
will not count as one of the permitted Management Demand Registrations and,
subject to paragraphs 2(b) and (c), will count as one of the permitted Demand
Registrations.
(j) Priority on Demand Registrations. If a Management Demand Registration
is an underwritten public offering and the managing underwriters advise the
Corporation in writing that in their opinion the number of Registrable Shares
and other securities requested to be included exceeds the number of Registrable
Shares and other securities which can be sold in such offering, the Corporation
will include in such registration, prior to the inclusion of any securities
which are not Registrable Shares, (i) first, the number of Management
Registrable Shares requested to be included which in the opinion of such
underwriters can be sold, pro rata among the respective holders on the basis of
the number of Management Registrable Shares owned or deemed owned by such
holders, with further successive pro rata allocations among the holders of
Management Registrable Shares if any such holder of Management Registrable
Shares has requested the registration of less than all such Management
Registrable Shares it is entitled to register; and (ii) second, if all of the
Management Registrable Shares requested to be registered pursuant to such
registration are included in such registration, the number of Investor
Registrable Shares requested to be included in such registration which in the
opinion of such underwriters can be sold, pro rata among the respective holders
on the basis of the number of Investor
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<PAGE> 10
Registrable Shares owned or deemed to be owned with further successive pro rata
allocations among the holders of Investor Registrable Shares if any holder of
Investor Registrable Shares requests the registration of less Investor
Registrable Shares than such holder is entitled to have registered.
(k) Restrictions on Registrations. The Corporation will not be obligated
to effect any Long-Form Registration within six months after the effective date
of a previous Long-Form Registration. The Corporation may postpone for up to,
but not longer than, three months the filing or the effectiveness of a
registration statement for a Management Demand Registration if the Corporation
reasonably believes that such Management Demand Registration might have a
material adverse effect on any proposal or plan by the Corporation or any of
its subsidiaries to engage in any acquisition of assets (other than in the
ordinary course of business) or any merger, consolidation, tender offer or
other significant transactions.
3. Piggyback Registrations.
(a) Right to Piggyback. Whenever the Corporation proposes to register any
of its securities under the Securities Act (other than a Demand Registration or
a Management Demand Registration) and the registration form to be used may be
used for the registration of Registrable Shares (a "Piggyback Registration"),
the Corporation will give prompt written notice to all holders of Registrable
Shares of its intention to effect such a registration and will include in such
registration all Registrable Shares with respect to which the Corporation has
received written requests for inclusion therein within 15 days after the
receipt of the Corporation's notice.
(b) Priority on Primary Registrations. If a Piggyback Registration is an
underwritten primary registration on behalf of the Corporation, and the
managing underwriters advise the Corporation in writing that in their opinion
the number of securities requested to be included in such registration exceeds
the number which can be sold in such offering, the Corporation will include in
such registration (i) first, the securities the Corporation proposes to sell;
(ii) second, the Registrable Shares requested to be included in such
registration which in the opinion of such underwriters can be sold, provided
that if less than all of such Registrable Shares requested to be included may
be included in such opinion of such underwriters, the Corporation shall
determine the Registrable Shares which shall be included in such registration
in accordance with the following procedures:
(1) If the number of Management Registrable Shares requested to be
included in such registration is more than one-third the number of
Investor Registrable Shares requested to be included in such
registration,
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<PAGE> 11
then the Corporation shall reduce the number of such
Management Registrable Shares which shall be included until the
first to occur of (a) the number of Registrable Shares to be
included equals the number of securities which in the opinion of
such underwriters can be included in such registration in addition
to the securities proposed to be registered by the Corporation and
(b) the number of Investor Registrable Shares equals three times
the number of Management Registrable Shares; thereafter, if any
additional reduction is necessary, it shall be made in accordance
with clause (3) below;
(2) If the number of Investor Registrable Shares requested to be
included in such registration is more than three times the number
of Management Registrable Shares requested to be included in such
registration, then the Corporation shall reduce the number of such
Investor Registrable Shares which shall be included until the
first to occur of (a) the number of Registrable Shares to be
included equals the number of securities which in the opinion of
such underwriters can be included in such registration in addition
to the securities proposed to be registered by the Corporation and
(b) the number of Investor Registrable Shares equals three times
the number of Management Registrable Shares; thereafter, if any
additional reduction is necessary, it shall be made in accordance
with clause (3) below;
(3) If the number of Investor Registrable Shares requested to be
included in such registration equals three times the number of
Management Registrable Shares requested to be included in such
registration and an additional reduction in the number of
securities being registered is necessary, then the Corporation
shall include in such registration the number of securities which
in the opinion of such underwriters can be sold and of such
number, 75% shall be Investor Registrable Shares and 25% shall be
Management Registrable Shares;
and (iii) third, other securities requested to be included in such
registration.
(c) Priority on Secondary Registrations. If a Piggyback Registration is
an underwritten secondary registration on behalf of holders of the
Corporation's securities, and the managing underwriters advise the Corporation
in writing that in their opinion the number of securities requested to be
included in such registration exceeds the number which can be sold in such
offering, the Corporation will include in such registration (i) first, the
securities requested to be included therein by the
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<PAGE> 12
ESOP if the registration is pursuant to an ESOP Demand Registration, (ii)
second, the securities requested to be included therein by the holders
requesting such registration if such request is by holders who have demand
registration rights granted as permitted hereunder ("Third-Party Holders"),
(iii) third, the Registrable Shares requested to be included in such
registration which in the opinion of such underwriters can be sold, provided
that if less than all of such Registrable Shares requested to be included may
be included in such opinion of such underwriters, the Corporation shall
determine the Registrable Shares which shall be included in such registration
in accordance with the following procedures:
(1) If the number of Management Registrable Shares requested
to be included in such registration is more than one-third the number of
Investor Registrable Shares requested to be included in such
registration, then the Corporation shall reduce the number of such
Management Registrable Shares which shall be included until the first to
occur of (a) the number of Registrable Shares to be included equals the
number of securities which in the opinion of such underwriters can be
included in such registration in addition to the securities proposed to
be registered by the Third-Party Holders and (b) the number of Investor
Registrable Shares equals three times the number of Management
Registrable Shares; thereafter, if any additional reduction is necessary,
it shall be made in accordance with clause (3) below;
(2) If the number of Investor Registrable Shares requested to
be included in such registration is more than three times the
number of Management Registrable Shares requested to be included
in such registration, then the Corporation shall reduce the number
of such Investor Registrable Shares which shall be included until
the first to occur of (a) the number of Registrable Shares to be
included equals the number of securities which in the opinion of
such underwriters can be included in such registration in addition
to the securities proposed to be registered by the Third-Party
Holders and (b) the number of Investor Registrable Shares equals
three times the number of Management Registrable Shares;
thereafter, if any additional reduction is necessary, it shall be
made in accordance with clause (3) below;
(3) If the number of Investor Registrable Shares requested to
be included in such registration equals three times the number of
Management Registrable Shares requested to be included in such
registration and an additional reduction in the number of
securities being
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<PAGE> 13
registered is necessary, then the Corporation shall include in such
registration the number of securities which in the opinion of such
underwriters can be sold, and of such number, 75% shall be Investor
Registrable Shares and 25% shall be Management Registrable Shares;
and (iii) third, other securities requested to be included in such
registration.
(d) Other Registrations. If the Corporation has previously filed a
registration statement with respect to Registrable Shares pursuant to paragraph
2 or pursuant to this paragraph 3, and if such previous registration has not
been withdrawn or abandoned, the Corporation will not file or cause to be
effected any other registration of any of its equity securities or securities
convertible or exchangeable into or exercisable for its equity securities under
the Securities Act at the request of any holder or holders of such securities,
until a period of 6 months has elapsed from the effective date of such previous
registration; provided, however, that if on its own behalf, the Corporation
decides to file a registration statement during such period, the rights of the
holders of Registrable Shares specified in Section 3 hereof shall apply.
(e) Overallotment Options. If, in an underwritten registration, an option
is granted to the underwriter to purchase securities in excess of the number of
securities which the Corporation or any Managers, Warrant Holders, or Investors
have registered at the same price as applies to such registration (an
"Overallotment Option"), the following shall apply:
(i) If such registration is an underwritten registration (other
than a Demand Registration, Management Demand Registration or ESOP
Demand Registration), the Corporation, at the Corporation's
option, may elect (a) to sell all or a portion of the securities
necessary to satisfy such Overallotment Option, or (b) to allow
any stockholder of the Corporation participating in such
registration to elect to sell that proportion of any securities
necessary to satisfy the Overallotment Option which the
Corporation does not wish to sell which his or its securities
included in such registration bears to the total number of
securities included in such registration by holders of securities;
and
(ii) If such registration is a Demand Registration, Management
Demand Registration or ESOP Demand Registration, the holders of
the Investor Registrable Shares and Management Registrable Shares
whose securities are included in such Demand Registration,
Management Demand Registration or ESOP Demand
-13-
<PAGE> 14
Registration, as the case may be, at each such holder's option, may elect
to sell the securities necessary to satisfy such Overallotment
Option in the proportion in which such holder's Investor Registrable
Shares or Management Registrable Shares, as the case may be, included in
such Demand Registration, Management Demand Registration or ESOP Demand
Registration, bears to the total number of securities included in such
registration by holders of Registrable Shares; if such holders' elections
are not sufficient to satisfy the Overallotment Option, the Corporation
may sell the securities necessary to satisfy such option.
4. Holdback Agreements.
(a) Each of the holders of Registrable Shares agrees not to effect
any public sale or distribution of equity securities of the Corporation, or any
securities convertible into or exchangeable or exercisable for such securities,
during the seven days prior to and the 60-day period beginning on the effective
date of any underwritten Demand Registration, Management Demand Registration or
ESOP Demand Registration (except as part of such underwritten registration),
unless the underwriters managing the registered public offering otherwise
agree.
(b) The Corporation agrees (i) not to effect any public sale or
distribution of its equity securities, or any securities convertible into or
exchangeable or exercisable for such securities, during the seven days prior to
and during the 60-day period beginning on the effective date of any
underwritten Demand Registration, Management Demand Registration or ESOP Demand
Registration or any underwritten Piggyback Registration (except as part of such
underwritten registration or pursuant to registrations on Form S-8 or any
successor form), unless the underwriters managing the registered public
offering otherwise agree, and (ii) to cause each holder of at least 3% (on a
fully-diluted basis) of its equity securities, or any securities convertible
into or exchangeable or exercisable for such securities, purchased from the
Corporation at any time after the date of this Agreement (other than in a
registered public offering) to agree not to effect any public sale or
distribution of any such securities during such period (except as part of such
underwritten registration, if otherwise permitted), unless the underwriters
managing the registered public offering otherwise agree.
5. Registration Procedures. Whenever the holders of Registrable
Shares have requested that any Registrable Shares be registered pursuant to this
Agreement, the Corporation will use its best efforts to effect the registration
of such Registrable Shares in accordance with the intended method of
disposition
-14-
<PAGE> 15
thereof, and pursuant thereto the Corporation will as expeditiously
as possible:
(a) prepare and file with the Commission a registration statement with
respect to such Registrable Shares and use its best efforts to cause such
registration statement to become and remain effective for such period as may be
reasonably necessary to effect the sale of such securities, not to exceed nine
months;
(b) prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective for a period
of not less than nine months and comply with the provisions of the Securities
Act applicable to the Corporation with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the
sellers thereof set forth in such registration statement;
(c) furnish to each seller of Registrable Shares and the underwriters of
the securities being registered such number of copies of such registration
statement, each amendment and supplement thereto, the prospectus included in
such registration statement (including each preliminary prospectus) and such
other documents as such seller or underwriters may reasonably request in order
to facilitate the disposition of the Registrable Shares owned by such seller or
the sale of such securities by such underwriters;
(d) use its best efforts to register or qualify such Registrable Shares
under such other securities or blue sky laws of such jurisdictions as any
seller reasonably requests and do any and all other acts and things which may
be reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Shares owned by such
seller (provided, however, that the Corporation will not be required to (i)
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subparagraph, (ii) subject itself
to taxation in any such jurisdiction or (iii) consent to general service of
process in any such jurisdiction);
(e) cause all such Registrable Shares to be listed on each securities
exchange on which similar securities issued by the Corporation are then listed
provided that such Registrable Shares meet the listing standards and
requirements;
(f) provide a transfer agent and registrar for all such Registrable
Shares not later than the effective date of such registration statement;
-15-
<PAGE> 16
(g) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
a majority of the Registrable Shares being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Shares (including, without limitation, effecting a stock split or a
combination of shares);
(h) make available at reasonable times for inspection by the seller of
Registrable Shares, any underwriter participating in any disposition pursuant
to such registration statement, and any attorney, accountant or other agent
retained by any such seller or underwriter, all pertinent financial and other
records, pertinent corporate documents and properties of the Corporation, and
cause the Corporation's officers, directors, employees and independent
accountants to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such registration
statement provided the Corporation has received reasonable written assurances
as to the purpose of such inspection and the confidential manner in which such
information will be treated, subject to applicable law and judicial process;
(i) notify each seller of such Registrable Shares, promptly after it
shall receive notice thereof, of the time when such registration statement has
become effective or a supplement to any prospectus forming a part of such
registration statement has been filed;
(j) notify each seller of such Registrable Shares of any request by the
Commission for the amending or supplementing of such registration statement or
prospectus or for additional information;
(k) prepare and file with the Commission, promptly upon the request of
any seller of such Registrable Shares, any amendments or supplements to such
registration statement or prospectus which, in the opinion of counsel selected
by the holders of a majority of the Registrable Shares being registered, is
required under the Securities Act or the rules and regulations thereunder in
connection with the distribution of Registrable Shares by such Seller;
(l) prepare and promptly file with the Commission and promptly notify
each seller of such Registrable Shares of the filing of such amendment or
supplement to such registration statement or prospectus as may be necessary to
correct any statements or omissions if, at the time when a prospectus relating
to such securities is required to be delivered under the Securities Act, any
event shall have occurred as the result of which any such prospectus or any
other prospectus as then in effect would include an untrue statement of a
material fact or
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<PAGE> 17
omit to state any material fact necessary to make the statements therein, in
the light of the circumstances in which they were made, not misleading;
(m) advise each seller of such Registrable Shares, promptly after it
shall receive notice or obtain knowledge thereof, of the issuance of any stop
order by the Commission suspending the effectiveness of such registration
statement or the initiation or threatening of any proceeding for such purpose
and promptly use all reasonable efforts to prevent the issuance of any stop
order or to obtain its withdrawal if such stop order should be issued unless
such stop order relates solely to any action or conduct of a seller of
Registrable Shares;
(n) at least forty-eight hours prior to the filing of any registration
statement or prospectus or any amendment or supplement to such registration
statement or prospectus, furnish a copy thereof to each seller of such
Registrable Shares and refrain from filing any such registration statement,
prospectus, amendment or supplement to which counsel selected by the holders of
a majority of the Registrable Shares being registered shall have reasonably
objected on the grounds that such amendment or supplement does not comply in
all material respects with the requirements of the Securities Act or the rules
and regulations thereunder, unless, in the case of an amendment or supplement,
in the opinion of counsel for the Corporation, the filing of such amendment or
supplement is reasonably necessary to protect the Corporation from any
liabilities under any applicable federal or state law and such filing will not
violate applicable laws; and
(o) at the request of any seller of such Registrable Shares in
connection with any underwritten offering, furnish on the date or dates
provided for in the underwriting agreement: (i) an opinion of counsel,
addressed to the underwriters and the sellers of Registrable Shares, covering
such matters as such underwriters and sellers may reasonably request,
including, without limiting the generality of the foregoing, opinions to the
effect that (A) such registration statement has become effective under the
Securities Act; (B) to the best of such counsel's knowledge no stop order
suspending the effectiveness thereof has been issued and no proceedings for
that purpose have been instituted or are pending or contemplated under the
Securities Act; (C) the registration statement, the prospectus, and each
amendment or supplement thereto comply as to form in all material respects with
the requirements of the Securities Act and the applicable rules and regulations
of the Commission thereunder (except that such counsel need express no opinion
as to financial statements or other financial or statistical data contained
therein); (D) while such counsel has not verified the accuracy, completeness,
or fairness of the statements contained in any registration statement or
prospectus, as either may be amended or supplemented, such counsel has no
reason to believe that the
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<PAGE> 18
registration statement, the prospectus, or any amendment or supplement thereto
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading (except that such counsel need express no opinion as to
financial statements or other financial or statistical data contained therein
or as to any information supplied by any seller or by any underwriter); (E) the
descriptions in the registration statement, the prospectus, or any amendment or
supplement thereto of all legal and governmental proceedings and all contracts
and other legal documents or instruments are accurate in all material respects;
and (F) while such counsel has not verified the accuracy, completeness, or
fairness of the statement contained in any registration statement or
prospectus, as either may be amended or supplemented, such counsel does not
know of any legal or governmental proceedings, pending or threatened, required
to be described in the registration statement, the prospectus, or any amendment
or supplement thereto which are not described as required nor of any contracts
or documents or instruments of the character required to be described in the
registration statement, the prospectus, or any amendment or supplement thereto
which are not described or filed as required; and (ii) a letter or letters from
the independent certified public accountants of the Corporation addressed to
the underwriters and the sellers of Registrable Shares, covering such matters
as such underwriters and sellers may reasonably request, in which letters such
accountants shall state, without limiting the generality of the foregoing, that
they are independent certified public accountants within the meaning of the
Securities Act and that in the opinion of such accountants the financial
statement and other financial data of the Corporation included in the
registration statement, the prospectus, or any amendment or supplement thereto
comply in all material respects with the applicable accounting requirements of
the Securities Act.
6. Registration Expenses.
(a) All expenses incident to the Corporation's performance of or
compliance with this Agreement, including without limitation, all registration
and filing fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, and fees and
disbursements of counsel for the Corporation and its independent certified
public accountants, underwriters (excluding discounts and commissions
attributable to the Registrable Shares included in such registration) and other
Persons retained by the Corporation (all such expenses being herein called
"Registration Expenses"), will be borne by the Corporation to the extent not
prohibited by applicable law including the Securities Act and the rules and
regulations thereunder. In addition, the Corporation will pay its internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees
-18-
<PAGE> 19
performing legal or accounting duties), the expense of any annual audit or
quarterly review, the expense of any liability insurance obtained by the
Corporation and the expenses and fees for listing the securities to be
registered on each securities exchange on which any shares of common stock are
then listed.
(b) In connection with each Demand Registration, Management Demand
Registration and Piggyback Registration effected pursuant to this Agreement,
the Corporation will reimburse the holders of Registrable Shares covered by
such registration for the reasonable fees and disbursements of one counsel
chosen by the holders of a majority of the Investor Registrable Shares
requested to be registered or, in the event of a Management Demand Registration
(which is not pre-empted by a Demand Registration as provided for in Section
2(h)), such counsel shall be chosen by the holders of a majority of the
Management Registrable Shares requested to be registered.
7. Indemnification.
(a) The Corporation agrees to indemnify, to the fullest extent permitted
by law, each seller of Registrable Shares, its officers and directors and each
Person who controls such seller (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities and expenses (including
without limitation, attorneys' fees except as limited by paragraph 7(c)) caused
by any untrue or alleged untrue statement of a material fact contained in any
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Corporation by such seller or any
underwriter expressly for use therein or by such seller's or underwriter's
failure to deliver a copy of the registration statement or prospectus or any
amendments or supplements thereto after the Corporation has furnished such
seller or underwriter with a sufficient number of copies of the same. In
connection with an underwritten offering, the Corporation will indemnify such
underwriters, their officers and directors and each Person who controls such
underwriters (within the meaning of the Securities Act) to the same extent as
provided above with respect to the indemnification of the sellers of
Registrable Shares. In connection with an underwritten offering, the
underwriters shall be required to agree to indemnify the Corporation, its
officers and directors and each Person who controls the Corporation (within the
meaning of the Securities Act) to the same extent as the Corporation agrees to
indemnify such underwriters in this paragraph 7(a), but only as to statements
contained in or omitted from any registration statement, prospectus or
preliminary prospectus or any amendment thereof or supplement thereto in
-19-
<PAGE> 20
reliance upon written information furnished to the Corporation by such
underwriters for use in the preparation thereof. The reimbursements required
by this paragraph 7(a) will be made by periodic payments during the course of
the investigation or defense, as and when bills are received or expenses
incurred.
(b) In connection with any registration statement in which a seller of
Registrable Shares is participating, each such seller will furnish to the
Corporation in writing such information and affidavits as the Corporation
reasonably requests for use in connection with any such registration statement
or prospectus and, to the fullest extent permitted by law, will indemnify the
Corporation, its directors and officers and each Person who controls the
Corporation (within the meaning of the Securities Act) against any losses,
claims, damages, liabilities and expenses (including, without limitation,
attorneys' fees except as limited by paragraph 7(c)) resulting from any untrue
statement of a material fact contained in the registration statement,
prospectus or preliminary prospectus or any amendment thereof or supplement
thereto or any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein not misleading, but
only to the extent that such untrue statement or omission is contained in any
information or affidavit so furnished in writing by such seller; provided that
the obligation to indemnify will be several, not joint and several, among such
sellers of Registrable Shares, and the liability of each such seller of
Registrable Shares will be in proportion to, and provided further that such
liability will be limited to, the net amount received by such seller from the
sale of Registrable Shares pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder will (i) give prompt
written notice to the indemnifying party of any claim with respect to which it
seeks indemnification and (ii) unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist with respect to such claim, permit such indemnifying party to
assume the defense of such claim with counsel reasonably satisfactory to the
indemnified party. If such defense is assumed, the indemnifying party will not
be subject to any liability for any settlement made by the indemnified party
without its consent (but such consent will not be unreasonably withheld). An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim will not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment of any indemnified party a
conflict of interest may exist between such indemnified party and any other of
such indemnified parties with respect to such claim.
-20-
<PAGE> 21
(d) The indemnification provided for under this Agreement will remain in
full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling Person of such
indemnified party and will survive the transfer of securities. The Corporation
also agrees, unless prohibited by law, to make such provisions as are
reasonably requested by any indemnified party for contribution to such party in
the event the Corporation's indemnification is unavailable for any reason.
8. Compliance with Rule 144. In the event that the Corporation (a)
registers a class of securities under Section 12 of the Exchange Act, (b)
issues an offering circular meeting the requirements of Regulation A under the
Securities Act or (c) commences to file reports under Section 13 or 15(d) of
the Exchange Act, then at the request of any holder who proposes to sell
securities in compliance with Rule 144 promulgated by the Commission under the
Securities Act, the Corporation will (i) forthwith furnish to such holder a
written statement of compliance with the filing requirements of the Commission
as set forth in Rule 144 as such rule may be amended from time to time and (ii)
make available to the public and such holders such information as will enable
the holders to make sales pursuant to Rule 144.
9. Participation in Underwritten Registrations. No Person may
participate in any registration hereunder which is underwritten unless such
Person (a) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (b) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements. The holders of a
majority of Investor Registrable Shares requested to be registered will have
the right to select the managing underwriters to administer any Demand or
Piggyback Registration, subject to the approval of the Corporation of such
managing underwriters, which approval will not be unreasonably withheld.
10. No Inconsistent Agreements. The Corporation will not hereafter enter
into any agreement with respect to the distribution of its securities which is
inconsistent with the rights granted to the holders of Registrable Shares in
this Agreement.
11. Remedies. Any Person having rights under any provision of this
Agreement will be entitled to enforce such rights specifically, to recover
damages caused by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law.
-21-
<PAGE> 22
12. Amendments and Waivers. Except as otherwise expressly provided
herein, the provisions of this Agreement may be amended or waived at any time
only by the written agreement of the Corporation, the holders of at least
66-2/3% of the Investor Registrable Shares then outstanding and the holders of
a majority of the Management Registrable Shares then outstanding; provided,
however, that no amendment hereto which materially and adversely affects the
rights of the Class D Registrable Shares in a way that does not materially and
adversely affect the rights of the holders of the other Investor Registrable
Shares shall be effective unless, in addition to the foregoing, such amendment
shall also have been approved by the holders of at least 66-2/3% of the Class D
Registrable Shares then outstanding. Any waiver, permit, consent or approval
of any kind or character on the part of any such holders of any provision or
condition of this Agreement must be made in writing and shall be effective only
to the extent specifically set forth in writing. Any waiver, permit, consent
or approval of any kind or character on the part of Harris Trust and Savings
Bank, not individually, but solely as Master Trustee for the Teachers'
Retirement System of the State of Illinois ("Harris") permitted or required by
the provisions of this Agreement may be made, and evidenced by a writing
executed, by Frontenac Company, as agent for Harris.
13. Successors and Assigns. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto will bind and inure to the benefit of the
respective successors and assigns of the parties hereto, whether so expressed
or not. In addition and whether or not any express assignment has been made,
the provisions of this Agreement which are for the benefit of purchasers or
holders of Registrable Shares are also for the benefit of, and enforceable by,
any subsequent holder of Registrable Shares who consents in writing to be bound
by this Agreement.
14. Other Registration Rights. Except for the registration rights granted
hereunder and under the ESOP Registration Agreement, the Corporation will not
grant to any Persons the right to request the Corporation to register any
equity securities of the Corporation, or any securities convertible or
exchangeable into or exercisable for such securities, without the written
consent of the holders of at least 66-2/3% of the Investor Registrable Shares.
Except for registrations pursuant to registration rights granted to the holders
of Registrable Shares hereunder or under the ESOP Registration Agreement or to
other Persons pursuant to this paragraph 14 or registrations of securities by
the Corporation, the Corporation shall not register any equity securities of
the Corporation, or any securities convertible or exchangeable into or
exercisable for such securities, without the written consent of the holders of
at least 66-2/3% of the Investor Registrable
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<PAGE> 23
Shares. The Corporation will not include in any Demand Registration any
securities which are not Registrable Shares without the written consent of
the holders of at least 66-2/3% of the Investor Registrable Shares requesting
such registration. The Corporation will not include in any Management Demand
Registration any securities which are not Registrable Shares without the
written consent of the holders of at least 66-2/3% of the Management
Registrable Shares requesting such registration.
The parties hereto hereby consent to the grant of registration rights
provided in the ESOP Registration Agreement.
15. Final Agreement. This Agreement constitutes the final agreement of
the parties concerning the matters referred to herein, and supersedes all prior
agreements and understandings.
16. Severability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the
remainder of this Agreement.
17. Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience of reference only and do not constitute a part of and
shall not be utilized in interpreting this Agreement.
18. Notices. Any notices required or permitted to be sent hereunder
shall be delivered personally or mailed, certified mail, return receipt
requested, or delivered by overnight courier service to the following
addresses, or such other addresses as shall be given by notice delivered
hereunder, and shall be deemed to have been given upon delivery, if delivered
personally, three business days after mailing, if mailed, or one business day
after delivery to the courier, if delivered by overnight courier service:
If to the holders of Investor Registrable Shares, to the addresses set
forth on the stock record books of the Corporation.
If to the holders of Management Registrable Shares, to the addresses set
forth on the stock record books of the Corporation.
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<PAGE> 24
If to the Corporation, to:
Marks Bros. Jewelers, Inc.
155 North Wacker Drive
Suite 500
Chicago, Illinois 60606
Attention: President
19. Governing Law. The validity, meaning and effect of this agreement
shall be determined in accordance with the laws of the State of Delaware
applicable to contracts made and to be performed in that state.
20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, and such counterparts together shall constitute one instrument. Each
party shall receive a duplicate original of the counterpart copy or copies
executed by it and the Corporation.
21. Termination of Original Registration Agreement. The Corporation, the
Old Investors, the Warrant Holders, the Managers and the Zero Coupon Note
Holders hereby agree that this Agreement replaces and supersedes the
Registration Agreement and that the Registration Agreement, including the
securities registration and other rights granted thereunder, is hereby amended
and restated in its entirety by this Agreement.
22. Initial Public Offering of Common Stock. Each of the parties hereto
hereby waives any right of notice to which such party is entitled under the
Registration Agreement or this Agreement with respect to the registration of
the Corporation's Common Stock under the Securities Act on a Registration
Statement on Form S-1 (File No. 333-1794) (the "Registration Statement") in
connection with the Corporation's initial public offering of Common Stock, and
each of the parties hereto hereby consents to such registration and, except to
the extent any such party is registering Registrable Shares under such
Registration Statement as reflected in Amendment No. 2 to the Registration
Statement (which such registration is deemed to be a Piggyback Registration
hereunder with all of the rights coincidental therewith, including with respect
to the payment of fees and expenses), each such party hereto hereby waives any
rights to registration to which such party is entitled with respect to its
Registrable Shares under the Registration Agreement or this Agreement.
23. Effectiveness. This Agreement shall become effective upon the
consummating of the Corporation's initial public offering of Common Stock under
its Registration Statement. In the event that such initial public offering is
not consummated, this Agreement shall be null and void and of no
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<PAGE> 25
effect and the Registration Agreement shall continue in full force and effect.
[BALANCE OF PAGE LEFT INTENTIONALLY BLANK. SIGNATURE PAGES TO FOLLOW.]
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<PAGE> 26
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
MARKS BROS. JEWELERS, INC.
By:
--------------------------
Executive Vice President,
Finance and Administration,
Treasurer and Secretary
[SIGNATURE PAGES CONTINUE]
<PAGE> 27
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
WILLIAM VLAIR VENTURE PARTNERS III
LIMITED PARTNERSHIP
By: William Blair Venture
Management Company,
its General Partner
By:
----------------------------
a General Partner
[SIGNATURE PAGES CONTINUE]
<PAGE> 28
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
FRONTENAC VENTURE V LIMITED
PARTNERSHIP
By: Frontenac Company,
its General Partner
By:
---------------------------
a General Partner
FRONTENAC DIVERSIFIED III LIMITED
PARTNERSHIP
By: Frontenac Company,
its General Partner
By:
------------------------------
a General Partner
[SIGNATURE PAGES CONTINUE]
<PAGE> 29
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
LEVY CAPITAL PARTNERS I
By:
------------------------------
a General Partner
[SIGNATURE PAGES CONTINUE]
<PAGE> 30
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
--------------------------------
HARVEY PLOTNICK
[SIGNATURE PAGES CONTINUE]
<PAGE> 31
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
CONTINENTAL ILLINOIS VENTURE
CORPORATION
By:
-------------------------------
Title:
----------------------------
[SIGNATURE PAGES CONTINUE]
<PAGE> 32
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
-----------------------------------
HUGH MARKS PATINKIN
-----------------------------------
HUGH MARKS PATINKIN, ON BEHALF OF
HUGH M. PATINKIN 1994 FAMILY TRUST
U/A/D November 18, 1994
-----------------------------------
HUGH MARKS PATINKIN, AS TRUSTEE FOR
BENJAMIN PATINKIN U/A/D MAY 4, 1988
-----------------------------------
HUGH MARKS PATINKIN, AS TRUSTEE FOR
SHANNON PATINKIN U/A/D MAY 4, 1988
-----------------------------------
HUGH MARKS PATINKIN, AS TRUSTEE FOR
JOSHUA PATINKIN U/A/D MAY 4, 1988
-----------------------------------
HUGH MARKS PATINKIN, AS TRUSTEE FOR
MAX PATINKIN U/A/D MAY 4, 1988
-----------------------------------
HUGH MARKS PATINKIN, AS TRUSTEE FOR
SHANNON PATINKIN U/A/D/
JANUARY 1, 1988
-----------------------------------
HUGH MARKS PATINKIN, AS TRUSTEE FOR
JOSHUA PATINKIN U/A/D
JANUARY 1, 1988
-----------------------------------
HUGH MARKS PATINKIN, AS TRUSTEE FOR
MAX PATINKIN U/A/D
JANUARY 1, 1988
[SIGNATURE PAGES CONTINUE]
<PAGE> 33
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
-----------------------------------
HUGH MARKS PATINKIN, AS TRUSTEE FOR
BENJAMIN PATINKIN U/A/D
JANUARY 1, 1988
-----------------------------------
HUGH MARKS PATINKIN, AS TRUSTEE FOR
PATINKIN TRUST U/A/D
NOVEMBER 18, 1994
-----------------------------------
A C. PATINKIN, AS TRUSTEE OF
HUGH M. PATINKIN 1994 FAMILY
TRUST U/A/D November 18, 1994
[SIGNATURE PAGES CONTINUE]
<PAGE> 34
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
-----------------------------------
DOUGLAS MARKS PATINKIN
[SIGNATURE PAGES CONTINUE]
<PAGE> 35
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
-----------------------------------
MATTHEW MARKS PATINKIN
-----------------------------------
MATTHEW MARKS PATINKIN, AS TRUSTEE
FOR ADAM PATINKIN U/A/D MAY 4, 1988
-----------------------------------
MATTHEW MARKS PATINKIN, AS TRUSTEE
FOR JASON PATINKIN U/A/D
MAY 4, 1988
-----------------------------------
MATTHEW MARKS PATINKIN, AS TRUSTEE
FOR LIZA PATINKIN U/A/D
DECEMBER 21, 1990
-----------------------------------
MATTHEW MARKS PATINKIN, AS TRUSTEE
FOR PATINKIN TRUST U/A/D
NOVEMBER 18, 1994
-----------------------------------
MATTHEW MARKS PATINKIN, ON BEHALF
OF MATTHEW M. PATINKIN 1994 FAMILY
TRUST U/A/D DECEMBER 19, 1994
-----------------------------------
ROBIN PATINKIN, AS TRUSTEE FOR
JASON PATINKIN U/A/D JUNE 28, 1988
-----------------------------------
ROBIN PATINKIN, AS TRUSTEE FOR
ADAM PATINKIN U/A/D JUNE 28, 1988
-----------------------------------
ROBIN PATINKIN, AS TRUSTEE FOR
LIZA PATINKIN U/A/D
FEBRUARY 2, 1992
[SIGNATURE PAGES CONTINUE]
<PAGE> 36
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
------------------------------
ROBIN PATINKIN, AS TRUSTEE FOR
MATTHEW M. PATINKIN 1994 FAMILY
TRUST U/A/D DECEMBER 19, 1994
[SIGNATURE PAGES CONTINUE]
<PAGE> 37
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
-----------------------
NICHOLAS MARKS PATINKIN
[SIGNATURE PAGES CONTINUE]
<PAGE> 38
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
--------------------------------
MARK ALAN PATINKIN
--------------------------------
MARK A. PATINKIN, AS TRUSTEE FOR
ARIEL PATINKIN U/A/D MAY 4, 1988
--------------------------------
MARK A. PATINKIN, AS TRUSTEE FOR
ALEX PATINKIN U/A/D
DECEMBER 16, 1991
--------------------------------
MARK A. PATINKIN, AS TRUSTEE FOR
ZACHARY PATINKIN U/A/D MAY 7, 1994
[SIGNATURE PAGES CONTINUE]
<PAGE> 39
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
---------------------------------
JOHN R. DESJARDINS
---------------------------------
JOHN R. DESJARDINS, ON BEHALF OF
JOHN R. DESJARDINS 1995 FAMILY
TRUST U/A/D DECEMBER 28, 1995
---------------------------------
CHERYL DESJARDINS, AS TRUSTEE FOR
THE JOHN R. DESJARDINS 1995 FAMILY
TRUST U/A/D DECEMBER 28, 1995
[SIGNATURE PAGES CONTINUE]
<PAGE> 40
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
WINFIELD MARKETING CORPORATION
By:
------------------------------
TITLE:
---------------------------
-----------------------------------
PHILLIP J. PATINKIN
-----------------------------------
LYNN PATINKIN
-----------------------------------
KAREN PATINKIN
[SIGNATURE PAGES CONTINUE]
<PAGE> 41
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
-----------------------------------
JOHN R. WILLIS
[SIGNATURE PAGES CONTINUE]
<PAGE> 42
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
-----------------------------------
AVY H. STEIN
[SIGNATURE PAGES CONTINUE]
<PAGE> 43
IN WITNESS WHEREOF, this Second Amended and Restated Registration
Agreement has been duly executed as of the date first set forth above.
CITIBANK, N.A.
By: ______________________________
Title: ___________________________
FIRST BANK NATIONAL ASSOCIATION
By: ______________________________
Title: ___________________________
FIRST UNION NATIONAL BANK
OF FLORIDA
By: ______________________________
Title: ___________________________
HIBERNIA NATIONAL BANK
By: ______________________________
Title: ___________________________
<PAGE> 44
SCHEDULES
SCHEDULES
1 Old Investors
2 New Investors
3 Warrant Holders
4 Managers
5 Zero Coupon Note Holders
6 Defaults
<PAGE> 45
SCHEDULE 1
NAME
William Blair Venture Partners
III Limited Partnership
Frontenac Venture V
Limited Partnership
Harris Trust and Savings Bank,
not individually, but solely as
Master Trustee for the Teachers'
Retirement System of the State
of Illinois
Levy Capital Partners I
Harvey Plotnick
<PAGE> 46
SCHEDULE 2
NAME
William Blair Venture Partners
III Limited Partnership
Harris Trust and Savings Bank,
not individually, but solely as
Master Trustee for the Teachers'
Retirement System of the State
of Illinois
Continental Illinois Venture Corporation
Hugh Marks Patinkin on behalf of
the Hugh M. Patinkin 1994 Family
Trust U/A/D November 18, 1994
(as successor in interest to
Hugh M. Patinkin)
Sheila C. Patinkin, as trustee for
the Hugh M. Patinkin 1994 Family
Trust U/A/D November 18, 1994
(as successor in interest to
Hugh M. Patinkin)
Douglas Marks Patinkin
Matthew Marks Patinkin
Nicholas Marks Patinkin
Mark Alan Patinkin
Phillip J. Patinkin (as successor
in interest to Winfield Marketing
Corporation)
Lynn Patinkin (as successor
in interest to Winfield Marketing
Corporation)
Karen Patinkin (as successor
in interest to Winfield Marketing
Corporation)
John Desjardins
John R. Willis
Avy H. Stein
<PAGE> 47
SCHEDULE 3
NAME
Harris Trust and Savings Bank,
not individually, but solely as
Master Trustee for the Teachers'
Retirement System of the State
of Illinois
<PAGE> 48
SCHEDULE 4
NAME
Hugh Marks Patinkin
Douglas Marks Patinkin
Matthew Marks Patinkin
John Desjardins
Mark Alan Patinkin
Nicholas Marks Patinkin
Hugh Marks Patinkin, as trustee for Benjamin Patinkin U/A/D May 4, 1988
Hugh Marks Patinkin, as trustee for Shannon Patinkin U/A/D May 4, 1988
Hugh Marks Patinkin, as trustee for Joshua Patinkin U/A/D May 4, 1988
Hugh Marks Patinkin, as trustee for Max Patinkin U/A/D May 4, 1988
Mark A. Patinkin, as trustee for Ariel Patinkin U/A/D May 4, 1988
Matthew Marks Patinkin, as trustee for Adam Patinkin U/A/D May 4, 1988
Matthew Marks Patinkin, as trustee for Jason Patinkin U/A/D May 4, 1988
Robin Patinkin, as trustee for Jason Patinkin U/A/D June 28, 1988
Robin Patinkin, as trustee for Adam Patinkin U/A/D June 28, 1988
Hugh Marks Patinkin, as trustee for Shannon Patinkin U/A/D January 1, 1988
Hugh Marks Patinkin, as trustee for Joshua Patinkin U/A/D January 1, 1988
Hugh Marks Patinkin, as trustee for Max Patinkin U/A/D January 1, 1988
Hugh Marks Patinkin, as trustee for Benjamin Patinkin U/A/D January 1, 1988
<PAGE> 49
Mark A. Patinkin, as trustee for Alex Patinkin U/A/D December 16, 1991
Matthew Marks Patinkin, as trustee for Liza Patinkin U/A/D December 21, 1990
Robin Patinkin, as Trustee for Liza Patinkin U/A/D February 2, 1992
Mark A. Patinkin, as Trustee for Zachary Patinkin U/A/D May 7, 1994
Hugh Marks Patinkin, as Trustee for Patinkin Trust U/A/D November 18, 1994
Matthew Marks Patinkin, as Trustee for Patinkin Trust U/A/D November 18, 1994
Hugh Marks Patinkin, on behalf of Hugh M. Patinkin 1994 Family Trust U/A/D
November 18, 1994
Matthew Marks Patinkin, on behalf of Matthew M. Patinkin 1994 Family Trust
U/A/D December 19, 1994
John R. Desjardins, on behalf of John R. Desjardins 1995 Family Trust U/A/D
December 29, 1995
Sheila C. Patinkin, as Trustee of the Hugh M. Patinkin 1994 Family Trust U/A/D
November 18, 1994
Robin Patinkin, as Trustee of the Matthew M. Patinkin 1994 Family Trust U/A/D
November 18, 1994
Cheryl Desjardins, as Trustee of the John R. Desjardins 1995 Family Trust U/A/D
December 28, 1995
<PAGE> 50
SCHEDULE 5
NAME
Citibank, N.A.
First Bank National Association
Hibernia National Bank
First Union National Bank of Florida
<PAGE> 1
EXHIBIT 10.7
MARKS BROS. JEWELERS, INC.
1996 LONG-TERM INCENTIVE PLAN
I. INTRODUCTION
1.1 PURPOSES. The purposes of the 1996 Long-Term Incentive Plan
(the "Plan") of Marks Bros. Jewelers, Inc. (the "Company"), and its
subsidiaries from time to time (individually a "Subsidiary" and
collectively the "Subsidiaries"), are (a) to align the interests of the
Company's stockholders and the recipients of awards under this Plan by
increasing the proprietary interest of such recipients in the Company's
growth and success, (b) to advance the interests of the Company by
attracting and retaining officers and other key employees, and
well-qualified persons who are not officers or employees of the Company
("non-employee directors") for service as directors of the Company and (c)
to motivate such employees and non-employee directors to act in the
long-term best interests of the Company's stockholders. For purposes of
this Plan, references to employment by the Company shall also mean
employment by a Subsidiary.
1.2 CERTAIN DEFINITIONS.
"AFFILIATE" and "ASSOCIATE" shall have the respective meanings
ascribed to such terms in Rule 12b-2, as in effect on the effective date of
this Plan, under the Exchange Act; provided, however, that no director or
officer of the Company shall be deemed an Affiliate or Associate of any
other director or officer of the Company solely as a result of his or her
being a director or officer of the Company.
"AGREEMENT" shall mean the written agreement evidencing an award
hereunder between the Company and the recipient of such award.
"BENEFICIAL OWNER" (including the terms "BENEFICIALLY OWN" and
"BENEFICIAL OWNERSHIP"), when used with respect to any Person, shall be
deemed to include any securities which:
(a) such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly (determined as provided in Rule
13d-3, as in effect on the effective date of this Plan, under the Exchange
Act);
(b) such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has:
(i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time or upon the satisfaction
of any conditions, or both) pursuant
<PAGE> 2
to any written or oral agreement, arrangement or understanding (other
than customary agreements with and among underwriters and selling group
members with respect to a bona fide public offering of securities), upon
the exercise of any options, warrants, rights or conversion or exchange
privileges or otherwise; provided, however, that a Person shall not be
deemed the Beneficial Owner of, or to Beneficially Own securities
tendered pursuant to a tender or exchange offer made by or on behalf of
such Person or any of such Person's Affiliates or Associates until such
tendered securities are accepted for purchase or exchange; or
(ii) the right to vote pursuant to any written or oral agreement,
arrangement or understanding; provided, however, that a Person shall not
be deemed the Beneficial Owner of, or to Beneficially Own, any security
otherwise subject to this item (ii) if such agreement, arrangement or
understanding to vote (1) arises solely from a revocable proxy or consent
given to such Person or any of such Person's Affiliates or Associates in
response to a public proxy or consent solicitation made pursuant to, and
in accordance with, the applicable rules and regulations under the
Exchange Act and (2) is not also then reportable by such Person on
Schedule 13D (or any comparable or successor report then in effect) under
the Exchange Act; or
(iii) the right to dispose of pursuant to any written or oral
agreement, arrangement or understanding (other than customary agreements
with and among underwriters and selling group members with respect to a
bona fide public offering of securities); or
(c) are beneficially owned, directly or indirectly, by any other Person
with which such Person or any of such Person's Affiliates or Associates has any
written or oral agreement, arrangement or understanding (other than
customary agreements with and among underwriters and selling group members with
respect to a bona fide public offering of securities) for the purpose of
acquiring, holding, voting (except to the extent contemplated by the proviso to
item (ii) of subparagraph (b) of the first paragraph of this definition) or
disposing of any securities of the Company.
Notwithstanding the first paragraph of this definition, no director or
officer of the Company shall be deemed to be the "Beneficial Owner" of, or to
"Beneficially Own," shares of Common Stock or other securities of the Company
beneficially owned by any other director or officer of the Company solely as a
result of his or her being a director or officer of the Company.
"BOARD" shall mean the Board of Directors of the Company.
-2-
<PAGE> 3
"BONUS STOCK" shall mean shares of Common Stock which are not subject to a
Restriction Period or Performance Measures.
"BONUS STOCK AWARD" shall mean an award of Bonus Stock under this Plan.
"CAUSE" shall mean commission of a felony involving moral turpitude or any
material breach of any statutory or common law duty to the Company or a
Subsidiary involving wilful malfeasance.
"CHANGE IN CONTROL" shall have the meaning set forth in Section 6.8(b).
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMMITTEE" shall mean the Committee designated by the Board, consisting
of two or more members of the Board, each of whom shall be (a) a "disinterested
person" within the meaning of Rule 16b-3 under the Exchange Act and (b) an
"outside director" within the meaning of Section 162(m) of the Code, subject to
any transition rules applicable to the definition of outside director.
"COMMON STOCK" shall mean the common stock, $.001 par value, of the
Company.
"COMPANY" has the meaning specified in Section 1.1.
"DIRECTORS OPTIONS" shall have the meaning set forth in Section 5.1.
"DISABILITY" shall mean the inability for a continuous period of at least
six months of the holder of an award to perform substantially such holder's
duties and responsibilities, as determined solely by the Committee.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended.
"EXEMPT PERSON" shall mean each of Hugh M. Patinkin, John R. Desjardins,
Mathew M. Patinkin and each Affiliate thereof and, until consummation of the
Company's initial public offering, Frontenac Company and any Affiliate thereof.
"FAIR MARKET VALUE" shall mean the average of the high and low transaction
prices of a share of Common Stock as reported in the National Association of
Securities Dealers Automated Quotation National Market System on the date as of
which such
-3-
<PAGE> 4
value is being determined, or, if the Common Stock is listed on a
national securities exchange, the average of the high and low transaction
prices of a share of Common Stock on the principal national stock exchange on
which the Common Stock is traded on the date as of which such value is being
determined, or, if there shall be no reported transactions for such date, on
the next preceding date for which transactions were reported; provided,
however, that if Fair Market Value for any date cannot be so determined, Fair
Market Value shall be determined by the Committee by whatever means or method
as the Committee, in the good faith exercise of its discretion, shall at such
time deem appropriate.
"FREE-STANDING SAR" shall mean an SAR which is not issued in tandem with,
or by reference to, an option, which entitles the holder thereof to receive,
upon exercise, shares of Common Stock (which may be Restricted Stock), cash or
a combination thereof with an aggregate value equal to the excess of the Fair
Market Value of one share of Common Stock on the date of exercise over the base
price of such SAR, multiplied by the number of such SARs which are exercised.
"INCENTIVE STOCK OPTION" shall mean an option to purchase shares of Common
Stock that meets the requirements of Section 422 of the Code, or any successor
provision, which is intended by the Committee to constitute an Incentive Stock
Option.
"INCUMBENT BOARD" shall have the meaning set forth in Section 6.8(b)(ii)
hereof.
"MATURE SHARES" shall mean shares of Common Stock for which the holder
thereof has good title, free and clear of all liens and encumbrances and which
such holder either (a) has held for at least six months or (b) has purchased on
the open market.
"NON-EMPLOYEE DIRECTOR" shall mean any director of the Company who is not
(a) an officer or employee of the Company or any Subsidiary and (b) Daniel H.
Blumenthal, Rodney L. Goldstein or Samuel B. Guren.
"NON-STATUTORY STOCK OPTION" shall mean a stock option which is not an
Incentive Stock Option.
"PERFORMANCE MEASURES" shall mean the criteria and objectives, established
by the Committee, which shall be satisfied or met (a) as a condition to the
exercisability of all or a portion of an option or SAR or (b) during the
applicable Restriction Period or Performance Period as a condition to the
holder's receipt, in the case of a Restricted Stock Award, of the shares of
Common Stock subject to such award, or, in the case of a Performance Share
Award, of payment with respect to such award. Such criteria and objectives may
include one or more of the
-4-
<PAGE> 5
following: the attainment by a share of Common Stock of a specified Fair
Market Value for a specified period of time, earnings per share, return to
stockholders (including dividends), return on equity, earnings of the
Company, revenues, market share, cash flows or cost reduction goals, or any
combination of the foregoing. If the Committee desires that compensation
payable pursuant to any award subject to Performance Measures be "qualified
performance-based compensation" within the meaning of section 162(m) of the
Code, the Performance Measures shall be established by the Committee no later
than the end of the first quarter of the Performance Period or Restriction
Period, as applicable (or such other time designated by the Internal Revenue
Service).
"PERFORMANCE PERIOD" shall mean any period designated by the Committee
during which the Performance Measures applicable to a Performance Share Award
shall be measured.
"PERFORMANCE SHARE" shall mean a right, contingent upon the attainment of
specified Performance Measures within a specified Performance Period, to
receive one share of Common Stock, which may be Restricted Stock, or in lieu
thereof, the Fair Market Value of such Performance Share in cash.
"PERFORMANCE SHARE AWARD" shall mean an award of Performance Shares under
this Plan.
"PERMANENT AND TOTAL DISABILITY" shall have the meaning set forth in
Section 22(e)(3) of the Code or any successor thereto.
"PERSON" shall mean any individual, firm, corporation, partnership or
other entity, and shall include any successor (by merger or otherwise) of any
of the forgoing.
"RESTRICTED STOCK" shall mean shares of Common Stock which are subject to
a Restriction Period.
"RESTRICTED STOCK AWARD" shall mean an award of Restricted Stock under
this Plan.
"RESTRICTION PERIOD" shall mean any period designated by the Committee
during which the Common Stock subject to a Restricted Stock Award may not be
sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or
disposed of, except as provided in this Plan or the Agreement relating to such
award.
"SAR" shall mean a stock appreciation right which may be a Free-Standing
SAR or a Tandem SAR.
"STOCK AWARD" shall mean a Restricted Stock Award or a Bonus Stock Award.
-5-
<PAGE> 6
"TANDEM SAR" shall mean an SAR which is granted in tandem with, or by
reference to, an option (including a Non-Statutory Stock Option granted prior
to the date of grant of the SAR), which entitles the holder thereof to receive,
upon exercise of such SAR and surrender for cancellation of all or a portion of
such option, shares of Common Stock (which may be Restricted Stock), cash or a
combination thereof with an aggregate value equal to the excess of the Fair
Market Value of one share of Common Stock on the date of exercise over the base
price of such SAR, multiplied by the number of shares of Common Stock subject
to such option, or portion thereof, which is surrendered.
"TAX DATE" shall have the meaning set forth in Section 6.5.
"TEN PERCENT HOLDER" shall have the meaning set forth in Section 2.1(a).
1.3 ADMINISTRATION. This Plan shall be administered by the Committee.
Any one or a combination of the following awards may be made under this Plan to
eligible officers and other key employees of the Company and its Subsidiaries:
(a) options to purchase shares of Common Stock in the form of Incentive Stock
Options or Non-Statutory Stock Options, (b) in the form of Tandem SARs or
Free-Standing SARs, (c) Stock Awards in the form of Restricted Stock or Bonus
Stock and (d) Performance Shares. The Committee shall, subject to the terms of
this Plan, select eligible officers and other key employees for participation
in this Plan and determine the form, amount and timing of each award to such
persons and, if applicable, the number of shares of Common Stock, the number of
SARs and the number of Performance Shares subject to such an award, the
exercise price or base price associated with the award, the time and conditions
of exercise or settlement of the award and all other terms and conditions of
the award, including, without limitation, the form of the Agreement evidencing
the award. The Committee shall, subject to the terms of this Plan, interpret
this Plan and the application thereof, establish rules and regulations it deems
necessary or desirable for the administration of this Plan and may impose,
incidental to the grant of an award, conditions with respect to the award, such
as limiting competitive employment or other activities. All such
interpretations, rules, regulations and conditions shall be conclusive and
binding on all parties.
The Committee may delegate some or all of its power and authority
hereunder to the Chief Executive Officer or other executive officer of the
Company as the Committee deems appropriate; provided, however, that the
Committee may not delegate its power and authority with regard to (a) the grant
of an award under this Plan to any person who is a "covered employee" within
the meaning of Section 162(m) of the Code or who, in the Committee's judgment,
is likely to be a covered employee at any time during the period an award
hereunder to such
-6-
<PAGE> 7
employee would be outstanding or (b) the selection for participation in this
Plan of an officer or other person subject to Section 16 of the Exchange Act or
decisions concerning the timing, pricing or amount of an award to such an
officer or other person.
No member of the Board of Directors or Committee, and neither the Chief
Executive Officer nor any other executive officer to whom the Committee
delegates any of its power and authority hereunder, shall be liable for any
act, omission, interpretation, construction or determination made in connection
with this Plan in good faith, and the members of the Board of Directors and the
Committee and the President and Chief Executive Officer or other executive
officer shall be entitled to indemnification and reimbursement by the Company
in respect of any claim, loss, damage or expense (including attorneys' fees)
arising therefrom to the full extent permitted by law, except as otherwise may
be provided in the Company's Certificate of Incorporation and/or By-laws, as
the same may be amended or restated from time to time, and under any directors'
and officers' liability insurance that may be in effect from time to time.
A majority of the Committee shall constitute a quorum. The acts of the
Committee shall be either (a) acts of a majority of the members of the
Committee present at any meeting at which a quorum is present or (b) acts
approved in writing by a majority of the members of the Committee without a
meeting.
1.4 ELIGIBILITY. Participants in this Plan shall consist of such officers
or other key employees of the Company and its Subsidiaries as the Committee, in
its sole discretion, may select from time to time. The Committee's
selection of a person to participate in this Plan at any time shall not require
the Committee to select such person to participate in this Plan at any other
time. Non-Employee Directors shall be eligible to participate in this Plan in
accordance with Article V.
1.5 SHARES AVAILABLE. Subject to adjustment as provided in Sections 6.7
and 6.8, [748,248] shares of Common Stock shall be available under this Plan,
reduced by the sum of the aggregate number of shares of Common Stock (a) that
are issued upon the grant of a Stock Award and (b) which become subject to
outstanding options, including Directors' Options, outstanding Free-Standing
SARs and outstanding Performance Shares. To the extent that shares of Common
Stock subject to an outstanding option (other than in connection with the
exercise of a Tandem SAR), Free-Standing SAR or Performance Share are not
issued or delivered by reason of the expiration, termination, cancellation or
forfeiture of such award or by reason of the delivery or withholding of shares
of Common Stock to pay all or a portion of the exercise price of an award, if
any, or to satisfy all or a portion of the tax withholding obligations relating
to
-7-
<PAGE> 8
an award, then such shares of Common Stock shall again be available under
this Plan.
Shares of Common Stock to be delivered under this Plan shall be made
available from authorized and unissued shares of Common Stock, or authorized
and issued shares of Common Stock reacquired and held as treasury shares or
otherwise or a combination thereof.
To the extent required by Section 162(m) of the Code and the rules and
regulations thereunder, the maximum number of shares of Common Stock with
respect to which options or SARs, Stock Awards or Performance Share Awards, or
a combination thereof may be granted during any calendar year to any person
shall be 275,000, subject to adjustment as provided in Section 6.7.
II. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
2.1 STOCK OPTIONS. The Committee may, in its discretion, grant options to
purchase shares of Common Stock to such eligible persons as may be selected by
the Committee. Each option, or portion thereof, that is not an Incentive Stock
Option, shall be a Non-Statutory Stock Option. Each Incentive Stock Option
shall be granted within ten years of the effective date of this Plan. To the
extent that the aggregate Fair Market Value (determined as of the date of
grant) of shares of Common Stock with respect to which options designated as
Incentive Stock Options are exercisable for the first time by a participant
during any calendar year (under this Plan or any other plan of the Company, or
any parent or Subsidiary) exceeds the amount (currently $100,000) established
by the Code, such options shall constitute Non-Statutory Stock Options.
Options shall be subject to the following terms and conditions and shall
contain such additional terms and conditions, not inconsistent with the terms
of this Plan, as the Committee shall deem advisable:
(a) Number of Shares and Purchase Price. To the extent required, the
number of shares of Common Stock subject to an option shall be determined by
the Committee. The purchase price per share of Common Stock purchasable upon
exercise of the option shall be determined by the Committee; provided, however,
that the purchase price per share of Common Stock purchasable upon exercise of
an Option shall not be less than 100% of the Fair Market Value of a share of
Common Stock on the date of grant of such option; provided further, that if an
Incentive Stock Option shall be granted to any person who, at the time such
option is granted, owns capital stock possessing more than ten percent of the
total combined voting power of all classes of capital stock of the Company (or
of any parent or Subsidiary) (a "Ten Percent Holder"), the purchase price per
share of Common
-8-
<PAGE> 9
Stock shall be the price (currently 110% of Fair Market Value)
required by the Code in order to constitute an Incentive Stock Option.
(b) Option Period and Exercisability. The period during which an option
may be exercised shall be determined by the Committee; provided, however, that
no Incentive Stock Option shall be exercised later than ten years after its
date of grant; provided further, that if an Incentive Stock Option shall be
granted to a Ten Percent Holder, such option shall not be exercised later than
five years after its date of grant. The Committee may, in its discretion,
establish Performance Measures which shall be satisfied or met as a condition
to the grant of an option or to the exercisability of all or a portion of an
option. The Committee shall determine whether an option shall become
exercisable in cumulative or non-cumulative installments and in part or in full
at any time. An exercisable option, or portion thereof, may be exercised only
with respect to whole shares of Common Stock, except that if the remaining
option then exercisable is for less than a whole share, such remaining amount
may be exercised.
(c) Method of Exercise. An option may be exercised (i) by giving written
notice to the Company specifying the number of whole shares of Common Stock to
be purchased and accompanied by payment therefor in full (or arrangement made
for such payment to the Company's satisfaction) either (1) in cash, (2) by
delivery of Mature Shares having a Fair Market Value, determined as of the date
of exercise, equal to the aggregate purchase price payable by reason of such
exercise, (3) by authorizing the Company to withhold whole shares of Common
Stock which would otherwise be delivered upon exercise of the option having a
Fair Market Value, determined as of the date of exercise, equal to the
aggregate purchase price payable by reason of such exercise, (4) in cash by a
broker-dealer acceptable to the Company to whom the optionee has submitted an
irrevocable notice of exercise or (5) a combination of (1), (2) and (3), in
each case to the extent set forth in the Agreement relating to the option, (ii)
if applicable, by surrendering to the Company any Tandem SARs which are
canceled by reason of the exercise of the option and (iii) by executing such
documents as the Company may reasonably request. The Committee shall have sole
discretion to disapprove of an election pursuant to any of clauses (2)-(5) and
in the case of an optionee who is subject to Section 16 of the Exchange Act,
the Company may require that the method of making such payment be in compliance
with Section 16 and the rules and regulations thereunder. Any fraction of a
share of Common Stock which would be required to pay such purchase price shall
be disregarded and the remaining amount due shall be paid in cash by the
optionee. No certificate representing Common Stock shall be delivered until
the full purchase price therefor has been paid.
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(d) Additional Options. The Committee shall have the authority to include
in any Agreement relating to an option a provision entitling the optionee to an
additional option in the event such optionee exercises the option represented
by such option agreement, in whole or in part, by delivering previously owned
whole shares of Common Stock in payment of the purchase price in accordance
with this Plan and such Agreement. Any such additional option shall be for a
number of shares of Common Stock equal to the number of delivered shares, shall
have a purchase price determined by the Committee in accordance with this Plan,
shall be exercisable on the terms and subject to the conditions set forth in
the Agreement relating to such additional option.
2.2 STOCK APPRECIATION RIGHTS. The Committee may, in its discretion,
grant SARs to such eligible persons as may be selected by the Committee. The
Agreement relating to an SAR shall specify whether the SAR is a Tandem SAR or a
Free-Standing SAR.
SARs shall be subject to the following terms and conditions and shall
contain such additional terms and conditions, not inconsistent with the terms
of this Plan, as the Committee shall deem advisable:
(a) Number of SARs and Base Price. The number of SARs subject to an award
shall be determined by the Committee. Any Tandem SAR related to an Incentive
Stock Option shall be granted at the same time that such Incentive Stock Option
is granted. The base price of a Tandem SAR shall be the purchase price per
share of Common Stock of the related option. The base price of a Free-Standing
SAR shall be determined by the Committee; provided, however, that such base
price shall not be less than 100% of the Fair Market Value of a share of Common
Stock on the date of grant of such SAR.
(b) Exercise Period and Exercisability. The Agreement relating to an
award of SARs shall specify whether such award may be settled in shares of
Common Stock (including shares of Restricted Stock) or cash or a combination
thereof. The period for the exercise of an SAR shall be determined by the
Committee; provided, however, that no Tandem SAR shall be exercised later than
the expiration, cancellation, forfeiture or other termination of the related
option. The Committee may, in its discretion, establish Performance Measures
which shall be satisfied or met as a condition to the exercisability of an SAR.
The Committee shall determine whether an SAR may be exercised in cumulative or
non-cumulative installments and in part or in full at any time. An exercisable
SAR, or portion thereof, may be exercised, in the case of a Tandem SAR, only
with respect to whole shares of Common Stock and, in the case of a
Free-Standing SAR, only with respect to a whole number of SARs. If an SAR is
exercised for shares of Restricted Stock, a certificate or certificates
representing such Restricted Stock shall be issued
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in accordance with Section 3.2(c) and the holder of such Restricted Stock
shall have such rights of a stockholder of the Company as determined pursuant
to Section 3.2(d). Prior to the exercise of an SAR for shares of Common Stock,
including Restricted Stock, the holder of such SAR shall have no rights as a
stockholder of the Company with respect to the shares of Common Stock subject
to such SAR.
(c) Method of Exercise. A Tandem SAR may be exercised (i) by giving
written notice to the Company specifying the number of whole SARs which are
being exercised, (ii) by surrendering to the Company any options which are
canceled by reason of the exercise of the Tandem SAR and (iii) by executing
such documents as the Company may reasonably request. A Free-Standing SAR may
be exercised (i) by giving written notice to the Company specifying the whole
number (or if the remaining SAR then exercisable is for less then one whole
share, such remaining amount) of SARs which are being exercised and (ii) by
executing such documents as the Company may reasonably request.
2.3 TERMINATION OF EMPLOYMENT.
(a) Disability. Subject to paragraph (f) below and Section 6.8, and
unless otherwise specified in the Agreement relating to an option or SAR, as
the case may be, if the employment with the Company of the holder of an option
or SAR terminates by reason of Disability, each option and SAR held by such
holder shall be exercisable only to the extent that such option or SAR, as the
case may be, is exercisable on the effective date of such holder's termination
of employment and may thereafter be exercised by such holder (or such holder's
legal representative or similar person) until and including the earliest to
occur of (i) the date which is three months (or such other period as set forth
in the Agreement relating to such option or SAR) after the effective date of
such holder's termination of employment and (ii) the expiration date of the
term of such option or SAR.
(b) Retirement. Subject to paragraph (f) below and Section 6.8, and
unless otherwise specified in the Agreement relating to an option or SAR, as
the case may be, if the employment with the Company of the holder of an option
or SAR terminates by reason of retirement on or after age 65 with the consent
of the Company, each option and SAR held by such holder shall be exercisable
only to the extent that such option or SAR, as the case may be, is exercisable
on the effective date of such holder's termination of employment and may
thereafter be exercised by such holder (or such holder's legal representative
or similar person) until and including the earliest to occur of (i) the date
which is six months (or such other period as set forth in the Agreement
relating to such option or SAR) after the effective date of such holder's
termination of employment and (ii) the expiration date of the term of such
option or SAR.
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(c) Death. Subject to paragraph (f) below and Section 6.8, and unless
otherwise specified in the Agreement relating to an option or SAR, as the case
may be, if the employment with the Company of the holder of an option or SAR
terminates by reason of death, each option and SAR held by such holder shall be
exercisable only to the extent that such option or SAR, as the case may be, is
exercisable on the date of such holder's death, and may thereafter be exercised
by such holder's executor, administrator, legal representative, beneficiary or
similar person, as the case may be, until and including the earliest to occur
of (i) the date which is one year (or such other period as set forth in the
Agreement relating to such option or SAR) after the date of death and (ii) the
expiration date of the term of such option or SAR.
(d) Other Termination. If the employment with the Company of the holder
of an option or SAR is terminated by the Company for Cause, each option and SAR
held by such holder shall terminate automatically on the effective date of such
holder's termination of employment.
Subject to paragraph (f) below and Section 6.8, and unless specified in
the Agreement relating to an option or SAR, as the case may be, if the
employment with the Company of the holder of an option or SAR terminates for
any reason other than Disability, retirement on or after age 65 with the
consent of the Company, death or Cause, each option and SAR held by such holder
shall be exercisable only to the extent that such option or SAR is exercisable
on the effective date of such holder's termination of employment and may
thereafter be exercised by such holder (or such holder's legal representative
or similar person) until and including the earliest to occur of (i) the date
which is three months (or such other period as set forth in the Agreement
relating to such option or SAR) after the effective date of such holder's
termination of employment and (ii) the expiration date of the term of such
option or SAR.
(e) Death Following Termination of Employment. Subject to paragraph (f)
below and Section 6.8, and unless otherwise specified in the Agreement relating
to an option or SAR, as the case may be, if the holder of an option or SAR dies
during the three-month period following termination of employment by reason of
Disability, or if the holder of an option or SAR dies during the three-month
period following termination of employment by reason of retirement on or after
age 65 with the consent of the Company, or if the holder of an option or SAR
dies during the three-month period following termination of employment for any
reason other than Disability or retirement on or after age 65 with the consent
of the Company (or, in each case, such other period as set forth in the
Agreement relating to such option or SAR), each option and SAR held by such
holder shall be fully exercisable and may thereafter be exercised by the
holder's executor, administrator, legal representative, beneficiary or
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similar person, as the case may be, until and including the earliest to occur
of (i) the date which is one year (or such other period as set forth in the
Agreement relating to such option or SAR) after the date of death and (ii) the
expiration date of the term of such option or SAR.
(f) Termination of Employment - Incentive Stock Options. Subject to
Section 6.8 and unless otherwise specified in the Agreement relating to the
option, if the employment with the Company of a holder of an incentive stock
option terminates by reason of Permanent and Total Disability (as defined in
Section 22(e)(3) of the Code), each incentive stock option held by such
optionee shall be exercisable only to the extent that such option is
exercisable on the effective date of such optionee's termination of employment
by reason of Permanent and Total Disability, and may thereafter be exercised by
such optionee (or such optionee's legal representative or similar person) until
and including the earliest to occur of (i) the date which is three months (or
such other period no longer than one year as set forth in the Agreement
relating to such option) after the effective date of such optionee's
termination of employment by reason of Permanent and Total Disability and (ii)
the expiration date of the term of such option.
Subject to Section 6.8 and unless otherwise specified in the Agreement
relating to the option, if the employment with the Company of a holder of an
Incentive Stock Option terminates by reason of death, each Incentive Stock
Option held by such optionee shall be exercisable only to the extent that such
option is exercisable on the date of such optionee's death and may thereafter
be exercised by such optionee's executor, administrator, legal representative,
beneficiary or similar person until and including the earliest to occur of (i)
the date which is one year (or such shorter period as set forth in the
Agreement relating to such option)after the date of death and (ii) the
expiration date of the term of such option.
If the employment with the Company of the optionee of an Incentive Stock
Option is terminated by the Company for Cause, each Incentive Stock Option held
by such optionee shall terminate automatically on the effective date of such
optionee's termination of employment.
If the employment with the Company of a holder of an Incentive Stock
Option terminates for any reason other than Permanent and Total Disability,
death or Cause, each Incentive Stock Option held by such optionee shall be
exercisable only to the extent such option is exercisable on the effective date
of such optionee's termination of employment, and may thereafter be exercised
by such holder (or such holder's legal representative or similar person) until
and including the earliest to occur of (i) the date which is three months after
the effective date of
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such optionee's termination of employment and (ii) the expiration date of the
term of such option.
If the holder of an Incentive Stock Option dies during the three-month
period following termination of employment by reason of Permanent and Total
Disability (or such shorter period as set forth in the Agreement relating to
such option), or if the holder of an Incentive Stock Option dies during the
three-month period following termination of employment for any reason other
than Permanent and Total Disability, death or Cause, each Incentive Stock
Option held by such optionee shall be exercisable only to the extent such
option is exercisable on the date of the optionee's death and may thereafter be
exercised by the optionee's executor, administrator, legal representative,
beneficiary or similar person until and including the earliest to occur of (i)
the date which is one year (or such shorter period as set forth in the
Agreement relating to such option) after the date of death and (ii) the
expiration date of the term of such option.
III. STOCK AWARDS
3.1 STOCK AWARDS. The Committee may, in its discretion, grant Stock
Awards to such eligible persons as may be selected by the Committee. Subject
to adjustment as provided in Sections 6.7 and 6.8 of this Plan, the aggregate
number of shares of Common Stock available under this Plan pursuant to all
Stock Awards shall not exceed 100,000 of the aggregate number of shares of
Common Stock available under this Plan. The Agreement relating to a Stock
Award shall specify whether the Stock Award is a Restricted Stock Award or
Bonus Stock Award.
3.2 TERMS OF STOCK AWARDS. Stock Awards shall be subject to the following
terms and conditions and shall contain such additional terms and conditions,
not inconsistent with the terms of this Plan, as the Committee shall deem
advisable.
(a) Number of Shares and Other Terms. The number of shares of Common
Stock subject to a Restricted Stock Award or Bonus Stock Award and the
Performance Measures (if any) and Restriction Period applicable to a Restricted
Stock Award shall be determined by the Committee.
(b) Vesting and Forfeiture. The Agreement relating to a Restricted Stock
Award shall provide, in the manner determined by the Committee, in its
discretion, and subject to the provisions of this Plan, for the vesting of the
shares of Common Stock subject to such award (i) if specified Performance
Measures are satisfied or met during the specified Restriction Period or (ii)
if the holder of such award remains continuously in the employment of the
Company during the specified Restricted Period
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<PAGE> 15
and for the forfeiture of the shares of Common Stock subject to such award (x)
if specified Performance Measures are not satisfied or met during the
specified Restriction Period or (y) if the holder of such award does not remain
continuously in the employment of the Company during the specified Restriction
Period.
Bonus Stock Awards shall not be subject to any Performance Measures or
Restriction Periods.
(c) Share Certificates. During the Restriction Period, a certificate or
certificates representing a Restricted Stock Award shall be registered in the
holder's name and may bear a legend, in addition to any legend which may be
required pursuant to Section 6.6, indicating that the ownership of the shares
of Common Stock represented by such certificate is subject to the restrictions,
terms and conditions of this Plan and the Agreement relating to the Restricted
Stock Award. All such certificates shall be deposited with the Company,
together with stock powers or other instruments of assignment (including a
power of attorney), each endorsed in blank with a guarantee of signature if
deemed necessary or appropriate, which would permit transfer to the Company of
all or a portion of the shares of Common Stock subject to the Restricted Stock
Award in the event such award is forfeited in whole or in part. Upon
termination of any applicable Restriction Period (and the satisfaction or
attainment of applicable Performance Measures), or upon the grant of a Bonus
Stock Award, in each case subject to the Company's right to require payment of
any taxes in accordance with Section 6.5, a certificate or certificates
evidencing ownership of the requisite number of shares of Common Stock shall be
delivered to the holder of such award.
(d) Rights with Respect to Restricted Stock Awards. Unless otherwise set
forth in the Agreement relating to a Restricted Stock Award, and subject to the
terms and conditions of a Restricted Stock Award, the holder of such award
shall have all rights as a stockholder of the Company, including, but not
limited to, voting rights, the right to receive dividends and the right to
participate in any capital adjustment applicable to all holders of Common
Stock; provided, however, that a distribution with respect to shares of Common
Stock, other than a distribution in cash, shall be deposited with the Company
and shall be subject to the same restrictions as the shares of Common Stock
with respect to which such distribution was made.
(e) Awards to Certain Executive Officers. Notwithstanding any other
provision of this Article III, and only Company, the Fair Market Value of the
number of shares of Common Stock subject to a Stock Award granted to a "covered
employee" within the meaning of Section 162(m) of the Code shall not exceed
$2,000,000 (i) at the time of grant in the case of a
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Stock Award granted upon the attainment of Performance Measures or (ii) in
the case of a Restricted Stock Award with Performance measures which shall be
satisfied or met as a condition to the holder's receipt of the shares of Common
Stock subject to such award, on the earlier of (x) the date on which the
Performance Measures are satisfied or met and (y) the date the holder makes an
election under Section 83(b) of the Code.
3.3 TERMINATION OF EMPLOYMENT. Subject to Section 6.8 and unless
otherwise set forth in the Agreement relating to a Restricted Stock Award, if
the employment with the Company of the holder of such award terminates, the
portion of such award which is subject to a Restriction Period shall terminate
as of the effective date of such holder's termination of employment shall be
forfeited and such portion shall be canceled by the Company.
IV. PERFORMANCE SHARE AWARDS
4.1 PERFORMANCE SHARE AWARDS. The Committee may, in its discretion, grant
Performance Share Awards to such eligible persons as may be selected by the
Committee.
4.2 TERMS OF PERFORMANCE SHARE AWARDS. Performance Share Awards shall be
subject to the following terms and conditions and shall contain such additional
terms and conditions, not inconsistent with the terms of this Plan, as the
Committee shall deem advisable.
(a) Number of Performance Shares and Performance Measures. The number of
Performance Shares subject to any award and the Performance Measures and
Performance Period applicable to such award shall be determined by the
Committee.
(b) Vesting and Forfeiture. The Agreement relating to a Performance Share
Award shall provide, in the manner determined by the Committee, in its
discretion, and subject to the provisions of this Plan, for the vesting of such
award, if specified Performance Measures are satisfied or met during the
specified Performance Period, and for the forfeiture of such award, if
specified Performance Measures are not satisfied or met during the specified
Performance Period.
(c) Settlement of Vested Performance Share Awards. The Agreement relating
to a Performance Share Award (i) shall specify whether such award may be
settled in shares of Common Stock (including shares of Restricted Stock) or
cash or a combination thereof and (ii) may specify whether the holder thereof
shall be entitled to receive, on a current or deferred basis, dividend
equivalents, and, if determined by the Committee, interest on any deferred
dividend equivalents, with respect to the number of shares of Common Stock
subject to such award. If a
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Performance Share Award is settled in shares of Restricted Stock, a
certificate or certificates representing such Restricted Stock shall be
issued in accordance with Section 3.2(c) and the holder of such Restricted
Stock shall have such rights of a stockholder of the Company as determined
pursuant to Section 3.2(d). Prior to the settlement of a Performance Share
Award in shares of Common Stock, including Restricted Stock, the holder of
such award shall have no rights as a stockholder of the Company with
respect to the shares of Common Stock subject to such award.
4.3 TERMINATION OF EMPLOYMENT. Subject to Section 6.8 and unless
otherwise set forth in the Agreement relating to a Performance Share Award,
if the employment with the Company of the holder of such award terminates,
the portion of such award which is subject to a Performance Period on the
effective date of such holder's termination of employment shall be
forfeited and such portion shall be canceled by the Company.
V. PROVISIONS RELATING TO NON-EMPLOYEE DIRECTORS
5.1 ELIGIBILITY. Each Non-Employee Director shall be granted
options to purchase shares of Common Stock in accordance with this Article
V (collectively "Directors Options"). All options granted under this
Article V shall constitute Non-Statutory Stock Options.
5.2 GRANTS OF STOCK OPTIONS. Each Non-Employee Director shall be
granted Non-Statutory Stock Options as follows:
(a) Time of Grant. On the date of the initial public offering by
the Company each non-Employee Director (other than any Non-Employee
Director who is expected to resign in connection with the Company's initial
public offering) shall be granted an option to purchase 10,000 shares of
Common Stock at a purchase price equal to the initial public offering
price. In addition, following the initial public offering of the Company,
on the date on which a person is first elected or begins to serve as a
Non-Employee Director (other than by reason of termination of employment)
shall be granted an option to purchase 10,000 shares of Common Stock at a
purchase price per share equal to the Fair Market Value of a share of
Common Stock on the date of grant of such option.
(b) Option Period and Exercisability. Except as otherwise
provided herein, each option granted under this Article V shall not be
exercisable during the first year following its date of grant. Thereafter,
such option may be exercised: (i) on or after the first anniversary of its
date of grant, for up to one-third of the shares of Common Stock subject to
such option on its date of grant, (ii) on or after the second anniversary
of its date of grant, for up to an additional one-third (two-thirds on a
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cumulative basis) of the shares of Common Stock subject to such option on its
date of grant, and (iii) on or after the third anniversary of its date
of grant, for up to the remaining one-third (all shares on a cumulative basis)
of the shares of Common Stock subject to such option on its date of grant.
Each option granted under this Article V shall expire ten years after its date
of grant. An exercisable option, or portion thereof, may be exercised in whole
or in part only with respect to whole shares of Common Stock. Options granted
under this Article V shall be exercisable in accordance with Section 2.1(c).
5.3 TERMINATION OF DIRECTORSHIP.
(a) Disability. Subject to Section 6.8, if the holder of an option
granted under this Article V ceases to be a director of the Company by reason
of Disability, each such option held by such holder shall be exercisable only
to the extent that such option is exercisable on the effective date of such
holder's ceasing to be a director and may thereafter be exercised by such
holder (or such holder's guardian, legal representative or similar person)
until the earliest to occur of the (i) date which is three months after the
effective date of such holder's ceasing to be a director and (ii) the
expiration date of the term of such option.
(b) Retirement. Subject to Section 6.8, if the holder of an option
granted under this Article V ceases to be a director of the Company on or after
age 65, each such option held by such holder shall be exercisable only to the
extent that such option is exercisable on the effective date of such holder's
ceasing to be a director and may thereafter be exercised by such holder (or
such holder's legal representative or similar person) until the earliest to
occur of the (i) date which is three months after the effective date of such
holder's ceasing to be a director and (ii) the expiration date of the term of
such option.
(c) Death. Subject to Section 6.8, if the holder of an option granted
under this Article V ceases to be a director of the Company by reason of death,
each such option held by such holder shall be fully exercisable and may
thereafter be exercised by such holder's executor, administrator, legal
representative, beneficiary or similar person, as the case may be, until the
earliest to occur of the (i) date which is one year after the date of death and
(ii) the expiration date of the term of such option.
(d) Other Termination. Subject to Section 6.8, if the holder of an option
granted under this Article V ceases to be a director of the Company for any
reason other than Disability, retirement on or after age 65 or death, each such
option held by such holder shall be exercisable only to the extent such option
is exercisable on the effective date of such holder's ceasing to be a director
and may thereafter be exercised by such holder (or
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such holder's legal representative or similar person) until the earliest to
occur of the (i) date which is three months after the effective date of such
holder's ceasing to be a director and (ii) the expiration date of the term of
such option.
(e) Death Following Termination of Directorship. Subject to Section 6.8,
if the holder of an option granted under this Article V dies during the
three-month period following such holder's ceasing to be a director of the
Company by reason of Disability, or if such a holder dies during the
three-month period following such holder's ceasing to be a director of the
Company on or after age 65, or if such a holder dies during the three-month
period following such holder's ceasing to be a director for any reason other
than by reason of Disability or retirement on or after age 65, each such option
held by such holder shall be exercisable only to the extent that such option is
exercisable on the date of the holder's death and may thereafter be exercised
by the holder's executor, administrator, legal representative, beneficiary or
similar person, as the case may be, until the earliest to occur of the (i) date
one year after the date of death and (ii) the expiration date of the term of
such option.
5.4 DIRECTORS OPTIONS. Each Directors Option shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of this Plan, as the Committee
shall deem advisable:
(a) Option Period and Exercisability. Directors Options shall become
exercisable as provided in Section 5.2(b). If at any time prior to the time
that a Directors Option becomes exercisable, a Non-Employee Director shall no
longer be a member of the Board, such Directors Option shall become void and of
no further force or effect; provided, however, that in the event of the
Disability, retirement or death of a Non-Employee Director prior to the time
that a Directors Option would otherwise become exercisable, such Directors
Option shall immediately become exercisable in full.
(b) Purchase Price. The purchase price for the shares of Common Stock
subject to any Directors Option shall be equal to 100% of the Fair Market Value
of a share of Common Stock on the date of grant of such Directors Option. Such
Directors Options shall be exercisable in accordance with Section 2.1(c).
(c) Restrictions on Transfer. Directors Options shall be subject to the
transfer restrictions and other provisions of Section 6.4.
(d) Expiration. Each Directors Option which has become exercisable
pursuant to Section 5.4(a), to the extent not theretofore exercised, shall
expire on the first to occur of (i) the date which is three months after the
first date on which the
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Non-Employee Director shall no longer be a member of the Board or the Board of
Directors of a Subsidiary and (ii) the tenth anniversary of the date of grant
of such option; provided, however, that if the Non-Employee Director shall die
within such three-month period following the date on which he shall have
ceased to serve as such a director, such option may be exercised at any time
within the one-year period following the date of death to the extent not
theretofore exercised (but in no event later than the tenth anniversary of the
date of grant).
VI. GENERAL
6.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan shall be submitted to
the stockholders of the Company for approval and, if approved by the
affirmative vote of a majority of the voting power of the shares of capital
stock of the Company entitled to vote thereon, shall become effective as of the
commencement of the initial public offering of the Company. This Plan shall
terminate ten years after its effective date unless terminated earlier by the
Board. Termination of this Plan shall not affect the terms or conditions of any
award granted prior to termination.
Awards hereunder may be made at any time prior to the termination of
this Plan, provided that no award may be made later than ten years after the
effective date of this Plan. In the event that this Plan is not approved by
the stockholders of the Company, this Plan and any awards hereunder shall be
void and of no force or effect.
6.2 AMENDMENTS. The Board may amend this Plan as it shall deem
advisable, subject to any requirement of stockholder approval required by
applicable law, rule or regulation including Rule 16b-3 under the Exchange Act
and Section 162(m) of the Code; provided, however, that no amendment shall be
made without stockholder approval if such amendment would (a) increase the
maximum number of shares of Common Stock available for issuance under this Plan
(subject to Section 6.7), (b) reduce the minimum purchase price in the case of
an option or the base price in the case of an SAR, (c) effect any change
inconsistent with Section 422 of the Code or (d) extend the term of this Plan;
provided further that, subject to Section 6.7, the number of shares of Common
Stock subject to an option granted to non-employee directors pursuant to
Article V, the purchase price therefor, the date of grant of any such option,
the termination provisions relating to such options, and the category of
persons eligible to be granted such options shall not be amended more than once
every six months, other than to comply with changes in the Code or ERISA, or
the rules and regulations thereunder. No amendment may impair the rights of a
holder of an outstanding award without the consent of such holder.
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6.3 AGREEMENT. Each award under this Plan shall be evidenced by an
Agreement setting forth the terms and conditions applicable to such award. No
award shall be valid until an Agreement is executed by the Company and the
recipient of such award and, upon execution by each party and delivery of the
Agreement to the Company, such award shall be effective as of the effective
date set forth in the Agreement.
6.4 NON-TRANSFERABILITY OF STOCK OPTIONS, SARS AND PERFORMANCE SHARES.
No option, SAR or Performance Share shall be transferable other than (i) by
will, the laws of descent and distribution or pursuant to beneficiary
designation procedures approved by the Company or (ii) as otherwise permitted
under Rule 16b-3 under the Exchange Act as set forth in the Agreement relating
to such award. Each option, SAR or Performance Share may be exercised or
settled during the participant's lifetime only by the holder or the holder's
legal representative or similar person. Except as permitted by the second
preceding sentence, no option, SAR or Performance Share may be sold,
transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed
of (whether by operation of law or otherwise) or be subject to execution,
attachment or similar process. Upon any attempt to so sell, transfer, assign,
pledge, hypothecate, encumber or otherwise dispose of any option, SAR or
Performance Share, such award and all rights thereunder shall immediately
become null and void.
6.5 TAX WITHHOLDING. The Company shall have the right to require, prior
to the issuance or delivery of any shares of Common Stock or the payment of any
cash pursuant to an award made hereunder, payment by the holder of such award
of any Federal, state, local or other taxes which may be required to be
withheld or paid in connection with such award. An Agreement may provide that
(i) the Company shall withhold whole shares of Common Stock which would
otherwise be delivered to a holder, having an aggregate Fair Market Value
determined as of the date the obligation to withhold or pay taxes arises in
connection with an award (the "Tax Date"), or withhold an amount of cash which
would otherwise be payable to a holder, in the amount necessary to
satisfy any such obligation or (ii) the holder may satisfy any such obligation
by any of the following means: (1) a cash payment to the Company, (2) delivery
to the Company of Mature Shares having an aggregate Fair Market Value,
determined as of the Tax Date, equal to the amount necessary to satisfy any
such obligation, (3) authorizing the Company to withhold whole shares of Common
Stock which would otherwise be delivered having an aggregate Fair Market Value,
determined as of the Tax Date, or withhold an amount of cash which would
otherwise be payable to a holder, equal to the amount necessary to satisfy any
such obligation, (4) in the case of the exercise of an option, a cash payment
by a broker-dealer acceptable to the Company to whom the optionee has submitted
an irrevocable notice of exercise or (5) any combination of (1), (2) and (3),
in each case to the extent
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<PAGE> 22
set forth in the Agreement relating to the award; provided, however, that the
Committee shall have sole discretion to disapprove of an election pursuant
to any of clauses (2)-(5) and that in the case of a holder who is subject to
Section 16 of the Exchange Act, the Company may require that the method of
satisfying such an obligation be in compliance with Section 16 and the rules
and regulations thereunder. An Agreement may provide for shares of Common
Stock to be delivered or withheld having an aggregate Fair Market Value in
excess of the minimum amount required to be withheld. Any fraction of a share
of Common Stock which would be required to satisfy such an obligation shall be
disregarded and the remaining amount due shall be paid in cash by the holder.
6.6 RESTRICTIONS ON SHARES. Each award made hereunder shall be subject
to the requirement that if at any time the Company determines that the listing,
registration or qualification of the shares of Common Stock subject to such
award upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the delivery of shares
thereunder, such shares shall not be delivered unless such listing,
registration, qualification, consent, approval or other action shall have been
effected or obtained, free of any conditions not acceptable to the Company.
The Company may require that certificates evidencing shares of Common Stock
delivered pursuant to any award made hereunder bear a legend indicating that
the sale, transfer or other disposition thereof by the holder is prohibited
except in compliance with the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
6.7 ADJUSTMENT. Except as provided in Section 6.8, in the event of any
stock split, stock dividend, recapitalization, reorganization, merger,
consolidation, combination, exchange of shares, liquidation, spin-off or other
similar change in capitalization or event, or any distribution to holders of
Common Stock other than a regular cash dividend, the number and class of
securities available under this Plan, the number and class of securities
subject to each outstanding option and the purchase price per security, the
number of securities subject to each option to be granted to Non-Employee
Directors pursuant to Article V, the terms of each outstanding SAR, the number
and class of securities subject to each outstanding Stock Award, and the terms
of each outstanding Performance Share shall be appropriately adjusted by the
Committee, such adjustments to be made in the case of outstanding options and
SARs without an increase in the aggregate purchase price or base price. The
decision of the Committee regarding any such adjustment shall be final, binding
and conclusive. If any such adjustment would result in a fractional security
being (a) available under this Plan, such fractional security shall be
disregarded, or (b) subject to an award under this Plan, the Company shall pay
the
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<PAGE> 23
holder of such award, in connection with the first vesting, exercise or
settlement of such award, in whole or in part, occurring after such adjustment,
an amount in cash determined by multiplying (i) the fraction of such security
(rounded to the nearest hundredth) by (ii) the excess, if any, of (1) the Fair
Market Value on the vesting, exercise or settlement date over (2) the exercise
or base price, if any, of such award.
6.8 CHANGE IN CONTROL.
(a) (i) Notwithstanding any provision in this Plan or any Agreement,
in the event of a Change in Control pursuant to Section (b)(iii) or (iv)
below, (1) all outstanding options and SARS shall immediately become
exercisable in full, (2) the Restriction Period applicable to any
outstanding Restricted Stock Award shall lapse, (3) the Performance
Period applicable to any outstanding Performance Share shall lapse and
(4) the Performance Measures applicable to any outstanding Restricted
Stock Award (if any) and to any outstanding Performance Share shall be
deemed to be satisfied at the maximum level. If, in connection with such
Change in Control, holders of Common Stock receive solely shares of
common stock that are registered under Section 12 of the Exchange Act,
there shall be substituted for each share of Common Stock available under
this Plan, whether or not then subject to an outstanding award, the
number and class of shares into which each outstanding share of Common
Stock shall be converted pursuant to such Change in Control. If, in
connection with such Change in Control, holders of Common Stock receive
solely cash and shares of common stock that are registered under Section
12 of the Exchange Act, each outstanding award shall be surrendered to
and canceled by the Company, and the holder shall receive, within ten
days of the occurrence of such Change in Control, a proportionate amount
of cash in the manner provided in Section (a)(ii) below, and there shall
be substituted for the award surrendered a similar award reflecting a
proportionate number of the class of shares into which each outstanding
share of Common Stock shall be converted to such Change in Control. In
the event of any such substitution, the proportion of cash and common
stock, the purchase price per share in the case of an option and the base
price in the case of an SAR, and any other terms of outstanding awards
shall be appropriately adjusted by the Committee, such adjustments to be
made in the case of outstanding options and SARs without an increase in
the aggregate purchase price or base price; provided, that the proportion
of cash and common stock substituted for outstanding awards shall reflect
the approximate proportion of cash and common stock received by holders
of Common Stock in such Change in Control. If, in connection with a
Change in Control, holders of Common Stock receive any portion of the
consideration in a form other than cash or shares of
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<PAGE> 24
common stock that are registered under Section 12 of the Exchange Act,
each share of Common Stock available under this Plan, whether or not
then subject to an outstanding award, shall be substituted or surrendered
for such proportion of common stock, cash or other consideration as shall
be determined by the Committee pursuant to Section 6.7.
(ii) Notwithstanding any provision in this Plan or any Agreement,
in the event of a Change in Control pursuant to Section (b)(i) or (ii)
below, or in the event of a Change in Control pursuant to Section
(b)(iii) or (iv) below in connection with which the holders of Common
Stock receive cash, each outstanding award shall be surrendered to the
Company by the holder thereof, and each such award shall immediately be
canceled by the Company, and the holder shall receive, within ten days of
the occurrence of a Change in Control pursuant to Section (b)(i) or (ii)
below or within ten days of the approval of the stockholders of the
Company contemplated by Section (b)(iii) or (iv) below, a cash payment
from the Company in an amount equal to (1) in the case of an option, the
number of shares of Common Stock then subject to such option, multiplied
by the excess, if any, of the greater of (A) the highest per share price
offered to stockholders of the Company in any transaction whereby the
Change in Control takes place or (B) the Fair Market Value of a share of
Common Stock on the date of occurrence of the Change in Control, over the
purchase price per share of Common Stock subject to the option; (2) in
the case of a Free-Standing SAR, the number of shares of Common Stock
then subject to such SAR, multiplied by the excess, if any, of the
greater of (A) the highest per share price offered to stockholders of the
Company in any transaction whereby the Change in Control takes place or
(B) the Fair Market Value of a share of Common Stock on the date of
occurrence of the Change in Control, over the base price of the SAR; and
(3) in the case of a Restricted Stock Award or Performance Share Award,
the number of shares of Common Stock or the number of Performance Shares,
as the case may be, then subject to such award, multiplied by the greater
of (A) the highest per share price offered to stockholders of the Company
in any transaction whereby the Change in Control takes place or (B) the
Fair Market Value of a share of Common Stock on the date of occurrence of
the Change in Control. In the event of a Change in Control, each Tandem
SAR shall be surrendered by the holder thereof and shall be canceled
simultaneously with the cancellation of the related option. Except as
may be provided in an agreement relating to an award, the Company may,
but is not required to, cooperate with any person who is subject to
Section 16 of the Exchange Act to assure that any cash payment in
accordance with the foregoing to such person is made in
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<PAGE> 25
compliance with Section 16 and the rules and regulations thereunder.
(b) "Change in Control" shall mean:
(i) the acquisition by any individual, entity or group (a
"Person"), including any "person" within the meaning of Section 13(d)(3)
or 14(d)(2) of the Exchange Act, of Beneficial Ownership of 25% or more
of either (1) the then outstanding shares of common stock of the Company
(the "Outstanding Company Common Stock") or (2) the combined voting power
of the then outstanding securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); excluding, however, the following: (A) any acquisition
directly from the Company (excluding any acquisition resulting from the
exercise of an exercise, conversion or exchange privilege unless the
security being so exercised, converted or exchanged was acquired directly
from the Company), (B) any acquisition by the Company, (C) any
acquisition by an employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company,
(D) any acquisition by an Exempt Person or (E) any acquisition by any
corporation pursuant to a transaction which complies with clauses (1),
(2) and (3) of subsection (iii) of this Section 6.8(b); provided further,
that for purposes of clause (2), if any Person (other than an Exempt
Person, the Company or any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by
the Company) shall become the Beneficial Owner of 50% or more of the
Outstanding Company Common Stock or 50% or more of the Outstanding
Company Voting Securities by reason of an acquisition by the Company, and
such Person shall, after such acquisition by the Company, become the
Beneficial Owner of any additional shares of the Outstanding Company
Common Stock or any additional Outstanding Company Voting Securities and
such Beneficial Ownership is publicly announced, such additional
Beneficial Ownership shall constitute a Change in Control;
(ii) individuals who, as of the effective date hereof, constitute
the Board of Directors (the "Incumbent Board") cease for any reason to
constitute at least a majority of such Board; provided that any
individual who becomes a director of the Company subsequent to the
effective date hereof whose election, or nomination for election by the
Company's stockholders, was approved by the vote of at least a majority
of the directors then comprising the Incumbent Board shall be deemed a
member of the Incumbent Board; and provided further, that any individual
who was initially elected as a director of the Company as a result of an
actual or threatened election contest, as such terms are
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<PAGE> 26
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act,
or any other actual or threatened solicitation of proxies or
consents by or on behalf of any Person other than the Board shall not be
deemed a member of the Incumbent Board;
(iii) approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of
all or substantially all of the assets of the Company (a "Corporate
Transaction"); excluding, however, a Corporate Transaction pursuant to
which (1) all or substantially all of the individuals or entities who are
the Beneficial Owners, respectively, of the Outstanding Company Common
Stock and the Outstanding Company Voting Securities immediately prior to
such Corporate Transaction will Beneficially Own, directly or indirectly,
more than 50% of, respectively, the outstanding shares of common stock,
and the combined voting power of the outstanding securities of such
corporation entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Corporate
Transaction (including, without limitation, a corporation which as a
result of such transaction owns the Company or all or substantially all
of the Company's assets either directly or indirectly) in substantially
the same proportions relative to each other as their Beneficial
Ownership, immediately prior to such Corporate Transaction, of the
Outstanding Company Common Stock and the Outstanding Company Voting
Securities, as the case may be, (2) no Person (other than an Exempt
Person; the Company; any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by
the Company; the corporation resulting from such Corporate Transaction;
and any Person which Beneficially Owned, immediately prior to such
Corporate Transaction, directly or indirectly, 50% or more of the
Outstanding Company Common Stock or the Outstanding Company Voting
Securities, as the case may be) will Beneficially Own, directly or
indirectly, 50% or more of, respectively, the outstanding shares of
common stock of the corporation resulting from such Corporate Transaction
or the combined voting power of the outstanding securities of such
corporation entitled to vote generally in the election of directors and
(3) individuals who were members of the Incumbent Board will constitute
at least a majority of the members of the board of directors of the
corporation resulting from such Corporate Transaction; or
(iv) approval by the stockholders of the Company of a plan of
complete liquidation or dissolution of the Company.
Notwithstanding anything to the contrary herein, no Change of Control
shall be deemed to have taken place as a result of the issuance of shares of
Common Stock by the Company or the
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<PAGE> 27
sale of shares of Common Stock by its stockholders in connection with the
Company's initial public offering.
6.9 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any
right to participate in this Plan. Neither this Plan nor any award made
hereunder shall confer upon any person any right to continued employment by the
Company, any Subsidiary or any affiliate of the Company or affect in any manner
the right of the Company, any Subsidiary or any affiliate of the Company to
terminate the employment of any person at any time without liability hereunder.
6.10 RIGHTS AS STOCKHOLDER. No person shall have any right as a
stockholder of the Company with respect to any shares of Common Stock or other
equity security of the Company which is subject to an award hereunder unless
and until such person becomes a stockholder of record with respect to such
shares of Common Stock or equity security.
6.11 GOVERNING LAW. This Plan, each award hereunder and the related
Agreement, and all determinations made and actions taken pursuant thereto, to
the extent not otherwise governed by the Code or the laws of the United States,
shall be governed by the laws of the State of Delaware and construed in
accordance therewith without giving effect to principles of conflicts of laws.
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<PAGE> 1
EXHIBIT 10.8
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. EACH SUCH
OMISSION IS DESIGNATED [***].
AMENDED AND RESTATED
PRIVATE LABEL CREDIT REVOLVING
CREDIT PLAN AGREEMENT
BY AND BETWEEN
BANK ONE, DAYTON, NA
d.b.a. BANC ONE PRIVATE LABEL CREDIT SERVICES
AND
MARKS BROS. JEWELERS, INC.
MAY 31, 1996
<PAGE> 2
TABLE OF CONTENTS
PAGE
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . 1
2. Bank One Covenants. . . . . . . . . . . . . . . . . . . . 2
3. Retailer Covenants. . . . . . . . . . . . . . . . . . . . 3
4. Plan Credit and Marketing Decisions, Terms and Conditions 4
5. Fees, Expenses and Pricing. . . . . . . . . . . . . . . . 6
6. Processing Agreement. . . . . . . . . . . . . . . . . . . 7
7. Operation Hours . . . . . . . . . . . . . . . . . . . . . 8
8. Advertising . . . . . . . . . . . . . . . . . . . . . . . 8
9. Telecommunication Requirements. . . . . . . . . . . . . . 9
10. Term/Termination. . . . . . . . . . . . . . . . . . . . . 9
11. Default . . . . . . . . . . . . . . . . . . . . . . . . . 10
12. Charge Back and Set off . . . . . . . . . . . . . . . . . 11
13. Indemnification . . . . . . . . . . . . . . . . . . . . . 12
14. Escrow Account. . . . . . . . . . . . . . . . . . . . . . 13
15. Exclusive Property. . . . . . . . . . . . . . . . . . . . 14
16. Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . 14
17. Financial Statements. . . . . . . . . . . . . . . . . . . 14
18. Amendment-Modification. . . . . . . . . . . . . . . . . . 14
19. Successors and Assigns. . . . . . . . . . . . . . . . . . 15
20. Option to Purchase. . . . . . . . . . . . . . . . . . . . 15
21. Confidentiality . . . . . . . . . . . . . . . . . . . . . 15
22. Severability. . . . . . . . . . . . . . . . . . . . . . . 16
23. Notices . . . . . . . . . . . . . . . . . . . . . . . . . 16
24. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . 17
ADDENDUM "A" PLAN CARD PROCESSING AGREEMENT. . . . . . . . . . 18
ADDENDUM "B" AUTHORIZATION TO TRANSACT TELEPHONE
OR MAIL ORDERS. . . . . . . . . . . . . . . . . . . . . . 30
ADDENDUM "C" PRIVATE LABEL ADVERTISING REQUIREMENTS. . . . . . 31
ADDENDUM "D" PRICING SCHEDULE. . . . . . . . . . . . . . . . . 33
ADDENDUM "E" CONTINGENCY PLAN FOR AUTHORIZATION
SYSTEM DOWNTIME . . . . . . . . . . . . . . . . . . . . . 36
CHARGEBACK AND INDEMNIFICATION AGREEMENT . . . . . . . . . . . 37
ADDENDUM "F" SECOND SOURCE FINANCING PROGRAM . . . . . . . . . 39
<PAGE> 3
AMENDED AND RESTATED
BANK ONE, DAYTON, NA d.b.a. BANK ONE PRIVATE LABEL
CREDIT SERVICES/MARKS BROS. JEWELERS. INC.
PRIVATE LABEL REVOLVING CREDIT PLAN AGREEMENT
This Amended and Restated Bank One, Dayton, NA, d.b.a. Banc One Private Label
Credit Services/ Marks Bros. Jewelers, Inc. Private Label Revolving Credit
Plan Agreement ("Agreement") is made this 6th day of May, 1996, to be effective
May 31, 1996 by and between Marks Bros. Jewelers, Inc., d.b.a. The Whitehall
Co. Jewelers and d.b.a. Lundstrom Jewelers, a Delaware corporation
("Retailer"), and Bank One, Dayton, NA, a national banking association ("Bank
One").
WITNESSETH:
WHEREAS, Bank One and Retailer entered into a private label revolving credit
plan agreement dated March 23, 1993 ("1993 Agreement"); and
WHEREAS, this Agreement amends and restates the 1993 Agreement: and
WHEREAS, Bank One currently offers its Jewelry Express credit card financing
service to numerous jewelry stores and companies ("J.E. Plan"); and
WHEREAS, Retailer desires to have Bank One modify Bank One's Plan ("Modified
Plan") (from time to time herein when certain terms and conditions are
applicable to the J.E. Plan and the Modified Plan, the J.E. Plan and Modified
Plan may be referred to jointly as the "Plan") to enable Retailer's customers
purchasing merchandise sold or services rendered or to be rendered by Retailer
(collectively "Products") to finance such Products under the Modified Plan and
to have the proceeds of each extension of credit under the Modified Plan be
remitted to Retailer in payment for the sale of such Products to Cardholders;
and
WHEREAS, Bank One is willing to establish such a Modified Plan for Retailer
subject to the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants contained herein, the
parties agree as follows:
1. Definitions. The following definitions shall apply to this Agreement:
"Account" shall mean a revolving line of credit established under the
Plan for a Cardholder for the purpose of financing merchandise or
services purchased by Cardholder from Retailer.
"Addendum" shall mean documentation attached to this Agreement which
specifies the particulars of this Agreement.
1
<PAGE> 4
"Agreement" shall collectively mean this Revolving Credit Plan
Agreement and all Addenda hereto.
"Applicant" shall mean the Retailer's customer who completes a Bank One
application for credit pursuant to the Plan.
"Business Day" shall be defined as any day which the Federal Reserve
Bank of Cleveland, Ohio is open for the transaction of general banking
business.
"Cardholder" shall mean an Applicant approved by Bank One to open an
Account.
"Charge Back" shall mean the reversal of a previously credited sales
Transaction, which involves the return of the sales Transaction from
Bank One to retailer.
"Consumer Interest Rate" shall mean the current annual percentage rate
currently charged to Plan Cardholders ("CIR").
"Loans" shall mean all credit extended under the Modified Plan on or
after the date of this Agreement.
"Opening Date" shall mean the date on which the first Cardholder
Account is opened under the Modified Plan.
"Plan Agreement" shall mean the Revolving Credit Plan Agreement and
Truth-In-Lending Disclosure issued by Bank One to the Cardholder setting
forth the terms of the extension of credit with the Cardholder.
"Modified Plan Card" shall mean the plastic credit card identified as
the card used by a Cardholder to finance Products from Retailer pursuant
to the Plan.
"Sales Agreement" shall mean the document(s) evidencing the sale,
exchange, or purchase of Retailer's Products at the time of the
Transaction.
"Transaction" shall mean those mutual acts and exchanges between the
Cardholder and Retailer occurring at the time of a purchase of Retailer's
Products.
"Transaction Draft" shall mean the document(s) required by Bank One
that Retailer is to complete to evidence a purchase, return or exchange at
the time of the Transaction.
2. BANK ONE COVENANTS. Bank One agrees:
A. To comply with all applicable consumer credit and other laws and
regulations in connection with Applicant credit evaluation procedures,
administration of the Plan and its operating procedures and forms.
Examples of these laws and regulations include Regulation
2
<PAGE> 5
B, Regulation Z, applicable federal and state interest rate and fee
limitation statutes and collection practice laws.
B. To perform all functions to administer and service the Plan,
including all necessary credit investigations, credit decisions and
notifications to Applicants of their prompt acceptance or rejection to the
Plan.
C. To design, supply and pay for all Plan application forms utilized
at the point of sale, the Plan Card Agreement, any separate Plan Card
carrier, and the periodic billing statement used in connection with the
Plan.
D. To provide and mail to accepted Plan Applicants the Plan Card(s)
and a second copy of the Plan Agreement.
E. To perform all administrative duties and services, including, but
not limited to, billing Cardholders, collecting balances, processing
adjustments and handling Cardholder inquiries.
F. To provide Retailer with monthly reports of Modified Plan
performance and activity.
G. To not sell, rent or use the list of Cardholders (or Applicants),
other than to Bank One's parent corporation, or an affiliate or
subsidiary, except in connection with its administration and operation of
the Plan. Bank One shall have the right both before, and after
termination of this Agreement, to mail to the Plan Cardholder base,
materials for the marketing of bank services or other products or services
offered by, or through Bank One or any other affiliate or subsidiary of
Banc One Corporation, provided that Bank One informs Marks Bros. of said
mailings prior to the mailing and no reference is made to Marks Bros. in
said mailings. Marks Bros. also agrees to allow Bank One to market
special "value added" programs, including but not limited to, credit
insurance, to the Plan Cardholder base, as long as Bank One has advised
Marks Bros. of any such program prior to its solicitation.
3. RETAILER COVENANTS. Retailer agrees:
A. To train store personnel in the implementation, operation, and
processing of the Plan including the taking of Plan credit applications
and transmission of same to Bank One.
B. To provide each Applicant with the first copy of the Plan
Agreement at, or before, the time the Applicant's credit application is
made.
C. To retain original Plan credit applications in trust for Bank One
for a minimum of thirty (30) months and to deliver any Plan credit
application to Bank One within ten (10) Business Days upon request of Bank
One unless said credit application has been previously forwarded.
Retailer agrees that the Plan Card will be the primary source of financing
offered to Retailer's customers and Bank One will have the first option to
approve each account subject to any of the following:
3
<PAGE> 6
(i) Retailer's customer chooses a credit source other than
Bank One;
(ii) Approval times go beyond five (5) minutes for phoned in
applications. Approval times go beyond twenty (20)
minutes for faxed in applications.
(iii) Bank One is unable to extend credit for the full amount
of the Retailer's customer's contemplated purchase.
D. To process in a timely manner Transaction Drafts for Cardholders
utilizing the Plan.
E. To act promptly and reasonably to resolve disputes with Cardholders
regarding Products financed under the Plan.
F. Not to offer any deviation from the Plan Agreement without the
prior written approval of Bank One. For example, oral representations
to Applicants or Cardholders relative to special terms, interest rates,
payment schedules or payment due dates.
G. That the Modified Plan and the Modified Plan Card shall be the
sole and exclusive source of financing under a Retailer sponsored credit
card available to Retailer's customers, except for the provision as
outlined in Section 3(C) above.
H. That if Retailer sells, offers to sell, arranges, gives or may give
(with or without cost) any warranty including extended manufacturer's
warranty, "free" check-ups, free servicing, trade in or credit for non-use
of any warranty (excepting manufacturer's warranty), then Retailer agrees
to fully indemnify Bank One for any losses relating to Cardholder's claims
for failure of Retailer to provide any warranty offered or sold by or
through Retailer.
I. To use its reasonable efforts to reserve usage of promotions,
beyond the 90 Days Same as Cash First Purchase promotion, for sales
totaling $250 or greater.
4. PLAN CREDIT AND MARKETING DECISIONS, TERMS AND CONDITIONS.
A. Bank One has the absolute and complete right to determine the
credit worthiness of Plan credit applications submitted to Bank One.
Bank One makes no representation either expressed or implied as to
Applicant approval rate. Credit criteria and standards to be applied to
Applicants will be at Bank One's sole discretion and Bank One may change
its credit criteria or Plan Agreement terms and conditions at any time as
deemed appropriate.
B. Bank One shall determine and be responsible for the legality of
the terms and conditions of the Plan and for the enforceability of the
Plan Agreement, except that the Consumer Interest Rate charged to Modified
Plan Cardholders shall be mutually agreed upon by Bank One and Retailer,
subject to applicable law.
4
<PAGE> 7
C. No minimum Transaction amount for purchases will be required except
as noted in Section 3.(I) of this Agreement. Purchase Transactions using
the Account will be for any amount up to Cardholder's available credit
limit. All "add on" purchase Transactions up to Cardholder's available
credit limit will be authorized and processed electronically using the
Bank One/Retailer electronic interface as set forth herein.
D. Bank One has the right to approve or disapprove all aspects of the
Plan not specified in this Agreement including, but not limited to,
advertising and promotional material as same relates to the Plan beyond
the advertising requirements set forth in Section Eight (8) herein and
those guidelines provided Retailer by Bank One, a copy of which is
attached hereto as Addendum "C" and made a part hereof. The purpose of
said approval being to allow Bank One to insure that the advertising does
not possibly jeopardize or impede Bank One's position that Bank One is the
creditor and by being owner of the Plan located in Ohio is subject only to
Ohio State law and any federal statute as applicable to national banks.
Bank One must be contacted for written approval at least ten (10) Business
Days before any changes may be implemented.
E. Bank One will provide the ability to put promotional messages on
monthly statements and advertising inserts in Modified Plan Cardholder
monthly envelopes. Retailer will be responsible for providing the message
and the insert layout to be printed, with such inserts limited to a
maximum of three (3) colors. Bank One will be responsible for and pay for
production plates, printing and production of inserts conforming to size
and weight specifications, wrapping and shipping. Bank One will also place
Retailer's messages on statements at no cost to Retailer, and pay the
costs for all statement mailings, including first-class postage up to a
weight of one (1) ounce per envelope. Any additional inserts to be added
to the envelope, as desired by Retailer in any given month, that such
weight exceeds one (1) ounce, such excess postage will be borne by
Retailer.
F. Use of Tradename and Trademark. During the term of this
Agreement, Bank One shall have a nonexclusive license to use the logo,
tradename, or service mark (collectively referred to as "Tradename") of
Marks Bros., as mutually agreed upon by Bank One and Marks Bros., solely
in connection with the Plan and consistent with the terms and purposes of
this Agreement. Such license shall be irrevocable as long as this
Agreement remains in effect. Upon termination of this Agreement for any
reason, Bank One's license to use the Tradename shall expire immediately
and Bank One shall take all necessary steps, at its cost, to revise and to
replace documents and any other materials related to the Plan that utilize
or evidence the Tradename, provided however that if Marks Bros. does not
purchase the Accounts upon termination, Bank One is granted a limited
license to use the Tradename solely for the collection of balances due and
owing on the accounts, but shall cause to be removed within ninety (90)
days from the effective date of the termination of the Agreement all other
references or use of the Tradename other than in connection with Accounts
collection. Marks Bros. represents and warrants that it is the owner of,
or is otherwise authorized to, permit Bank One to use the Tradename in
accordance with this Agreement in connection with the Plan. Marks Bros.
shall be responsible for the validity of the
5
<PAGE> 8
Tradename. Bank One covenants not to take any action, or fail to take
any action, that would materially impair the validity of the Tradename.
Any and all rights to the Tradename not specifically granted and licensed
under this Agreement shall be reserved for and retained by Marks Bros.
G. Special Promotional Financing Programs. From time to time the
parties may mutually agree to develop and implement special promotional
financing programs ("Special Programs"), and will use their best
reasonable efforts to agree on the terms and costs associated with said
Special Programs. If the parties fail to mutually agree on said terms and
costs, then Marks Bros. may utilize another source for Special Programs.
Notwithstanding the foregoing, the Special Programs offered and used
through other sources may not exceed five percent (5%) of the total annual
private label sales of the Plan. To maintain compliance for this special
provision of the Agreement, Marks Bros. will submit to Bank One a monthly
report with supporting documentation to ensure said compliance.
H. First Time Buyers Program. Bank One has developed and agrees to
provide to Marks Bros. a special financing program called the "First Time
Buyers Program". Bank One may unilaterally terminate or materially modify
the First Time Buyers Program with ninety (90) days prior written notice
to Marks Bros., provided that said termination or modification is not due
to misrepresentation, misuse, or fraud on the part of Marks Bros., the
occurrence of which would provide the basis for immediate termination by
Bank One. In the event of termination by Bank One of the First Time
Buyers Program, Marks Bros. may pursue and utilize another source for this
program. In the event of such termination, Bank One will cooperate with
Marks Bros. to enable an orderly transition and provide Marks Bros. with
information related to the program that Bank One determines, in its sole
discretion, to be reasonably related to this program.
5. FEES, EXPENSES AND PRICING. Any extraordinary expense(s) to be
incurred by Bank One under the Modified Plan which are caused or
requested by Retailer and to be billed to Retailer, will be mutually
agreed upon by the parties prior to occurrence. The discount rate to be
charged on all Plan Transactions and other miscellaneous fees are set
forth in the Pricing Schedule attached hereto as Addendum "D" and made a
part hereof.
Bank One shall pay to Marks Bros., in consideration for administrative
services rendered in connection with processing credit insurance
applications, [***] of the Net Insurance Revenues received
by Bank One in connection with any credit insurance related to the Plan.
For purposes of this Agreement, the term "Net Insurance Revenues" shall
mean credit insurance premiums realized by Bank One after Cardholder
adjustments, refunds, credits, charge offs, and remittances to the
insurance provider. All the payments from Bank One to Marks Bros.
provided for herein shall be calculated and made monthly unless otherwise
agreed between the parties and shall each be accompanied by a statement
showing the calculations resulting in such payments. Marks Bros. shall
utilize any insurance sales training materials (by way of example only,
and not in limitation, videos, memos, etc.)
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<PAGE> 9
provided by Bank One to assist in promoting insurance plan enrollment
at the point of sale, or at time of application.
With regard to any insurance program, Marks Bros. agrees to indemnify
and to hold Bank One harmless from and against any and all actions,
lawsuits, complaints, liabilities, losses, claims, damages and expenses
(including, without limitation, reasonable fees and disbursements
of counsel) suffered, sustained, incurred, paid or required to be paid by
Bank One, whether filed or claimed by consumers or instrumentalities of
the Federal or state governments arising out of or resulting from (i) the
breach, incorrectness, or incompleteness of any representation, warranty
or covenant made by Marks Bros., as related to the insurance program
offered through the Plan or in any other instrument delivered pursuant
thereto; (ii) its actions under such insurance program and in conducting
its business; and (iii) acts or omissions of Bank One performed in
response to requests or instructions given by Marks Bros. to Bank One
regarding the insurance program offered under the Plan. This indemnity
shall not apply to any actions of Marks Bros. taken at the request of Bank
One, or to any action following the approval of, or at the direction of,
Bank One.
Bank One shall indemnify and hold Marks Bros. harmless from and against
any and all actions, lawsuits, complaints, liabilities, losses, claims,
damages and expenses (including, without limitation, reasonable fees and
disbursements of counsel) suffered, sustained, incurred, paid or required
to be paid by Marks Bros., whether filed or claimed by consumers or
instrumentalities of the federal or state governments arising out of or
resulting from (i) any failure on Bank One's part to comply with any
federal, state or local statute, law or regulation with regard to the
validity and legality of Bank One's business as it relates to the
insurance programs offered through the Plan, (ii) any and all federal,
state and local filings, reports, disclosures, taxes and the like required
of Bank One in regard to the insurance programs offered through the Plan,
and (iii) any and all quality or failure claims arising from or in any
way related to the insurance programs under the Plan, and (iv) acts or
omissions of Marks Bros. performed in response to requests or instructions
given by Bank One to Marks Bros. regarding the insurance program offered
under the Plan. This indemnity shall not apply to any actions of Bank One
taken at the request of Marks Bros. or to any action following the
approval of, or at the direction of, Marks Bros.
6. PROCESSING AGREEMENT. The Bank One/Retailer Processing Agreement,
which sets forth the duties, rights and obligations of each of the
parties relative to the mechanics of the services to be provided herein,
is attached hereto as Addendum "A" and is incorporated herein as if fully
rewritten herein. Each of Retailer's store locations will be obligated to
comply with Addendum "A"
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<PAGE> 10
7. OPERATION HOURS.
A. Bank One's credit application processing and credit approval
department's hours of operation are set forth below, however, same is
subject to the availability of information necessary to make credit
decisions from the credit bureaus serving the market area(s) in which
Applicants reside. Such Bank One hours shall apply 362 days (excluding
Easter Sunday, Thanksgiving Day and Christmas Day) per year as follows
except as otherwise communicated.
Monday - Saturday 8 a.m. - 12:00 midnight (Eastern Time Zone)
Sunday 11:00 a.m. - 9:00 p.m. (Eastern Time Zone)
B. Transaction processing by Bank One will be offered twenty-four (24)
hours a day, 365 days a year, except when a disaster beyond the reasonable
control of Bank One occurs.
8. ADVERTISING.
A. Retailer will:
(i) Display upon its premises in a manner approved by Bank
One, decals, signs or other advertising materials supplied by Bank
One which are intended to notify the public that the Retailer offers
and accepts the Plan Card;
(ii) Display the appropriate Bank One service marks, logo types
and the Verbiage on all promotional materials and advertising,
including but not limited to forms of print medium, in which the
front of the Plan Card is depicted;
(iii) State on all advertising referencing the Plan that the
Plan is a "credit service of Bank One, Dayton, NA, Dayton, OH 45401,
offered through (Retailer's Name) (the "Verbiage"),
(iv) Not state in writing at any time nor state orally (as
best as Retailer can control) that the Plan or the Plan Card is owned
or controlled by the Retailer or refer to the Plan or Plan Card as
"Our Plan" or "Our Plan Card", and,
(v) Follow any and all supplemental advertising guidelines
relative to the Plan issued by Bank One from time to time.
B. Bank One and Retailer agree that the following guidelines shall
control use of the Plan name mark and logo and the Bank One mark and
logo:
(i) Applications for Cardholders to apply for the Plan shall
include the Plan mark and logo and the Bank One name, logo and
Verbiage,
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<PAGE> 11
(ii) Plan disclosures, Plan Agreements and the Cardholder
periodic billing statements will contain the Retailer's name and
logo, the Plan name and logo and the Bank One name, logo and
Verbiage, and
(iii) The letterhead for general correspondence to Cardholders
and others relating to the Plan shall only include the Bank One name
and logo. The correspondence shall reference that it is concerning
the Plan.
C. Bank One and Retailer agree to mutually cooperate in good faith in
determining the manner their respective names, logos and verbiage are
used on documentation relating to the Plan. Mutual consent of the parties
shall be required for specific layouts for such documents.
9. TELECOMMUNICATION REQUIREMENTS.
A. Facsimile machines (Panafax Machines or equivalent) and supporting
telecommunication lines necessary for the transmission of credit
applications are required for each of Retailer's store locations. Said
facsimile machines and supporting telecommunication lines shall be in
accordance with Bank One specifications; and, at the time of the signing
of this Agreement, Bank One acknowledges that they are in accordance with
Bank One specifications. A Bank One Authorization/Data Capture Terminal
("ADACS") is also required for each store location and will be provided by
Bank One. Electronic Cash Registers may be utilized in lieu of the Data
Capture Terminal.
B. Transaction Drafts must be transmitted electronically through the
medium of the ADACS utilizing the Bank One data capture network.
C. The cost of any changes, additions, modifications or alterations
in any of the data transmission systems, reporting requirements or
general system programming which are requested by Retailer shall be borne
solely and exclusively by Retailer.
D. If in its sole discretion Marks Bros. selects PC Dial Up, it must
provide the equipment necessary for processing.
10. TERM/TERMINATION.
A. The term of this Agreement is for three (3) years from May
31, 1996, so that, unless otherwise agreed to by the parties, the
Agreement will terminate at 5:00 p.m., E.S.T., on May 31, 1999
("Term"), provided however, that Bank One may terminate this Agreement
upon thirty (30) days prior written notice to Marks Bros. if, at any time
during the Term, Marks Bros. fails to pay its commercial debt obligations
as agreed, or is otherwise in default of those commercial debt
obligations, including but not limited to, those commercial debt
obligations due in May of 1997.
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<PAGE> 12
B. During the period after notice of termination is given and before
the scheduled termination date, the parties shall cooperate to provide
for an orderly transition. Bank One shall maintain existing application
response times, credit policies, and Cardholder Agreement terms and
conditions, defined as those in effect prior to any proposed change.
Retailer shall continue to offer Plan financing and encourage use of the
Plan by Cardholders. During the period after notice of termination, in
cooperation and concurrence with Bank One, which concurrence may not be
unreasonably withheld, Marks Bros. may reasonably be permitted to develop
and test other financing sources.
11. DEFAULT. This Agreement shall terminate immediately and without
notice to Retailer upon any fraudulent misrepresentation by Retailer or
the commencement of bankruptcy or insolvency proceedings by or against
Retailer. In addition, in the event of:
(i) Any failure by Retailer to pay to Bank One any amount due
hereunder within ten (10) days after receipt by Retailer of written
notice from Bank One that such payment was not received by Bank One
on the payment due date; or
(ii) Any other default, except misrepresentation, by Retailer in
performing any covenant, promise, term or duty under any provision of
this Agreement, which default continues for a period of thirty (30)
days or more following the date of receipt of notice thereof by
Retailer from Bank One; then Bank One may, at its option, terminate
this Agreement by written notice to Retailer, such termination to be
effective upon receipt of notice thereof by Retailer. Any Draft
accepted by Bank One after the effective date of termination will be
returned to Retailer and will not be credited to Retailer's Settlement
Account. If the deposit has already been posted to Retailer's
Settlement Account, said posting will be reversed and the Draft
returned to Retailer.
Upon any default by Retailer by reason of fraudulent
misrepresentation, Bank One has the right to collect any amount due
or which may become due to Bank One from any account belonging to
Retailer held by Bank One without notice to Retailer. Upon any other
default by Retailer, Bank One has the right to collect any amount due
or which may become due to Bank One from any account belonging to
Retailer held by Bank One after Bank One has given written notice to
Retailer of such default and any applicable cure period shall have
expired.
12. CHARGE BACK AND SET OFF. In order to assure, implement and maximize Bank
One's rights of Charge Back and Set off, and their availability to Bank
One for any and all indebtedness and obligations of Retailer to Bank One
hereunder in this Agreement, whether now existing and hereafter incurred:
10
<PAGE> 13
A. Retailer understands and recognizes that each purchase of a
Transaction by Bank One creates a contingent and unmatured claim for
Charge Back in favor of Bank One against Retailer.
B. Marks Bros. irrevocably grants to Bank One a right of Set Off in
and to any of Marks Bros.' funds in the Escrow Account and the
Merchant ACH Account established under the terms of the Plan Agreement,
now or hereafter in the possession of Bank One, together with the proceeds
thereof. Marks Bros. also irrevocably grants to Bank One a lien and
security interest in and to any of Marks Bros.' funds in said Escrow
Account and Merchant ACH Account. Any such funds, money or amounts may
be commingled with other funds of Bank One and need not be maintained in
any separate account.
C. The right of Retailer to receive any amounts due or to become due
from Bank One is expressly subject and subordinate to the Charge
Back, Set off and lien rights of Bank One with respect to claims that are
liquidated, fixed or matured. No failure of Bank One to exercise its
rights of Charge Back, Set off or lien and no course of conduct by Bank
One in not exercising its rights of Charge Back, Set off or lien shall in
any respect constitute a waiver of or impair the rights and remedies of
Bank One to exercise at any subsequent time the rights of Charge Back, Set
off and lien provided for in this Agreement and under applicable law.
D. Retailer agrees to duly exercise and deliver to Bank One such
instruments and documents as Bank One may reasonably request to perfect
and confirm the lien, security interest, right of Set off and
subordination set forth in this Agreement.
E. In recognition that each time a Transaction is purchased by Bank
One pursuant to this Agreement a contingent and unmatured claim for
Charge Back accrues against Retailer in favor of Bank One for the amount
that Bank One is required, or has the right, to pay to or repurchase with
respect to any fee, discount, customer credit and adjustment, charge,
fine, assessment, penalty or other item which may be charged back to
Retailer by Bank One, Retailer and Bank One hereby agree that this
Agreement constitutes a contract to extend debt financing or financial
accommodations by Bank One to Retailer.
F. On Transaction Drafts which cannot be processed by electronic
swipe of a credit card, and other than Transaction Drafts resulting from
telephone, mail order or immediate credit, Marks Bros. will obtain by
manual means an authorization and the imprint of the credit card, and
shall obtain by said imprint, or otherwise print on the Transaction Draft
the name of the Cardholder, the Cardholder's Plan Card number, the
signature of the Cardholder, the Transaction Date, the merchandise or
service description or, if applicable, the referencing number (SKU) of the
Products sold, the total cash price of the sale, and the city and state
wherein the Transaction occurred. The failure of Marks Bros. to obtain
the foregoing information when manual processing of a Transaction Draft is
required will enable Bank One to Charge Back said Transaction to Marks
Bros. in accordance with the procedures for Charge Back and Set Off set
forth in Section 12. of this Agreement.
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<PAGE> 14
13. INDEMNIFICATION.
A. Retailer agrees to indemnify Bank One and to hold Bank One
harmless from and against any and all liabilities, losses, claims,
damages and expenses (including, without limitation, fees and
disbursements of counsel) suffered, sustained, incurred, paid or required
to be paid by Bank One:
(i) Arising out of or resulting from the breach, incorrectness, or
incompleteness of any representation, warranty or covenant made by
Retailer in this Agreement or in any other instrument delivered
pursuant hereto;
(ii) Its actions under the Plan and in conducting its business;
(iii) Any failure on Retailer's part to comply with any
local, state or federal statute, law or regulation with regard to the
validity and legality of Retailer's business; (d) any and all aspects
of Retailer's business including, but not limited to the selection
use, and operation of sales agreements used in conjunction with a
Transaction with Cardholders; (e) any and all local, state or federal
filings, reports, disclosures, taxes and the like required of
Retailer; or (f) any and all product liability claims or condition,
quality, or failure claims arising from or in anyway related to
Products (including any warranty as set forth in paragraph 3(I)
purchased from Retailer with a Plan Card; and (g) acts or omissions
of Bank One performed in response to requests or instructions given
by Retailer to Bank One. This indemnity shall not apply to any
actions of Retailer taken at the request of Bank One.
B. Bank One agrees to indemnify Retailer and to hold Retailer
harmless from and against any and all liabilities, losses, claims,
damages and expenses (including, without limitation, fees and
disbursements of counsel) suffered, sustained, incurred, paid or required
to be paid by Retailer: (a) arising out of or resulting from the breach,
incorrectness, or incompleteness of any representation, warranty or
covenant made by Bank One in this Agreement or in any other instrument
delivered pursuant hereto; (b) its actions under the Plan and in
conducting its business; (c) any failure on Bank One's part to comply with
any local, state or federal statute, law or regulation with regard to the
validity and legality of Bank One's business; (d) any and all aspects of
Bank One's business; (e) any and all local, state or federal filings,
reports, disclosures, taxes and the like required of Bank One; and (f)
acts or omissions of Retailer performed in response to requests or
instructions given by Bank One to Retailer. This indemnity shall not apply
to any actions of Bank One taken at the request of Retailer.
C. Each party agrees to give prompt written notice to the
indemnifying party of any third-party claim, action or proceeding as
to which it may request indemnification hereunder. Each party will
cooperate with the other party in determining the validity of any such
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<PAGE> 15
third-party claim, action or proceeding. The indemnifying party
hereunder shall have the right to defend with counsel reasonably
satisfactory to the indemnified party any such third-party claim, action
or proceeding, subject to the right of the indemnified party, at its own
expense, to participate in the defense of the same. Neither the
indemnifying party nor the indemnified party shall settle or compromise
any such third-party claim, action or proceeding without the prior written
consent of the other.
D. Each party shall indemnify the other on demand for damages,
claims, etc., suffered by said party for the breach of any one of the
covenants set forth herein and such reimbursement shall be secured by this
Agreement.
E. Neither party shall be liable for any consequential damages
arising from the other actions under this Agreement. Both parties waive
any claim for punitive damages arising from the other party's actions
under this Agreement. Both parties also waive their right to request a
trial by jury in any litigation involving Retailer and Bank One.
14. ESCROW ACCOUNT. At the termination of this Agreement, or prior
thereto if deemed reasonably necessary by Bank One by reason of
Excessive Charge Back Activity (as defined below), Bank One may require
Retailer to maintain with Bank One money in escrow in an amount equal to
the lesser of (a) six (6) month's historical charge backs, or (b)
$100,000. This amount will be used to settle Drafts, Credit Vouchers and
Cardholder disputes which arise after the termination of this Agreement
relating to Transactions made prior to the termination. Retailer agrees to
pay Bank One the amount of the escrow balance required promptly on demand
or Bank One may debit Retailer's account or withhold payment(s) owed to
merchant at termination for the required escrow balance. Bank One will pay
Retailer interest on the funds in the escrow account at a market rate.
Bank One will release the money held in escrow (if any) not later than one
hundred eighty (180) calendar days after the termination date and Retailer
will be provided with an accounting of any money taken out of the escrow
account.
For purposes hereof, Excessive Charge Back Activity shall mean (1) charge
backs exceeding three percent (3%) of Qualified Card transactions
during any period of six (6) consecutive months, and/or (2) Bank One's
reasonable determination that charge back activity indicates a probability
of material fraud by the Retailer.
Bank One may terminate this Agreement upon reasonable notice to
Retailer for Retailer's failure to establish an escrow account upon Bank
One's demand to do so made in accordance herewith.
15. EXCLUSIVE PROPERTY. All Accounts, specifications, data, programs,
forms and procedures utilized or developed by Bank One in connection
with services under this Agreement shall be and remain the property of
Bank One and may only be used by Retailer in accordance with the terms of
this Agreement.
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<PAGE> 16
16. WAIVER. No delay or failure of Bank One or Retailer in exercising
any right, power or privilege hereunder shall affect such right, power
or privilege; nor shall any single or partial exercise of any right, power
or privilege or any abandonment or discontinuance of steps to enforce such
a right, power or privilege effect such right, power or privilege. The
rights and remedies of Bank One and Retailer hereunder are cumulative and
not exclusive. Any waiver, permit, consent or approval of any kind by Bank
One or Retailer of any breach or default hereunder, or any such waiver of
any provision or conditions hereof, must be in writing and shall be
effective only to the extent set forth in such writing. No waiver shall be
deemed to be a continuing waiver in respect to any subsequent breach or
default either of similar or different nature unless expressly so stated
in writing.
17. FINANCIAL STATEMENTS. The financial statements heretofore furnished by
Retailer to Bank One fairly presents the financial condition of the
Retailer as of the dates thereof and the results of Retailer's operations
for the periods then ended. Within thirty (30) days of the date of receipt
thereof, Retailer shall furnish to Marks Bros.' senior lenders Retailer's
annual financial statements for each fiscal year of Retailer ending after
the date hereof, audited by a "Big Six" certified public accounting firm
or by other certified public accountants reasonably acceptable to Bank One.
Such audited annual financial statements will include a statement of income
and expense in the operation of Retailer's business. In addition, Retailer
agrees to furnish to Bank One from time to time such other financial
information concerning Retailer as Bank One may reasonably request. Bank
One hereby agrees that all financial statements and other financial
information concerning Retailer which Retailer has provided or hereafter
provides to Bank One is confidential and Bank One shall maintain the
confidentiality thereof in accordance with Bank One's standard practices
for maintaining the confidentiality of its customer's confidential
information.
Notwithstanding the foregoing, during the Term of this Agreement,
Marks Bros. will provide to Bank One quarterly financial statements, which
financial statements will be either certified by a certified public
accountant firm, or by any officer of Marks Bros.
18. AMENDMENT-MODIFICATION. This Agreement may be amended from time to
time by mutual consent. In addition, in the event that Bank One shall
reasonably determine that an amendment or modification of the terms hereof
is necessary to comply with applicable laws or regulations, Bank One may
amend or modify this Agreement by sending notice of such amendment or
modification to Retailer, with such amendment or modification to be
effective on the earlier of:
(i) The date which is thirty (30) days following the date of
receipt of notice thereof by Retailer; or
(ii) The date upon which such amendment or modification is
required to be effective by such law or regulation, as applicable.
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<PAGE> 17
19. SUCCESSORS AND ASSIGNS. All terms and provisions of this Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and
their respective transferees, successors and assigns; provided, however,
that this Agreement and all rights, privileges, duties and obligations of
the parties hereto may not be assigned or delegated by either party without
the written consent of the other party. Notwithstanding the foregoing,
Bank One may (a) without such consent assign any or all of its rights and
obligations hereunder to BANC ONE CORPORATION or to any subsidiary or
affiliate wholly owned (directly or indirectly) by BANC ONE CORPORATION,
but only if BANC ONE CORPORATION or such subsidiary or affiliate, as the
case may be, shall, prior to such assignment, have obtained all necessary
governmental or regulatory approvals and authorizations and have obtained,
filed and satisfied all other consents, authorizations, notifications,
requirements and conditions necessary for it to receive such assignment
and engage fully in the activities contemplated by it without satisfying
any further such requirements whatsoever or (b) sell Plan Accounts as
accounts receivable for securitization, however, retaining servicing
thereon. BANC ONE CORPORATION or such subsidiary or affiliate, as the
case may be, shall thereafter be subject to, bound by and entitled to the
benefits of the provisions of this Agreement with the same effect as
though it were an original party hereto; provided, however, that no such
assignment shall relieve Bank One of any of its obligations or liabilities
hereunder which are not performed or discharged fully by BANC ONE
CORPORATION or such subsidiary or affiliate.
20. OPTION TO PURCHASE. In the event a notice of termination of
this Agreement is given by either party, Retailer shall have sixty (60)
calendar days in which to advise Bank One that Retailer desires to buy the
active Modified Accounts from Bank One. If Retailer elects to buy the
active Modified Accounts, then the parties shall use their best efforts
and good faith efforts to negotiate and sign a sales agreement within
sixty (60) days from receipt of the notice of termination. If Retailer
determines that it will not buy the active Modified Accounts or Retailer
and Bank One are unable to negotiate a sales agreement for the active
Modified Accounts, Retailer shall have the right of first refusal to
purchase the active Modified Accounts on the same terms and conditions as
any other purchaser with which Bank One later reaches agreement on
purchase of the active Modified Accounts, if Bank One decides to sell the
active Accounts and not to liquidate them.
21. CONFIDENTIALITY. The terms of this Agreement shall be deemed to be
confidential and shall not be disclosed to third parties without
the prior written authorization of the other party. Each party will hold
and will cause its officers, directors, employees, representative, agents,
consultants and advisors to hold in strict confidence, all documents and
information obtained by them with respect to the other party hereto in
connection with the transactions contemplated by this Agreement except to
the extent that such information can be shown to have been or to have
become (i) generally available to the public other than as a result of a
disclosure by the officers, directors, employees, representatives, agents,
consultants or advisors of such party, (ii) made available on a
nonconfidential basis from a source other than the officers, directors,
employees, representatives, agents, consultants or advisors of such party,
or (iii) known to such party prior to the date of disclosure of such
information
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<PAGE> 18
by the other party, and will not release or disclose such information
to any other person, except their auditors, attorneys, and other
consultants in connection with the transactions contemplated by this
Agreement. Notwithstanding, permission from the other party shall not be
necessary for disclosures pursuant to any federal, state or local
governmental body, laws or regulations, in which case notice shall be
promptly given to the other party. Prior authorization shall be required
for disclosure of information to a potential successor to the other party
or to a party which may purchase the Cardholder accounts. In either case,
the potential successor shall sign a written non-disclosure agreement
containing terms similar to those contained herein.
22. SEVERABILITY. If any of the provisions or parts of this Agreement
are determined to be illegal or invalid under any applicable statute of
rule or law, such provision(s) or part(s) shall be deemed omitted without
affecting any other provision(s) or part(s) of this Agreement, which shall
remain in full force and effect.
23. NOTICES. All notices and other communications provided for
under this Agreement shall be delivered, either by first-class,
registered or certified mail, postage prepaid, return receipt requested,
or via overnight mail service (such as Western Union Mailgram or Federal
Express) or telegraphed to either party at the address listed below, or,
as to each party, at such other address as shall be designated by such
party in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices and communications shall, when
mailed or telegraphed, be effective upon receipt or delivery.
BANK ONE:
Banc One Private Label Credit Services
Kettering Tower, 26th Floor
40 North Main Street
Dayton, Ohio 45401
Attn: Sales Manager
RETAILER:
Mark Bros. Jewelers, Inc.
Attn: Executive Vice President, Finance
155 North Wacker Drive
Chicago, IL 60606
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24. MISCELLANEOUS.
A. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and assigns.
B. This Agreement and the Addenda hereto contain the entire Agreement
between the parties regarding the subject matter hereof.
C. Except to the extent superseded by Federal law applicable to national
banks, this Agreement shall be subject to and construed under the laws of
the State of Ohio.
D. This Agreement shall supersede all prior agreements regarding the
subject matter hereof and become effective when signed by both parties.
E. All obligations incurred or existing under this Agreement as of the
date of termination or default, whether then known by either party to
exist, shall survive such termination or default.
F. Retailer will provide Bank One with not less than thirty (30) days
prior written notice of any intent to sell or transfer any substantial
part (50% or more) of Retailer's total assets and/or to liquidate or change
the basic nature of its business. Upon receipt of such notice, Bank One
may, at its option, terminate this Agreement in accordance with Section Ten
(10) hereof.
G. In all cases under the Agreement wherein consent is required of one of
the parties, the decision by the parties shall be made in good faith and
not be unreasonably withheld. Furthermore, the parties agree that each
shall in good faith perform their obligations under this Agreement.
IN WITNESS WHEREOF, the parties hereto have set their hands upon the day
and year first above written.
WITNESS: MARKS BROS. JEWELERS, INC.
By:
- ----------------------- ------------------------
Title:
- ----------------------- ------------------------
BANK ONE, DAYTON, NA
By:
- ----------------------- ------------------------
Title:
- ----------------------- ------------------------
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<PAGE> 20
ADDENDUM "A"
PLAN CARD PROCESSING AGREEMENT
This Agreement governs the mechanics of the Plan and the Plan Card in connection
with Retailer's sale of Products.
1. PROCEDURES. The procedures set forth by Bank One in any Retailer
Operations Guide, Credit Card Sales Guide, Operating Procedure Manual or
other guides/manuals supplied by Bank One to Retailer at any time
("Procedures"), are hereby incorporated into and made a part of this
Agreement, and the rules and regulations issued by VISA and MasterCard or
any successor thereto, as amended from time to time, shall be followed by
Retailer and shall govern the processing of Transactions initiated through
the medium of the Plan Cards issued to Cardholders. If there exists a
conflict between the Procedures and the rules and regulations issued by
Visa or MasterCard, the Procedures shall control.
2. HONORING THE PLAN CARD. Retailer will honor all valid Plan Cards when
properly presented as payment from a Cardholder for a Transaction.
Retailer will not refuse a sale because it falls below a certain dollar
amount. Retailer will have a zero floor limit ("Floor Limit") for all
Plan Card Transactions. Marks Bros. will use reasonable efforts to
require a minimum purchase of $250 on all promotions beyond the 90 Days
Same as Cash First Purchase promotion. Merchant will not require any Card
holder to provide any personal information such as home or business
telephone number or address or a driver's license for identification as a
condition for honoring a Plan Card.
3. COMPLETION OF SALES TRANSACTION DRAFTS AND CREDIT VOUCHERS. All
Transaction Drafts will be on forms supplied or approved by Bank One and
each will be completed in conformity with the terms of this Agreement, and
any written instructions provided by Bank One, and will include, among
other things, the name of the Cardholder, Cardholder's Plan Card number,
the imprint of the Plan Card if the electronic interface is not available,
the signature of the Cardholder, the Transaction date, the merchandise or
service description or, if applicable, the referencing number (SKU) of the
Products sold that Retailer will be able to identify upon request by Bank
One, the total cash price of the sale, and the city and state wherein the
Transaction occurred. If the merchandise or service description is not
included on the Transaction Draft, then Retailer must include this
information on the Sales Invoice which must be attached to the Transaction
Draft. As authorized by separate Addendum "B" to this Agreement, Retailer
does not need to secure the Cardholder's signature or the Plan Card
imprint for telephone or mail order sales. Retailer will compare the
signature on the Transaction Draft to the signature on the Plan Card and
if they appear to be different, will contact Bank One's authorization
facility. A copy of the Transaction Draft will be given to the Cardholder,
and one copy, or more will be retained by Retailer.
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4. RETAILER'S REPRESENTATIONS OF TRANSACTIONS TENDERED.
A. All Transaction Drafts tendered represent obligations originated
with a Cardholder as a result of a Transaction with Retailer in the
amount set forth on such Transaction Draft for Retailer's Products only
and do not involve credit for any other purpose. Retailer will not
knowingly complete any Transaction Draft which is fraudulent, nor present
a Transaction Draft for processing, directly or indirectly, which did not
originate as a result of any act between the Cardholder and Retailer.
Retailer will not tender for acceptance by Bank One any Transaction Draft
as to which it has knowledge of any invalidity or defense to the
collectibility of such Transaction Draft; will exercise due care in
filling out forms and processing its work; and will require no special
agreement, condition or security from a Cardholder in connection with any
Transaction Draft. If Bank One determines that Retailer is involved in any
fraudulent activity, Bank One, in addition to any other rights it may
have, may offset funds in Retailer's account or any other account
maintained by Bank One.
B. Retailer additionally warrants and represents that no Transaction
Draft submitted by Retailer represents a sale by Retailer:
(i) of any Product warranty,
(ii) of any service contract or
(iii) for work which is to be performed in the future (i.e.
deposits), unless, and only if, Retailer is specifically authorized
by a separate addendum to this Agreement to submit such Transaction
Drafts to Bank One. Bank One reserves the right to unilaterally
withdraw said authorization without notice to Retailer.
5. SETTLEMENT ACCOUNT.
A. Bank One will pay Retailer the total face amount of each
Transaction Draft accepted hereunder in accordance with the terms and
conditions contained in this Agreement. Retailer must maintain a
commercial checking account with any Automated Clearing House (hereinafter
"ACH") member financial institution (which may include Bank One) and will
authorize "pre-notifications" through any authorized transfer system (such
as the Central Regional Automated Funds Transfer System, Inc.). Retailer
authorizes ongoing credits and debits to such account pursuant to the
terms of this Agreement. Bank One will transfer funds to or from said
account for the purpose of settling Transaction Drafts, charging
applicable fees, providing refunds, debiting for charge backs, and any
other necessary transactions. ACH transfers will be credited within two
(2) Business Days. If desired by Retailer, Bank One will establish a
special Retailer account into which all proceeds of Transaction Drafts
will be deposited. The procedures will be identical to those involved if
Retailer had elected to maintain a Bank One commercial checking account,
except that Bank One will make a report to Retailer of all activity in
such account as of the end of each monthly period.
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<PAGE> 22
B. In reference to the above mentioned account(s), all figures are
subject to final auditing and checking by Bank One, and Retailer agrees
that Bank One may make any corrections necessary without prior notice to
Retailer, or may elect to return Transaction Drafts for Retailer's
correction.
6. IMPRINTERS AND FORMS.
A. Bank One will provide Retailer with an appropriate number of
Transaction Draft imprinters, which unless otherwise agreed, will remain
the exclusive property of Bank One. Retailer will use such imprinters
whenever possible and will return such imprinters, and any validation
plates, if the same are utilized, upon termination of this Agreement.
B. Bank One will provide Retailer with an appropriate number of sales
drafts, credit vouchers, and deposit slips upon request from Retailer
without charge.
7. AUTHORIZATIONS. In the event of suspicious or unusual circumstances,
Retailer will request a "Code 10" authorization. With the exception of a
"Code 10" authorization, Retailer must advise Bank One of the specific
reason authorization is requested. If authorization is given, Retailer
will type or print legibly on the Transaction Draft the authorization
approval code received.
8. UNACCEPTABLE PLAN CARDS. Retailer will not, without authorization,
complete a Transaction involving use of a Plan Card if Retailer's
authorization request is rejected.
9. RETRIEVAL OF THE PLAN CARD. If, in response to an authorization request,
Retailer is advised to obtain or hold onto a Plan Card, or if given other
instructions, Retailer shall use its best efforts, by reasonable and
peaceful means, to comply with such advice or such instructions.
10. CASH PAYMENT/DISCOUNTS/DEPOSITS. Marks Bros. will be entitled under the
Fair Credit Billing Act to grant, or offer to grant, discounts for use of
cash to make a purchase. Cardholders may tender, and Marks Bros. may
accept in trust for the benefit of Bank One, payments in the form of
either personal check, cashiers' check, official check or money order
payable to the order of Bank One, by Cardholders to their Accounts
("Store Payments"). Payments offered by Cardholders on their Accounts
which are in the form of cash or credit card shall not be accepted by
Marks Bros., and shall not be considered as Store Payments hereunder.
Store Payments with remittance advice and Cardholder account number
notated on the memo line of the check or money order shall be placed upon
receipt by Marks Bros. in pre-addressed Bank One envelopes, supplied to
Marks Bros. by Bank One, and placed in the U.S. mail the same day the
Store Payments are received.
Each Marks Bros. store which accepts Store Payments shall maintain a
record log, in which Marks Bros. will record the date, Cardholder's name,
Account number, amount of the payment, and payment form (i.e., personal
check, money order, cashiers' check or official
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check) on a Payment Log in the form of Exhibit C, attached hereto.
Marks Bros. shall maintain Payment Logs for a one (1) year period,
commencing with the date of this Agreement.
11. ADDITIONAL CHARGE TO CARDHOLDERS. Retailer will not require the
Cardholder to pay any part of any fee or charge assessed by Bank One to
Retailer, whether through any increase in price or otherwise, or to pay
any contemporaneous finance charge in connection with the Transaction in
which a Plan Card is used.
12. DISCLOSURE AND STORAGE OF CARDHOLDER INFORMATION. Retailer will not,
without the Cardholder's and Bank One's written consent, sell, purchase,
provide, or exchange Qualified Card account number information to any
third party other than Retailer's agents for the purpose of assisting
Retailer in its business. Retailer will store all Cardholder account
number information in a manner consistent with Retailer's procedures for
maintaining the confidentiality of its own confidential customer
information which includes, but is not limited to, the prohibition of
sharing such information with non-Retailer employees or agents and, in the
event that Retailer determines to destroy or discard any such information,
will do so in a manner reasonably calculated to render all Cardholder
account number information contained therein unreadable by others.
13. MULTIPLE TRANSACTION SEGMENTS. When a purchase is completed by
Retailer and two or more Transaction Drafts are prepared for the purpose
of creating individual Cardholder receipts, a separate authorization shall
be obtained for the amount of each Transaction Draft. For purchases
involving multiple cards or other combination of payment methods accepted
for a purchase, each payment segment completed with a Plan Card shall
require authorization for such corresponding amount.
14. IMPRINTER REPAIR/REPLACEMENT/DAMAGE. Bank One reserves the right to
debit Retailer's account on a non-refundable basis, for repair,
replacement, handling, shipping, out of pocket costs and expenses for any
imprinter owned by Bank One in the event of one of the following: the
imprinter is not returned to Bank One or its agent at any time for repair
or replacement within ten (10) calendar days when requested to do so or
the imprinter must be replaced as a result of loss, destruction, misuse or
abuse by the Retailer. Replacement cost (if necessary) will be the cost of
a new imprinter. All repairs and replacement charges for any imprinter
owned by the Retailer will be borne by Retailer. Retailer will be
responsible for the loss of any imprinter and for any damage resulting
from improper handling or operation once the imprinter has been delivered
to the Retailer.
15. IMPRINTER TAXES. With respect to any imprinter, Retailer will pay when
due: (a) all use, excise, personal property, ad valorem or other taxes;
(b) all assessments, fees and charges payable with respect to the
ownership, possession or rental of the imprinter, and (c) all expenses
resulting from registration, inspection or other governmental
requirements, now or hereafter existing, all of which are imposed by
governmental entities because of the location or use of any imprinter at
Retailer's place(s) of business.
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16. RETURNED MERCHANDISE AND ADJUSTMENTS. Retailer will establish
a fair policy for the exchange and return of Products and adjustment of
contracts involving services, which may require return of the item
purchased in its original condition within 90 days of the date of sale as
a condition to refunds. If Retailer limits acceptance of returned
Products, proper disclosure must be provided to Cardholder and purchased
goods or services must be delivered to the Cardholder at the time the
Transaction takes place. Proper disclosure shall be given if the words "NO
REFUND", "EXCHANGE ONLY" or "IN-STORE CREDIT ONLY" are legibly printed on
the Draft, receipt or invoice in letters approximately 1/4 inch high and
in close proximity to the space provided for the Cardholder's signature.
Retailer will issue credit vouchers for any refund, adjustment or
cancellation of a sale where the original sale involved a Qualified Card
as long as the item purchased is returned in its original condition within
90 days of the date of the sale, and such credits must be to the same
account used in the original sale. Credit vouchers may not exceed the
original Transaction amount. Retailer will not make any cash refunds when
the Transaction involved the use of a Qualified Card.
17. CHARGE BACKS.
A. Bank One may enact Charge Back(s) to Retailer for a Transaction when
one of the following occurs:
(i) Billing Error. Where a Cardholder asserts a "billing
error" as defined by Regulation Z (12 CFR Part 226), Section 226.13,
in the manner and within the time limits required by said Section,
and after giving Retailer an opportunity to respond in accordance
with the Procedures, which shall include a time period of at least
ten (10) Business Days, Bank One determines that a billing error has
occurred.
(ii) Merchandise or Service Dispute. Where a Cardholder
refuses to pay based on an assertion of a dispute about the quality
of the merchandise or services purchased (which is not a billing
error under Regulation Z Section 226.13), including any alleged
breach of warranty provided Cardholder by or through Retailer, Bank
One shall request from Retailer for a written response. If Retailer
provides a good faith response as determined by Bank One which
indicated that (a) it is reasonably addressing the Cardholder's
concern, (b) the Cardholder has not made a good faith attempt to
resolve the dispute, or (c) the Retailer is not responsible for the
dispute, no Charge Back will be made. If no written response is
received within twenty (20) calendar days from Bank One's request, so
long as Bank One can show, if reasonably requested by Retailer,
reasonable evidence, by memo or file documentation to the Cardholders
account, that it has made such request of merchant, then a Charge
Back for the amount of the Transaction will be made.
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(iii) Operating Regulations Violation. The occurrence of any
one (1) or more of the Charge Back reasons set forth in the Operating
Regulations of VISA and/or Mastercard.
(iv) Agreement Violations. With respect to any individual
Transaction, failure to comply with authorization procedures,
Transaction production requirements, breach of any representation or
a breach of the processing requirements set forth in this Agreement
or the Procedures.
B. When a Charge Back may be MADE PURSUANT TO THIS paragraph,
Retailer agrees that it will reimburse Bank One and that without
prior notice Bank One may charge Retailer's account for the full amount of
the Transaction. In the event of any such Charge Back, Bank One hereby
assigns to Retailer the Charge Back Transaction, along with all
appropriate documentation, and the right to collect the amount assessed to
Retailer.
C. Merchant shall not redeposit transactions, with or without the
Cardholders consent, that have been previously charged back and not
represented.
18. TRANSACTION DRAFT OR VOUCHER RETENTION. One (1) copy or more
of each Transaction Draft and accompanying invoice or bill will be
retained by Retailer (held in trust for Bank One) for a period of three
(3) years from date of the Transaction, filed by date, and such copy shall
be provided to Bank One upon request within three (3) Business Days of
such request. Failure to provide requested Transaction Draft copies on a
timely basis may result in Retailer's assumption of liability in
settlement of Cardholder disputes and Bank One shall have the right to
charge back the full amount of the Transaction in question to Retailer's
account. Upon termination or default of the Plan, Retailer will secure and
store all invoices and Transaction Drafts for Bank One at Retailer's
expense or will assemble and send same to Bank One at Retailer's option
but Bank One's cost.
19. TRANSACTION DRAFT VERIFICATION. At any reasonable time Bank One
may examine and verify all records of Retailer pertaining to Transaction
Drafts submitted hereunder. Bank One shall have no liability or assume any
cost with regard to such records other than reasonable costs of reproducing
such records from duplicates provided by Retailer, except as otherwise
specified in Section Eighteen (18) hereof.
20. PAYMENT ON TRANSACTION DRAFTS. Bank One will have the sole right to
receive payment on Transaction Drafts it purchases. Retailer agrees not
to sue or to make any collections thereon, except as it may be
specifically authorized by Bank One or in the event that the Transaction
is charged back to Retailer. If specifically authorized, Retailer will
hold all collections, if any, in trust for Bank One and will deliver same
immediately to Bank One.
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21. IMMEDIATE CREDIT FOR INITIAL PURCHASE.
A. Bank One will permit Retailer to allow an approved Applicant, for
the initial purchase only, a Plan credit charge in an amount not to exceed
the credit limit established by Bank One ("Immediate Credit"), provided
that the following procedures are adhered to by retailer:
(i) Applicant completes and signs a credit application applying
for issuance of a Plan Card:
(ii) Marks Bros. submits Applicant's completed credit
application to Bank One via facsimile machine, PC Dial Up, or oral
communication by telephone on a timely basis, but in no event more
than ten (10) days from date of Application; and
(iii) Retailer processes the initial purchase after obtaining
appropriate authorization from Bank One.
22. CREDIT APPLICATIONS.
A. Retailer agrees to provide each Applicant at or before the
time that Applicant's credit application is made a copy of the Plan
Agreement.
B. Any credit application which is (i) knowingly falsified by
Retailer, (ii) accepted by Retailer knowing that the application
contains false information, or (iii) accepted by Retailer knowing that the
Applicant(s) signature is missing, the date of application is missing, the
identification required to be verified by Retailer has not been completed,
Applicant(s) social security number is missing, Applicant(s) date of birth
is missing, or Applicant(s) printed name is missing or other requirements
as set forth in the Procedures have not been met, may not be honored, at
the discretion of Bank One, for the purpose of crediting settlement
proceeds to Retailer's account. If proceeds have been credited to
Retailer, then Bank One may assess to Retailer's account as a Charge Back
said Transaction (hereinafter a credit application meeting the criteria of
either (i), (ii) or (iii) above, will be known as a "Problem
Application".
C. Any subsequent charge(s) to an Account which was/were honored by
Bank One but later determined to be improper because the Account was
established with a Problem Application, may be assessed to Retailer as a
Charge Back within a reasonable time after such Problem Application is
made aware to and recognized by Bank One.
23. DATA CAPTURE PROCEDURES. Bank One will supply Retailer with an approved
electronic point of sale terminal ("POS Terminal") to be used for the
electronic authorization and
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monetary settlement of Transactions. In accordance, the following is
agreed to:
A. Installation.
(i) Retailer will install a POS Terminal(s) interconnected
to the Bank One designated authorization system and Retailer will use
a Bank One Transaction Draft imprinter(s), including validation
plate(s) or an approval electronic printer(s). Such equipment will
remain the absolute property of Bank One, unless otherwise agreed,
and Retailer will surrender such equipment at the request of Bank
One.
(ii) Retailer may have a direct outside business telephone line
for POS Terminal(s). If Retailer chooses to not install a direct
outside business telephone line, Retailer is responsible for
contacting its telephone company and ensuring compatibility of the
POS Terminal(s) with Retailer's telephone system before installation
of the POS Terminal(s). Bank One assumes no liability for damage to
Retailer's telephone system resulting from the use of the POS
Terminal(s).
B. Use of POS Terminal
(i) Retailer will receive and process all authorizations and
periodically balance all Transactions in accordance with the terms of
this Agreement and the Procedures.
(ii) Retailer in accepting the Plan Cards and using the POS
Terminal, will exercise due care in inputting and processing
Retailer's work. Retailer ensures the accuracy and adequacy of
information entered through the POS Terminal(s) as evidenced by the
system log maintained by Bank One, and will affect corrections and
adjustments in the manner prescribed in the Procedures. Bank One is
not responsible for Retailer omissions.
(iii) Retailer will record the Bank One provided authorization
number and sequence number on all Transaction Drafts. The sequence
number is to be recorded on all credit vouchers.
(iv) Retailer will obtain an authorization prior to completing
a "Forced Transaction" and will process said authorization in
accordance with the Procedures. If no prior authorization is received
on a "Forced Transaction", such Transaction shall be Retailer's
liability and will be subject to a charge back by Bank One; except
when such "Forced Transaction" complies with the terms and conditions
set forth in Addendum E attached hereto.
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(v) Retailer will electronically deposit Transaction Drafts
to Bank One within one (1) Business Day from the date of Transaction.
(vi) The electronic submission to Bank One of Transaction
Drafts shall constitute an endorsement to Bank One by Retailer.
C. POS Terminal and/or Electronic Printer Repair and Replacement
In the event of a POS Terminal and/or electronic printer malfunction,
Retailer is responsible for calling Bank One's Retailer Services
Department within one (1) Business Day. Bank One will arrange for the
repair or the replacement of any POS Terminal and/or electronic printer
which fails to function properly during the normal course of operation due
to a defect in materials or workmanship. Retailer will be responsible for
the loss of any POS Terminal and/or electronic printer and for any damage
resulting from improper handling or operation. Retailer will also provide
adequate insurance covering loss of, or damage, to all POS Terminal(s)
and/or electronic printers.
D. Fees and Service Charges
(i) Retailer will pay Bank One fees and charges, including set
up costs and POS Terminal(s) rental, as set forth in the attached
Addendum and as agreed upon from time to time by the parties. The
charge will be imposed by Bank One to cover set-up costs for each POS
Terminal and will be paid to Bank One by Retailer upon receipt of
invoice.
(ii) Bank One reserves the right to debit Retailer's account,
on a non-refundable basis, for the replacement cost of the POS
Terminal and/or electronic printer, if:
(a) the POS Terminal and/or electronic printer is not returned
in time for repair or replacement, or
(b) the POS Terminal and/or electronic printer is not returned
within ten (10) days of Bank One's written request, or
(c) the POS Terminal and/or electronic printer must be replaced
as a result of loss, destruction, misuse or abuse by Retailer.
(iii) Bank One may, at its discretion, levy its standard
service charges for any additional assistance in POS Terminal
operation and resolution of problems which are not caused by POS
Terminal(s) malfunction or system malfunction, but are due to
Retailer's failure to adhere to the Procedures.
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(iv) The use of the term "POS Terminal" shall include and
encompass "Electronic Cash Registers" and the term POS Terminal
shall not be used in such a manner as to exclude Electronic Cash
Registers, and/or Transactions processed using Electronic Cash
Registers.
E. Terminal Taxes
As to any POS Terminal and/or electronic printer. Retailer will pay
when due: (i) all use, excise, personal property, ad valorem or other
taxes; (ii) all assessments, fees and charges payable with respect to the
ownership, possession or rental of the POS Terminal and/or electronic
printer, and (iii) all expenses resulting from registration, inspection or
other governmental requirements, now or hereafter existing, all of which
are imposed by governmental entities because of the location or use of any
POS Terminal and/or electronic printer at Retailer's place(s) of business.
F. Conflict With Other Agreement Provisions
Any conflict between this paragraph and any other Agreement provision
will be controlled by this paragraph.
24. MISCELLANEOUS.
(i) This Agreement shall become effective when signed by both
parties and shall remain in full force and effect until termination or
default.
(ii) This Agreement shall be governed by the laws of the State of Ohio
and shall be binding upon the parties, their heirs, successors or assigns.
(iii) This Agreement supersedes any prior agreements concerning the
subject matter hereof Agreement between the parties and will govern all
prior Qualified Card Transactions previously submitted to Bank One,
regardless of date of submission.
(iv) All obligations of Retailer incurred or existing under this
Agreement existing as the date of termination or default, regardless of
whether then known by either party to exist, shall survive such
termination or default.
(v) Retailer will provide Bank One with not less than thirty (30)
days prior written notice of any intent to sell or transfer any
substantial part (50% or more) of Retailer's total assets and/or to
liquidate or change the basic nature of its business. Upon receipt of such
notice, Bank One may, at its option, terminate this Agreement in
accordance with Section 24 (ix) hereof.
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(vi) All specifications, data, programs, forms and procedures
utilized or developed by Bank One in connection with services under this
Agreement shall be and remain the property of Bank One and may only be
used by Retailer in accordance with the terms of this Agreement.
(vii) This Agreement may be amended from time to time by mutual
consent. In addition, in the event that Bank One shall reasonably
determine that an amendment or modification of the terms hereof is
necessary to comply with applicable laws or regulations, Bank One may
amend or modify this Agreement by sending notice of such amendment or
modification to Retailer, with such amendment or modification to be
effective on the earlier of:
(a) The date which is thirty (30) days following the date of
receipt of notice thereof by Retailer; or
(b) The date upon which such amendment or modification is
required to be effective by such law or regulation, as
applicable.
(viii) If any of the provisions or parts of this Agreement are
determined to be illegal or invalid under any applicable statute or rule
of law, such provisions or parts shall be deemed omitted without affecting
any other provisions or parts of this Agreement, which shall remain in
full force and effect.
(ix) This Agreement shall terminate immediately and without notice to
Retailer upon any fraudulent misrepresentation by Retailer or the
commencement of bankruptcy or insolvency proceedings by or against
Retailer. In addition, in the event of:
(a) Any failure by Retailer to pay to Bank One any amount due
hereunder within five (5) days after receipt by Retailer of
written notice from Bank One that such payment was not received
by Bank One on the payment due date; or
(b) Any other default, except misrepresentation, by Retailer
in performing any covenant, promise, term or duty under any
provision of this Agreement, which default continues for a
period of thirty (30) days or more following the date of receipt
of notice thereof by Retailer from Bank One; then Bank One may,
at its option, terminate this Agreement by written notice to
Retailer, such termination to be effective upon receipt of
notice thereof by Retailer. Any Draft accepted by Bank One after
the effective date of termination will be returned to Retailer
and will not be credited to Retailer's Settlement Account. If
the deposit has already been posted to Retailer's Settlement
Account, said posting will be reversed and the Draft returned to
Retailer.
Upon any default by Retailer by reason of fraudulent misrepresentation,
Bank One has the right to collect any amount due or which may become due
to Bank One from any account belonging to Retailer held by Bank One
without notice to Retailer. Upon any other default
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<PAGE> 31
by Retailer, Bank One has the right to collect any amount due or which
may become due to Bank One from any account belonging to Retailer held by
Bank One after Bank One has given written notice to Retailer of such
default and any applicable cure period shall have expired.
(x) In all cases under the Agreement wherein consent is required of
one of the parties, the decision by the parties shall be made in good
faith and not be unreasonably withheld. Furthermore, the parties agree
that each shall in good faith perform their obligations under this
Agreement.
IN WITNESS WHEREOF, the parties have hereto set their hands this__day of
__________________.
MARKS BROS. JEWELERS, INC.
By:
------------------------
Title:
---------------------
BANK ONE, DAYTON, NA
By:
------------------------
Title:
---------------------
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ADDENDUM "B"
AUTHORIZATION TO TRANSACT TELEPHONE OR MAIL ORDERS
A. Bank One specifically authorizes Retailer to sell its own Products
by telephone or mail order and to submit said Plan Transactions to Bank
One. When a Transaction is based on a telephone order or mail order the
Transaction Draft may be completed without a Cardholder signature or a
Plan Card imprint; however, Retailer shall request from Cardholder and
then type or print legibly on the Transaction Draft the following
information as Cardholder states it appears on the Plan Card: the Account
number and the embossed name. Retailer shall also type or print legibly
"telephone order" or "mail order", as applicable, on the Cardholder
signature panel of the Transaction Draft.
B. Retailer specifically agrees that a Transaction representing a
sale made by telephone or mail order may be assessed to Retailer as a
Charge Back in accordance with the Charge Back provisions contained in the
Agreement, if at any time any defense or problem is made or presented to
Bank One or found by Bank One questioning the validity or authorization
of the Transaction.
C. Any conflict between this Addendum and any other Agreement
provision will be controlled by this Addendum.
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ADDENDUM "C"
PRIVATE LABEL ADVERTISING REQUIREMENTS
Bank One encourages Retailer to promote the Plan. Retailer can advertise in
local newspapers and directory services. Retailer can also develop its own
advertising. Bank One reserves the right to approve or disapprove all aspects of
the advertising and promotional material relating to the Plan, and its credit
features used in advertisements. To comply with Federal Regulations (Truth in
Lending Regulation Section 226.16) among others, Retailer agrees to the
following guidelines when developing advertising:
A. The full name of the service can be any of these:
"WHITEHALL/LUNDSTROM JEWELRY EXPRESS" ("PROGRAM NAME") "PROGRAM
NAME", a credit service of Bank One, Dayton, NA, offered through
COMPANY NAME.
B. Display on premises all decals, signs, or other advertising
materials supplied by Bank One, which are intended to notify the public
that Retailer offers and accepts the "PROGRAM NAME" credit card.
C. Do not imply that Retailer owns or operates the "PROGRAM NAME"
program. Don't use terms such as "exclusive" and "only from".
D. Display the Bank One logo on all advertising in which the front of
the "PROGRAM NAME" credit card is used.
E. Do not imply that "PROGRAM NAME" is extending credit. Use one of
the following disclaimers (in small print). "PROGRAM NAME" is a credit
service of Bank One, Dayton, NA, Dayton, Ohio. "PROGRAM NAME" is a credit
card program of Bank One, Dayton, NA, Dayton, Ohio offered through "COMPANY
NAME".
F. You should use phrases such as: Low monthly payment. No annual
membership fee.
G. Do not use terms such as "free" and "interest free".
H. Do not alter the "PROGRAM NAME" credit card or the Bank One logo.
I. Any Monthly payment quoted in your advertisement must specify the
"PROGRAM NAME" to which the payment refers. If promoting a "PROGRAM NAME"
minimum payment, specify the "PROGRAM NAME", in conjunction with the
minimum payment.
J. If featuring a minimum payment, use a disclaimer that includes all
of the following:
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Annual percentage rate
Percent/minimum payment due each month Example: The minimum monthly
payment is _____% of the unpaid balance, or $______ , whichever is
greater, and is based on an ANNUAL PERCENTAGE RATE of ____%.
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ADDENDUM "D"
PRICING SCHEDULE
I. 1996 Promotional Discount Rates
Promotion Discount Rate
90 Days Same as Cash; [***] Day Grace Period Billing [***]
on First Use
90 Days Same as Cash after First Use above [***]
120 Days Same as Cash [***]
6 Months Same as Cash [***]
12 Months Same as Cash [***]
First Time Buyer Sales [***]
A. The Promotions and Discount Rates delineated above will be effective for
the remainder of calendar year 1996. Discount Rates will be reviewed for each
subsequent calendar year of the Term, and will be re-established at the
beginning of each subsequent calendar year, to be effective for the remainder
of that calendar year. It is agreed that the offered Discount Rate for the
First Time Buyer Sales program becomes the promotional Discount Rate applicable
plus [***], and remains so except as governed by other provisions of this
Agreement.
B. If neither party presents to the other any proposed change in the
Discount Rates for the next succeeding calendar year, then the Discount Rates
established in the preceding calendar year will be effective for the next
succeeding calendar year.
C. If the parties cannot agree to changes proposed to the Discount
Rates for the next succeeding calendar year within thirty (30) calendar days
from receipt by one party from the other of said proposed changes, then the
Agreement will terminate upon the expiration of one hundred eighty (180) days
from the end of said thirty (30) calendar day period.
II. Visa/MasterCard Discount Rate
A. The Discount Rate to be paid for Visa or MasterCard processing
during the remainder of calendar year 1996 is 1.65% ("Visa/MC Rate"). The
Visa/MC Rate will be reviewed for each
33
<PAGE> 36
subsequent calendar year of the Term, and will be re-established at the
beginning of each subsequent calendar year, to be effective for the remainder
of that calendar year.
B. If neither party presents to the other any proposed change in the
Visa/ MC Rate for the next succeeding calendar year, then the Visa/MC Rate
established in the preceding calendar year will be effective for the next
succeeding calendar year.
C. If the parties cannot agree to changes proposed to the Visa/MC Rate
for the next succeeding calendar year within thirty (30) calendar days from
receipt by one party from the other of said proposed changes, then either
party may terminate the Visa/MasterCard processing relationship upon thirty
(30) days prior written notice.
III. Application Reconsideration
[***] each Reconsidered Application [***] of total applications. A
Reconsidered Application is defined as a second request to approve an account
that was previously declined, or a second request for a credit limit increase,
when the first request was declined. Reconsidered Applications submitted
under the First Time Buyers Program [***]. Reconsidered Application fees will
be billed by the 15th business day of the following month, based upon
statistics prepared by Bank One as set forth in Exhibit A, attached hereto.
The first bill for Reconsidered Applications would encompass the months of
October, November and December, 1996.
IV. Nonactivated Accounts
A. Effective October 1, 1996, and continuing every quarter thereafter
for the remainder of the Tem, the activation rate of new Accounts for the
preceding [***] will be evaluated against the following
performance results. [***] will be adjusted by the amounts set forth
in the following matrix for the preceding [***]:
QUARTERLY ACTIVATION RATE
Bank One will provide Marks Bros. with monthly reporting to measure the
new account activation [***]:
Promotional Discount Rate Change to Contract Rate
-------------------------------------------------
<TABLE>
<CAPTION>
Promotion
- ---------
<S> <C> <C> <C> <C> <C>
90 Days SAC First
Use/25 Day Grace [***]
Period
</TABLE>
34
<PAGE> 37
<TABLE>
<S> <C> <C> <C> <C>
90 Days SAC after
First Use
120 Days SAC
6 Months SAC
12 Months SAC
</TABLE>
Bank One will provide Marks Bros. monthly with an open-to-buy list of
all new Cardholders who did not activate their Accounts in the month in which
they were opened. To increase activation rates, Marks Bros., at its sole
discretion, will offer these customers, via a mailing, [***] discount (funded
by Marks Bros) and [***] same as cash offer for which the [***] discount rate
paid by Marks Bros. will be [***]. Bank One will produce the mailing piece in
a format meeting the approval of both Marks Bros. and Bank One. Bank One will
also provide a monthly mailing list to Marks Bros. who will conduct the
mailing. The customer will be required to bring in the mailing piece for
tracking purposes. A separate transaction code will be utilized for these
first use six (6) months same as cash transactions.
V. Marketing Contribution
No later than December 1 of each year of the Term, Bank One will inform
Marks Bros. of Bank One's marketing budget or of specific promotional events
planned for the following calendar year.
35
<PAGE> 38
ADDENDUM E
CONTINGENCY PLAN FOR AUTHORIZATION SYSTEM DOWNTIME
The following three (3) steps must be completed prior to proceeding to
Downtime Procedures.
STEP 1.
Attempt to obtain authorization through the terminal. If the
response is:
"Lost Communication with Host" or
"No Response from Host" - then
STEP 2.
Call the Voice Authorization Center at 1-800-395-0080 to obtain an
authorization. If a recording indicates the system is down - then
STEP 3.
Call Bank One, Merchant Operations Department using the following
emergency number - 1-800-333-1049, extension 6936. Ask for the
manager on duty. The manager will indicate whether the system is
down and if so, will give the anticipated time frame before normal
operations will resume. The manager will either give an
authorization or will instruct the store to go to "Down Time
Procedures".
Down Time Procedures
For sale amounts up to $750.00, use authorization code:
7777DD (DD = current day of the month) Example: 777716 (16th of the
month - current date: January 16, 1996)
For sale amounts over $750.00, the authorization would be declined
until the authorization system is operable.
If the Bank One Merchant Operations Department cannot be contacted or
is closed for the day, the store should proceed to the Down Time
Procedures, but only after the first three (3) steps above have been
completed and it has been determined that the authorization system is
down.
The above procedures are designed to be used in emergency situations
only and should not be relied upon for terminal down time or Application
Processing down time. In these situations, the Voice Authorization Center
should be contacted or the Credit Processing Department for new
applications.
36
<PAGE> 39
CHARGE BACK AND INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made and entered into this 31st day of May, 1996, by
and between Marks Bros. Jewelers, Inc. d.b.a. The Whitehall Co. jewelers and
d.b.a. Lundstrom Jewelers, a Delaware corporation ("Marks") and Bank One,
Dayton, NA, d.b.a. Banc One Private Label Credit Services, a national banking
association ("Bank One").
WITNESSETH:
WHEREAS, Marks has requested that Bank One permit Marks to obtain
Cardholder account numbers directly from Bank One by telephone when authorized
to do so by Cardholder; and
WHEREAS, Bank One is agreeable to provide Cardholder account numbers to
Marks upon the following terms and conditions;
NOW THEREFORE, in consideration of the mutual covenants contained
herein, the parties agree as follows:
A. Marks will only request from Bank One Cardholder account numbers
by telephone when specifically requested and authorized to do so by a
Cardholder who is physically present in a Marks retail sales location and
who wishes to make a purchase but does not have his/her Card available so
as to consummate the purchase.
B. Marks specifically agrees that in the event a Cardholder disputes
any transaction, or any portion thereof, resulting from Marks obtaining
the Cardholder's account number from Bank One by telephone, asserting that
the purchase was not made by the Cardholder, Bank One may immediately, and
without notice to Marks, CHARGE BACK said transaction to Marks pursuant to
the CHARGE BACK provisions set forth in Paragraph 17 of Addendum "A", Plan
Card Processing Agreement, to the Amended and Restated Private Label
Revolving Credit Plan Agreement dated May 31, 1996.
C. Marks agrees to indemnify Bank One and to hold Bank One harmless
from and against any and all actions, lawsuits, complaints, liabilities,
losses, claims, damages and expenses (including, without limitation,
reasonable fees and disbursements of counsel) suffered, sustained,
incurred, paid or required to be paid by Bank One, whether filed or
claimed by consumers or instrumentalities of the Federal or state
governments, arising out of or resulting from the acquisition by Marks of
Cardholder account numbers from Bank One by telephone.
37
<PAGE> 40
D. Marks shall indemnify Bank One on demand for said damages, claims,
etc., suffered by Bank One and such reimbursement shall be offset against
amounts due Marks. Both parties waive their respective right to request a
trial by jury in any litigation involving Marks and Bank One.
WITNESS: MARKS BROS. JEWELERS, INC.
By:
---------------------------
Title:
------------------------
BANK ONE, DAYTON, NA
By:
---------------------------
Title:
------------------------
38
<PAGE> 41
ADDENDUM "F" TO THE
PRIVATE LABEL REVOLVING
CREDIT PLAN AGREEMENT BY AND BETWEEN
BANK ONE, DAYTON, NA,
d.b.a BANC ONE PRIVATE LABEL CREDIT SERVICES AND
MARKS BROS. JEWELERS, INC.
DATED MARCH 23, 1993
This Addendum is made and entered into this 31st day of May, 1996, to
be effective May 31, 1996, by and between Marks Bros. Jewelers, Inc., d.b.a The
Whitehall Co. Jewelers and d.b.a Lundstrom Jewelers, a Delaware corporation
("Marks"), and Bank One, Dayton, NA, a national banking association ("Bank
One").
WITNESSETH:
WHEREAS, Bank One now has the capability of offering to Marks a second
source financing program designed to expand the Private Label Revolving Credit
Plan between Bank One and Marks;
WHEREAS, Marks desires to have Bank One implement this second source
financing program;
WHEREAS, Bank One is willing to implement this second source financing
program; and
WHEREAS, Marks and Bank One have mutually determined that the following
additional terms and conditions are both necessary and desirable to the ongoing
relationship contemplated by the Revolving Credit Plan Agreement entered into
by the parties;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties agree as follows:
1. The average outstanding Plan balances and the Plan interest
proceeds generated under this second source financing program shall not be
included in the outstanding Plan balances generated from the regular financing
program.
2. Immediately upon the execution of this Addendum, Bank One shall
incorporate the credit criteria of the second source financing program into the
review process of all applications received by Bank One which do not qualify
under the credit criteria of the regular financing program for the "Jewelry
Express" Private Label Revolving Credit Plan.
3. Marks shall pay to Bank One, for this second source financing
program, a fee in the amount of Two percent (2%) plus the Discount Rate (as set
forth in Addendum "D") of the
39
<PAGE> 42
net retail sales which occur on those additional accounts which are
approved and opened as a result of the second source financing program. This
fee shall be paid to Bank One by Marks at the end of each calendar month and
shall be in addition to any and all other special promotional pricing which may
be mutually agreed to by Bank One and Marks from time to time.
4. It is hereby specifically agreed by and between Bank One and Marks
that the second source financier may, at its sole and exclusive discretion,
market consumer loan products to the accountholders of those additional
accounts which are approved and opened through the second source financing
program.
5. In the event that the agreement by and between Bank One and the
second source financier is terminated at any time for any reason whatsoever,
this Addendum may be terminated by Bank One or Marks and be of no force or
effect, with no liability to Bank One or Marks for said termination, upon
written notification of said termination and the date of termination by Bank
One to Marks or Marks to Bank One.
6. Any conflict between this Addendum and any other Agreement
provision shall be controlled by this Addendum.
7. Both parties agree to work in good faith to correct any known
problems which may occur as a result of the implementation of this second
source financing program.
IN WITNESS WHEREOF, the parties have hereto set their hands this 31st
day of May, 1996.
MARKS BROS. JEWELERS, INC.
By
- ----------------------------- -------------------------------
Title
- ----------------------------- -----------------------------
BANK ONE, DAYTON, NA
By
- ----------------------------- -------------------------------
Title
- ----------------------------- -----------------------------
40
<PAGE> 1
MARKS BROTHERS JEWELERS, INC. EXHIBIT 12.1
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Three months ended
April 30,
Year ended January 31, ----------------- -----------------
--------------------------------------------- Proforma Proforma
1992 1993 1994 1995 1996 1996 1996 1996
---------- --------- -------- ------ ------ ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available earnings:
Earnings (loss) before income taxes (17,157) (3,557) (1,176) 571 2,048 9,154 (1,406) 211
Add: Interest expense 9,397 7,821 8,920 10,594 12,314 5,798 3,014 1,397
Add: Interest portion of rental expense 2,009 2,178 2,326 2,570 3,060 3,060 745 745
---------- --------- -------- ------- ------- ------- ------- -------
Available earnings (5,751) 6,442 10,070 13,735 17,422 18,012 2,353 2,353
========== ========= ======== ======= ======= ======= ======= =======
Fixed charges:
Interest expense 9,397 7,821 8,920 10,594 12,314 5,798 3,014 1,397
Interest portion of rental expense 2,009 2,178 2,326 2,570 3,060 3,060 745 745
---------- --------- -------- ------- ------- ------- ------- -------
Fixed charges 11,406 9,999 11,246 13,164 15,374 8,858 3,759 2,142
========== ========= ======== ======= ======= ======= ======= =======
Ratio of earnings to fixed charges (0.50) 0.64 0.90 1.04 1.13 2.03 0.63 1.10
========== ========= ======== ======= ======= ======= ======= =======
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
reports dated February 27, 1996, except as to Note 14 which is as of May 7,
1996 on our audits of the financial statements of Marks Bros. Jewelers, Inc. as
of January 31, 1995 and 1996 and for the twelve months then ended. We also
consent to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Chicago, Illinois
July 30, 1996
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
Marks Bros. Jewelers, Inc. (the "Company") hereby constitutes and appoints Hugh
M. Patinkin and John R. Desjardins, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to that certain Registration Statement on form
S-1 for the Company (including post-effective amendments) relating to (i) the
exchange of the Company's Series C Senior Subordinated Notes Due 2004, for its
outstanding Series A Senior Subordinated Notes Due 2004, (ii) the exchange of
the Company's Series D Senior Subordinated Notes Due 2004 for its outstanding
Series B Senior Subordinated Notes Due 2004 and (iii) the sale by a selling
noteholder of a portion of the Company's Series A Senior Subordinated Notes Due
2004, and all instruments necessary or advisable in connection therewith and
to file the same with the Securities and Exchange Commission, each of said
attorneys and authority to do and perform in the name and on behalf of the
undersigned every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as the undersigned might or
could do in person, and the undersigned hereby ratifies and confirms his
signature as it may be signed by his said attorneys and agents and each of them
to any and all such amendments and instruments.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Power of Attorney has been signed below by the undersigned on the date
indicated.
<PAGE> 2
Date: July 29, 1996
Jack A. Smith
----------------------------
Jack A. Smith
-2-
<PAGE> 1
Exhibit 25.1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
____CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
A NATIONAL BANKING ASSOCIATION 41-1592157
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
SIXTH STREET AND MARQUETTE AVENUE
MINNEAPOLIS, MINNESOTA 55479
(Address of principal executive offices) (Zip code)
----------------------------
MARKS BROS. JEWELERS, INC.
(Exact name of obligor as specified in its charter)
DELAWARE 36-1433610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 N. WACKER DRIVE
CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip code)
SERIES C SENIOR SUBORDINATED NOTES DUE 2004
SERIES D SENIOR SUBORDINATED NOTES DUE 2004
SERIES A SENIOR SUBORDINATED NOTES DUE 2004
(Title of the indenture securities)
<PAGE> 2
Item 1. General Information. Furnish the following information as to the
trustee:
(a) Name and address of each examining or supervising
authority to which it is subject.
Comptroller of the Currency
Treasury Department
Washington, D.C.
Federal Deposit Insurance Corporation
Washington, D.C.
The Board of Governors of the Federal Reserve
System
Washington, D.C.
(b) Whether it is authorized to exercise corporate
trust powers.
The trustee is authorized to exercise corporate
trust powers.
Item 2. Affiliations with Obligor. If the obligor is an affiliate of the
trustee, describe each such affiliation.
None with respect to the trustee.
No responses are included for Items 3-15 of this Form T-1 because the
obligor is not in default as provided under Item 13.
Item 16. List of Exhibits. List below all exhibits filed as a part
of this Statement of Eligibility.
Norwest Bank incorporates by reference
into this Form T-1 the exhibits
attached hereto.
Exhibit 1. a. A copy of Articles of Association of
the trustee now in effect.*
Exhibit 2. a. A copy of the certificate of authority
of the trustee to commence business
issued June 28, 1872, by the Comptroller
of the Currency to The Northwestern
National Bank of Minneapolis.*
b. A copy of the certificate of the
Comptroller of the Currency dated
January 2, 1934, approving the
consolidation of the Northwestern
National Bank of Minneapolis and the
Minnesota Loan and Trust Company of
Minneapolis.*
c. A copy of the certificate of the Acting
Comptroller of the Currency dated
January 12, 1943, as to change of
corporate title of Northwestern National
Bank and Trust Company of Minneapolis to
Northwestern National Bank of
Minneapolis.*
d. A copy of the certificate of the
Comptroller of the Currency dated
May 1, 1983, authorizing Norwest Bank
Minneapolis, National Association, to
act as fiduciary.*
<PAGE> 3
Exhibit 3. A copy of the authorization of the trustee to exercise
corporate trust powers issued January 2, 1934, by the
Federal Reserve Board.*
Exhibit 4. Copy of By-laws of the trustee as now in effect.*
Exhibit 5. Not applicable.
Exhibit 6. The consent of the trustee required by Section 321(b) of
the Act.
Exhibit 7. A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority. **
Exhibit 8. A copy of the certificate dated May 10, 1983 of name change
from Northwestern National Bank Minneapolis to Norwest Bank
Minneapolis, National Association.*
Exhibit 9. A copy of the certificate dated January 11, 1988, of name
change from Norwest Bank Minneapolis, National Association
to Norwest Bank Minnesota, National Association.*
* Incorporated by reference to the exhibit of the same number filed
with the registration statement number 33-66086.
** Incorporated by reference to the exhibit of the same number filed
with the registration statement number 333-1126.
<PAGE> 4
EXHIBIT 6
June 10, 1996
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
In accordance with Section 321(b) of the Trust Indenture Act of 1939, as
amended, the undersigned hereby consents that reports of examination of the
undersigned made by Federal or State authorities authorized to make such
examination may be furnished by such authorities to the Securities and
Exchange Commission upon its request therefor.
Very truly yours,
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
Curtis D. Schwegman
Corporate Trust Officer
<PAGE> 5
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Norwest Bank Minnesota, National Association, a
national banking association organized and existing under the laws of the
United States of America, has duly caused this statement of eligibility to
be signed on its behalf by the undersigned, thereunto duly authorized, all
in the City of Minneapolis and State of Minnesota on the 10th day of June,
1996.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
/s/ Curtis D. Schwegman
-----------------------
Curtis D. Schwegman
Corporate Trust Officer
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 p.m., NEW YORK CITY
TIME, ON , 1996 (AS SUCH DATE AND TIME MAY BE EXTENDED BY THE COMPANY
IN ITS SOLE DISCRETION, THE "EXPIRATION DATE").
MARKS BROS. JEWELERS, INC.
Series A Senior Subordinated Notes due 2004
and
Series B Senior Subordinated Notes due 2004
PLEASE READ CAREFULLY THE ATTACHED INSTRUCTIONS
If you desire to accept the Exchange Offer, this Letter of Transmittal
should be completed, signed, and submitted to:
<TABLE>
<S> <C>
By Overnight Courier:
- --------------------------------------------
Norwest Bank Minnesota,
- --------------------------------------------
National Association
- --------------------------------------------
Corporate Trust Operations
- --------------------------------------------
Norwest Center
- --------------------------------------------
Sixth and Marquette
- --------------------------------------------
Minneapolis, MN 55479-0113
- --------------------------------------------
By Mail:
- --------------------------------------------
(registered or certified mail recommended)
- --------------------------------------------
Norwest Bank Minnesota,
- --------------------------------------------
National Association
- --------------------------------------------
Corporate Trust Operations
- --------------------------------------------
P.O. Box 1517
- --------------------------------------------
Minneapolis, MN 55480-1517
- --------------------------------------------
</TABLE>
Delivery of this Letter of Transmittal to an address other than as set
forth above or transmission of instructions via a facsimile number other than
that set forth above will not constitute a valid delivery.
The undersigned hereby acknowledges receipt of the Prospectus dated May 2,
1996 (the "Prospectus") of Marks Bros. Jewelers, Inc., a Delaware corporation
(the "Company"), and this Letter of Transmittal (the "Letter of Transmittal"),
that together constitute the Company's offer (the "Exchange Offer") to exchange
(i) $1,000 principal amount of its new Series C Senior Subordinated Notes due
2004 (the "Series C Notes") for each $1,000 principal amount of its outstanding
Series A Senior Subordinated Notes due 2004 (the "Series A Notes"), and (ii)
$1,000 principal amount of its new Series D Senior Subordinated Notes due 2004
(the "Series D Notes," and collectively with the Series C Notes, the "New
Notes") for each $1,000 principal amount of its outstanding Series B Senior
Subordinated Notes due 2004 (the "Series B Notes," and collectively with the
Series A Notes, the "Old Notes"). Capitalized terms used but not defined herein
have the meanings ascribed to them in the Prospectus.
The undersigned hereby tenders the Old Notes described in Box 1 below (the
"Tendered Old Notes") pursuant to the terms and conditions described in the
Prospectus and this Letter of Transmittal. The undersigned is the registered
owner of all the Tendered Old Notes and the undersigned represents that it has
received from each beneficial owner of Tendered Old Notes ("Beneficial Owners")
a duly completed and executed form of "Instruction to Registered Holder from
Beneficial Owner" accompanying this Letter of Transmittal, instructing the
undersigned to take the action described in this Letter of Transmittal.
This Letter of Transmittal is to be used whether the Old Notes are to be
physically delivered herewith, or whether guaranteed delivery procedures or
book-entry delivery procedures are being used, pursuant to the procedures set
forth in the Prospectus under the caption "The Exchange Offer -- Procedures for
Tendering."
4
<PAGE> 2
If delivery of Tendered Old Notes is to be made by book-entry transfer to the
account maintained by the Exchange Agent at The Depository Trust Company
("DTC"), this Letter of Transmittal need not be manually executed; provided,
however, that tenders of Old Notes must be effected in accordance with the
procedures mandated by DTC's Automated Tender Offer Program ("ATOP") and the
procedures set forth in the Prospectus under the caption "The Exchange Offer --
Exchanging Book Entry Old Notes." If a registered holder desires to tender Old
Notes and such Old Notes are not immediately available or time will not permit
all documents required by the Exchange Offer to reach the Exchange Agent (or
such registered holder is unable to complete the procedure for book-entry
transfer on a timely basis) prior to the Expiration Date, a tender may be
effected in accordance with the guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery
Procedures." See instruction 2.
Subject to, and effective upon, the acceptance for exchange of the Tendered
Old Notes, the undersigned hereby exchanges, assigns, and transfers to, or upon
the order of, the Company, all right, title, and interest in, to, and under the
Tendered Old Notes.
Please issue the New Notes exchanged for Tendered Old Notes in the name(s)
of the undersigned. Similarly, unless otherwise indicated under "Special
Delivery Instructions" below (Box 3), please send or cause to be sent the
certificates for New Notes (and accompanying documents, as appropriate) to the
undersigned at the address shown below in Box 1.
The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent as the true and lawful agent and attorney in fact of the undersigned with
respect to the Tendered Old Notes, with full power of substitution (such power
of attorney being deemed to be an irrevocable power coupled with an interest),
to (i) deliver the Tendered Old Notes to the Company or cause ownership of the
Tendered Old Notes to be transferred to, or upon the order of, the Company, on
the books of the registrar for the Old Notes and deliver all accompanying
evidences of transfer and authenticity to, or transfer ownership of such Old
Notes on the account books maintained by DTC to, or upon the order of, the
Company upon receipt by the Exchange Agent, as the undersigned's agent, of the
New Notes to which the undersigned is entitled upon the acceptance by the
Company of the Tendered Old Notes pursuant to the Exchange Offer, and (ii)
receive all benefits and otherwise exercise all rights of beneficial ownership
of the Tendered Old Notes, all in accordance with the terms of the Exchange
Offer.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer -- Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer, subject only to withdrawal of
such tenders on the terms set forth in the Prospectus under the caption "The
Exchange Offer -- Withdrawal of Tenders." All authority herein conferred or
agreed to be conferred shall survive the death or incapacity of the undersigned
and any Beneficial Owner(s), and every obligation of the undersigned or any
Beneficial Owners hereunder shall be binding upon the heirs, representatives,
successors, and assigns of the undersigned and such Beneficial Owner(s).
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, assign, and transfer the Tendered
Old Notes and that the Company will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges, encumbrances, and adverse
claims when the Tendered Old Notes are acquired by the Company as contemplated
herein. The undersigned and each Beneficial Owner will, upon request, execute
and deliver any additional documents reasonably requested by the Company as
necessary or desirable to complete and give effect to the transactions
contemplated hereby.
The undersigned hereby represents and warrants that the information set
forth in Box 2 is true and correct.
By accepting the Exchange Offer, the undersigned hereby represents and
warrants that (i) the New Notes to be acquired by the undersigned and any
Beneficial Owner(s) in connection with the Exchange Offer are being acquired by
the undersigned and any Beneficial Owner(s) in the ordinary course of business
of the undersigned and any Beneficial Owner(s), (ii) the undersigned and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to
5
<PAGE> 3
participate, in the distribution of the New Notes, and (iii) the undersigned and
each Beneficial Owner acknowledge and agree that any person participating in the
Exchange Offer for the purpose of distributing the New Notes must comply with
the registration and prospectus delivery requirements of the Securities Act of
1933, as amended (together with the rules and regulations promulgated
thereunder, the "Securities Act"), in connection with a secondary resale
transaction of the New Notes acquired by such person and cannot rely on the
position of the Staff of the Securities and Exchange Commission (the
"Commission") set forth in no-action letters that are discussed in the section
of the Prospectus entitled "The Exchange Offer--Resales of the New Notes."
The undersigned and each Beneficial Owner understand that a secondary
resale transaction described in clause (iii) above should be covered by an
effective registration statement containing the selling securityholder
information required by Item 507 of Regulation S-K of the Commission. Except as
otherwise disclosed to the Company in writing, the undersigned hereby represents
and warrants that neither it nor any Beneficial Owner(s) is an "affiliate," as
defined under Rule 405 of the Securities Act, of the Company.
If the undersigned or any Beneficial Owner(s) is a "broker" or "dealer"
registered under the Exchange Act, the undersigned understands and acknowledges
that it and any such Beneficial Owner(s) may be deemed to be an "underwriter"
within the meaning of the Securities Act and, therefore, must deliver a
prospectus relating to the New Notes in connection with any resales by it or any
Beneficial Owner(s) of New Notes acquired for its own account or the account of
any Beneficial Owner(s) in the Exchange Offer. If the undersigned or any
Beneficial Owner(s) is a "broker" or "dealer" that acquired Old Notes for its
own account pursuant to its market-making or other trading activities (other
than Old Notes acquired directly from the Company), the undersigned and any
Beneficial Owner(s) may use the Prospectus to satisfy the prospectus delivery
requirements of the Securities Act. Notwithstanding the foregoing, the
undersigned does not thereby admit that it or any Beneficial Owner(s) is an
"underwriter" within the meaning of the Securities Act.
6
<PAGE> 4
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING THE BOXES
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
BOX 1
DESCRIPTION OF OLD NOTES TENDERED
(ATTACH ADDITIONAL SIGNED PAGES, IF NECESSARY)
- ------------------------------------------------------------------------------------------------
Aggregate
Name(s) and address(es) of Registered Principal
Old Note Holder(s), Series of Amount Aggregate
exactly as name(s) appear(s) on Old Note Old Notes Certificate Represented Principal
Certificate(s) (Series A or Number(s) by Amount
(Please fill in, if blank) Series B) of Old Notes Certificate(s) Tendered*
- ------------------------------------------------------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
* The minimum permitted tender is $1,000 in principal amount of Old Notes. All
other tenders must be in integral multiples of $1,000 of principal amount.
Unless otherwise indicated in this column, the principal amount of all Old
Note Certificates identified in this Box 1 or delivered to the Exchange Agent
herewith shall be deemed tendered. See Instruction 4.
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------
BOX 2
BENEFICIAL OWNER(S)
- ---------------------------------------------------------------------------------------------
State of Principal Residence of Each Principal Amount of Tendered Old Notes Held for
Beneficial Owner Account
of Tendered Old Notes of Beneficial Owner
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
If delivery of Old Notes is to be made by book-entry transfer to the
account maintained by the Exchange Agent at DTC, then tenders of Old Notes must
be effected in accordance with the procedures mandated by DTC's Automated Tender
Offer Program and the procedures set forth in the Prospectus under the caption
"The Exchange Offer -- Exchanging Book-Entry Old Notes."
7
<PAGE> 5
BOX 3
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 5, 6 AND 7)
To be completed ONLY if the New Notes exchanged for the Old Notes and
untendered Old Notes are to be sent to someone other than the undersigned, or to
the undersigned at an address other than that shown above.
Mail New Note(s) and any untendered Old Notes to:
Name(s):
- --------------------------------------------------------------------------------
(please print)
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(include Zip Code)
Tax Identification or
Social Security No.:
BOX 4
USE OF GUARANTEED DELIVERY
/ / CHECK HERE ONLY IF OLD NOTES ARE BEING TENDERED BY MEANS OF A NOTICE OF
GUARANTEED DELIVERY. See Instruction 2. If this box is checked, please
provide the following information:
Name(s) of Registered Holder(s):
- --------------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
Name of Institution which Guaranteed Delivery:
8
<PAGE> 6
- --------------------------------------------------------------------------------
BOX 5
TENDERING HOLDER SIGNATURE
(SEE INSTRUCTIONS 1 AND 5)
IN ADDITION, COMPLETE SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
X Signature Guarantee
(If required by Instruction 5)
X (Signature of Registerd Holder(s) Authorized Signature
or Authorized Signatory) X
Note: The above lines must be signed by the Name:
registered holder(s) of Old Notes as their (please print)
name(s) appear(s) on the Old Notes or by
person(s) authorized to become registered Title:
holder(s) (which must be transmitted with
this Letter of Transmittal). If signature is Name of Firm:
by a trustee, executor, administrator, Must be an Eligible
guardian, attorney-in-fact, officer, or Institution as defined in
other person acting in a fiduciary or Instruction 2)
representative capacity, such person must
set forth his or her full title below. See Address:
Instruction 5.
Name(s): (include Zip Code)
Capacity: Area Code and
Telephone Number:
Street Address: (include Zip Code) Dated:
Area Code and
Telephone Number:
Tax Identification or
Social Security Number:
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE> 7
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. Delivery of this Letter of Transmittal and Old Notes. The Tendered
Old Notes, as well as a properly completed and duly executed copy of this Letter
of Transmittal, a Substitute Form W-9 (or facsimile thereof) and any other
documents required by this Letter of Transmittal must be received by the
Exchange Agent at its address set forth herein prior to the Expiration Date;
provided, however that book-entry transfers of Old Notes may be effected in
accordance with the procedures set forth in the Prospectus under the caption
"The Exchange Offer -- Exchanging Book-Entry Old Notes." The method of delivery
of certificates for Old Notes and all other required documents is at the
election and risk of the tendering holder and delivery will be deemed made only
when actually received by the Exchange Agent. If delivery is by mail, registered
mail with return receipt requested, properly insured, is recommended. Instead of
delivery by mail, it is recommended that the holder use an overnight or hand
delivery service. In all cases, sufficient time should be allowed to assure
timely delivery. Neither the Company nor the registrar is under any obligation
to notify any tendering holder of the Company's acceptance of Tendered Old Notes
prior to the Closing of the Exchange Offer.
2. Guaranteed Delivery Procedures. Holders who wish to tender their Old
Notes but whose Old Notes are not immediately available and who cannot deliver
their Old Notes, Letter of Transmittal and any other documents required by the
Letter of Transmittal to the Exchange Agent prior to the Expiration Date must
tender their Old Notes according to the guaranteed delivery procedures set forth
below, including completion of Box 4. Pursuant to such procedures: (i) such
tender must be made by or through a firm which is a member of a registered
national securities exchange or if the National Association of Securities
Dealers, Inc., or is a commercial bank or trust company having an office or
correspondent in the United States, or is otherwise an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Securities Exchange
Act of 1934, as amended (an "Eligible Institution") and the Notice of Guaranteed
Delivery must be signed by the holder; (ii) prior to the Expiration Date, the
Exchange Agent must have received from the holder and the Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail, or hand delivery setting forth the name and address of the
holder, the certificate number or numbers of the Tendered Old Notes (except in
the case of book-entry tenders), and the principal amount of Tendered Old Notes,
stating that the tender is being made thereby and guaranteeing that, within five
business days after the Expiration Date, of the Letter of Transmittal (or
facsimile thereof), together with the Tendered Old Notes and any other required
documents will be deposited by the Eligible Institution with the Exchange Agent;
and (iii) such properly completed and executed documents required by this Letter
of Transmittal and the Tendered Old Notes in proper form for transfer (or a
Book-Entry Confirmation with respect to such Old Notes) must be received by the
Exchange Agent within five business days after the Expiration Date. Any holder
who wishes to tender Old Notes pursuant to the guaranteed delivery procedures
described above must ensure that the Exchange Agent receives the Notice of
Guaranteed Delivery relating to such Old Notes prior to the Expiration Date.
Failure to complete the guaranteed delivery procedures outlined above will not,
of itself, affect the validity or effect a revocation of any Letter of
Transmittal form properly completed and executed by an Eligible Holder who
attempted to use the guaranteed delivery process.
3. Beneficial Owner Instructions to Registered Holders. Only a holder in
whose name the Old Notes are registered on the books of the registrar (or the
legal representative or attorney-in-fact of such registered holder) may execute
and deliver this Letter of Transmittal. Any Beneficial Owner of Old Notes who is
not the registered holder must arrange promptly with the registered holder to
execute and deliver this Letter of Transmittal on his or her behalf through the
execution and delivery to the registered holder of the Instructions to
Registered Holder from Beneficial Owner form accompanying this Letter of
Transmittal.
4. Partial Tenders. Tenders of Old Notes will be accepted only in
integral multiples of $1,000 in principal amount. If less than the entire
principal amount of Old Notes is tendered, the tendering holder should fill in
the principal amount tendered in the column labeled "Aggregate Principal Amount
Tendered" of
10
<PAGE> 8
the box entitled "Description of Old Notes Tendered" (Box 1) above. The entire
principal amount of Old Notes delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated. If the entire principal amount of
all Old Notes is not tendered, Old Notes for the principal amount of Old Notes
not tendered and New Notes exchanged for any Old Notes tendered will be sent to
the holder at his or her registered address, unless a different address is
provided in the appropriate box on this Letter of Transmittal, as soon as
practicable following the Expiration Date.
5. Signatures on the Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures. If this Letter of Transmittal is signed by the
registered holder(s) of the Tendered Old Notes, the signature must correspond
with the name(s) as written on the face of the Tendered Old Notes without
alteration, enlargement, or any change whatsoever.
If any of the Tendered Old Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal. If any Tendered
Old Notes are held in different names on several Old Notes, it will be necessary
to complete, sign, and submit as many separate copies of the Letter of
Transmittal documents as there are names in which Tendered Old Notes are held.
If this Letter of Transmittal is signed by the registered holder(s) of
Tendered Old Notes tendered and New Notes are to be issued and any untendered
principal amount of Old Notes is to be reissued) to the registered holder(s),
the registered holder(s) need not and should not endorse any Tendered Old Notes
nor provide a separate bond power. In any other case, such registered holder(s)
must either properly endorse the Old Notes tendered or transmit a properly
completed separate bond power with this Letter of Transmittal, with the
signature(s) on the endorsement or bond power guaranteed by an Eligible
Institution.
If this Letter of Transmittal is signed by a person other than the
Registered Holder(s) of any Old Notes, the Tendered Old Notes must be endorsed
or accompanied by appropriate bond powers, in each case, signed as the name of
the registered holder(s) appears on the Old Notes, with the signature on the
endorsement or bond power guaranteed by an Eligible Institution along with the
other documents required upon transfer by the Purchase Agreements.
If this Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 5 must be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal must be guaranteed by an Eligible
Institution unless the Tendered Old Notes are tendered (i) by a Registered
Holder who has not completed the box set forth herein entitled "Special Delivery
Instructions" (Box 3) or (ii) by an Eligible Institution.
6. Special Delivery Instructions. Tendering Eligible Holders should
indicate, in the applicable box (Box 3), the name and address to which the New
Notes and/or substitute Old Notes for principal amounts not tendered or not
accepted for exchange are to be sent, if different from the name and address of
the person signing this Letter of Transmittal.
7. Transfer Taxes. The Company will pay all transfer taxes, if any,
applicable to the sale and transfer of Old Notes to it or its order pursuant to
the Exchange Offer. If, however, a transfer tax is imposed for any reason other
than the transfer and sale of Old Notes to the Company or its order pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or on any other person) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
from taxes therefrom is not submitted with this Letter of Transmittal, the
amount of transfer taxes will be billed directly to such tendering holder.
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
11
<PAGE> 9
8. Tax Identification Number. Federal income tax law requires that a
holder of any Old Notes which are accepted for exchange must provide the Company
(as payor) with its correct taxpayer identification number ("TIN"), which, in
the case of a holder who is an individual, is his or her social security number.
If the Company is not provided with the correct TIN, the holder may be subject
to a $50 penalty imposed by the Internal Revenue Service. (If withholding
results in an over-payment of taxes, a refund may be obtained.) Certain holders
(including, among others, all corporations and certain foreign individuals) are
not subject to these backup withholding and reporting requirements. See the
enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9" for additional instructions.
To prevent backup withholding, each tendering holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (i) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified the holder that such holder is no longer subject to backup withholding.
If the Old Notes are registered in more than one name or are not in the name of
the actual owner, consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for information on which TIN to
report.
The Company reserves the right in its sole discretion to take whatever
steps are necessary to comply with the Company's obligation regarding backup
withholding.
9. Validity of Tenders. All questions as to the validity, form,
eligibility (including time of receipt), and acceptance of Tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the right to reject any and all
Old Notes not validly tendered or any Old Notes the Company's acceptance of
which would, in the opinion of the Company or its counsel, be unlawful. The
Company also reserves the right to waive any conditions of the Exchange Offer or
defects or irregularities in tenders of Old Notes as to any ineligibility of any
holder who seeks to tender Old Notes in the Exchange Offer. The interpretation
of the terms and conditions of the Exchange Offer (including this Letter of
Transmittal and the instructions hereto) by the Company shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. The Company will use reasonable efforts to give
notification of defects or irregularities with respect to tenders of Old Notes,
but shall not incur any liability for failure to give such notification.
10. Waiver of Conditions. The Company reserves the absolute right to
amend, waive, or modify specified conditions in the Exchange Offer in the case
of any Tendered Old Notes.
11. No Conditional Tender. No alternative, conditional, irregular, or
contingent tender of Old Notes or transmittal of this Letter of Transmittal will
be accepted.
12. Mutilated, Lost Stolen, or Destroyed Old Notes. Any tendering holder
whose Old Notes have been mutilated, lost, stolen, or destroyed should contact
the Exchange Agent at the address indicated above for further instruction.
13. Requests for Assistance or Additional Copies. Questions and requests
for assistance and requests for additional copies of the Prospectus may be
directed to the Exchange Agent at the address and telephone number specified in
the Prospectus. Holders may also contact their broker, dealer, commercial bank,
trust company, or other nominee for assistance concerning the Exchange Offer.
14. Acceptance of Tendered Old Notes and Issuance of New Notes; Return of
Old Notes. Subject to the terms and conditions of the Exchange Offer, the
Company will accept for exchange all validly tendered Old Notes as soon as
practicable after the Expiration Date and will issue New Notes therefor as soon
as practicable thereafter. For purposes of the Exchange Offer, the Company shall
be deemed to have accepted tendered Old Notes when, as and if the Company has
given written or oral notice thereof to the Exchange Agent. If any Tendered Old
Notes are not exchanged pursuant to the Exchange Offer for any reason, such
unexchanged Old Notes will be returned, without expense, to the undersigned at
the address shown below or at a different address as may be indicted herein
under "Special Delivery Instructions."
15. Withdrawal. Tenders may be withdrawn only pursuant to the limited
withdrawal rights set forth in the Prospectus under the caption "The Exchange
Offer -- Withdrawal of Tenders".
12
<PAGE> 10
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER OF SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give the
Payer. --Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification number have nine digits separated by only
one hyphen: i.e. 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
GIVE THE SOCIAL GIVE THE EMPLOYER
====================================================================== SECURITY ==========================================
IDENTIFICATION NUMBER
FOR THIS TYPE OF ACCOUNT NUMBER OF- FOR THIS TYPE OF ACCOUNT OF-
====================================================================== ==========================================================
<C> <S> <C> <C> <C> <C>
1. Individual The individual 5. Sole proprietorship The Owner3
account
2. Two or more The actual owner of 6. A valid trust, estate, Legal entity (Do not
individuals the account or, if or pension trust furnish the
combined funds, the identifying number of
first individual on the personal
the account1 representative or
trustee unless the
legal entity itself is
not designated in the
account title.)4
3. Custodian account of a The minor3 7. Corporate The Corporation
minor
(Uniform Gift to
Minors Act)
4. a. The usual revocable The grantor-trustee1 8. Association, club, The organization
savings religious,
trust account charitable,
(grantor is also educational, or
trustee) other tax-exempt
organization
b. So-called trust The actual owner1
account that is
not a legal or valid
trust under
State law
9. Partnership The partnership
10. A broker or registered The broker or nominee
nominee
11. Account with the The public entity
Department
of Agriculture in the
name of a public
entity
(such as a State or
local government,
school
district, or person)
that receives
agricultural program
payments
==================================================== ======================================================
</TABLE>
1 List first and circle the name of the person whose number you furnish.
2 Circle the minor's name and furnish the minor's social security number.
3 You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your SSN or EIN.
4 List first and circle the name of the legal trust, estate, or pension trust.
Note: If no name is circled when there is more than one name, the number will be
considered to be that of the first name issued.
13
<PAGE> 11
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER OF SUBSTITUTE FORM W-9
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5. Application or a Social Security Number Card, for Form
SS-4. Application for Employer identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
Payees Exempt from Backup Withholding Payees specifically exempted from backup
withholding on most payments include the following:
- - A Corporation
- - A financial institution
- - An organization exempt from tax under Section 501(a), or, an individual
retirement plan.
- - The United States or any agency or instrumentality thereof.
- - A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
- - A foreign government, a political subdivision of a foreign government, or any
agency or instrumentality thereof.
- - An international organization or any agency, or instrumentality thereof.
- - A registered dealer in securities or commodities registered in the U.S. or a
possession of the U.S.
- - A real estate investment trust.
- - A common trust fund operated by a bank under section 584(a).
- - An exempt charitable remainder trust, or a non-exempt trust described in
section 4947(a)(1).
- - An entity registered at all times under the Investment Company Act of 1940.
- - A foreign central bank of issue.
Payment of dividends and patronage dividends not generally subject to backup
withholding include the following:
- - Payments to nonresident aliens subject to withholding under section 1441.
- - Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
- - Payments of patronage dividends where the amount received is not paid in
money.
- - Payments made by certain foreign organizations.
Payments of interest not generally subject to backup withholding include the
following:
- - Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid in
the course of the payer's trade or business and you have not provided your
correct taxpayer identification number to the payer.
- - Payments of tax-exempt interest (including exempt interest dividends under
section 852).
- - Payments described in section 6049(b)(5) to nonresident aliens.
- - Payments on tax free covenant bonds under section 1451.
- - Payments made by certain foreign organizations.
Exempt payee described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO
SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends
that are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6045 and 6050A.
PENALTIES
FAILURE TO FURNISH TIN. If you fail to furnish your correct TIN to a requester,
you are subject to a penalty of $50 for each such failure unless your failure is
due to reasonable cause and not to willful neglect.
14
<PAGE> 12
CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you make a
false statement with no reasonable basis that results in no backup withholding,
you are subject to a $500 penalty.
CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Willfully falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
MISUSE OF TINS. If the requester discloses or uses TINs in violation of Federal
law, the requester may be subject to civil and criminal penalties.
PRIVACY ACT NOTICE. Section 6109 requires you to furnish your correct TIN to
persons who must file information returns with the IRS to report interest,
dividends, and certain other income paid to you, mortgage interest you paid, the
acquisition or abandonment of secured property, cancellation of debt, or
contributions you made to an IRA. The IRS uses the numbers for identification
purposes and to help verify the accuracy of your tax return. You must provide
your TIN whether or not you are required to file a tax return. Payers must
generally withhold 31% of taxable interest, dividend, and certain other payments
to a payee who does not furnish a TIN to a payer. Certain penalties may also
apply.
15
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
SERIES A SENIOR SUBORDINATED NOTES DUE 2004
AND
SERIES B SENIOR SUBORDINATED NOTES DUE 2004
OF
MARKS BROS. JEWELERS, INC.
As set forth in the Exchange Offer (as defined below), this form or one
substantially equivalent hereto or the electronic form used by The Depository
Trust Company for this purpose must be used to accept the Offer (as defined
below) if certificates for (i) Series A Senior Subordinated Notes due 2004 (the
"Series A Notes") or (ii) Series B Senior Subordinated Notes due 2004 (the
"Series B Notes") of Marks Bros. Jewelers, Inc. (the "Company") are not
immediately available or if a holder of the Old Notes is unable to complete the
procedure for book entry transfer on a timely basis, or if time will not permit
all required documents to reach the Exchange Agent prior to 5:00 p.m. New York
City time on , 1996 unless extended (the "Expiration Date"). This
form or a facsimile hereof may be delivered by hand or sent by telegram,
facsimile transmission or mail to the Exchange Agent. Capitalized terms used
herein and not defined herein shall have the meanings assigned to them in the
Exchange Offer.
The Exchange Agent is:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
By Overnight Courier:
Norwest Bank Minnesota,
National Association
Corporate Trust Operations
Norwest Center
Sixth and Marguette
Minneapolis, MN 55479-0113
By Facsimile:
(for Eligible Institutions only)
Norwest Bank Minnesota,
National Association
Corporate Trust Operations
(612) 667-4927
For information with respect to
the Offer call the Corporate Trust Operations Department of the Exchange Agent
Phone No. (612)667-9764
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on a
Letter of Transmittal is required to be guaranteed by an Eligible Institution
(as defined therein) under the instructions thereto, such signature guarantee
must appear in the applicable space provided in the signature box on the Letter
of Transmittal.
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tenders the Old Notes indicated below pursuant to
the guaranteed delivery procedures set forth in the accompanying Prospectus
dated May 2, 1996 (the "Prospectus") and in the related Letter of Transmittal
(which together with the Prospectus constitute the "Exchange Offer"), receipt of
which is hereby acknowledged.
The undersigned hereby represents and warrants that the undersigned accepts
the terms and conditions of the Exchange Offer, has full power and authority to
tender, exchange, assign and transfer the Old Notes tendered hereby, and that
when the same are accepted for exchange by the Company, the Company will acquire
good and unencumbered title thereto, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim or right. The
undersigned will, upon request, execute and deliver any additional documents
deemed by the Exchange Agent or the Company to be reasonably necessary or
desirable to complete the sale, assignment and transfer of the Old Notes
tendered hereby.
The undersigned acknowledges that this Exchange Offer is being made in
reliance on an interpretation by the staff of the Securities and Exchange
Commission that the New Notes issued pursuant to the terms of the Prospectus in
exchange for the Old Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the company within the meaning of Rule 405 under the Securities
Act of 1933, as amended (the "Securities Act"), or a "broker or "dealer"
registered under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New Notes are acquired in
the ordinary course of business of such holders and any Beneficial Owners and
such holders and any Beneficial Owners have no arrangement with any person to
participate in the distribution of such New Notes.
The undersigned represents that (i) the New Notes acquired pursuant to the
Offer are being obtained in the ordinary course of business of such holder and
any Beneficial Owner(s), (ii) neither such holder nor any Beneficial Owner is
participating, intends to participate, or has any arrangement or understanding
with any person to participate, in the distribution of such New Notes, and (iii)
neither such holder nor any Beneficial Owner is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company or, if such holder or any
Beneficial Owner is an affiliate, that such holder and any Beneficial Owner will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
If the undersigned or any Beneficial Owner is a broker or dealer registered
under the Exchange Act that acquired Old Notes for its own account pursuant to
its market-making or other trading activities (other than Old Notes acquired
directly from the Company), the undersigned understands and acknowledges that it
may be deemed to be an "underwriter" within the meaning of the Securities Act
and, therefore, must deliver a prospectus relating to the New Notes in
connection with any resales by it of New Notes acquired for its own account in
the Exchange Offer. Notwithstanding the foregoing, the undersigned does not
thereby admit that it is an "underwriter" within the meaning of the Securities
Act.
The undersigned understands and acknowledges that the Company reserves in
its sole discretion to purchase or make offers for any Old Notes that remain
outstanding subsequent to the Expiration Date or, as set forth in the Prospectus
under the caption "The Exchange Offer -- Conditions of the Exchange Offer," to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
THE UNDERSIGNED UNDERSTANDS AND AGREES THAT THE COMPANY RESERVES THE RIGHT
NOT TO ACCEPT TENDERED OLD NOTES FROM ANY TENDERING HOLDER IF THE COMPANY
DETERMINES, IN ITS SOLE AND ABSOLUTE DISCRETION, THAT SUCH ACCEPTANCE COULD
RESULT IN A VIOLATION OF APPLICABLE SECURITIES LAWS.
2
<PAGE> 3
Names(s) of Record Holder(s):
Please Print
Address(es):
Area Code and Tel. No(s):
Signature(s)
<TABLE>
<CAPTION>
CERTIFICATE NO(S) PRINCIPAL AMOUNT
(IF AVAILABLE) TENDERED
<S> <C>
- --------------------------------------------- ---------------------------------------------
- --------------------------------------------- ---------------------------------------------
- --------------------------------------------- ---------------------------------------------
- --------------------------------------------- ---------------------------------------------
</TABLE>
GUARANTEE
(Not to be used for signature guarantee)
The undersigned, a member firm of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the United
States, hereby guarantees delivery to the Exchange Agent of certificates for the
Old Notes tendered hereby, in proper form for transfer with delivery of a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof) and any other documents required by the Letter of Transmittal, all
within five (5) business days after the Expiration Date.
The undersigned acknowledges that it must communicate the guarantee to the
Exchange Agent and must deliver the Letter of Transmittal and certificates for
Old Notes to the Exchange Agent within the time period shown hereon. Failure to
do so could result in a financial loss to the undersigned.
<TABLE>
<S> <C>
- --------------------------------------------- ---------------------------------------------
Firm Authorized Signature
- --------------------------------------------- Name
Address (Please Type or Print)
- --------------------------------------------- Title
Zip Code
Dated , 1994
Area Code and Tel. No.
</TABLE>
DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM -- THEY SHOULD BE
SENT WITH THE LETTER OF TRANSMITTAL.
3
<PAGE> 1
EXHIBIT 99.3
MARKS BROS. JEWELERS, INC.
OFFER TO EXCHANGE
ITS
SERIES C SENIOR SUBORDINATED NOTES DUE 2004
FOR ANY AND ALL OF ITS OUTSTANDING
SERIES A SENIOR SUBORDINATED NOTES DUE 2004
AND ITS
SERIES D SENIOR SUBORDINATED NOTES DUE 2004
FOR ANY AND ALL OF ITS OUTSTANDING
SERIES B SENIOR SUBORDINATED NOTES DUE 2004
To Our Clients:
Enclosed for your consideration are the Prospectus, dated May 2, 1996 (the
"Prospectus") and the related Letter of Transmittal (which together with the
Prospectus constitute the "Offer") in connection with the offer by Marks Bros.
Jewelers, Inc., a Delaware corporation (the "Company"), to exchange its (i)
Series C Senior Subordinated Notes due 2004 (the "Series C Notes") for any and
all of its outstanding Series A Senior Subordinated Notes due 2004 (the "Series
A Notes"), and (ii) Series D Senior Subordinated Notes due 2004 (the "Series D
Notes," and collectively with the Series C Notes, the "New Notes") for any and
all of its outstanding Series B Senior Subordinated Notes due 2004 (the "Series
B Notes," and collectively with the Series A Notes, the "Old Notes"), upon the
terms and subject to the conditions set forth in the Offer.
We are the Registered Holders of Old Notes held for your account. An
exchange of the Old Notes can be made only by us as the Registered Holders and
pursuant to your instructions. The Letter of Transmittal is furnished to you for
your information only and cannot be used by you to exchange the Old Notes held
by us for your account. The Offer provides a procedure for holders to tender by
means of guaranteed delivery.
We request information as to whether you wish us to exchange any or all of
the Old Notes held by us for your account upon the terms and subject to the
conditions of the Offer.
Your attention is directed to the following:
1. The Series C Notes will be exchanged for the Series A Notes at the
rate of $1,000 principal amount of Series C Notes for each $1,000
principal amount outstanding of Series A Notes, and the Series D Notes
will be exchanged for the Series B Notes at the rate of $1,000 principal
amount of Series D Notes for each $1,000 principal amount outstanding of
Series B Notes. Interest will accrue from the last January 31, April 30,
July 31 or October 31 on which interest was paid on the Old Notes, or,
if no interest has been paid on the Old Notes, from May 7, 1996. The
form and terms of the Series C Notes are the same in all material
respects as the form and terms of the Series A Notes (which they
replace) and the form and terms of the Series D Notes are the same in
all material respects as the form and terms of the Series B Notes (which
they replace), except that the Series C Notes and the Series D Notes
have been registered under the Securities Act of 1933, as amended (the
"Securities Act").
2. Based on an interpretation by the staff of the Securities and
Exchange Commission (the "SEC"), New Notes issued pursuant to the Offer
in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than any such holder
which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act or a "broker" or "dealer" registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of business of such holder and any
beneficial owner and such holder and any beneficial owner have no
arrangement with any person to
16
<PAGE> 2
participate in the distribution of such New Notes. See "Shearman &
Sterling," SEC No-Action Letter (available July 2, 1993), "Morgan
Stanley & Co., Inc.," SEC No-Action Letter (available June 5, 1991) and
"Exxon Capital Holdings Corporation," SEC No-Action Letter (available
May 13, 1988).
3. The Offer is not conditioned on any minimum principal amount of
Old Notes being tendered except that Old Notes may be tendered only in
integral multiples of $1,000.
4. Notwithstanding any other term of the Offer, the Company will not
be required to accept for exchange, or exchange New Notes for, any Old
Notes not theretofore accepted for exchange, and may terminate or amend
the Offer as provided herein before the acceptance of such Old Notes, if
any of the conditions described in the Prospectus under "The Exchange
Offer -- Conditions of the Exchange Offer" exist.
5. Tendered Old Notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on , 1996 if such Old Notes have not
previously been accepted for exchange pursuant to the Offer.
6. Any transfer taxes applicable to the exchange of the Old Notes
pursuant to the Offer will be paid by the Company, except as otherwise
provided in Instruction 7 of the Letter of Transmittal.
If you wish to have us tender any or all of your Old Notes, please so
instruct us by completing, detaching and returning to us the instruction form
attached hereto. An envelope to return your instructions is enclosed. If you
authorize a tender of your Old Notes, the entire principal amount of Old Notes
held for your account will be tendered unless otherwise specified on the
instruction form. Your instructions should be forwarded to us in ample time to
permit us to submit a tender on your behalf by the Expiration Date.
THE OFFER IS NOT BEING MADE TO, NOR WILL TENDERS BE ACCEPTED FROM OR ON
BEHALF OF, HOLDERS OF THE OLD NOTES IN ANY JURISDICTION IN WHICH THE MAKING OF
THE OFFER OR ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH
JURISDICTION OR WOULD OTHERWISE NOT BE IN COMPLIANCE WITH ANY PROVISION OF ANY
APPLICABLE SECURITY LAW.
17
<PAGE> 3
MARKS BROS. JEWELERS, INC.
OFFER TO EXCHANGE
ITS
SERIES C SENIOR SUBORDINATED NOTES DUE 2004
FOR ANY AND ALL OF ITS OUTSTANDING
SERIES A SENIOR SUBORDINATED NOTES DUE 2004
AND ITS
SERIES D SENIOR SUBORDINATED NOTES DUE 2004
FOR ANY AND ALL OF ITS OUTSTANDING
SERIES B SENIOR SUBORDINATED NOTES DUE 2004
The undersigned acknowledge(s) receipt of your letter and the enclosed
Prospectus and the related Letter of Transmittal in connection with the offer by
the Company to purchase the Old Notes.
This will instruct you to tender the principal amount of Old Notes
indicated below held by you for the account of the undersigned, upon the terms
and subject to the conditions set forth in the Prospectus and the related Letter
of Transmittal.
The undersigned holder represents that (i) the New Notes acquired pursuant
to the Offer are being obtained in the ordinary course of business of such
holder and any beneficial owner, (ii) such holder and any beneficial owner is
not participating, does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of such New
Notes, and (iii) neither such holder nor any beneficial owner is an "affiliate,"
as defined under Rule 405 of the Securities Act, of the Company or, if such
holder or any beneficial holder is an affiliate, that such holder and any
beneficial owner will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
If the undersigned is a "broker" or "dealer" registered under the Exchange
Act that acquired Old Notes for its own account pursuant to its market-making or
other trading activities (other than Old Notes acquired directly from the
Company), the undersigned understands and acknowledges that it may be deemed to
be an "underwriter" within the meaning of the Securities Act and, therefore,
must deliver a prospectus relating to the New Notes in connection with any
resales by it of New Notes acquired for its own account in the Exchange Offer.
Notwithstanding the foregoing, the undersigned does not thereby admit that it is
an "underwriter" within the meaning of the Securities Act.
The undersigned acknowledges and certifies that it is the beneficial
owner of the principal amount of Old Notes indicated below and by tendering
such Old Notes the undersigned consents to, and the undersigned does hereby
consent to, the execution of the First Supplemental Indenture of Marks Bros.
Jewelers, Inc. to Norwest Bank Minnesota, National Association in substantially
the form attached hereto as Annex A, which First Supplemental Indenture
supplements and modifies the Indenture governing the oLD Notes dated as of
April 15, 1996 of Marks Bros. Jewelers, Inc. to Norwest Bank Minnesota,
National Association.
Sign Here
--------------------------------------
Signature(s)
If the signature above is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer, or other person acting in a fiduciary or
representative capacity, such person must set forth his or her full title
below:
Name: ______________________________
Capacity: __________________________
18
<PAGE> 4
Securities which are to be tendered:
TENDER ALL OF THE OLD NOTES
Principal Amount*
/ / Series A Notes
/ / Series B Notes
NAME(S) (PLEASE PRINT)
ADDRESS
ZIP CODE
AREA CODE AND TELEPHONE NO.
Dated: , 1996
- ---------------
*Unless otherwise indicated, it will be assumed that all of the Old Notes listed
are to be tendered.
19
<PAGE> 5
Annex A
This FIRST SUPPLEMENTAL INDENTURE dated as of the __ day of
July, 1996 between MARKS BROS. JEWELERS, INC., a corporation duly organized and
existing under the laws of the State of Delaware (the "Company"), having its
principal office at 155 North Wacker Drive, Chicago, Illinois 60606, and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association,
as trustee (the "Trustee"), having its principal office at Sixth and Marquette,
Minneapolis, Minnesota 55479.
W I T N E S S E T H:
WHEREAS, the Company and the Trustee have heretofore executed
and delivered an Indenture dated as of April 15, 1996 (the "Original
Indenture," the Original Indenture as supplemented by this First Supplemental
Indenture being hereinafter called the "Indenture") providing, among other
things, for the issuance from time to time of the Company's unsecured
debentures, notes or other evidences of indebtedness (the "Notes") in one or
more series;
WHEREAS, there is currently issued and outstanding under the
Indenture the following two series of Notes (respectively, the "Series A
Securities" and the "Series B Securities"; and, collectively, the "Existing
Notes"):
<TABLE>
<CAPTION>
Name of Series Principal Amount Outstanding
-------------- ----------------------------
<S> <C>
Series A Senior $12,000,000
Subordinated Notes
due October 31, 2004
Series B Senior $ 8,000,000
Subordinated Notes
due October 31, 2004
</TABLE>
WHEREAS, the Company desires to offer and issue under the
Indenture two new series of Notes (the "New Notes") in exchange for the
Existing Notes, as more fully hereinafter described;
WHEREAS, the Company has duly authorized the creation of an
issue of Series C Senior Subordinated Notes due 2004 (herein called the "Series
C Securities"), of substantially the tenor and amount hereinafter set forth,
and to provide therefor the Company has duly authorized the execution and
delivery of this First Supplemental Indenture;
WHEREAS, the Company has duly authorized the creation of an
issue of Series D Senior Subordinated Notes due 2004 (herein called the "Series
D Securities"), of substantially the tenor and amount hereinafter set forth,
and to provide therefor the Company has duly authorized the execution and
delivery of this First Supplemental Indenture;
WHEREAS, Section 902 of the Original Indenture provides that
the Company and the Trustee may enter into a supplemental indenture, with the
consent of the Holders of not less than a majority in principal amount of the
"Outstanding Notes" (as defined in the Original Indenture), of each series
affected, for the purpose of changing in any manner any provisions of the
Original Indenture;
<PAGE> 6
WHEREAS, the holders of not less than a majority in principal
amount of the Notes outstanding as of 5:00 p.m., New York City time, on July
___, 1996, the record date for such purpose, have consented to this First
Supplemental Indenture; and
WHEREAS, all acts and things necessary to make this First
Supplemental Indenture a valid agreement in accordance with its terms have been
done;
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of
the Existing Notes and any other Notes hereafter issued under the Indenture by
the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of the respective Holders from time to time of the Notes,
as follows:
ARTICLE ONE
AMENDMENTS TO ORIGINAL INDENTURE
SECTION 1.01. Amendment of Section 101.
(a) The following definitions are inserted in Section 101
of the Original Indenture in the proper alphabetical location:
""Effective Registration" means that the Company shall have
(i) commenced a Registered Exchange Offer for the Series A Securities
and/or the Series B Securities pursuant to an effective Registration
Statement under the Securities Act or (ii) filed and caused to become
effective a Senior Notes Shelf Registration under the Securities Act
for the sale of the Series A Securities and/or the Series B Securities
by the Holders."
""Registered Exchange Offer" means a proposed offer pursuant
to a Registration Statement pursuant to which the Company offers in
exchange for the Series A Securities a duly authorized series of
senior subordinated debt securities having terms in all material
respects identical to those of the Series A Securities, and/or a
proposed offer pursuant to a Registration Statement pursuant to which
the Company offers in exchange for the Series B Securities a duly
authorized series of senior subordinated debt securities having terms
in all material respects identical to those of the Series B
Securities."
""Registration Statement" shall have the meaning given such
term in each of (i) Section 16 of that certain Placement Agent
Agreement, dated as of May 7, 1996, between the Company and William
Blair & Company, L.L.C., as the placement agent thereunder and (ii)
Section 8.6 of that certain Note Agreement Re: $8,000,000 Series B
Senior Subordinated Notes Due October 31, 2004, dated as of April 15,
1996, among the Company and the Purchasers parties thereto."
""Senior Notes Shelf Registration" means a proposed offer
pursuant to a registration statement or an appropriate form under the
Securities Act relating to the offer and sale of Notes
-2-
<PAGE> 7
by the holders thereof from time to time without restrictions or
limitations under the Securities Act in accordance with the methods of
distribution set forth in such registration statement and Rule 415
under the Securities Act."
""Series A Security" and "Series A Securities" have the
meaning stated in the second recital of the First Supplemental
Indenture and more particularly mean any Series A Securities
authenticated and delivered under this Indenture."
""Series B Security" and "Series B Securities" have the
meaning stated in the second recital of the First Supplemental
Indenture and more particularly mean any Series B Securities
authenticated and delivered under this Indenture, including without
limitation any Series B Security constituting a Secondary Note."
""Series C Security" and "Series C Securities" have the
meaning stated in the fourth recital of the First Supplemental
Indenture and more particularly mean any Series C Securities
authenticated and delivered under this Indenture."
""Series D Security" and "Series D Securities" have the
meaning stated in the fifth recital of the First Supplemental
Indenture and more particularly mean any Series D Securities
authenticated and delivered under this Indenture, including without
limitation any Series D Security constituting a Secondary Note."
(b) The Original Indenture is hereby amended to strike
the definition of "Series A Note" now contained therein and to substitute the
following therefor:
""Series A Note" and "Series A Notes" means collectively the
Series A Securities and the Series C Securities treated as a single
series for all purposes under this Indenture, except with respect to
any amendment or supplement to the Indenture that treats the Series A
Securities and the Series C Securities materially differently."
(c) The Original Indenture is hereby amended to strike
the definition of "Series B Note" now contained therein and to substitute the
following therefor:
""Series B Note" and "Series B Notes" means collectively the
Series B Securities and the Series D Securities treated as a single
series for all purposes under this Indenture, except with respect to
any amendment or supplement to the Indenture that treats the Series B
Securities and the Series D Securities materially differently."
SECTION 1.02. Addition of Sections 206, 207, 208 and 209.
The Original Indenture is hereby amended to add the following Sections 206,
207, 208 and 209 immediately following Section 205:
"Section 206. Form of Face of Series C Security.
-3-
<PAGE> 8
MARKS BROS. JEWELERS, INC.
Series C Senior Subordinated Note due 2004
No. _______ $_____________
CUSIP 570698 AD 2
Marks Bros. Jewelers, Inc., a Delaware corporation (herein
called the "Company," which term includes any successor person under
the Indenture hereinafter referred to), for value received, hereby
promises to pay to _________ or registered assigns, the principal sum
of _________ Dollars on October 31, 2004 at the office or agency of
the Company referred to below, and to pay interest thereon on July 31,
1996 and quarterly thereafter on October 31, January 31, April 30 and
July 31 in each year, from the Issue Date, or from the most recent
Interest Payment Date to which interest has been paid or duly provided
for, at the rate of 12.15% per annum, until the principal hereof is
paid or duly provided for. The interest so payable, and punctually
paid or duly provided for, on any Interest Payment Date will, as
provided in such Indenture, be paid to the person in whose name this
Series C Note (or one or more Predecessor Notes) is registered at the
close of business on the Regular Record Date for such interest, which
shall be the January 15, April 15, July 15 or October 15 (whether or
not a Business Day), as the case may be, next preceding such Interest
Payment Date. Interest shall be computed on the basis of a 360-day
year of twelve 30-day months. Any such interest not so punctually
paid or duly provided for shall forthwith cease to be payable to the
Holder on such Regular Record Date, and such defaulted interest, and
(to the extent lawful) interest on such defaulted interest at the rate
borne by the Series C Notes, may be paid to the person in whose name
this Series C Note (or one or more Predecessor Notes) is registered at
the close of business on a Special Record Date for the payment of such
Defaulted Interest to be fixed by the Trustee, notice whereof shall be
given to Holders of Series C Notes not less than ten days prior to
such Special Record Date, or may be paid at any time in any other
lawful manner not inconsistent with the requirements of any securities
exchange on which the Series C Notes may be listed, and upon such
notice as may be required by such exchange, all as more fully provided
in said Indenture. Payment of the principal of (and premium, if any)
and interest on this Series C Note will be made at the office or
agency of the Company maintained for that purpose in the City of
Chicago, or at such other office or agency of the Company as may be
maintained for such purpose, in such coin or currency of the United
States of America as at the time of payment is legal tender for
payment of public and private debts; provided, however, that payment
of interest (a) may be made at the option of the Company by check
mailed to the address of the person entitled thereto as such address
shall appear on the Note Register or (b) by wire transfer of
immediately available funds to the account of any Holder in whose name
not less than $100,000 principal amount of Series C Notes is
registered on the Note Register as previously designated by such
person.
Reference is hereby made to the further provisions of
this Series C Note set forth on the reverse hereof, which further
provisions shall for all purposes have the same effect as if set forth
at this place.
Unless the certificate of authentication hereon has
been duly executed by the Trustee referred to on the reverse hereof by
manual signature, this Series C Note shall not be entitled to any
benefit under the Indenture, or be valid or obligatory for any
purpose.
IN WITNESS WHEREOF, the Company has caused this
instrument to be duly executed under its corporate seal.
MARKS BROS. JEWELERS, INC.
By _________________________________
Attest:
________________
Authorized Signature"
-4-
<PAGE> 9
"Section 207. Form of Reverse of Series C Security.
This Series C Note is one of a duly authorized issue of
securities of the Company designated as its Series C Senior
Subordinated Notes due 2004 (herein called the "Series C Notes"),
limited, together with the duly authorized issue of securities of the
Company designated as its Series A Senior Subordinated Notes due 2004
(the "Series A Securities"; and, together with the Series C Notes, the
"Series A Notes") (except as otherwise provided in the Indenture
referred to below) in aggregate principal amount to $12,000,000, which
may be issued under an indenture (herein called the "Indenture") dated
as of April 15, 1996 between the Company and Norwest Bank Minneapolis,
National Association, as trustee (herein called the "Trustee," which
term includes any successor trustee under the Indenture), to which
Indenture and all indentures supplemental thereto reference is hereby
made for a statement of the respective rights, limitations of rights,
duties, obligations and immunities thereunder of the Company, the
Trustee and the Holders of the Series A Notes, and of the terms upon
which the Series A Notes are, and are to be, authenticated and
delivered. The Indenture also governs the terms of two duly
authorized issues of securities of the Company designated as its
Series B Senior Subordinated Notes due 2004 (the "Series B
Securities") and its Series D Senior Subordinated Notes due 2004 (the
"Series D Securities; and, together with the Series B Securities, the
"Series B Notes") limited in aggregate principal amount to $8,000,000.
The Series A Notes and Series B Notes are sometimes herein
collectively referred to as the "Notes."
The Series C Notes are, to the extent and in the manner
provided in the Indenture, subordinate and subject in right of payment
to the prior payment in full of all Senior Indebtedness of the
Company, whether outstanding on the date of the Indenture or
thereafter created, incurred, assumed or guaranteed. Each Holder of
this Series C Note, by accepting the same, (a) agrees to and shall be
bound by the provisions of Article Fourteen of the Indenture, (b)
authorizes and directs the Trustee on his behalf to take such action
as may be necessary or appropriate to effectuate the subordination as
provided in the Indenture and (c) appoints the Trustee his
attorney-in-fact for such purpose.
Subject to the provisions of Article Fourteen of the
Indenture, the Series A Notes are subject to redemption upon not less
than 30 nor more than 60 days' notice, in amounts of $1,000 or an
integral multiple of $1,000 (a) at any time on or after July 31, 2001,
as a whole or in part, at the election of the Company and (b) in part
on July 31, 2001 and on each October 31, January 31, April 30 and July
31 thereafter to and including July 31, 2004 for the Sinking Fund
provided for in the Indenture upon payment of the Redemption Price,
which shall consist of (i) 100% of the principal amount of the Series
C Notes so redeemed in case of a redemption for said Sinking Fund or
the applicable percentage of the principal amount of the Series C
Notes so redeemed set forth below in the case of any other such
redemption:
If redeemed during the period set forth below,
<TABLE>
<CAPTION>
PERIOD PERCENTAGE
------ ----------
<S> <C>
July 31, 2001 - July 30, 2002 . . . . . . . . . . . . 106.00%
July 31, 2002 - July 30, 2003 . . . . . . . . . . . . 105.00%
July 31, 2003 - July 30, 2004 . . . . . . . . . . . . 104.00%
July 31, 2004 and thereafter . . . . . . . . . . . . . 100.00%
</TABLE>
plus, in each case, (ii) any interest accrued on the Series C Notes so
redeemed to the Redemption Date.
In the case of any redemption of Series C Notes, interest
installments whose Stated Maturity is on or prior to the Redemption
Date will be payable to the Holders of such Series C Notes, or one or
more Predecessor Notes, of record at the close of business on the
relevant Regular Record Date referred to on the face hereof. Series C
Notes (or portions thereof) for whose redemption and payment
provision is made in accordance with the Indenture shall cease to bear
interest from and after the Redemption Date.
In the event of redemption of this Series C Note in part only,
a new Series C Note or Series C Notes for the unredeemed portion
hereof shall be issued in the name of the Holder hereof upon the
cancellation hereof.
-5-
<PAGE> 10
If an Event of Default shall occur and be continuing, the
principal of all the Series C Notes may be declared due and payable in
the manner and with the effect provided in the Indenture.
The Indenture contains provisions for defeasance at any time
of (a) the entire indebtedness of the Company on this Series C Note
and (b) certain restrictive covenants and the related Defaults and
Events of Default, upon compliance by the Company with certain
conditions set forth therein, which provisions apply to this Series C
Note.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders under the
Indenture at any time by the Company and the Trustee with the consent
of the Holders of not less than a majority in principal amount of the
Outstanding Notes of each series which is affected by the modification
or amendment (voting, in the case of both series of Notes being
affected substantially identically, as one class, in which case such
majority shall include the Holder or Holders of the Institutional
Series B Notes). The Indenture also contains provisions permitting
the Holders of not less than a majority in principal amount of the
Outstanding Notes of each series affected (voting, in the case of both
series of Notes being affected substantially identically, as one
class, in which case such majority shall include the Holder or Holders
of the Institutional Series B Notes), on behalf of the Holders of such
series of Notes, to waive compliance by the Company with certain
provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by or on
behalf of the Holder of this Series C Note shall be conclusive and
binding upon such Holder and upon all future Holders of this Series C
Note and of any Series C Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof whether or not
notation of such consent or waiver is made upon this Series C Note.
No reference herein to the Indenture and no provision of this
Series C Note or of the Indenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the
principal of (and premium, if any) and interest on this Series C Note
at the times, place and rate, and in the coin or currency, herein
prescribed.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Series C Note is
registerable on the Note Register of the Company, upon surrender of
this Series C Note for registration of transfer at the office or
agency of the Company maintained for such purpose in Chicago, duly
endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Note Registrar duly executed
by, the Holder hereof or his attorney duly authorized in writing, and
thereupon one or more new Series C Notes, of authorized denominations
and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
The Series C Notes are issuable only in registered form
without coupons in denominations of $1,000 and any integral multiple
thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Series C Notes are exchangeable for
a like aggregate principal amount of Series C Notes of a different
authorized denomination, as requested by the Holder surrendering the
same.
No service charge shall be made for any registration of
transfer or exchange of Series C Notes, but the Company may require
payment of a sum sufficient to pay all documentary, stamp or similar
issue or transfer taxes or other governmental charges payable in
connection therewith.
Prior to the time of due presentment of this Series C Note for
registration of transfer, the Company, the Trustee and any agent of
the Company or the Trustee may treat the person in whose name this
Series C Note is registered as the owner hereof for all purposes,
whether or not this Series C Note be overdue, and neither the Company,
the Trustee nor any agent shall be affected by notice to the contrary.
All terms not otherwise defined herein shall have the meanings
assigned to them in the Indenture.
This Series C Note shall be governed by and construed in
accordance with the laws of the State of Illinois, without regard to
the conflict-of-laws rules thereof."
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<PAGE> 11
"Section 208. Form of Face of Series D Security.
THIS NOTE IS ISSUED WITH "ORIGINAL ISSUE DISCOUNT." THIS NOTE WAS
ISSUED ON JULY ___, 1996 FOR AN ISSUE PRICE OF $___________. ASSUMING
THAT THE COMPANY DOES NOT EXERCISE ITS RIGHT TO ISSUE ADDITIONAL NOTES
IN LIEU OF CASH INTEREST PAYMENTS AT EACH OPPORTUNITY, THE TOTAL
AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $___________ FOR EACH $1,000
PRINCIPAL AMOUNT, AND THE YIELD TO MATURITY ON THE ISSUE DATE IS
____%, COMPOUNDED SEMI-ANNUALLY.
MARKS BROS. JEWELERS, INC.
Series D Senior Subordinated Note due 2004
No. _______ $_____________
CUSIP 570698 AE 0
Marks Bros. Jewelers, Inc., a Delaware corporation
(herein called the "Company," which term includes any successor person
under the Indenture hereinafter referred to), for value received,
hereby promises to pay to _________ or registered assigns, the
principal sum of _________ Dollars on October 31, 2004 at the office
or agency of the Company referred to below, and to pay interest
thereon (a) at the rate of 15.0% per annum, payable in cash (the "Cash
Interest"), plus, for years or portions thereof commencing on or after
May 1, 1998, (b) additional interest (the "Additional Interest")
initially at the rate of 1.0% per annum, with the rate of such
Additional Interest to increase in 1.0% per annum increments per each
subsequent year commencing May 1, 1999, such Cash Interest and
Additional Interest to be paid on July 31, 1996 and quarterly
thereafter on October 31, January 31, April 30 and July 31 in each
year, from the Issue Date, or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, until the
principal hereof is paid or duly provided for.
The Company may, at its option and in its sole
discretion, in lieu of the payment in whole or in part of the
Additional Interest in cash, pay such Additional Interest through the
issuance of additional Series D Notes ("Secondary Notes") in a
principal amount equal to the amount of such Additional Interest,
rounded to the nearest whole dollar. The Company shall notify the
Trustee or an authenticating agent of such election not less than 10
nor more than 45 days prior to the Regular Record Date for an Interest
Payment Date on which Secondary Notes will be issued. On such
Interest Payment Date the Trustee or authenticating agent shall
authenticate Secondary Notes for original issuance to the Holders of
Series B Notes on the preceding Regular Record Date, as shown by the
records of the Note Registrar, in the amount required to pay such
Additional Interest. Notwithstanding any other provision of this
paragraph or such Indenture to the contrary, the Company shall pay
cash in lieu of issuing Secondary Notes in any denomination of less
than $1,000 (which shall be determined with respect to the aggregate
amount of Series B Notes held by each Holder as shown by the records
of the Note Registrar) unless the Company is prohibited from making
such payments pursuant to Article Fourteen of such Indenture.
Any such Secondary Notes shall be governed by the
Indenture and shall be subject to the same terms as this Series D Note
(except, as the case may be, with respect to the title, issuance date
and aggregate principal amount). The term "Series B Notes" shall
include the Secondary Notes that may be issued under such Indenture.
Interest payable pursuant to this Series D Note, and
punctually paid or duly provided for, on any Interest Payment Date
will, as provided in such Indenture, be paid to the person in whose
name this Series D Note (or one or more Predecessor Notes) is
registered at the close of business on the Regular Record Date for
such interest, which shall be the January 15, April 15, July 15 or
October 15 (whether or not a Business Day), as the case may be, next
preceding such Interest Payment Date. Interest shall be computed on
the basis of a 360-day year of twelve 30-day months. Any such
interest not so punctually paid or duly provided for shall forthwith
cease to be payable to the Holder on such Regular Record Date, and
such defaulted interest, and (to the extent lawful) interest on such
defaulted interest at the rate borne by the Series D Notes, may be
paid to the person in whose name this Series D Note (or one or more
Predecessor Notes) is registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest to be fixed by
the Trustee, notice whereof shall be given to Holders of Series D
Notes not less than ten days prior to such Special Record Date, or may
be paid at any time in any other
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<PAGE> 12
lawful manner not inconsistent with the requirements of any securities
exchange on which the Series D Notes may be listed, and upon such
notice as may be required by such exchange, all as more fully provided
in said Indenture. Payment of the principal of (and premium, if any)
and interest on this Series D Note will be made at the office or
agency of the Company maintained for that purpose in the City of
Chicago, or at such other office or agency of the Company as may be
maintained for such purpose, in such coin or currency of the United
States of America as at the time of payment is legal tender for
payment of public and private debts; provided, however, that payment
of interest shall be made by the Company by wire transfer of
immediately available funds to the account of any Holder in whose name
not less than $100,000 principal amount of Series D Notes is
registered on the Note Register as previously designated by such
person.
Reference is hereby made to the further provisions of
this Series D Note set forth on the reverse hereof, which further
provisions shall for all purposes have the same effect as if set forth
at this place.
Unless the certificate of authentication hereon has
been duly executed by the Trustee referred to on the reverse hereof by
manual signature, this Series D Note shall not be entitled to any
benefit under the Indenture, or be valid or obligatory for any
purpose.
IN WITNESS WHEREOF, the Company has caused this
instrument to be duly executed under its corporate seal.
MARKS BROS. JEWELERS, INC.
By ____________________________
Attest:
________________
Authorized Signature"
"Section 209. Form of Reverse of Series D Security.
This Series D Note is one of a duly authorized issue of
securities of the Company designated as its Series D Senior
Subordinated Notes due 2004 (herein called the "Series D Notes"),
limited, together with the duly authorized issue of securities of the
Company designated as its Series B Senior Subordinated Notes due 2004
(the "Series B Securities"; and, together with the Series D Notes, the
"Series B Notes") (except as otherwise provided in the Indenture
referred to below) in aggregate principal amount to $8,000,000, which
may be issued under an indenture (herein called the "Indenture") dated
as of April 15, 1996 between the Company and Norwest Bank Minnesota,
National Association, as trustee (herein called the "Trustee," which
term includes any successor trustee under the Indenture), to which
Indenture and all indentures supplemental thereto reference is hereby
made for a statement of the respective rights, limitations of rights,
duties, obligations and immunities thereunder of the Company, the
Trustee and the Holders of the Series B Notes, and of the terms upon
which the Notes are, and are to be, authenticated and delivered. The
Indenture also governs the terms of two duly authorized issues of
securities of the Company designated as its Series A Senior
Subordinated Notes due 2004 (the "Series A Securities") and its Series
C Senior Subordinated Notes due 2004 (the "Series C Securities; and,
together with the Series A Securities, the "Series A Notes") limited
in aggregate principal amount to $12,000,000. The Series A Notes and
Series B Notes are sometimes herein collectively referred to as the
"Notes."
The Series D Notes are, to the extent and in the manner
provided in the Indenture, subordinate and subject in right of payment
to the prior payment in full of all Senior Indebtedness of the
Company, whether outstanding on the date of the Indenture or
thereafter created, incurred, assumed or guaranteed. Each Holder of
this Series D Note, by accepting the same, (a) agrees to and shall be
bound by the provisions of Article Fourteen of the Indenture, (b)
authorizes and directs the Trustee on his behalf to take such action
as may be necessary or appropriate to effectuate the subordination as
provided in the Indenture and (c) appoints the Trustee his
attorney-in-fact for such purpose.
Subject to the provisions of Article Fourteen of the
Indenture, the Series B Notes are subject to redemption upon not less
than 30 nor more than 60 days' notice, in amounts of $1,000 or an
integral multiple of
-8-
<PAGE> 13
$1,000 (a) at any time on or after the Issue Date, as a whole or in
part, at the election of the Company and (b) in part on July 31, 2001
and on each October 31, January 31, April 30 and July 31 thereafter to
and including July 31, 2004 for the Sinking Fund provided for in the
Indenture upon payment of the Redemption Price, which shall consist of
(i) 100% of the principal amount of the Notes so redeemed in case of a
redemption for said Sinking Fund or the applicable percentage of the
principal amount of the Notes so redeemed set forth below in the case
of any other such redemption:
If redeemed during the period set forth below,
<TABLE>
<CAPTION>
PERIOD PERCENTAGE
------ ----------
<S> <C>
July 31, 1996 - July 30, 1997 . . . . . . . . . . . . 112%
July 31, 1997 - July 30, 1998 . . . . . . . . . . . . 112%
July 31, 1998 - July 30, 1999 . . . . . . . . . . . . 110%
July 31, 1999 - July 30, 2000 . . . . . . . . . . . . 110%
July 31, 2000 - July 30, 2001 . . . . . . . . . . . . 109%
July 31, 2001 - July 30, 2002 . . . . . . . . . . . . 108%
July 31, 2002 - July 30, 2003 . . . . . . . . . . . . 107%
July 31, 2003 - July 30, 2004 . . . . . . . . . . . . 106%
July 31, 2004 and thereafter . . . . . . . . . . . . . 105%
</TABLE>
plus, in each case, (ii) any interest accrued on the Series D Notes so
redeemed to the Redemption Date (which interest so accrued shall be
paid solely by cash).
In the case of any redemption of Series D Notes, interest
installments whose Stated Maturity is on or prior to the Redemption
Date will be payable to the Holders of such Series D Notes, or one or
more Predecessor Notes, of record at the close of business on the
relevant Regular Record Date referred to on the face hereof. Notes
(or portions thereof) for whose redemption and payment provision is
made in accordance with the Indenture shall cease to bear interest
from and after the Redemption Date.
In the event of redemption of this Series D Note in part only,
a new Series D Note or Series D Notes for the unredeemed portion
hereof shall be issued in the name of the Holder hereof upon the
cancellation hereof.
If an Event of Default shall occur and be continuing, the
principal of all the Series D Notes may be declared due and payable in
the manner and with the effect provided in the Indenture.
The Indenture contains provisions for defeasance at any time
of (a) the entire indebtedness of the Company on this Series D Note
and (b) certain restrictive covenants and the related Defaults and
Events of Default, upon compliance by the Company with certain
conditions set forth therein, which provisions apply to this Series D
Note.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders under the
Indenture at any time by the Company and the Trustee with the consent
of the Holders of not less than a majority in principal amount of the
Outstanding Notes of each series which is affected by the modification
or amendment (voting, in the case of both series of Notes being
affected substantially identically, as one class, in which case such
majority shall include the Holder or Holders of the Institutional
Series B Notes). The Indenture also contains provisions permitting
the Holders of not less than a majority in principal amount of the
Outstanding Notes of each series affected (voting, in the case of both
series of Notes being affected substantially identically, as one
class, in which case such majority shall include the Holder or Holders
of the Institutional Series B Notes), on behalf of the Holders of such
series of Notes, to waive compliance by the Company with certain
provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by or on
behalf of the Holder of this Series D Note shall be conclusive and
binding upon such Holder and upon all future Holders of this Series D
Note and of any Series D Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof whether or not
notation of such consent or waiver is made upon this Series D Note.
-9-
<PAGE> 14
No reference herein to the Indenture and no provision of this
Series D Note or of the Indenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the
principal of (and premium, if any) and interest on this Series D Note
at the times, place and rate, and in the coin or currency, herein
prescribed.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Series D Note is
registerable on the Note Register of the Company, upon surrender of
this Series D Note for registration of transfer at the office or
agency of the Company maintained for such purpose in Chicago, duly
endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Note Registrar duly executed
by, the Holder hereof or his attorney duly authorized in writing, and
thereupon one or more new Series D Notes, of authorized denominations
and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
The Series D Notes are issuable only in registered form
without coupons in denominations of $1,000 and any integral multiple
thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Series D Notes are exchangeable for
a like aggregate principal amount of Series D Notes of a different
authorized denomination, as requested by the Holder surrendering the
same.
No service charge shall be made for any registration of
transfer or exchange of Series D Notes, but the Company may require
payment of a sum sufficient to pay all documentary, stamp or similar
issue or transfer taxes or other governmental charges payable in
connection therewith.
Prior to the time of due presentment of this Series D Note for
registration of transfer, the Company, the Trustee and any agent of
the Company or the Trustee may treat the person in whose name this
Series D Note is registered as the owner hereof for all purposes,
whether or not this Series D Note be overdue, and neither the Company,
the Trustee nor any agent shall be affected by notice to the contrary.
All terms not otherwise defined herein shall have the meanings
assigned to them in the Indenture.
This Series D Note shall be governed by and construed in
accordance with the laws of the State of Illinois, without regard to
the conflict-of-laws rules thereof."
SECTION 1.03. Amendment of Section 301. Section 301 of the
Original Indenture is hereby amended by striking the first four paragraphs
thereof and replacing the following therefor:
"The aggregate principal amount of Notes which may be
authenticated and delivered under this Indenture is limited to
$20,000,000, of which $12,000,000 shall be authenticated and delivered
as Series A Notes and $8,000,000 shall be authenticated and delivered
as Series B Notes, and except for Notes authenticated and delivered
upon registration of transfer of, or in exchange for, or in lieu of,
other Notes pursuant to Section 303, 304, 305, 306, 906 or 1108, and
Series B Securities and Series D Securities delivered in payment of
Additional Interest as set forth below.
The Series A Securities shall be known and designated as the
"Series A Senior Subordinated Notes due 2004" of the Company, and the
Series C Securities shall be known and designated as the "Series C
Senior Subordinated Notes due 2004" of the Company. The Stated
Maturity of the Series A Notes shall be October 31, 2004, and they
shall bear interest at the rate of 12.15% per annum from the Issue
Date, or from the most recent Interest Payment Date to which interest
has been paid or duly provided for, payable on July 31, 1996 and
quarterly thereafter on October 31, January 31, April 30 and July 31
in each year, until the principal hereof is paid or duly provided for.
The Series B Securities shall be known and designated as the
"Series B Senior Subordinated Notes due 2004" of the Company, and the
Series D Securities shall be known and
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<PAGE> 15
designated as the "Series D Senior Subordinated Notes due 2004" of the
Company. The Stated Maturity of the Series B Notes shall be October
31, 2004, and they shall bear interest at the rate of (a) 15.0% per
annum, payable in cash (the "Cash Interest"), plus, for years or
portions thereof commencing on or after May 1, 1998, (b) additional
interest (the "Additional Interest") initially at the rate of 1.0% per
annum, with the rate of such Additional Interest to increase in 1.0%
per annum increments per each subsequent year commencing May 1, 1999,
such Cash Interest and Additional Interest to be paid on July 31, 1996
and quarterly thereafter on October 31, January 31, April 30 and July
31 in each year, from the Issue Date, or from the most recent Interest
Payment Date to which interest has been paid or duly provided for,
until the principal hereof is paid or duly provided for.
The Company may, at its option and in its sole discretion, (i)
in lieu of the payment in whole or in part of the Additional Interest
with respect to Series B Securities in cash, pay such Additional
Interest through the issuance of additional Series B Securities, and
(ii) in lieu of the payment in whole or in part of the Additional
Interest with respect to Series D Securities in cash, pay such
Additional Interest through the issuance of additional Series D
Securities (such Series B Securities and Series D Securities issued as
Additional Interest are herein collectively referred to as the
"Secondary Notes"), in each case in a principal amount equal to the
amount of such Additional Interest, rounded to the nearest whole
dollar. The Company shall notify the Trustee or an authenticating
agent of such election not less than 10 nor more than 45 days prior to
the Regular Record Date for an Interest Payment Date on which
Secondary Notes will be issued. On such Interest Payment Date the
Trustee or authenticating agent shall authenticate Secondary Notes for
original issuance to the Holders of Notes on the preceding Regular
Record Date, as shown by the records of the Note Registrar, in the
amount required to pay such Additional Interest. Notwithstanding any
other provision of this Indenture to the contrary, the Company shall
pay cash in lieu of issuing Secondary Notes in any denomination of
less than $1,000 (which shall be determined with respect to the
aggregate amount of Notes held by each Holder as shown by the records
of the Note Registrar) unless the Company is prohibited from making
such payments pursuant to Article Fourteen of this Indenture."
SECTION 1.04. Addition of Section 312. The Original
Indenture is hereby amended to add the following Section 312 immediately
following Section 311:
"Section 312. Effective Registration.
In the event that the Company has an Effective Registration,
the Company shall notify the Trustee within three (3) days after the
Effective Date. If the Effective Registration involves a Senior Notes
Shelf Registration, the Company shall cause to be delivered to the
Trustee certificates for the Series A Securities and Series B
Securities without legends and the Trustee shall authenticate and
deliver certificated Series A Securities and Series B Securities
without legends to Holders presenting their certificated Series A
Securities or Series B Securities, respectively, for exchange, or to
transferees of the Series A Securities or Series B Securities,
respectively, covered by the Senior Notes Shelf Registration. If the
Effective Registration is with respect to a Registered Exchange Offer
for the Series A Securities, the Trustee shall notify the Holders of
receipt of such notice and, after receipt of a written order of the
Company (signed as specified in Section 303 hereof) for the
authentication and delivery of Series C Securities and a properly
completed letter of transmittal or other requested documents from a
Holder as specified in the exchange offer documents, shall exchange
such Holder's Series A Securities for Series C Securities upon the
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<PAGE> 16
terms set forth in the exchange offer documents. If the Effective
Registration is with respect to a Registered Exchange Offer for the
Series B Securities, the Trustee shall notify the Holders of receipt
of such notice and, after receipt of a written order of the Company
(signed as specified in Section 303 hereof) for the authentication and
delivery of Series D Securities and a properly completed letter of
transmittal or other requested documents from a Holder as specified in
the exchange offer documents, shall exchange such Holder's Series B
Securities for Series D Securities upon the terms set forth in the
exchange offer documents."
SECTION 1.05. Addition of Section 612. The Original
Indenture is hereby amended to add the following Section 612 immediately
following Section 611:
"Section 612. Preferential Collection of Claims Against
Company.
The Trustee shall comply with TIA Section 311(a), excluding
any creditor relationship listed in TIA Section 311(b). A Trustee who
has resigned or been removed shall be subject to TIA Section 311(a) to
the extent indicated therein."
SECTION 1.06. Amendment of Section 702. Section 702 of the
Original Indenture is hereby amended by adding the following sentence and
paragraph at the end thereof:
"The Trustee also shall comply with TIA Section 313(b).
A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock
exchange upon which any series of Notes are listed, with the
Commission and also with the Company. The Company will notify the
Trustee when any series of Notes are listed on any stock exchange."
SECTION 1.07. Addition of Section 704. The Original
Indenture is hereby amended to add the following Section 704 immediately
following Section 703.
"Section 704. Preservation of Information; Communication to
Holders.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the
names and addresses of Holders. If the Trustee is not the Note
Registrar, the Company shall promptly furnish to the Trustee on or
before each semi-annual interest payment date and at such other times
as the Trustee may request in writing a list in such form and as of
such date as the Trustee may reasonably require of the names and
addresses of the Holders.
Holders may communicate pursuant to TIA Section 312(b) with
other Holders with respect to their rights under this Indenture or the
Notes."
-12-
<PAGE> 17
ARTICLE TWO
THE TRUSTEE
SECTION 2.01. Trustee Not Responsible for Validity or
Recitals. The Trustee shall not be responsible in any manner whatsoever for or
in respect of the validity or sufficiency of this First Supplemental Indenture
or the due execution hereof by the Company, or for or in respect of the
recitals and statements contained herein, all of which recitals and statements
are made solely by the Company.
SECTION 2.02. Duties, Responsibilities and Liabilities of
Trustee. Except as herein otherwise expressly provided, no duties,
responsibilities or liabilities are assumed, or shall be construed to be
assumed, by the Trustee by reason of this First Supplemental Indenture other
than as set forth in the Original Indenture; and this First Supplemental
Indenture is executed and accepted on behalf of the Trustee subject to all the
terms and conditions set forth in the Original Indenture as fully to all
intents as if the same were herein set forth at length.
ARTICLE THREE
MISCELLANEOUS PROVISIONS
SECTION 3.01. Provisions of Original Indenture Deemed
Incorporated. Except as herein otherwise expressly provided, all of the
provisions, definitions, terms and conditions of the Original Indenture shall
be deemed to be incorporated in, and made a part of, this First Supplemental
Indenture; the Original Indenture is in all respects hereby ratified and
confirmed; and the Original Indenture and this First Supplemental Indenture
shall be read, taken and construed as one and the same instrument.
SECTION 3.02. Benefits Restricted to Parties and Holders of
Notes. Nothing in this First Supplemental Indenture is intended, or shall be
construed, to give to any person or corporation other than the parties hereto
and the Holders of Notes issued and to be issued under the Indenture any legal
or equitable right, remedy or claim under or in respect of this First
Supplemental Indenture, or under any covenant, condition or provision herein
contained, all the covenants, conditions and provisions of this First
Supplemental Indenture being intended to be, and being, for the sole and
exclusive benefit of the parties hereto and of the Holders of Notes issued and
to be issued under the Indenture.
SECTION 3.03. Successors and Assigns of Company. All
covenants and agreements in this First Supplemental Indenture by the Company
shall bind and inure to the benefit of its successors and assigns, whether so
expressed or not.
SECTION 3.04. Headings and Table of Contents. Article and
Section headings herein, the Table of Contents and the Reconciliation and Tie
Between Trust Indenture Act of 1939 and Indenture, dated as of April 15, 1996,
are inserted for convenience of reference only and shall not be deemed to be a
part hereof.
SECTION 3.05. Counterparts. This First Supplemental
Indenture may be executed in any number of counterparts, each of which when so
executed shall be deemed to be an original; but all such counterparts shall
together constitute but one and the same instrument.
-13-
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have caused this First
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
above written.
MARKS BROS. JEWELERS, INC.
By:________________________________
Name:
Title:
(Corporate Seal)
Attest:
____________________________
Name:
Title:
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Trustee
By:______________________________
Name:
Title:
-14-
<PAGE> 1
EXHIBIT 99.4
MARKS BROS. JEWELERS, INC.
OFFER TO EXCHANGE
ITS
SERIES C SENIOR SUBORDINATED NOTES DUE 2004
FOR ANY AND ALL OF ITS OUTSTANDING
SERIES A SENIOR SUBORDINATED NOTES DUE 2004
AND ITS
SERIES D SENIOR SUBORDINATED NOTES DUE 2004
FOR ANY AND ALL OF IT OUTSTANDING
SERIES B SENIOR SUBORDINATED NOTES DUE 2004
, 1996
To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
We are enclosing herewith an offer by Marks Bros. Jewelers, Inc., a
Delaware corporation (the "Company"), to exchange its (i) Series C Senior
Subordinated Notes due 2004 (the "Series C Notes") for any and all of its
outstanding Series A Senior Subordinated Notes due 2004 (the "Series A Notes"),
and (ii) Series D Senior Subordinated Notes due 2004 (the "Series D Notes," and
collectively with the Series C Notes, the "New Notes") for any and all of its
outstanding Series B Senior Subordinated Notes due 2004 (the "Series B Notes,"
and collectively with the Series A Notes, the "Old Notes"), upon the terms and
subject to the conditions set forth in the accompanying Prospectus, dated May 2,
1996 (the "Prospectus"), and related Letter of Transmittal (which together with
the Prospectus constitutes the "Offer").
The Offer provides a procedure for holders to tender the Old Notes by means
of guaranteed delivery.
The Offer will expire at 5:00 p.m., New York City time, on ,
1996, unless extended (the "Expiration Date"). Tendered Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date, if such Old Notes have not previously been accepted for exchange pursuant
to the Offer.
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "SEC"), New Notes issued pursuant to the Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by holders
thereof (other than any such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act of 1933, as amended (the
"Securities Act") or a "broker" or "dealer" registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of business of
such holder and any beneficial owner and such holder and any beneficial owner
have no arrangement with any person to participate in the distribution of such
New Notes. See "Shearman & Sterling," SEC No-Action Letter (available July 2,
1993), "Morgan Stanley & Co., Inc.," SEC No-Action Letter (available June 5,
1991) and "Exxon Capital Holding Corporation," SEC No-Action Letter (available
May 13, 1988).
The Offer is not conditioned on any minimum principal amount of Old Notes
being tendered except that Old Notes may be tendered only in integral multiples
of $1,000.
Notwithstanding any other term of the Offer, the Company will not be
required to accept for exchange, or exchange New Notes for, any Old Notes not
theretofore accepted for exchange, and may terminate or amend the Offer as
provided herein before the acceptance of such Old Notes, if any of the
conditions described in the Prospectus under "The Exchange Offer -- Conditions
of the Exchange Offer" exist.
20
<PAGE> 2
THE COMPANY RESERVES THE RIGHT NOT TO ACCEPT TENDERED OLD NOTES FROM ANY
TENDERING HOLDER IF THE COMPANY DETERMINES, IN ITS SOLE AND ABSOLUTE DISCRETION,
THAT SUCH ACCEPTANCE COULD RESULT IN A VIOLATION OF APPLICABLE SECURITIES LAWS.
For your information and for forwarding to your clients for whom you hold
Old Notes registered in your name or in the name of your nominee, we are
enclosing the following documents:
1. A Prospectus, dated May 2, 1996.
2. A Letter of Transmittal for your use and for the information of
your clients.
3. A printed form of letter which may be sent to your clients for
whose accounts you hold Old Notes registered in your name or in the name of
your nominee, with space provided for obtaining such clients' instructions
with regard to the Offer.
4. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 of the Internal Revenue Service (included in Letter of
Transmittal, instruction number 8).
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE.
Any inquiries you may have with respect to the Offer may be addressed to,
and additional copies of the enclosed materials may be obtained from the
of the Exchange Agent at the following telephone number: ( )
.
Very truly yours,
MARKS BROS. JEWELERS, INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
AS THE AGENT OF THE COMPANY, THE EXCHANGE AGENT OR ANY OTHER PERSON, OR
AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON
BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE DOCUMENTS
ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN.
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