<PAGE> 1
As filed with the Securities and Exchange Commission on May 17, 1996
REGISTRATION NO. 333-
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
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. [ ]
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(1)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series C Senior
Subordinated Notes $12,000,000 N/A N/A $4,138.00
Due 2004.............
Series D Senior $8,000,000 N/A N/A $2,759.00
Subordinated Notes Due
2004.................
</TABLE>
(1) Pursuant to Rule 457(f)(2) under the Securities Act of 1933, as
amended, the registration fee is calculated with reference to the book
value of the securities to be exchanged, which was $12,000,000 and
$8,000,000, respectively, as of May 7, 1996.
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 . . . . . . . . . . Not Applicable
6. Dilution . . . . . . . . . . . . . . . . . . . . . . Not Applicable
7. Selling Security Holders . . . . . . . . . . . . . . Not Applicable
8. Plan of Distribution . . . . . . . . . . . . . . . . Plan of Distribution
9. Description of Securities to be Registered. . . . . The New 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 May 17, 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
____________________
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 (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
January 31, 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 $17,184,000.
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."
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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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
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<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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Management's Discussion And Analysis Of Financial Condition And Results Of Operations . . . . . 28
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
The Recapitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
The New Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Stock Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Plan Of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
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 149 stores in 24 states at
March 31, 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) (28 stores) and Marks Bros. Jewelers(TM) (4
stores)(in each case, as of March 31, 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 40 new
stores (net of closings) since the beginning of fiscal 1991,
including 15 in fiscal 1995 and three during February and
March 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 (three of which had been opened as
of March 31, 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."
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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 . . . . . . . . . . _____________________ is serving as exchange agent (the "Exchange
Agent") in connection with the Exchange Offer.
</TABLE>
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<PAGE> 11
SUMMARY OF TERMS OF THE NEW 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.
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. 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 January 31, 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
$17,184,000. 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>
JANUARY 31, 1996
----------------------------
ACTUAL PRO FORMA(12)
-------- ----------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................... $ 21,512 $ 16,138
Total assets.............................................................. 87,403 67,533
Total debt................................................................ 107,891 37,184
Stockholders' (deficit) equity............................................ (47,858) 2,979
</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 $17.4 million in a
debt discount (as of January 31, 1996)), as if the Recapitalization had
occurred on January 31, 1996. See Use of Proceeds, "The Recapitalization"
and "Pro Forma Financial Data."
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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
January 31, 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 $37,184,000, 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 January 31, 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 $17,184,000. 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
- 10 -
<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 other officers,
directors and certain other stockholders beneficially own approximately 47.6%
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 $42.6 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 $1.9
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 January 31, 1996, one of these subordinated notes had a
principal amount outstanding of $22.7 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 __________ __, 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
___________________________________ 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 (______)_____________ or addressed as follows:
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<PAGE> 27
By Overnight Courier: By Facsimile:
By Mail: By Hand:
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 and are estimated in the aggregate to be
approximately $_______. Such expenses include fees and expenses of the
Exchange Agent and Trustee (as defined), accounting and legal fees and printing
costs, among others.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes which are not exchanged for New Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) so long as the Old Notes are eligible for resale pursuant to Rule 144A
under the Securities Act to a person whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A, purchasing for
its own account or for the account of a qualified institutional buyer to whom
notice is given that the resale, pledge or other transfer is being made in
reliance on Rule 144A, (iii) in an offshore transaction in accordance with
Regulation S under the Securities Act, but only in the case of a transfer that
is effected by the delivery to the transferee of Old Notes registered in its
name (or its nominee's name) on the books maintained by the registrar of the
Old Notes, (iv) pursuant to an exemption from registration in accordance with
Rule 144 (if available) or Rule 145 under the Securities Act, (v) in reliance
on another exemption from the registration requirements of the Securities Act,
but only in the case of a transfer that is effected by the delivery to the
transferee of Old Notes registered in its name (or its nominee's name) on the
books maintained by the registrar of the Old Notes, and subject to the receipt
by the registrar or co-registrar of a certification of the transferor and an
opinion (satisfactory to the Company) of counsel (satisfactory to the Company)
to the effect that such transfer is in compliance with the Securities Act, or
(vi) pursuant to an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any state of
the United States. Following the Consummation of the Exchange Offer, holders
of Old Notes will have no further rights of registration or exchange under the
Placement Agreement or the Notes Agreement.
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<PAGE> 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 and has not been listed for a full fiscal quarter. 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 May 16, 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 May
16, 1996, the closing bid price of the Company's Common Stock as reported by
the Nasdaq National Market was $22 per share.
As of May 15, 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 January 31, 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>
JANUARY 31, 1996
----------------------
ACTUAL PRO FORMA
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of long-term debt:
Old revolver loan..................................................... $ 2,119 $ --
Senior accreting notes-current........................................ 1,908 --
Old term loan-current................................................. 7,938 --
New Revolver.......................................................... -- 2,184
Outstanding checks, net............................................... 7,991 7,991
------- -------
Total short-term debt.............................................. $19,956 $10,175
======= =======
Long-term debt:
Old term loan......................................................... $18,662 $ --
Senior accreting notes................................................ 47,819 --
Zero coupon notes..................................................... 5,847 --
Subordinated debt..................................................... 23,598 --
New Term Loan......................................................... -- 15,000
Subordinated Notes.................................................... -- 20,000
------- -------
Total long-term debt............................................... 95,926 35,000
Stockholders' equity:
Preferred stock....................................................... -- --
Common stock and additional paid-in capital(1)........................ 8,796 33,471
Accumulated deficit................................................... (14,673) (30,492)
Treasury stock........................................................ (20,333) --
Deferred ESOP compensation............................................ (21,648) --
------- -------
Total stockholders' (deficit) equity............................... (47,858) 2,979
------- -------
Total capitalization............................................. $48,068 $37,979
======= =======
</TABLE>
- ------------------------------
(1) Excludes (i) 553,770 shares of Common Stock reserved for issuance upon
exercise of options previously granted, (ii) 699,118 shares of Common Stock
reserved for issuance pursuant to stock options granted as of the
consummation of the IPO and (iii) 72,071 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 are unaudited and are derived from condensed pro forma
financial statements. See "Pro Forma Financial Data." 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(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>
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 the unaudited pro forma condensed balance sheet as of January 31,
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 (ii) the restructuring of the ESOP, as if each such
transaction had occurred as of January 31, 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. 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........................................ -- 5,687(2) 5,668
Other......................................................... (44) 174(3) 130
Stock award expense............................................. 461 -- 461
ESOP compensation expense....................................... 590 (590)(4) --
-------- -------- ---------
Income before taxes........................................... 2,048 7,087 9,154
Income tax benefit (provision).................................. 14,924 (2,835)(5) 12,081
-------- -------- ---------
Net income(6)................................................. $ 16,972 $ 4,252 $ 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) 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.
(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.
- 27 -
<PAGE> 34
PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 31, 1996
---------------------------------------
PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS AS ADJUSTED
------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Accounts receivable, net................................... $ 1,169 $ -- $ 1,169
Layaway receivable, net.................................... 1,576 -- 1,576
Merchandise inventories.................................... 55,401 (15,000)(1) 40,401
Other current assets....................................... 714 (155)(2) 559
Deferred income taxes, net................................. 15,691 (7,172)(3) 8,519
Property and equipment, net................................ 12,852 -- 12,852
Other long-term assets..................................... -- 2,457(4) 2,457
------- -------- -------
Total assets.......................................... $87,403 $ (19,870) $ 67,533
======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Old revolver loan........................................ $ 2,119 $ (2,119)(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................ 1,908 (1,908)(5) --
Long-term portion of senior accreting notes.............. 47,819 (47,819)(5) --
Zero coupon notes........................................ 5,847 (5,847)(5) --
Subordinated debt........................................ 23,598 (23,598)(5) --
Other long-term liabilities.............................. 1,170 -- 1,170
Outstanding checks....................................... 7,991 -- 7,991
Other current liabilities................................ 18,209 -- 18,209
New Revolver............................................. -- 2,184(6) 2,184
New Term Loan............................................ -- 15,000(7) 15,000
Subordinated Notes....................................... -- 20,000(8) 20,000
------- -------- -------
Total liabilities..................................... 135,261 (70,707) 64,554
STOCKHOLDERS' EQUITY:
Common Stock and additional paid-in capital.............. 8,796 24,675(9) 33,471
Accumulated deficit...................................... (14,673) (15,819)(10) (30,492)
Treasury stock........................................... (20,333) 20,333(11) --
Deferred ESOP compensation............................... (21,648) 21,648(12) --
------- -------- -------
Total stockholders' (deficit) equity.................. (47,858) 50,837 2,979
------- -------- -------
Total liabilities and stockholders' (deficit)
equity.............................................. $87,403 $ (19,870) $ 67,533
======= ======== =======
</TABLE>
- ------------------------------
(1) To record the reduction in inventory pursuant to the Gold Consignment
Facility.
(2) To reflect the sale of the interest rate cap agreement.
(3) To record the reversal of the tax-effected temporary difference related to
interest accruals for long-term debt.
(4) To record the unamortized issuance costs related to the Recapitalization.
(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 $17.4 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 149 stores in 24 states at March 31, 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 $11.0 million net of tax).
The Company anticipates opening 18 stores in fiscal 1996 (three of
which had been opened as of March 31, 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 two months of fiscal 1996 (i.e., February and March) net
sales increased $4.0 million, or 25.2%, to $19.9 million from $15.9 million in
the first two months of fiscal 1995. Comparable store sales increased by 14.8%
($2.3 million) in the first two months of fiscal 1996, as compared to a 13.3%
increase in the first two months 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
INCREASE
PERCENTAGE OF NET SALES ----------------
YEAR ENDED JANUARY 31, 1995 1996
---------------------------------------- OVER OVER
1994 1995 1996 1994 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 17.1% 22.8%
Cost of Sales (including buying and
occupancy expenses) . . . . . . . . . . . . . . . 59.8 60.2 59.3 17.8 21.0
------ ------ ------
Gross Profit . . . . . . . . . . . . . . . . . . 40.2 39.8 40.7 16.0 25.5
Selling, general and administrative expenses . . . . 31.1 28.8 28.9 8.5 23.2
----- ----- -----
Income from operations . . . . . . . . . . . . . 9.1 11.0 11.8 41.9 31.6
Interest expense, including deferred interest
of $5,467, $6685, and $8,171 respectively . . . 9.8 9.9 9.4 18.8 16.2
Stock award expense . . . . . . . . . . . . . . . . . -- -- 0.4 * *
ESOP compensation expense . . . . . . . . . . . . . . 0.6 0.5 0.5 7.0 7.9
----- ------ ------
Income (loss) from continuing
operations before income taxes . . . . . . . . . . (1.3) 0.5 1.6 * *
Income tax benefit . . . . . . . . . . . . . . . . . -- -- 11.4 * *
------ ----- -----
Gain on disposal of discontinued operations . . . . . 3.0 -- -- * *
------ ----- -----
Income before cumulative effect or
change in accounting for ESOP . . . . . . . . 1.7 0.5 13.0 * *
Cumulative effect of change in accounting
for ESOP . . . . . . . . . . . . . . . . . . . . . (9.4) -- -- * *
------ ---- ------
Net income (loss) . . . . . . . . . . . . . . . . (7.7)% 0.5% 13.0% * *
- -------------------- ====== ==== ======
</TABLE>
* Not meaningful
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 and,
in particular, expects to experience a net loss in the first fiscal quarter of
1996.
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)
APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31,
1994 1994 1994 1994 1995 1995 1995 1996
---- ----- ---- ---- ---- ---- ---- ----
<S> <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
Gross Profit . . . . . 6,968 8,494 8,326 18,672 8,880 11,235 10,724 22,461
Income from
operations . . . . . 370 1,424 1,079 8,839 854 2,803 1,800 9,956
</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 in the past funded these seasonal working capital needs through
borrowings under the Company's revolver and increases in trade payables.
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, three of
which had been opened as of March 31, 1996. As of March 31, 1996, the Company
has entered into leases for 11 new stores and has reached understandings with
respect to four 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.
- 34 -
<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 149 stores
in 24 states at March 31, 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) (28 stores) and Marks Bros.
Jewelers(TM) (4 stores) (in each case, as of March 31, 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) (28
stores) and Marks Bros. Jewelers(TM) (4 stores) (in each case, as of March 31,
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 28 malls,
25 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 set to open in May 1996 in a mall in which the Company already
operates a Whitehall and a Lundstrom store.
INDUSTRY
Total retail sales by jewelry stores in the United States in 1994 were
approximately $16.9 billion, and such sales grew between l989 and l994 at an
annual rate of approximately 3.3%, according to the U.S. Department of
Commerce.
The jewelry market is generally divided into three segments: fine
jewelry, costume jewelry, and guild jewelry. The broad "fine" jewelry market
segment represents a majority of the jewelry market in terms of revenue, and it
includes jewelry made from precious metals and gemstones, as well as finer
watches. Fine jewelry is sold at a range of price points from middle to upper
end, with the upper end consisting of luxury items such as unique design
jewelry items and expensive time pieces. Except for a few designer label
offerings, fine jewelry is generally not marketed under brand names. Costume
- 35 -
<PAGE> 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,
---------------------------------------
NUMBER OF STORES: 1992 1993 1994 1995 1996
---------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Open at beginning of year . . . . . . . . . . . . . . . . . . . . 109 111 113 122 131
Opened during year . . . . . . . . . . . . . . . . . . . . . . . 8 4 11 11 15
Closed during year . . . . . . . . . . . . . . . . . . . . . . . (6) (2) (2) (2) --
--- --- --- --- ----
Open at End of year . . . . . . . . . . . . . . . . . . . . . . . 111 113 122 131 146
=== === === === ===
Net Increase 2 2 9 9 15
</TABLE>
The Company currently plans to open 18 new stores in fiscal 1996
(three of which had been opened as of March 31, 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 four stores in the St. Louis area with a fifth
store planned to be opened in St. Louis in fiscal 1996 and a fourth store 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 28 Lundstrom stores, 25 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 30 of the
Company's stores have jewelers located in the store to provide on-site repair
services to the customer. To enhance customer service, over the next 12 months
the Company is seeking to expand the number of stores with on-site jewelry
repair.
- 38 -
<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.
- 39 -
<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.
- 40 -
<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.
- 41 -
<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 149 stores in 24 states as of March 31, 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 January 31, 1996, the Company had a total of 990 employees,
including 900 store level employees and 90 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
- 43 -
<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.
- 45 -
<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 $42.6 million.
- 46 -
<PAGE> 53
THE NEW 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 "Notes" refer to the New 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)
- 48 -
<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 January 31, 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 $17,438,000. 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
- 51 -
<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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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
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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
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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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<PAGE> 68
dividends, interest or otherwise, except that accrued interest included as
provided in the foregoing clause (ii) may be deducted when paid; and (v) there
shall not be deducted from the aggregate amount of Investments any decrease in
the value thereof.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind. A person shall be deemed to own subject to a Lien any property which
such person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Pari Passu Indebtedness" means any Indebtedness of the Company that
is pari passu in right of payment to the Notes.
"Permitted Investment" means any of the following: (i) Investments by
the Company or any Wholly Owned Restricted Subsidiary of the Company in another
person, if as a result of such Investment such other person is merged or
consolidated with or into, or transfer or conveys all or substantially all of
its assets to the Company or such Wholly Owned Restricted Subsidiary; (ii)
Investments in short-term obligations of, or fully guaranteed by, the United
States of America; (iii) Investments in commercial paper rated "P-1" or better
by Moody's or "A-1" or better by S&P; (iv) Investments in certificates of
deposit issued by and time deposits with commercial banks (whether domestic or
foreign) having capital and surplus in excess of $100,000,000; (v) Investments
in any mutual fund organized under the Investment Company Act of 1940 or money
market fund organized under the laws of the United States of America or any
state thereof which invests only in instruments described in clause (ii), (iii)
or (iv) below; (vi) Investments representing Capital Stock or obligations
issued to the Company or any of its Restricted Subsidiaries in settlement of
claims against any other person by reason of a composition or readjustment of
debt or a reorganization of any debtor of the Company or of such Restricted
Subsidiary; (vii) Investments in Cash Equivalents; (viii) loans and advances to
employees and officers of the Company and its Restricted Subsidiaries made in
compliance with clause (ii) of the second sentence under the covenant
"--Limitations on Transactions with Affiliates" described above; (ix)
Investments by the Company or a Wholly Owned Restricted Subsidiary in the
Capital Stock of a Wholly Owned Restricted Subsidiary; (x) Investments in any
of the Notes; (xi) receivables owing to the Company or any Restricted
Subsidiary created in the ordinary course of business; and (xii) Investments in
any person in addition to that described in clauses (i) through (xi) of this
definition of "Permitted Investments" not to exceed $3,000,000 in the aggregate
at any time outstanding.
"person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any person, any and all
shares, interests, participations or other equivalents (however designated) of
such person's preferred or preference stock whether now outstanding or issued
after the Issue Date, and including, without limitation, all classes and series
of preferred or preference stock of such person.
"Redeemable Capital Stock" means any class or series of Capital Stock
that, either by its terms, by the terms of any security into which it is
convertible or exchangeable or by contract or otherwise, is, or upon the
happening of an event or passage of time would be, required to be redeemed
prior to any Stated Maturity of the Notes or is redeemable at the option of the
holder thereof at any time prior to any Stated Maturity of the Notes, or, at
the option of the holder thereof, is convertible into or exchangeable for debt
securities at any time prior to any Stated Maturity of the Notes.
"Restricted Payment" has the meaning set forth under "--Limitation on
Restricted Payments" covenant above.
"Restricted Subsidiary" means any Subsidiary of the Company other
than an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Corporation and its successors.
"Senior Indebtedness" means the principal of, premium, if any, and
interest on any Indebtedness of the Company, whether outstanding on the Issue
Date or thereafter created, incurred or assumed, unless, in the case of any
particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides
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that such Indebtedness shall not be senior in right of payment to the Notes.
Without limiting the generality of the foregoing, "Senior Indebtedness" shall
also include all obligations of the Company, whether outstanding on the Issue
Date or thereafter created, incurred or assumed, under or in respect of the
Bank Credit Agreement, whether for principal, interest (including interest
accruing after the filing of a petition initiating any proceeding under any
state, federal or foreign bankruptcy laws whether or not allowable in such
proceeding), reimbursement of amounts drawn under letters of credit issued or
arranged for pursuant thereto, obligations owed to the Banks with respect to
Interest Rate Protection Obligations incurred to satisfy the requirements of
the Bank Credit Agreement or otherwise and reimbursement of other amounts,
guarantees in respect thereof, and all charges, fees, indemnifications,
damages, penalties, expenses (including any post-petition expenses in any
state, federal or foreign bankruptcy proceeding) and other amounts or
liabilities payable by the Company or its Restricted Subsidiaries under the
Bank Credit Agreement. Notwithstanding the foregoing, "Senior Indebtedness"
shall not include (a) Indebtedness evidenced by the Notes, (b) Indebtedness
that is expressly subordinate or junior in right of payment to any Indebtedness
of the Company, (c) Indebtedness which, when incurred and without respect to
any election under Section I 1 1 1 (b) of Title 11, United States Code, is by
its terms without recourse to the Company, (d) any repurchase, redemption or
other obligation in respect of Redeemable Capital Stock, (e) to the extent it
might constitute Indebtedness, amounts owing for goods, materials or services
purchased in the ordinary course of business or consisting of trade payables or
other current liabilities (other than any current liabilities owing under the
Bank Credit Agreement or the current portion of any long-term Indebtedness
which would constitute Senior Indebtedness but for the operation of this clause
(e)), (f) to the extent it might constitute Indebtedness, amounts owed by the
Company for compensation to employees or for services rendered to the Company,
(g) to the extent it might constitute Indebtedness, any liability for federal,
state, local or other taxes owed or owing by the Company, (h) Indebtedness of
the Company to a Subsidiary of the Company or any other Affiliate of the
Company or any of such Affiliate's Subsidiaries and (i) that portion of any
Indebtedness which at the time of issuance is issued in violation of the
Indenture.
"series of Notes" or "Notes of any series" shall mean and refer to
Series A Notes and/or Series B Notes and/or Series C Notes and/or Series D
Notes.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which any principal of such Note or such installment of interest is due
and payable, and when used with respect to any other Indebtedness or any
installments of interest thereon, means any date specified in the instrument
governing such Indebtedness as the fixed date on which the principal of such
Indebtedness, or such installment of interest thereon, is due and payable.
"Subordinated Indebtedness" means, with respect to the Company,
Indebtedness of the Company which is expressly subordinated in right of payment
to the Notes pursuant to subordination provisions described in
"--Subordination," as appropriately modified to include the Notes as "Senior
Indebtedness" thereunder.
"Subsidiary" means, with respect to any person, (i) a corporation a
majority of whose Voting Stock is at the time, directly or indirectly, owned by
such person, by one or more Subsidiaries of such person or by such person and
one or more Subsidiaries of such person and (ii) any other person (other than a
corporation), including, without limitation, a joint venture or partnership, in
which such person, one or more Subsidiaries of such person or such person and
one or more Subsidiaries of such person, directly or indirectly, at the date of
determination thereof, has at least a majority ownership interest entitled to
vote in the election of directors, managers or trustees thereof (or other
person performing similar functions). For purposes of this definition, any
directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a
Subsidiary.
"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such by the Company (a) no portion of the Indebtedness or any
other obligation (contingent or otherwise) of which (i) is guaranteed by the
Company or any other Subsidiary of the Company, (ii) is recourse to or
obligates the Company or any other Subsidiary of the Company in any way or
(iii) subjects any property or asset of the Company or any other Subsidiary of
the Company, directly or indirectly, contingently or otherwise, to the
satisfaction thereof, (b) which has no Indebtedness or any other obligation
that, if in default in any respect (including a nonpayment default), would
Permit (upon notice, lapse of time or both) any holder of any other
Indebtedness of the Company or any Restricted Subsidiary to declare a default
on such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity, (c) with which the Company or any other
Subsidiary of the Company has no contract, agreement, arrangement,
understanding or is subject to an obligation of any kind, whether written or
oral, other than a transaction on terms no less favorable to the Company or any
other Subsidiary of the
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Company than those which might be obtained at the time from persons at arm's
length who are not Affiliates of the Company, and (d) with which neither the
Company nor any other Subsidiary of the Company has any obligation (other than
by the terms of the Indenture) (i) to subscribe for additional shares of
Capital Stock or other equity interest therein or (ii) to maintain or preserve
such Subsidiary's financial condition or to cause such Subsidiary to achieve
certain levels of operating results. The Company may designate an Unrestricted
Subsidiary as a Restricted Subsidiary by written notice to the Trustee under
the Indenture; provided however, that the Company shall not be permitted to
designate any Unrestricted Subsidiary as a Restricted Subsidiary unless, after
giving effect to such designation, no Default or Event of Default would have
then occurred or be continuing. A designation of an Unrestricted Subsidiary as
a Restricted Subsidiary may not thereafter be rescinded.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any person (irrespective of whether or not, at the time, stock
of any other class or classes shall have, or might have, voting power by reason
of the happening of any contingency).
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary
of the Company of which 100% of the outstanding Capital Stock is owned by the
Company or another Wholly Owned Restricted Subsidiary of the Company. For
purposes of this definition, any directors' qualifying shares or investments by
foreign nationals mandated by applicable law shall be disregarded in
determining the ownership of a Restricted Subsidiary.
BOOK-ENTRY ONLY SYSTEM
The following information has been furnished by DTC for use in this
Prospectus. The Company does not take any responsibility for its accuracy or
completeness.
DTC will act as securities depository for the Notes. The Notes will
be registered in the name of Cede & Co. (DTC's partnership nominee). One
fully-registered Series C Note and Series D Note will be issued in the
aggregate issuance amount and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds
securities that its participants ("Participants") deposit with DTC. DTC also
facilitates the settlement among Participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities Notes. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations. DTC is owned by a number of its
Direct Participants and by the New York Stock Exchange, Inc., the American
Stock Exchange, Inc., and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others such as securities brokers
and dealers, banks, and trust companies that clear through or maintain a
custodial relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The Rules applicable to DTC and its Participants
are on file with the Commission.
Purchases of the Notes under the DTC system must be made by or through
Direct Participants, which will receive a credit for the Notes on DTC's
records. The ownership interest of each actual purchaser of each Note
("Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Direct or Indirect Participant through
which the Beneficial Owner entered into the transaction. Transfers of
ownership interests in the Notes are to be accomplished by entries made on the
books of Participants acting on behalf of Beneficial Owners. Except as
otherwise provided herein, Beneficial Owners will not receive Notes
representing their ownership interests in the Notes, except in the event that
use of the book-entry system for the Notes is discontinued.
To facilitate subsequent transfers, all Notes deposited by
Participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of the Notes with DTC and their registration in the
name of Cede & Co. effect no change in beneficial ownership. DTC has no
knowledge of the actual Beneficial Owners of the Notes; DTC's records reflect
only the identity of the Direct Participants to whose accounts such Notes are
credited, which may or may not be the Beneficial Owners. The Participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
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<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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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 and Director
Vicky Lau 43 Senior Vice President, Merchandise
Daniel H. Blumenthal 32 Director
Rodney L. Goldstein 44 Director
Samuel B. Guren 49 Director
Norman J. Patinkin(2) 69 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.
All directors were elected pursuant to the terms of the Stockholders
Agreement between the Company and substantially all of its stockholders. This
agreement was terminated upon the completion of the IPO.
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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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 and as a director
since 1990.
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. Daniel H. Blumenthal has served as a director of the Company since
1995. Mr. Blumenthal has been a Managing Director of Willis Stein & Partners,
L.L.C., a private equity investment management company, since 1995. Prior
thereto, he served as Vice President of Continental Illinois Venture
Corporation from 1993 to 1994 and practiced law with the firm of Latham &
Watkins from 1988 to 1993.
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.
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
eight 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, Blumenthal and an outside director who will be added to the Board
comprise Class II, which class will stand for election at the annual meeting of
stockholders to be held in 1998. Messrs. M. Patinkin, Goldstein and Guarnaccia
comprise Class III, which class will stand for election at the annual meeting
of stockholders to be held in 1999.
It is anticipated that two new outside directors will be added to the
Board of Directors shortly, one of whom will replace Mr. Blumenthal, who is
expected to leave the Board upon the election of his replacement. Officers of
the Company serve at the pleasure of the Board of Directors.
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 and Norman J. Patinkin. The
Compensation Committee, which consists of Rodney L. Goldstein, Samuel B. Guren
and Norman J. Patinkin, reviews and recommends the compensation arrangements
for all officers, approves such arrangements for other senior level employees
and administers, and takes such other action as may be required in connection
with certain compensation and incentive plans of the Company (including the
grant of stock options). The Company's Restated By-Laws provide that the
Compensation Committee shall be comprised of directors who are not employees of
the Company.
- 67 -
<PAGE> 74
COMPENSATION OF DIRECTORS
Non-employee directors receive compensation of $2,000 per meeting of
the Board of Directors and $500 per meeting of a committee thereof. Directors
who are officers or employees of the Company receive no compensation for
serving as directors. All directors are reimbursed for out-of-pocket expenses
incurred in connection with attendance at meetings of the Board of Directors
and meetings of committees of the Board of Directors.
The Company recently adopted the 1996 Long-Term Incentive Plan. See
"Management--Stock Plans." Pursuant to this plan, on the date of the closing
of the IPO (or, if later, on the date on which a person is first elected or
begins to serve as a non-employee director) each non- employee director (other
than Messrs. Goldstein, Blumenthal and Guren) will be granted a nonqualified
option to purchase 10,000 shares of Common Stock (a "Directors Option") which
will vest one-third each on the first, second and third anniversaries thereof.
The per share exercise price of such options will be equal to the fair market
value of the Common Stock on the date of grant of such option. Mr. Norman
Patinkin was granted a Directors Option on May 7, 1996, the date of the closing
of the IPO.
EXECUTIVE COMPENSATION
Summary Compensation. The following summary compensation table sets
forth certain information concerning compensation for services rendered in all
capacities awarded to, earned by or paid to the Company's Chief Executive
Officer and the other named executive officers during the year ended January
31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------------------------
SECURITIES
RESTRICTED STOCK UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS AWARDS (1) OPTIONS
--------------------------- ----------- ------ ----- ---------- -------
<S> <C> <C> <C> <C> <C>
Hugh M. Patinkin 1995 $255,000 $191,250 $223,576 228,337
President and Chief
Executive Officer
John R. Desjardins 1995 234,000 175,500 128,001 154,603
Executive Vice
President,
Finance and
Administration,
Treasurer and Secretary
Matthew M. Patinkin 1995 200,000 150,000 102,401 124,634
Executive Vice
President,
Store Operations
Lynn D. Eisenheim 1995 160,000 120,000 -- 69,040
Executive Vice
President,
Merchandising
- -------------------------------
</TABLE>
(1) Represents restricted stock awards (which are the only restricted
shares held by such executive officers) which became no longer subject
to forfeiture upon the consummation of the IPO. The value is
calculated by multiplying an assumed fair market value at January 31,
1996, based upon an independent appraisal at September 28, 1995 (the
date of award) by the number of restricted shares awarded. Dividends
will be payable on the shares if and to the extent paid on shares of
Common Stock generally.
- 68 -
<PAGE> 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.
- 69 -
<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 771,189 shares of Common Stock have been reserved
for issuance under the 1996 Plan, subject to adjustment in the event of a stock
split, stock dividend or other changes in capital structure. No grants may be
made under the 1996 Plan after ten years after its effective date. The 1996
Plan also provides for the automatic grants of stock options to non-employee
directors described above under the heading "--Compensation of Directors."
The purposes of the 1996 Plan are to align the interests of the
Company's stockholders and the recipients of grants under the 1996 Plan by
increasing the proprietary interest of such recipients in the Company's growth
and success and to
- 70 -
<PAGE> 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. See
"Management--Compensation of Directors." Additional grants of incentive stock
options covering a total of 90,091 shares of Common Stock with the same
exercise price and expiration date may be made to other employees or directors
(of which 7,676 options were granted to employees effective as of the
consummation of the IPO).
The Company intends to file a registration statement under the
Securities Act to register all shares of Common Stock issuable pursuant to the
1995 Options and the Company's 1996 Plan.
SEVERANCE AGREEMENTS
The Company has entered into severance agreements with its four
executive officers and 14 of its other management employees which provide for
certain payments after a "change of control." A "change of control" is defined
under these agreements to include (i) an acquisition by a third party
(excluding certain affiliates of the Company) of beneficial ownership of at
least 25% of the outstanding shares of Common Stock, (ii) a change in a
majority of the incumbent Board of Directors and (iii) merger, consolidation or
sale of substantially all of the Company's assets if the Company's shareholders
do not continue to own at least 60% of the equity of the surviving or resulting
entity. Pursuant to these agreements such employees will receive certain
payments and benefits if they terminate employment voluntarily six months after
a "change of control," or earlier if they terminate for "good reason," as
defined in such agreements (such as certain changes in duties, titles,
- 71 -
<PAGE> 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.
- 72 -
<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.
- 73 -
<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 **
Daniel H. Blumenthal . . . . . . . . . . . . . --- ---
John J. Guarnaccia(9) . . . . . . . . . . . . . 19,669 **
Rodney L. Goldstein+(2)(3) . . . . . . . . . . 1,037,672 12.4
Samuel B. Guren+(4) . . . . . . . . . . . . . . 464,437 5.5
Norman J. Patinkin(10) . . . . . . . . . . . . 69,726 **
U.S. Trust Fiduciary Services,
as trustee for the ESOP,
1300 Eye Street, N.W., Suite 1080 East
Washington, D.C. 20005(11) . . . . . . . . . . 843,887 10.1
All executive officers and directors
as a group (10 persons) . . . . . . . . . . 3,125,324 35.4
</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%.
- 74 -
<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) Includes 13,520 shares of Common Stock issuable pursuant to presently
exercisable stock options. Shares beneficially owned by Mr. Guarnaccia
include shares allocated to his account in the ESOP (approximately 6,149
shares) as to which he has voting power.
(10) Norman J. Patinkin's three children own an aggregate of 69,725 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.
(11) 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.
- 76 -
<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.
ORIGINAL ISSUE DISCOUNT ON SERIES D NOTES
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 of
some or all of such original Series D Notes or Additional Series D Notes should
be treated as a disposition of a proportionate amount of such single Series D
Note, (i.e, a propotionate amount of each original series D Note and Additional
Series D Note) with the following rules applied accordingly.
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 received 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
"--Original Issue Discount 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, 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 (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 unreduced by principal payments).
- 77 -
<PAGE> 84
Because Additional Interest may be paid in either cash or by
delivery of additional Series D Notes, the Series D Notes will be treated as
having "original issue discount" equal to the aggregate sum of such Additional
Interest. Therefore, the Additional Interest Rider 82 A 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 Additional 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. Rider 82 B 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. For this purpose, yield to
maturity will be computed at the beginning of every accrual period assuming the
Company elects to pay future Additional Interest in cash or in additional
Series D Notes so as to minimize the yield to maturity, with adjustments to
reflect actual experience.
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
Additional Interest allocable to the accrual period.
Rider 82 C 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 Rider 82 D are 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 discount 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
- 78 -
<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
"gratified stated interest" Series D Notes. 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 Addition Series D Notes, and therefore is
uncertain, the application of the foregoing rule is unclear in the case of the
Series D Note.
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 Nongratifying 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 equal to the difference between the amount realized upon
such sale, exchange or redemption and the holder's adjusted basis in the Note.
Such adjusted basis in the 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 respect of a Note, and reduced (but not
below zero) by any payments of cash on the Note other than payments of
"gratified 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
PLAN OF DISTRIBUTION AND EXCHANGE OFFER
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.
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. 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 $6,897.00
Printing and engraving expenses *
Legal fees and expenses *
Accounting fees and expenses *
Blue Sky fees and expenses (including legal fees and expenses) *
Exchange Agent fees and expenses *
Miscellaneous *
--------------
Total $ *
==============
</TABLE>
- -------------
*To be filed by amendment
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 -- Form of 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 -- Form of Restated By-Laws of the Company (incorporated by reference to Exhibit 3.2 of the Common Stock Registration
Statement)
4.1 -- Form of Stockholders Rights Plan (incorporated by reference to Exhibit 4.1 of the Common Stock Registration
Statement)
4.2 -- Certificate of Designations of Series A Junior Participating Preferred Stock (incorporated by reference to
Exhibit 4.2 of the Common Stock Registration Statement)
4.3 -- Indenture governing the Notes dated as of April 15, 1996 between the Company and Norwest Bank Minnesota, National
Association, as Trustee
4.4 -- Form of Series A Notes (included in Exhibit 4.3 to this Registration Statement)
4.5 -- Form of Series B Notes (included in Exhibit 4.3 to this Registration Statement)
4.6 -- Form of Series C Notes (included in Exhibit 4.3 to this Registration Statement)
4.7 -- Form of Series D Notes (included in Exhibit 4.3 to this Registration Statement)
*5.1 -- Opinion of Sidley & Austin
10.1 -- Form of Second Amended and Restated Registration Agreement (incorporated by reference to Exhibit 10.10 of the
Common Stock Registration Statement)
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 (incorporated by reference to Exhibit 10.7 of the Common Stock
Registration Statement)
*10.8 -- Agreement with Bank One, N.A.
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 (included in the signature page of this Registration Statement)
*25.1 -- Statement of Eligibility of Trustee on Form T-1 of _____________________________ (filed herewith and bound
separately)
*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>
______________________________________________________________
*To be filed by amendment
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 registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in Chicago,
Illinois on May 17, 1996.
MARKS BROS. JEWELERS, INC.
By: /s/ John R. Desjardins
-----------------------------------------------
John R. Desjardins
Executive Vice President,
Finance and Administration
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Marks Bros. Jewelers,
Inc., hereby severally constitute and appoint Hugh M. Patinkin and John R.
Desjardins, and each of them singly, our true and lawful attorneys, with full
power to them and each of them singly, to sign for us in our names in the
capacities indicated below, all pre-effective and post-effective amendments to
this registration statement, including any filings pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, and generally to do all things in
our names and on our behalf in such capacities to enable Marks Bros. Jewelers,
Inc. to comply with the provisions of the Securities Act of 1933, as amended,
and all requirements of Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed on May 17, 1996 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
- --------- --------
<S> <C>
/s/ Hugh M. Patinkin Chairman, President and Chief Executive Officer (principal
- -------------------------------------------- executive officer) and Director
Hugh M. Patinkin
/s/ John R. Desjardins Executive Vice President, Finance and Administration, and
- -------------------------------------------- Treasurer (principal financial and accounting officer) and Director
John R. Desjardins
/s/ Matthew M. Patinkin Director
- --------------------------------------------
Matthew M. Patinkin
/s/ John J. Guarnaccia Director
- --------------------------------------------
John J. Guarnaccia
/s/ Daniel H. Blumenthal Director
- --------------------------------------------
Daniel H. Blumenthal
/s/ Rodney L. Goldstein Director
- --------------------------------------------
Rodney L. Goldstein
/s/ Samuel B. Guren Director
- --------------------------------------------
Samuel B. Guren
/s/ Norman J. Patinkin Director
- -------------------------------------------
Norman J. Patinkin
</TABLE>
II-6
<PAGE> 113
MARKS BROS. JEWELERS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
TWELVE MONTHS ENDED JANUARY 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN E
---------- ------------------------ ----------
COLUMN A BALANCE AT CHARGED TO CHARGED TO COLUMN D BALANCE AT
- ----------------------------------------- BEGINNING COSTS AND OTHER -------- END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTION OF PERIOD
- ----------------------------------------- ---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Twelve months ended January 31, 1994:
Allowance for doubtful accounts........ $ 484 $ 480 -- $ 445(1) $ 519
====== ====== ==== ======
Inventory allowance.................... 840 1,687 -- 1,301 1,226
====== ====== ==== ======
Twelve months ended January 31, 1995:
Allowance for doubtful accounts........ $ 519 $ 615 -- $ 629(1) $ 505
====== ====== ==== ======
Inventory allowance.................... 1,226 1,932 -- 1,594 1,564
====== ====== ==== ======
Twelve months ended January 31, 1996:
Allowance for doubtful accounts........ $ 505 $ 918 -- $ 858(1) $ 565
====== ====== ==== ======
Inventory allowance.................... 1,564 2,045 -- 2,347 1,262
====== ====== ==== ======
</TABLE>
Note:
(1) Uncollectible items written off, less recoveries of items previously written
off.
S-2
<PAGE> 114
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
3.1 -- Form of 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 -- Form of Restated By-Laws of the Company (incorporated by reference to Exhibit 3.2 of the Common Stock Registration
Statement)
4.1 -- Form of Stockholders Rights Plan (incorporated by reference to Exhibit 4.1 of the Common Stock Registration
Statement)
4.2 -- Certificate of Designations of Series A Junior Participating Preferred Stock (incorporated by reference to
Exhibit 4.2 of the Common Stock Registration Statement)
4.3 -- Indenture governing the Notes dated as of April 15, 1996 between the Company and Norwest Bank Minnesota, National
Association, as Trustee
4.4 -- Form of Series A Notes (included in Exhibit 4.3 to this Registration Statement)
4.5 -- Form of Series B Notes (included in Exhibit 4.3 to this Registration Statement)
4.6 -- Form of Series C Notes (included in Exhibit 4.3 to this Registration Statement)
4.7 -- Form of Series D Notes (included in Exhibit 4.3 to this Registration Statement)
*5.1 -- Opinion of Sidley & Austin
10.1 -- Form of Second Amended and Restated Registration Agreement (incorporated by reference to Exhibit 10.10 of the
Common Stock Registration Statement)
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 (incorporated by reference to Exhibit 10.7 of the Common Stock
Registration Statement)
*10.8 -- Agreement with Bank One, N.A.
</TABLE>
II-7
<PAGE> 115
<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 (included in the signature page of this Registration Statement)
*25.1 -- Statement of Eligibility of Trustee on Form T-1 of _____________________________ (filed herewith and bound
separately)
*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>
___________________________________
*To be filed by amendment
II-8
<PAGE> 1
EXHIBIT 4.3
================================================================================
MARKS BROS. JEWELERS, INC.
Issuer
To
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Trustee
_____________________________________
Indenture
Dated as of April 15, 1996
_____________________________________
Series A Senior Subordinated Notes due 2004
Series B Senior Subordinated Notes due 2004
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION . . . . . . . . . 1
SECTION 101. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
"Affiliate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Agent Address" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Average Life to Stated Maturity" . . . . . . . . . . . . . . . . . . . . 2
"Bank Credit Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Banks" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Board of Directors" . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Board Resolution" . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Business Day" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Capital Stock" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Capitalized Lease Obligation" . . . . . . . . . . . . . . . . . . . . . 3
"Cash Equivalents" . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Common Stock" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Company" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Company Request" or "Company Order" . . . . . . . . . . . . . . . . . . 3
"Consignment Fees" . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Consolidated Cash Interest Expense" . . . . . . . . . . . . . . . . . . 3
"Consolidated EBITDA" . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"Consolidated Funded Debt" . . . . . . . . . . . . . . . . . . . . . . . 4
"Consolidated Minimum Store Rent" . . . . . . . . . . . . . . . . . . . . 4
"Consolidated Net Income" . . . . . . . . . . . . . . . . . . . . . . . . 4
"Consolidated Tangible Net Worth" . . . . . . . . . . . . . . . . . . . . 4
"Consolidated Total Assets" . . . . . . . . . . . . . . . . . . . . . . . 5
"Consolidated Total Interest Expense" . . . . . . . . . . . . . . . . . . 5
"Consolidated Total Liabilities" . . . . . . . . . . . . . . . . . . . . 5
"Corporate Trust Office" . . . . . . . . . . . . . . . . . . . . . . . . 5
"Corporation" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Covenant Defeasance" . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Defaulted Interest" . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Defeasance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Designated Senior Indebtedness" . . . . . . . . . . . . . . . . . . . . 5
"Event of Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Exchange Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Federal Bankruptcy Code" . . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
"GAAP" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Guarantee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Holder" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Indebtedness" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Indenture" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Interest Payment Date" . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Institutional Series B Notes" . . . . . . . . . . . . . . . . . . . . . 7
"Investment" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Issue Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Lien" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Maturity" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Moody's" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Non-payment Default" . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Note" and "Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Note Register" and "Note Registrar" . . . . . . . . . . . . . . . . . . 8
"Officers' Certificate" . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Opinion of Counsel" . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Outstanding" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Pari Passu Indebtedness" . . . . . . . . . . . . . . . . . . . . . . . . 9
"Paying Agent" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Payment Blockage Period" . . . . . . . . . . . . . . . . . . . . . . . . 9
"Payment Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Permitted Investment" . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Person" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Predecessor Note" . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Preferred Stock" . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Redeemable Capital Stock" . . . . . . . . . . . . . . . . . . . . . . 10
"Redemption Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Redemption Price" . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Regular Record Date" . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Responsible Officer" . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Restricted Payment" . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Restricted Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . . 10
"S&P" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Securities Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Senior Indebtedness" . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Series A Note" and "Series A Notes" . . . . . . . . . . . . . . . . . 11
"Series B Note" and "Series B Notes" . . . . . . . . . . . . . . . . . 11
"series of Notes" or "Notes of any series" . . . . . . . . . . . . . . 11
"Significant Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . 11
"Special Record Date" . . . . . . . . . . . . . . . . . . . . . . . . . 11
"Stated Maturity" . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
"Subordinated Indebtedness" . . . . . . . . . . . . . . . . . . . . . . 11
"Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
"Surviving Entity" . . . . . . . . . . . . . . . . . . . . . . . . . . 12
"Trust Indenture Act" or "TIA" . . . . . . . . . . . . . . . . . . . . 12
"Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
"Unrestricted Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . 12
"Voting Stock" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C>
"Wholly Owned Restricted Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 102. Compliance Certificates and Opinions . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 103. Form of Documents Delivered to Trustee . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 104. Acts of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 105. Notices, etc., to Trustee and Company . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 106. Notice to Holders; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 107. Effect of Headings and Table of Contents . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 108. Conflict of Any Provision of Indenture with Trust Indenture Act . . . . . . . . . . . 16
SECTION 109. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 110. Separability Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 111. Benefits of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 112. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 113. Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE TWO NOTE FORMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 201. Forms Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 202. Form of Face of Series A Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 203. Form of Reverse of Series A Note . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 202. Form of Face of Series A Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 203. Form of Reverse of Series A Note . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 205. Form of Trustee's Certificate of Authentication . . . . . . . . . . . . . . . . . . . 26
ARTICLE THREE THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 301. Title and Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 302. Denominations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 303. Execution, Authentication, Delivery and Dating . . . . . . . . . . . . . . . . . . . 28
SECTION 304. Temporary Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 305. Registration, Registration of Transfer and Exchange . . . . . . . . . . . . . . . . . 29
SECTION 306. Mutilated, Destroyed, Lost and Stolen Notes . . . . . . . . . . . . . . . . . . . . . 30
SECTION 307. Payment of Interest; Interest Rights Preserved . . . . . . . . . . . . . . . . . . . 31
SECTION 308. Persons Deemed Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 309. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 310. Computation of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 311. CUSIP Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE FOUR SATISFACTION AND DISCHARGE . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 401. Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 402. Application of Trust Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE FIVE REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 501. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 502. Acceleration of Maturity; Rescission and Annulment . . . . . . . . . . . . . . . . . 36
SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee . . . . . . . . . . . 37
SECTION 504. Trustee May File Proof of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 505. Trustee May Enforce Claims without Possession of Notes . . . . . . . . . . . . . . . 38
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<S> <C> <C>
SECTION 506. Application of Money Collected . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 507. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest . . . . . . 40
SECTION 509. Restoration of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 510. Rights and Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 511. Delay or Omission Not Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 512. Control by Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 513. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 514. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 515. Waiver of Stay, Extension or Usury Laws . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE SIX THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 601. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 602. Certain Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 603. Trustee Not Responsible for Recitals or Issuance of Notes . . . . . . . . . . . . . . 43
SECTION 604. May Hold Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 605. Money Held in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 606. Compensation and Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 607. Conflicting Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 608. Corporate Trustee Required; Eligibility . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 609. Resignation and Removal; Appointment of Successor . . . . . . . . . . . . . . . . . . 45
SECTION 610. Acceptance of Appointment by Successor . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 611. Merger, Conversion, Consolidation or Succession to Business . . . . . . . . . . . . . 46
ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY . . . . . . . . . . . 47
SECTION 701. Disclosure of Names and Addresses of Holders . . . . . . . . . . . . . . . . . . . . 47
SECTION 702. Reports by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 703. Reports by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE . . . . . . . . . 47
SECTION 801. Company May Consolidate, etc., Only on Certain Terms . . . . . . . . . . . . . . . . 47
SECTION 802. Successor Substituted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE NINE SUPPLEMENTAL INDENTURES . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 901. Supplemental Indentures without Consent of Holders . . . . . . . . . . . . . . . . . 49
SECTION 902. Supplemental Indentures with Consent of Holders . . . . . . . . . . . . . . . . . . . 49
SECTION 903. Execution of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 904. Effect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 905. Conformity with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 906. Reference in Notes to Supplemental Indentures . . . . . . . . . . . . . . . . . . . . 51
SECTION 907. Notice of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . 51
</TABLE>
-iv-
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<TABLE>
<S> <C> <C>
ARTICLE TEN COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 1001. Payment of Principal, Premium, If Any, and Interest . . . . . . . . . . . . . . . . . 51
SECTION 1002. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 1003. Money for Note Payments to Be Held in Trust . . . . . . . . . . . . . . . . . . . . . 52
SECTION 1004. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 1005. Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 1006. Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 1007. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 1008. Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 1009. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 1010. Limitation on Consolidated Funded Debt . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 1011. Limitation on Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 1012. Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 1013. Limitation on Issuance and Sale of Capital Stock by Restricted Subsidiaries . . . . . 56
SECTION 1014. Limitation on Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . 57
SECTION 1015. Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 1016. Restriction on Transfer of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 1017. Limitation on Certain Other Subordinated . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 1018. Waiver of Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 1019. Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 1020. Fixed Charge Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ARTICLE ELEVEN REDEMPTION OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 1101. Right of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 1101. Right of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 1103. Applicability of Article . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 1104. Election to Redeem; Notice to Trustee . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 1105. Selection by Trustee of Notes to Be Redeemed . . . . . . . . . . . . . . . . . . . . 61
SECTION 1106. Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 1107. Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 1108. Notes Payable on Redemption Date . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 1109. Notes Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
ARTICLE TWELVE SINKING FUND PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 1201. Sinking Fund Payments -- Series A Notes. . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 1201. Sinking Fund Payments -- Series A Notes. . . . . . . . . . . . . . . . . . . . . . . 63
ARTICLE THIRTEEN DEFEASANCE AND COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . . 63
SECTION 1301. Company's Option to Effect Defeasance or Covenant Defeasance . . . . . . . . . . . . 63
SECTION 1302. Defeasance and Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 1303. Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 1304. Conditions to Defeasance or Covenant Defeasance . . . . . . . . . . . . . . . . . . . 64
</TABLE>
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<PAGE> 7
<TABLE>
<S> <C> <C>
SECTION 1305. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other
Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 1306. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
ARTICLE FOURTEEN SUBORDINATION OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 1401. Notes Subordinate to Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 1402. Payment Over of Proceeds upon Dissolution, etc . . . . . . . . . . . . . . . . . . . 67
SECTION 1403. Suspension of Payment When Senior Indebtedness in Default . . . . . . . . . . . . . . 68
SECTION 1404. Payment Permitted If No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 1405. Subrogation to Rights of Holders of Senior Indebtedness . . . . . . . . . . . . . . . 70
SECTION 1406. Provisions Solely to Define Relative Rights . . . . . . . . . . . . . . . . . . . . . 70
SECTION 1407. Trustee to Effectuate Subordination . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 1408. No Waiver of Subordination Provisions . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 1409. Notice to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 1410. Reliance on Judicial Order or Certificate of Liquidating Agent . . . . . . . . . . . 72
SECTION 1411. Rights of Trustee as a Holder of Senior Indebtedness; Preservation
of Trustee's Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 1412. Article Applicable to Paying Agents . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 1413. No Suspension of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 1414. Trust Moneys Not Subordinated . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 1415. Proof of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 1416. Trustee Not Fiduciary for Holders of Senior Indebtedness . . . . . . . . . . . . . . 73
</TABLE>
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<PAGE> 8
INDENTURE, dated as of April 15, 1996, between MARKS BROS. JEWELERS, INC.,
a corporation duly organized and existing under the laws of the State of
Delaware (herein called 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 (herein called
the "Trustee"), having its principal office at Sixth and Marquette,
Minneapolis, Minnesota 55479.
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of Series A
Senior Subordinated Notes due 2004 (herein called the "Series A Notes"), of
substantially the tenor and amount hereinafter set forth, and to provide
therefor the Company has duly authorized the execution and delivery of this
Indenture.
The Company has duly authorized the creation of an issue of Series B
Senior Subordinated Notes due 2004 (herein called the "Series B Notes"), of
substantially the tenor and amount hereinafter set forth, and to provide
therefor the Company has duly authorized the execution and delivery of this
Indenture.
This Indenture is subject to the provisions of the Trust Indenture Act of
1939, as amended, that are required to be part of this Indenture and shall, to
the extent applicable, be governed by such provisions.
All acts and things necessary have been done to make the Notes, when
executed by the Company and authenticated and delivered hereunder and duly
issued by the Company, the valid, binding and legal obligations of the Company,
and to make this Indenture a valid agreement of the Company, in accordance with
their and its terms.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes by
the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Notes, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 101. Definitions.
For all purposes of this Indenture, except as otherwise expressly provided
or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular;
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
<PAGE> 9
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles; and
(d) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision.
"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.
"Agent Address" means c/o Bank of Boston, 100 Federal Street, Boston,
Massachusetts 02210, Attention: Ms. Elizabeth A. Ratto.
"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, dated as of May 3, 1996, 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.
"Board of Directors" of any person means the board of directors of such
person or any duly authorized committee of such board.
"Board Resolution" of any person means a copy of a resolution certified by
the Secretary or an Assistant Secretary of such person to have been duly
adopted by the Board of Directors of such person and to be in full force and
effect on the date of such certification and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in the City of Chicago or the
City of New York are authorized or obligated by law, regulation or executive
order to close.
"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, 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.
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<PAGE> 10
"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 of the Company 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.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act or, if at any time after the
execution of this Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"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.
"Company" means the person named as the "Company" in the first paragraph
of this Indenture, until a successor person shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Company" shall
mean such successor person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company (i) by its Chairman, its President or any
Vice President and (ii) by its Treasurer, an Assistant Treasurer, its Secretary
or an Assistant Secretary, and delivered to the Trustee; provided, however,
that such written request or order may be signed by any two of the officers and
directors listed in clause (i) above in lieu of being signed by one of such
officers and directors listed in such clause (ii) and one of the officers
listed in clause (ii) above.
"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.
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<PAGE> 11
"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" means, 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 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 this
Indenture and the transactions contemplated hereby to the extent included
in Consolidated Total Assets; plus
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<PAGE> 12
(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.
"Corporate Trust Office" means the office of the Trustee at which at any
particular time its corporate trust business shall be principally administered,
which office at the date of execution of this Indenture is located at Sixth and
Marquette, Minneapolis, Minnesota 55479-0069; Attention: Corporate Trust
Trustee Administration.
"Corporation" includes corporations, associations, partnerships, companies
and business trusts.
"Covenant Defeasance" has the meaning set forth in Section 1303.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Defaulted Interest" has the meaning specified in Section 307.
"Defeasance" has the meaning specified in Section 1302.
"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 specified in Section 501.
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<PAGE> 13
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, and rules and regulations thereunder.
"Federal Bankruptcy Code" means the Bankruptcy Act of Title 11 of the
United States Code, as amended from time to time.
"GAAP" or "generally accepted accounting principles" means (i) when used
in Sections 1010, 1019 and 1020, whether directly or 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, or any definition related
thereto, then the Company and the Trustee on behalf of 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 this 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 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 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.
"Holder" means a person in whose name a Note is registered in the Note
Register.
"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
-6-
<PAGE> 14
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.
"Indenture" means this instrument as originally executed (including all
exhibits and schedules hereto) and as it may from time to time be supplemented
or amended by one or more indentures supplemental hereto entered into pursuant
to the applicable provisions hereof.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Notes.
"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 such 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 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.
"Issue Date" means the date on which the Notes are originally issued under
this Indenture.
"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.
"Maturity" when used with respect to any Note, means the date on which the
principal of (and premium, if any) and interest on such Note become due and
payable as therein or herein provided, whether at Stated Maturity or any
payment date for a Redemption Date and whether by declaration of acceleration,
call for redemption or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
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<PAGE> 15
"Non-payment Default" means any event (other than a Payment Default) the
occurrence of which entitles one or more persons to accelerate the maturity of
any Designated Senior Indebtedness.
"Note" and "Notes" shall mean, collectively, Series A Notes and Series B
Notes and shall particularly mean any Notes authenticated and delivered under
this Indenture.
"Note Register" and "Note Registrar" have the respective meanings
specified in Section 305.
"Officers' Certificate" means a certificate signed by (i) the Chairman, a
vice-chairman, the President, a Vice President or the Treasurer of the Company
and (ii) the Secretary or an Assistant Secretary of the Company and delivered
to the Trustee; provided, however, that such certificate may be signed by two
of the officers and directors listed in clause (i) above in lieu of being
signed by one of such officers and directors listed in such clause (i) and one
of the officers listed in clause (ii) above.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company, and who shall be acceptable to the Trustee. Each such
opinion (i) shall include the statements provided for in TIA Section 314(e) to
the extent applicable and (ii) may state that the counsel rendering such
opinion have relied upon an Officers' Certificate with respect to factual
matters which are set forth in such opinion.
"Outstanding", when used with respect to the Notes, means, as of the date
of determination, all Notes theretofore authenticated and delivered under this
Indenture, except:
(i) Notes theretofore cancelled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Notes, or portions thereof, for whose payment, redemption or
purchase money in the necessary amount has been theretofore deposited in
compliance with the terms of this Indenture with the Trustee or any Paying
Agent (other than the Company) in trust or set aside and segregated in
trust by the Company (if the Company shall act as its own Paying Agent)
for the Holders of such Notes, and the Trustee or such Paying Agent is not
prohibited from paying such money to the Holders on that date pursuant to
the terms of Article Fourteen hereof; provided that, if such Notes are to
be redeemed, notice of such redemption has been duly given pursuant to
this Indenture or provision therefor satisfactory to the Trustee has been
made;
(iii) Notes with respect to which the Company has effected
defeasance as provided in Article Thirteen and not in violation of
Sections 1402 and 1403; and
(iv) securities paid pursuant to Section 306 and Notes in exchange
for or in lieu of which other Notes have been authenticated and delivered
pursuant to this Indenture, other than any such Notes in respect of which
there shall have been presented to the Trustee proof satisfactory to it
that such Notes are held by a bona fide purchaser in whose hands the
Notes are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Notes have given any request, demand,
direction, consent, notice or waiver hereunder, and for the purpose of making
the calculations required by TIA Section 313, Notes owned by the Company or any
other obligor upon the Notes or any Affiliate of the Company or such other
obligor shall be disregarded and deemed not to be outstanding, except that, in
determining whether the Trustee shall be
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protected in relying upon any such request, demand, direction, consent, notice
or waiver, only Notes which the Trustee actually knows to be so owned shall be
so disregarded. Notes so owned which have been pledged in good faith may be
regarded as outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Notes and that the
pledgee is not the Company or any other obligor upon the Notes or any Affiliate
of the Company or such other obligor.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is
pari passu in right of payment to the Notes.
"Paying Agent" means any person authorized by the Company to pay the
principal of (and premium, if any) or interest on any Notes on behalf of the
Company.
"Payment Blockage Period" has the meaning set forth in Section 1403.
"Payment Default" means any default in the payment of principal of (or
premium, if any) or interest or other obligation on Designated Senior
Indebtedness.
"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 transfers 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) above or (vii) 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
Section 1014; (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) above 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.
"Predecessor Note" of any particular Note means every previous Note
evidencing all or a portion of the same debt as that evidenced by such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 306 in exchange for a mutilated
security or in lieu of a lost, destroyed or stolen Note shall be deemed to
evidence the same debt as the mutilated, lost, destroyed or stolen Note.
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"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.
"Redemption Date", when used with respect to any Notes to be redeemed, in
whole or in part, means the date fixed for such redemption by or pursuant to
this Indenture.
"Redemption Price", when used with respect to any Note to be redeemed,
means the price at which it is to be redeemed pursuant to this Indenture.
"Regular Record Date" for the interest payable on any Interest Payment
Date means 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.
"Responsible Officer", when used with respect to the Trustee, means the
chairman or any vice-chairman of the board of directors, the chairman or any
vice chairman of the executive committee of the board of directors, the
president, any vice president, any assistant vice president, the secretary, any
assistant secretary, the treasurer, any assistant treasurer, the cashier, any
assistant cashier, any trust officer or assistant trust officer, the controller
or any assistant controller or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above-designated
officers or assigned by the Trustee to administer corporate trust matters at
its Corporate Trust Office, and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of his knowledge of and familiarity with the particular subject.
"Restricted Payment" has the meaning set forth under Section 1011.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Corporation and its successors.
"Securities Act" means the Securities Act of 1933, as amended, from time
to time, and rules and regulations thereunder.
"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 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,
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<PAGE> 18
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 1111(b) of the Federal Bankruptcy
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 this Indenture.
"Series A Note" and "Series A Notes" have the meaning stated in the
recitals of this Indenture and more particularly mean any Series A Notes
authenticated and delivered under this Indenture.
"Series B Note" and "Series B Notes" have the meaning stated in the
recitals of this Indenture and more particularly mean any Series B Notes
authenticated and delivered under this Indenture, including without limitation
any Series B Note constituting a Secondary Note.
"series of Notes" or "Notes of any series" shall mean and refer to Series
A Notes and Series B Notes.
"Significant Subsidiary" shall have the same meaning as in Rule 1.02(v) of
Regulation S-X under the Securities Act.
"Special Record Date" for the payment of any Defaulted Interest means a
date fixed by the Trustee pursuant to Section 307.
"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
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<PAGE> 19
contained in Article Fourteen hereof, 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.
"Surviving Entity" has the meaning set forth in Section 801.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as
amended and as in force at the date as of which this Indenture was executed,
except as provided in Section 905.
"Trustee" means the person named as the "Trustee" in the first paragraph
of this Indenture until a successor Trustee shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Trustee" shall
mean such successor Trustee.
"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 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 this 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
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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.
SECTION 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take any
action under any provision of this Indenture, the Company shall furnish to the
Trustee an Officers' Certificate stating that all conditions precedent, if any,
provided for in this Indenture (including any covenant compliance with which
constitutes a condition precedent) relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, except
that in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate
or opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition
or covenant provided for in this Indenture (other than pursuant to Section
1008) shall include:
(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
person or that they be so certified or covered by only one document, but one
such person may certify or give an opinion with respect to some matters and one
or more other such persons as to other matters, and any such person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate
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<PAGE> 21
or Opinion of Counsel may be based, insofar as it relates to factual matters,
upon a certificate or opinion of, or representations by, an officer or officers
of the Company stating that the information with respect to such factual matters
is in the possession of the Company, unless such counsel know, or in the
exercise of reasonable care should know, that the certificate or opinion or
representations with respect to such matters are erroneous.
Where any person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 104. Acts of Holders.
(a) Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given or taken by Holders may
be embodied in and evidenced by one or more instruments of substantially
similar tenor signed by such Holders in person or by an agent duly appointed in
writing, and except as herein otherwise expressly provided, such action shall
become effective when such instrument or instruments are delivered to the
Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or
of a writing appointing any such agent shall be sufficient for any purpose of
this Indenture and (subject to TIA Section 315) conclusive in favor of the
Trustee and the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any person of any such
instrument or writing may be proved in any reasonable manner which the Trustee
deems sufficient.
(c) The ownership of Notes shall be proved by the Note Register.
(d) If the Company shall solicit from the Holders any request, demand,
authorization, direction, notice, consent, waiver or other Act, the Company
may, at its option, by or pursuant to Board Resolution, fix in advance a record
date for the determination of Holders entitled to give such request, demand,
authorization, direction, notice, consent, waiver or other Act, but the Company
shall have no obligation to do so. Notwithstanding TIA Section 316(c), any
such record date shall be the record date specified in or pursuant to such
Board Resolution, which shall be a date not more than 30 days prior to the
first solicitation of Holders generally in connection therewith and no later
than the date such solicitation is completed.
If such a record date is fixed, such request, demand, authorization,
direction, notice, consent, waiver or other Act may be given before or after
such record date, but only the Holders of record at the close of business on
such record date shall be deemed to be Holders for the purposes of determining
whether Holders of the requisite proportion of Notes then outstanding have
authorized or agreed or consented to such request, demand, authorization,
direction, notice, consent, waiver or other Act, and for this purpose the Notes
then Outstanding shall be computed as of such record date; provided that no
such authorization, agreement or consent by the Holders on such record date
shall be deemed effective unless it shall become effective pursuant to the
provisions of this Indenture not later than six months after the record date.
(e) Any request, demand, authorization, direction, notice, consent, waiver
or other Act by the Holder of any Note shall bind every future Holder of the
same Note and the Holder of every Note
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<PAGE> 22
issued upon the registration of transfer thereof or in exchange therefor or in
lieu thereof, in respect of anything done, omitted or suffered to be done by
the Trustee, any Paying Agent or the Company in reliance thereon, whether or
not notation of such action is made upon such Note.
SECTION 105. Notices, etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver or
Act of Holders or other document provided or permitted by this Indenture to be
made upon, given or furnished to or filed with
(1) the Trustee by any Holder, the Banks, the holders of Designated
Senior Indebtedness or the Company shall be sufficient for every purpose
hereunder if made, given, furnished or delivered in writing to or with
the Trustee at its Corporate Trust Office, Attention: Corporate Trust
Trustee Administration; or
(2) the Company by the Trustee or by any Holder shall be sufficient
for every purpose hereunder (unless otherwise herein expressly provided)
if made, given, furnished or delivered in writing to the Company
addressed to it at the address of its principal office specified in the
first paragraph of this Indenture, Attention: President, or at any other
address furnished in writing to the Trustee by the Company.
SECTION 106. Notice to Holders; Waiver.
Where this Indenture provides for notice of any event to Holders by the
Company or the Trustee, such notice shall be sufficiently given (unless
otherwise herein expressly provided) if in writing and mailed, first-class
postage prepaid, to each Holder affected by such event, at his address as it
appears in the Note Register, not later than the latest date, and not earlier
than the earliest date, prescribed for the giving of such notice. In any case
where notice to Holders is given by mail, neither the failure to mail such
notice nor any defect in any notice so mailed to any particular Holder shall
affect the sufficiency of such notice with respect to other Holders. Any
notice when deposited for mailing to a Holder in the aforesaid manner shall be
conclusively deemed to have been received by such Holder, whether or not
actually received by such Holder. Where this Indenture provides for notice in
any manner, such notice may be waived in writing by the person entitled to
receive such notice, either before or after the event, and such waiver shall be
the equivalent of such notice. Waivers of notice by Holders shall be filed
with the Trustee, but such filing shall not be a condition precedent to the
validity of any action taken in reliance upon such waiver.
In case, by reason of the suspension of or irregularities in regular mail
service or by reason of any other cause, it shall be impracticable to mail
notice of any event as required by any provision of this Indenture, then any
method of giving such notice as shall be satisfactory to the Trustee shall be
deemed to be a sufficient giving of such notice.
SECTION 107. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
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<PAGE> 23
SECTION 108. Conflict of Any Provision of Indenture with Trust Indenture
Act.
If and to the extent that any provision of this Indenture limits,
qualifies or conflicts with the duties imposed by Sections 310 to 318,
inclusive, of the Trust Indenture Act or conflicts with any provision (an
"incorporated provision") required by or deemed to be included in this
Indenture by operation of such Trust Indenture Act Sections, such imposed
duties or incorporated provision shall control. If any provision of this
Indenture modifies or excludes any provision of the Trust Indenture Act that
may be so modified or excluded, the latter provision shall be deemed to apply
to this Indenture as so modified or excluded, as the case may be.
SECTION 109. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall bind
its respective successors and assigns, whether so expressed or not.
SECTION 110. Separability Clause.
In case any provision in this Indenture or in the Notes shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
SECTION 111. Benefits of Indenture.
Nothing in this Indenture or in the Notes, express or implied, shall give
to any person (other than the parties hereto and their successors hereunder,
any Paying Agent, the Holders and the holders of Senior Indebtedness) any
benefit or any legal or equitable right, remedy or claim under this Indenture.
SECTION 112. Governing Law.
This Indenture and the Notes 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 113. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity or Maturity of any Note shall not be a Business Day, then
(notwithstanding any other provision of this Indenture or of the Notes) payment
of interest or principal (and premium, if any) need not be made on such date,
but may be made on the next succeeding Business Day with the same force and
effect as if made on the Interest Payment Date, Redemption Date or at the
Stated Maturity or Maturity; provided that no interest shall accrue for the
period from and after such Interest Payment Date, Redemption Date, Stated
Maturity or Maturity, as the case may be, to the next succeeding Business Day.
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<PAGE> 24
ARTICLE TWO
NOTE FORMS
SECTION 201. Forms Generally.
The Notes and the Trustee's certificate of authentication shall be in
substantially the forms set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture, and may have such letters, numbers or other marks
of identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange or as may,
consistently herewith, be determined by the officers executing such Notes, as
evidenced by their execution of the Notes. Any portion of the text of any Note
may be set forth on the reverse thereof, with an appropriate reference thereto
on the face of the Note.
The definitive Notes shall be printed, lithographed or engraved or may be
produced by any combination of these methods or may be produced in any other
manner permitted by the rules of any securities exchange on which the Notes may
be listed, all as determined by the officers of the Company executing such
Notes, as evidenced by their execution of such Notes.
SECTION 202. Form of Face of Series A Note.
THIS SERIES A NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS. NEITHER
THIS SERIES A NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED,
SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN
THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR
NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SERIES A NOTE BY ITS ACCEPTANCE HEREOF AGREES (A) TO
OFFER, SELL OR OTHERWISE TRANSFER SUCH SERIES A NOTE ONLY (1) TO THE COMPANY,
(2) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE
UNDER THE SECURITIES ACT, (3) FOR SO LONG AS THIS SERIES A NOTE IS ELIGIBLE FOR
RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE
144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE
TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (4) PURSUANT TO OFFERS AND
SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S
UNDER THE SECURITIES ACT, (5) PURSUANT TO THE EXEMPTION FROM REGISTRATION
PROVIDED BY RULE 144 UNDER THE SECURITIES ACT, IF AVAILABLE, AND IN EACH OF THE
FOREGOING CASES, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE
OF THE UNITED STATES OR (6) PURSUANT TO ANY OTHER APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, AND (B) ANY TRANSFEREE OF THIS
SERIES A NOTE BY ITS ACCEPTANCE HEREOF WILL BE DEEMED TO HAVE AGREED TO AND
WILL BE BOUND BY THE RESALE RESTRICTIONS REFERRED TO ABOVE.
IN THE EVENT THAT A REGISTRATION STATEMENT COVERING THE SERIES A NOTES
SHALL BECOME EFFECTIVE UNDER THE SECURITIES ACT AND UNDER ANY APPLICABLE STATE
SECURITIES LAWS OR IN THE EVENT THAT THE COMPANY SHALL RECEIVE AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT, IN THE OPINION OF SUCH COUNSEL, THIS
LEGEND IS NOT, OR IS NO LONGER, NECESSARY OR REQUIRED (INCLUDING, WITHOUT
-17-
<PAGE> 25
LIMITATION, BECAUSE OF THE AVAILABILITY OF THE EXEMPTIONS AFFORDED BY RULE 144
OR RULE 144A OF THE GENERAL RULES AND REGULATIONS OF THE COMMISSION) , THE
COMPANY SHALL, OR SHALL INSTRUCT ITS TRANSFER AGENTS AND REGISTRARS TO, REMOVE
THIS LEGEND FROM THE CERTIFICATES EVIDENCING THIS SERIES A NOTE OR ISSUE A NEW
SERIES A NOTE WITHOUT SUCH LEGEND IN LIEU THEREOF.
MARKS BROS. JEWELERS, INC.
Series A Senior Subordinated Note due 2004
No. _______ $_____________
CUSIP 570698 AA 8
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 A 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 A Notes, may
be paid to the person in whose name this Series A 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 A 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 A 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 A
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 A Notes is
registered on the Note Register as previously designated by such person.
Reference is hereby made to the further provisions of this Series A
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.
-18-
<PAGE> 26
Unless the certificate of authentication hereon has been duly executed by
the Trustee referred to on the reverse hereof by manual signature, this Series
A 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 203. Form of Reverse of Series A Note.
This Series A Note is one of a duly authorized issue of securities of the
Company designated as its Series A Senior Subordinated Notes due 2004 (herein
called the "Series A Notes"), limited (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 a duly authorized issue of
securities of the Company designated as its Series B Subordinated Notes due
2004 (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 A 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 A Note, by accepting the same, (a) agrees to and shall be
bound by such provisions, (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 A Notes so
redeemed in case of a redemption for said Sinking Fund or the applicable
percentage of the principal amount of the Series A Notes so redeemed set forth
below in the case of any other such redemption:
-19-
<PAGE> 27
If redeemed during the period set forth below,
<TABLE>
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 A Notes so redeemed
to the Redemption Date.
In the case of any redemption of Series A Notes, interest installments
whose Stated Maturity is on or prior to the Redemption Date will be payable to
the Holders of such Series A 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 A 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 A Note in part only, a new
Series A Note or Series A 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 A 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 A 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 A 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 A Note shall be conclusive and binding upon such
Holder and upon all future Holders of this Series A Note and of any Series A
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 A Note.
No reference herein to the Indenture and no provision of this Series A
Note or of the Indenture shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the
-20-
<PAGE> 28
principal of (and premium, if any) and interest on this Series A 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 A Note is registerable on the Note
Register of the Company, upon surrender of this Series A 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 A Notes, of authorized denominations and for
the same aggregate principal amount, will be issued to the designated
transferee or transferees.
The Series A 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 A
Notes are exchangeable for a like aggregate principal amount of Series A 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 A 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 A 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 A Note is
registered as the owner hereof for all purposes, whether or not this Series A
Note be overdue, and neither the Company, the Trustee nor any agent shall be
affected by notice to the contrary.
All terms used in this Series A Note which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
This Series A 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 204. Form of Face of Series B Note.
THIS SERIES B NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS. NEITHER
THIS SERIES B NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED,
SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN
THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR
NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SERIES B NOTE BY ITS ACCEPTANCE HEREOF AGREES (A) TO
OFFER, SELL OR OTHERWISE TRANSFER SUCH SERIES A NOTE ONLY (1) TO THE COMPANY,
(2) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE
UNDER THE SECURITIES ACT, (3) FOR SO LONG AS THIS SERIES B NOTE IS ELIGIBLE FOR
RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE
144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE
TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (4) PURSUANT TO OFFERS AND
SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S
UNDER THE SECURITIES ACT, (5)
-21-
<PAGE> 29
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT, IF AVAILABLE, AND IN EACH OF THE FOREGOING CASES, IN ACCORDANCE
WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR (6)
PURSUANT TO ANY OTHER APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT, AND (B) ANY TRANSFEREE OF THIS SERIES B NOTE BY ITS
ACCEPTANCE HEREOF WILL BE DEEMED TO HAVE AGREED TO AND WILL BE BOUND BY THE
RESALE RESTRICTIONS REFERRED TO ABOVE.
IN THE EVENT THAT A REGISTRATION STATEMENT COVERING THE SERIES B NOTES
SHALL BECOME EFFECTIVE UNDER THE SECURITIES ACT AND UNDER ANY APPLICABLE STATE
SECURITIES LAWS OR IN THE EVENT THAT THE COMPANY SHALL RECEIVE AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT, IN THE OPINION OF SUCH COUNSEL, THIS
LEGEND IS NOT, OR IS NO LONGER, NECESSARY OR REQUIRED (INCLUDING, WITHOUT
LIMITATION, BECAUSE OF THE AVAILABILITY OF THE EXEMPTIONS AFFORDED BY RULE 144
OR RULE 144A OF THE GENERAL RULES AND REGULATIONS OF THE COMMISSION) , THE
COMPANY SHALL, OR SHALL INSTRUCT ITS TRANSFER AGENTS AND REGISTRARS TO, REMOVE
THIS LEGEND FROM THE CERTIFICATES EVIDENCING THIS SERIES B NOTE OR ISSUE A NEW
SERIES B NOTE WITHOUT SUCH LEGEND IN LIEU THEREOF.
MARKS BROS. JEWELERS, INC.
Series B Senior Subordinated Note due 2004
No. _______ $_____________
CUSIP 570698 AB 6
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 B 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
-22-
<PAGE> 30
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 B 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 B 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 B 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 B
Notes, may be paid to the person in whose name this Series B 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 B 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 B 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 B 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 B Notes is registered on the Note Register
as previously designated by such person.
Reference is hereby made to the further provisions of this Series B 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
B Note shall not be entitled to any benefit under the Indenture, or be valid or
obligatory for any purpose.
-23-
<PAGE> 31
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 205. Form of Reverse of Series B Note.
This Series B Note is one of a duly authorized issue of securities of the
Company designated as its Series B Senior Subordinated Notes due 2004 (herein
called the "Series B Notes"), limited (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 a duly authorized issue of securities
of the Company designated as its Series A Subordinated Notes due 2004 (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 B 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 B 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 $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:
-24-
<PAGE> 32
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 B 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 B Notes, interest installments
whose Stated Maturity is on or prior to the Redemption Date will be payable to
the Holders of such Series B 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 B Note in part only, a new
Series B Note or Series B 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 B 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 B 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 B 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 B Note shall be conclusive and binding upon such
Holder and upon all future Holders of this Series B Note and of any Series B
Note issued upon the registration of transfer
-25-
<PAGE> 33
hereof or in exchange herefor or in lieu hereof whether or not notation of such
consent or waiver is made upon this Series B Note.
No reference herein to the Indenture and no provision of this Series B
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 B 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 B Note is registerable on the Note
Register of the Company, upon surrender of this Series B 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 B Notes, of authorized
denominations and for the same aggregate principal amount, will be issued to
the designated transferee or transferees.
The Series B 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 B
Notes are exchangeable for a like aggregate principal amount of Series B 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 B 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 B 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 B Note is
registered as the owner hereof for all purposes, whether or not this Series B
Note be overdue, and neither the Company, the Trustee nor any agent shall be
affected by notice to the contrary.
All terms used in this Series B Note which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
This Series B 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 205. Form of Trustee's Certificate of Authentication.
TRUSTEE'S CERTIFICATE OF AUTHENTICATION.
This is one of the Notes referred to in the within-mentioned Indenture.
Dated: NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Trustee
By: ________________________
Authorized Signatory
-26-
<PAGE> 34
ARTICLE THREE
THE SECURITIES
SECTION 301. Title and Terms.
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 Notes delivered in payment of Additional Interest as set
forth below.
The Series A Notes shall be known and designated as the "Series A Senior
Subordinated Notes due 2004" of the Company. Their Stated Maturity 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 Notes shall be known and designated as the " Series B Senior
Subordinated Notes due 2004" of the Company. Their Stated Maturity 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, in lieu of the
payment in whole or in part of the Additional Interest with respect to Series B
Notes in cash, pay such Additional Interest through the issuance of additional
Series B 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 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.
Any such Secondary Notes shall be governed by this Indenture and shall be
subject to the same terms as this 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
this Indenture.
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The principal of (and premium, if any) and interest on the Notes shall be
payable at the office or agency of the Company maintained for such purpose in
the City of Chicago, or at such other office or agency of the Company as may be
maintained for such purpose; provided, however, that, at the option of the
Company, interest may be paid by check mailed to addresses of the persons
entitled thereto as such addresses shall appear on the Note Register.
The Series A Notes and Series B Notes shall be redeemable as provided in
Article Eleven.
The Notes shall be subordinated in right of payment to Senior Indebtedness
as provided in Article Fourteen.
SECTION 302. Denominations.
The Notes shall be issuable only in registered form without coupons and
only in denominations of $1,000 and any integral multiple thereof.
SECTION 303. Execution, Authentication, Delivery and Dating.
The Notes shall be executed on behalf of the Company by its Chairman, its
President or one of its Vice Presidents, under its corporate seal reproduced
thereon and attested by its Secretary or one of its Assistant Secretaries. The
signature of any of these officers on the Notes may be manual or facsimile
signatures and may be imprinted or otherwise reproduced on the Notes.
Notes bearing the manual or facsimile signatures of individuals who were
at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Notes or did not hold
such offices at the date of such Notes.
At any time and from time to time after the execution and delivery of this
Indenture, the Company may deliver Notes executed by the Company to the Trustee
for authentication, together with a Company Order for the authentication and
delivery of such Notes, and the Trustee in accordance with such Company Order
shall authenticate and deliver such Notes.
Each Note shall be dated the date of its authentication.
No Note shall be entitled to any benefit under this Indenture or be valid
or obligatory for any purpose unless there appears on such Note a certificate
of authentication substantially in the form provided for herein duly executed
by the Trustee by manual signature of one of its duly authorized signatories,
and such certificate upon any Note shall be conclusive evidence, and the only
evidence, that such Note has been duly authenticated and delivered hereunder
and is entitled to the benefits of this Indenture.
In case the Company, pursuant to Article Eight, shall be consolidated or
merged with or into any other person or shall convey, transfer, lease or
otherwise dispose of substantially all of its properties and assets to any
person, and the successor person resulting from such consolidation, or
surviving such merger, or into which the Company shall have been merged, or the
successor person which shall have received a conveyance, transfer, lease or
other disposition as aforesaid, shall have executed an indenture supplemental
hereto with the Trustee pursuant to Article Eight, any of the Notes
authenticated or
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delivered prior to such consolidation, merger, conveyance, transfer, lease
or other disposition may, from time to time, at the request of the successor
person, be exchanged for other Notes executed in the name of the successor
person with such changes in phraseology and form as may be appropriate, but
otherwise in substance of like tenor as the Notes surrendered for such exchange
and of like principal amount; and the Trustee, upon Company Order of the
successor person, shall authenticate and deliver Notes as specified in such
request for the purpose of such exchange. If Notes shall at any time be
authenticated and delivered in any new name of a successor person pursuant to
this Section in exchange or substitution for or upon registration of transfer of
any Notes, such successor person, at the option of any Holder but without
expense to such Holder, shall provide for the exchange of all Notes at the time
Outstanding held by such Holder for Notes authenticated and delivered in such
new name.
SECTION 304. Temporary Notes.
Pending the preparation of definitive Notes, the Company may execute, and
upon Company Order the Trustee shall authenticate and deliver, temporary Notes
which are printed, lithographed, typewritten, mimeographed or otherwise
produced, in any authorized denomination, substantially of the tenor of the
definitive Notes in lieu of which they are issued and with such appropriate
insertions, omissions, substitutions and other variations as the officers
executing such Notes may determine, as conclusively evidenced by their
execution of such Notes.
If temporary Notes are issued, the Company will cause definitive Notes to
be prepared without unreasonable delay. After the preparation of definitive
Notes, the temporary Notes shall be exchangeable for definitive Notes upon
surrender of the temporary Notes at the office or agency of the Company
designated for such purpose pursuant to Section 1002, without charge to the
Holder. Upon surrender for cancellation of any one or more temporary Notes,
the Company shall execute and the Trustee shall authenticate and deliver in
exchange therefor a like principal amount of definitive securities of
authorized denominations. Until so exchanged, the temporary Notes shall in all
respects be entitled to the same benefits under this Indenture as definitive
Notes.
SECTION 305. Registration, Registration of Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust Office of the
Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 1002 being herein sometimes
referred to as the "Note Register") in which, subject to such reasonable
regulations as it may prescribe, the Company shall provide for the registration
of Notes and of transfers of Notes. The Note Register shall be in written form
or any other form capable of being converted into written form within a
reasonable time. At all reasonable times, the Note Register shall be open to
inspection by the Trustee. The Trustee is hereby initially appointed as
security registrar (the "Note Registrar") for the purpose of registering Notes
and transfers of Notes as herein provided.
Upon surrender for registration of transfer of any Note of any series at
the office or agency of the Company designated pursuant to Section 1002, the
Company shall execute, and the Trustee shall authenticate and deliver, in the
name of the designated transferee or transferees, one or more new Notes of such
series of any authorized denomination or denominations of a like aggregate
principal amount.
At the option of the Holder, Notes of any series may be exchanged for
other Notes of such series of any authorized denomination and of a like
aggregate principal amount, upon surrender of the Notes to be exchanged at such
office or agency. Whenever any Notes of any series are so surrendered for
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exchange, the Company shall execute, and the Trustee shall authenticate and
deliver, the Notes of such series which the Holder making the exchange is
entitled to receive.
All Notes issued upon any registration of transfer or exchange of Notes
shall be the valid obligations of the Company, evidencing the same debt, and
entitled to the same benefits under this Indenture, as the Notes surrendered
upon such registration of transfer or exchange.
Every Note presented or surrendered for registration of transfer or for
exchange or redemption shall (if so required by the Company or the Note
Registrar) be duly endorsed, or be accompanied by a written instrument of
transfer, in form satisfactory to the Company and the Note Registrar, duly
executed by the Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange or redemption of 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 charge that may be imposed in connection with any
registration of transfer or exchange of Notes, other than exchanges pursuant to
Section 303, 304, 906 or 1108 not involving any transfer.
The Company shall not be required (a) to issue, register the transfer of
or exchange any Note during a period beginning at the opening of business (i)
15 days before the mailing of a notice of redemption of the Notes selected for
redemption under Section 1104 and ending at the close of business on the day of
such mailing or (ii) 15 days before an Interest Payment Date and ending on the
close of business on the Interest Payment Date, or (b) to register the transfer
of or exchange any Note so selected for redemption in whole or in part, except
the unredeemed portion of any Note being redeemed in part.
SECTION 306. Mutilated, Destroyed, Lost and Stolen Notes.
If (i) any mutilated Note is surrendered to the Trustee, or (ii) the
Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Note, and there is delivered to the Company
and the Trustee such security or indemnity as may be required by them to save
each of them harmless, then, in the absence of notice to the Company or the
Trustee that such Note has been acquired by a bona fide purchaser, the Company
shall execute and upon Company Order the Trustee shall authenticate and
deliver, in exchange for any such mutilated Note or in lieu of any such
destroyed, lost or stolen Note, a new Note of like tenor and principal amount,
bearing a number not contemporaneously Outstanding.
In case any such mutilated, destroyed, lost or stolen Note has become or
is about to become due and payable, the Company in its discretion may, instead
of issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses
(including the fees and expenses of the Trustee) connected therewith.
Every replacement Note issued pursuant to this Section in lieu of any
destroyed, lost or stolen Note shall constitute a contractual obligation of the
Company, whether or not the destroyed, lost or stolen Note shall be at any time
enforceable by anyone, and shall be entitled to all benefits of this Indenture
equally and proportionately with any and all other Notes duly issued hereunder.
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The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes.
SECTION 307. Payment of Interest; Interest Rights Preserved.
Interest on any Note which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the person in whose
name such Note (or one or more Predecessor Notes) is registered at the close of
business on the Regular Record Date for such interest at the office or agency
of the Company maintained for such purpose pursuant to Section 1002; provided,
however, that (x) each installment of interest on Series A Notes (i) may at the
Company's option be paid by mailing a check for such interest, payable to or
upon the written order of the person entitled thereto pursuant to Section 308,
to the address of such Person as it appears in the Note Register or (ii) by
wire transfer of immediately available funds to the account of any Holder of
Series A Notes in whose name not less than $100,000 principal amount of Series
A Notes is registered on the Note Register as previously designated by such
Person and (y) each installment of interest on Series B Notes shall be made by
the Company by wire transfer of immediately available funds to the account of
any Holder of Series B Notes in whose name not less than $100,000 principal
amount of Series B Notes is registered on the Note Register as previously
designated by such Person.
Any interest on any Note which is payable, but is not punctually paid or
duly provided for, on any Interest Payment Date shall forthwith cease to be
payable to the holder on the Regular Record Date by virtue of having been such
Holder, and such defaulted interest and (to the extent lawful) interest on such
defaulted interest at the rate borne by the Notes (such defaulted interest and
interest thereon herein collectively called "Defaulted Interest") may be paid
by the Company, at its election in each case, as provided in clause (1) or (2)
below:
(1) The Company may elect to make payment of any Defaulted Interest
to the persons in whose names the Notes (or their respective Predecessor
Notes) are registered at the close of business on a Special Record Date
for the payment of such Defaulted Interest, which shall be fixed in the
following manner. The Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on each Note and the
date of the proposed payment, and at the same time the Company shall
deposit with the Trustee an amount of money equal to the aggregate amount
proposed to be paid in respect of such Defaulted Interest or shall make
arrangements satisfactory to the Trustee for such deposit prior to the
date of the proposed payment, such money when deposited to be held in
trust for the benefit of the persons entitled to such Defaulted Interest
as in this clause provided. Thereupon the Trustee shall fix a Special
Record Date for the payment of such Defaulted Interest which shall be not
more than 15 days and not less than 10 days prior to the date of the
proposed payment and not less than 10 days after the receipt by the
Trustee of the notice of the proposed payment. The Trustee shall
promptly notify the Company of such Special Record Date, and in the name
and at the expense of the Company, shall cause notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor
to be mailed, first-class postage prepaid, to each Holder at his address
as it appears on the Note Register, not less than 10 days prior to such
Special Record Date. Notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor having been so mailed, such
Defaulted Interest shall be paid to the persons in whose names the Notes
(or their respective Predecessor Notes) are registered at the close of
business on such Special Record Date and shall no longer be payable
pursuant to the following clause (2).
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(2) The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any
securities exchange on which the Notes may be listed, and upon such
notice as may be required by such exchange, if, after notice given by the
Company to the Trustee of the proposed payment pursuant to this clause
such manner of payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Note delivered
under this Indenture upon registration of transfer of or in exchange for or in
lieu of any other Note shall carry the rights to interest accrued and unpaid,
and to accrue, which were carried by such other Note.
SECTION 308. Persons Deemed Owners.
Prior to the due presentment of a 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 such Note is registered as the owner of such Note for the
purpose of receiving payment of principal of (and premium, if any) and (subject
to Section 307) interest on such Note and for all other purposes whatsoever,
whether or not such Note be overdue, and none of the Company, the Trustee or
any agent of the Company or the Trustee shall be affected by notice to the
contrary.
SECTION 309. Cancellation.
All Notes surrendered for payment, redemption, registration of transfer or
exchange shall, if surrendered to any person other than the Trustee, be
delivered to the Trustee and shall be promptly cancelled by it. The Company
may at any time deliver to the Trustee for cancellation any Notes previously
authenticated and delivered hereunder which the Company may have acquired in
any manner whatsoever, and may deliver to the Trustee (or to any other person
for delivery to the Trustee) for cancellation any Notes previously
authenticated hereunder which the Company has not issued and sold, and all
Notes so delivered shall be promptly cancelled by the Trustee. No Notes shall
be authenticated in lieu of or in exchange for any Notes cancelled as provided
in this Section, except as expressly permitted by this Indenture. All
cancelled Notes held by the Trustee shall be disposed of by the Trustee in
accordance with its customary procedures unless by Company Order the Company
shall direct that cancelled Notes be returned to it.
SECTION 310. Computation of Interest.
Interest on the Notes shall be computed on the basis of a 360-day year of
twelve 30-day months.
SECTION 311. CUSIP Numbers.
The Company in issuing the Notes may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices
of redemption as a convenience to Holders; provided, that any such notice may
state that no representation is made as to the correctness of such numbers
either as printed on the Notes or as contained in any notice of a redemption
and that reliance may be placed only on the other identification numbers
printed on the Notes, and any such redemption shall not be affected by any
defect in or omission of such numbers.
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ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture.
This Indenture shall upon Company Request cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of Notes
herein expressly provided for) and the Trustee, on demand of and at the expense
of the Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture when
(1) either
(a) all Notes theretofore authenticated and delivered (other than
(i) Notes which have been destroyed, lost or stolen and which have been
replaced or paid as provided in Section 306 and (ii) Notes for whose
payment money has theretofore been deposited in trust with the Trustee or
any Paying Agent or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust, as
provided in Section 1003) have been delivered to the Trustee for
cancellation; or
(b) all such Notes not theretofore delivered to the Trustee for
cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity
within one year, or
(iii) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of
the Company,
and the Company, in the case of (i), (ii) or (iii) above, has irrevocably
deposited or caused to be deposited with the Trustee, under the terms of
an irrevocable trust agreement in form and substance satisfactory to the
Trustee, as trust funds in trust solely for the benefit of Holders for
that purpose an amount in U.S. dollars sufficient to pay and discharge
the entire indebtedness on such Notes not theretofore delivered to the
Trustee for cancellation, for principal (and premium, if any) and
interest to the date of such deposit (in the case of Notes which have
become due and payable) or to the Stated Maturity or Redemption Date, as
the case may be;
(2) the making of such Company Request does not constitute a default
under the Indenture or any other material agreement or instrument to
which the Company is a party or by which it is bound;
(3) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(4) the Company has delivered to the Trustee an Officers'
Certificate and an opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge
of this Indenture have been complied with.
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Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 606 and, if money shall
have been deposited with the Trustee pursuant to subclause (b) of clause (1) of
this Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
SECTION 402. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 1003, all money
deposited with the Trustee pursuant to Section 401 shall be held in trust and
applied by it, in accordance with the provisions of the Notes and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as Paying Agent) as the Trustee may determine, to
the persons entitled thereto, of the principal (and premium, if any) and
interest for whose payment such money has been deposited with the Trustee.
Money so held in trust shall not be subject to the provisions of Article
Thirteen of this Indenture.
ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default.
The occurrence of any one of the following events will be an "Event of
Default" with respect to Notes of any series:
(1) 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, whether or not such
payment shall be prohibited by the provisions of Article Fourteen hereof;
(2) 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, whether or not such payment shall be
prohibited by the provisions of Article Fourteen hereof;
(3) the failure by the Company or any Restricted Subsidiary to
comply with its obligations under Article Eight;
(4) the failure by the Company to perform or observe any other term,
covenant or agreement contained in the Notes or this Indenture (other
than a default specified in Section 501(l), 501(2) or 501(3)) for a
period of 20 days after written 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;
(5) 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
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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;
(6) 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;
(7) a decree or order is entered by a court having jurisdiction in
the premises (i) for relief in respect of the Company or any Significant
Subsidiary or one or more Subsidiaries which, in the aggregate, would
constitute a Significant Subsidiary in an involuntary case or proceeding
under the Federal Bankruptcy Code or any other federal or state
bankruptcy, insolvency, reorganization or similar law or (ii) adjudging
the Company or any Significant Subsidiary or one or more Subsidiaries
which, in the aggregate, would constitute a Significant Subsidiary as
bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in respect
of the Company or any Significant Subsidiary or one or more Subsidiaries
which, in the aggregate, would constitute a Significant Subsidiary, under
the Federal Bankruptcy Code or any other similar applicable federal or
state law for the relief of debtors, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator (or other similar official)
of the Company or any Significant Subsidiary or one or more Subsidiaries
which, in the aggregate, would constitute a Significant Subsidiary or of
any substantial part of any of their properties, or ordering the winding
up or liquidation of any of their affairs, and any such decree or order
remains unstayed and in effect for a period of 60 consecutive days;
(8) the Company or any Significant Subsidiary or one or more
Subsidiaries which, in the aggregate, would constitute a Significant
Subsidiary institutes a voluntary case or proceeding under the Federal
Bankruptcy Code or any other similar applicable federal or state law for
the relief of debtors or any other case or proceedings to be adjudicated
as bankrupt or insolvent, or the Company or any Significant Subsidiary or
one or more Subsidiaries which, in the aggregate, would constitute a
Significant Subsidiary consents to the entry of a decree or order for
relief in respect of the Company or any Significant Subsidiary or one or
more Subsidiaries which, in the aggregate, would constitute a Significant
Subsidiary in any involuntary case or proceeding under the Federal
Bankruptcy Code or any other similar applicable federal or state law for
the relief of debtors or to the institution of bankruptcy or insolvency
proceedings against the Company or any Significant Subsidiary or one or
more Subsidiaries which, in the aggregate, would constitute a Significant
Subsidiary or the Company or any Significant Subsidiary or one or more
Subsidiaries which, in the aggregate, would constitute a Significant
Subsidiary files a petition or answer or consent seeking reorganization
or relief under the Federal Bankruptcy Code or any other similar
applicable federal or state law for the relief of debtors, or consents to
the filing of any such petition or to the appointment of or taking
possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of any of the Company or any
Significant Subsidiary or one or more Subsidiaries which, in the
aggregate, would constitute a
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significant Subsidiary or of any substantial part of its property, or
makes an assignment for the benefit of creditors, or is or are unable to
pay debts generally as they come due, or admits in writing its or their
inability to pay its or their debts generally as they become due or takes
corporate action in furtherance of any such action; or
(9) any representation or warranty of the Company in this 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 502. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default (other than as specified in Section 501(7) or
501(8) with respect to the Company or any Significant Subsidiary or one or more
Subsidiaries which, in the aggregate, would constitute a Significant
Subsidiary) shall occur and be continuing, the Trustee, by notice to the
Company, or the Holders of not less than 25% in aggregate principal amount of
the Notes of any series 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 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;
provided, however, that the Trustee or such Holders shall, prior to such
declaration of acceleration, provide not less than two days' prior written
notice of the Trustee's or such Holders' intent to so accelerate to the agent
or agents for the Banks under the Bank Credit Agreement for the benefit of
holders of Designated Senior Indebtedness, such notice to be delivered to the
agent or agents at the Agent Address. If an Event of Default specified in
Section 501(7) or 501(8) 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.
At any time after a declaration of acceleration has been made with respect
to any series of Notes (or all Notes, as the case may be) and before a judgment
or decree for payment of money due has been obtained by the Trustee as
hereinafter in this Article provided, the Holders of at least 75% in aggregate
principal amount of the Notes of such series then Outstanding (or of all of the
Notes, as the case may be), by written notice to the Company and the Trustee,
may rescind and annul such declaration and its consequences if:
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay:
(A) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel,
(B) all overdue interest on the Notes of such series then
Outstanding (or on all Outstanding Notes, as the case may be),
(C) all unpaid principal of and premium, if any, on any
Outstanding Notes of such series (or of all Outstanding Notes, as
the case may be) which has become due
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otherwise than by such declaration of acceleration, and
interest on such unpaid principal at the rate borne by the Notes of
such series, and
(D) 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 has become due otherwise
than by such declaration of acceleration;
(2) the rescission would not conflict with any judgment or decree of
a court of competent jurisdiction; and
(3) all Events of Default, other than the non-payment of amounts of
principal of, premium, if any, and interest on Notes that have become due
solely by such declaration of acceleration, have been cured or waived as
provided in Section 513.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
SECTION 503.Collection of Indebtedness and Suits for Enforcement by
Trustee.
The Company covenants that if
(a) default is made in the payment of any installment of interest on
any Note of any series when such interest becomes due and payable and
such default continues for a period of 10 days, or
(b) default is made in the payment of the principal of (or premium,
if any, on) any Note of any series at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to the Trustee for the
benefit of the Holders of Notes of such series, the whole amount then due and
payable on such Notes for principal (and premium, if any) and interest, and
interest on any overdue principal (and premium, if any) and, to the extent that
payment of such interest shall be legally enforceable, upon any overdue
installment of interest, at the rate borne by the Notes of such series; and, in
addition thereto, such further amount as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Company or any other obligor upon the Notes of such series and
collect the moneys adjudged or decreed to be payable in the manner provided by
law out of the property of the Company or any other obligor upon the Notes of
such series, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate private or judicial proceedings as the Trustee
shall deem most effectual to protect and enforce any such rights.
Without limiting the generality of the foregoing, the Company agrees to
pay all reasonable out-of-pocket expenses (including without limitation
reasonable attorneys' fees and costs, and reasonable consulting, accounting,
appraisal, investment banking and similar professional fees and charges)
incurred
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by the Trustee or any Holder in connection with the enforcement of or
preservation of rights under this Indenture after the occurrence of a Default
or an Event of Default or any other event or circumstance which would
constitute a Default or Event of Default if not amended, waived or consented
to; provided, however, that the Company will not be responsible for the fees or
expenses of more than five law firms (one of which shall in all cases be
counsel, if any, to the Holder or Holders of the Institutional Series B Notes).
SECTION 504. Trustee May File Proof of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the Notes
or the property of the Company or of such other obligor or their creditors, the
Trustee (irrespective of whether the principal of the Notes shall then be due
and payable as therein expressed or by declaration or otherwise and
irrespective of whether the Trustee shall have made any demand on the Company
for the payment of overdue principal, premium, if any, or interest) shall be
entitled and empowered, by intervention in such proceeding or otherwise,
(i) to file and prove a claim for the whole amount of principal (and
premium, if any) and interest owing and unpaid in respect of the Notes
and to file such other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee (including any claim
for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel) and of the Holders allowed in such
judicial proceeding; and
(ii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator
or similar official in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay the
Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 606.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition or other similar
arrangement affecting the Notes or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Holder in any such
proceeding.
SECTION 505. Trustee May Enforce Claims without Possession of Notes.
All rights of action and claims under this Indenture or the Notes may be
prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any
such proceeding instituted by the Trustee shall be brought in its own name and
as trustee of an express trust, and any recovery of judgment shall, after
provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel be for the
ratable benefit of the Holders of the Notes in respect of which such judgment
has been recovered.
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SECTION 506. Application of Money Collected.
Subject to Article Fourteen, any money collected by the Trustee pursuant
to this Article shall be applied in the following order, at the date or dates
fixed by the Trustee and, in case of the distribution of such money on account
of principal (or premium, if any) or interest, upon presentation of the Notes
and the notation thereon of the payment if only partially paid and upon
surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section
606;
SECOND: To the payment of the amounts then due and unpaid for
principal of (any premium, if any) and interest on the Notes in respect
of which or for the benefit of which such money has been collected,
ratably, without preference or priority of any kind, according to the
amounts due and payable on such Notes for principal (and premium, if any)
and interest, respectively, with application on the Notes to be made
first, to the payment of interest on the Notes, second, to the payment of
premium, if any, then due on the Notes, third, to the payment of
principal accrued on the Notes and fourth, to the payment of any and all
other amounts due and owing under the Indenture; and
THIRD: The balance, if any, to the Company.
SECTION 507. Limitation on Suits.
No Holder of any Notes of any series shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee
of a continuing Event of Default;
(2) the Holders of not less than 25% in principal amount of the
Outstanding Notes of such series shall have made written request to the
Trustee to institute proceedings in respect of such Event of Default in
its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 30 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(5) no direction inconsistent with such written request has been
given to the Trustee during such 30-day period by the Holders of a
majority or more in principal amount of the Outstanding Notes of such
series;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
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SECTION 508. Unconditional Right of Holders to Receive Principal, Premium
and Interest.
Subject to the provisions of Article Fourteen hereof and notwithstanding
any other provision in this Indenture, the Holder of any Note shall have the
right, which is absolute and unconditional, to receive payment, as provided
herein and in such Note of the principal of (and premium, if any) and interest
on, such Note on the respective Stated Maturities expressed in such Note (or,
in the case of redemption, on the Redemption Date) and to institute suit for
the enforcement of any such payment, and such rights shall not be impaired
without the consent of such Holder.
SECTION 509. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce any
right or remedy under this Indenture and such proceeding has been discontinued
or abandoned for any reason, or has been determined adversely to the Trustee or
to such Holder, then and in every such case, subject to any determination in
such proceeding, the Company, the Trustee and the Holders shall be restored
severally and respectively to their former positions hereunder and thereafter
all rights and remedies of the Trustee and the Holders shall continue as though
no such proceeding had been instituted.
SECTION 510. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment of
mutilated, destroyed, lost or stolen Notes in the last paragraph of Section
306, no right or remedy herein conferred upon or reserved to the Trustee or to
the Holders is intended to be exclusive of any other right or remedy, and every
right and remedy shall, to the extent permitted by law, be cumulative and in
addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
SECTION 511. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Note of any
series to exercise any right or remedy accruing upon any Event of Default shall
impair any such right or remedy or constitute a waiver of any such Event of
Default or an acquiescence therein. Every right and remedy given by this
Article or by law to the Trustee or to the Holders may be exercised from time
to time, and as often as may be deemed expedient, by the Trustee or by the
Holders, as the case may be.
SECTION 512. Control by Holders.
The Holders of not less than a majority in principal amount of the Notes
Outstanding 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), shall 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, provided, however,
that
(1) such direction shall not be in conflict with any rule of law or
with this Indenture,
(2) subject to the provisions of TIA Section 315, the Trustee may
take any other action deemed proper by the Trustee which is not
inconsistent with such direction, and
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(3) the Trustee need not take any action which involves it in
personal liability or is unjustly prejudicial to the Holders not
consenting.
SECTION 513. Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of the Notes
Outstanding 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 all of the Institutional
Series B Notes), may on behalf of the Holders of all the Notes of such series
or both series, as the case may be, waive any past Default or Event of Default
hereunder and its consequences, except a Default or Event of Default
(1) in the payment of the principal of (or premium, if any) or
interest on any Note, or
(2) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of
each Outstanding Note affected.
Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
Default or Event of Default or impair any right consequent thereon.
SECTION 514. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Note by his
acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy
under this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may
in its discretion assess reasonable costs, including reasonable attorneys'
fees, against any party litigant in such suit, having due regard to the merits
and good faith of the claims or defenses made by such party litigant; but the
provisions of this Section shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder, or group of Holders, holding in
the aggregate more than 10% in principal amount of the Outstanding Notes of any
series, or to any suit instituted by any Holder for the enforcement of the
payment of the principal of (or premium, if any) or interest on any Note on or
after the respective Stated Maturities expressed in such Note (or, in the case
of redemption, on or after the Redemption Date).
SECTION 515. Waiver of Stay, Extension or Usury Laws.
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law or any usury law or
other law which would prohibit or forgive the Company from paying all or any
portion of the principal of, premium, if any, or interest on the Notes as
contemplated herein, wherever enacted, now or at any time hereafter in force,
or which may affect the covenants or the performance of this Indenture and (to
the extent that it may lawfully do so) the Company hereby expressly waives all
benefit or advantage of any such law, and covenants that it will not hinder,
delay or
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impede the execution of any power herein granted to the Trustee, but
will suffer and permit the execution of every such power as though no such law
had been enacted.
ARTICLE SIX
THE TRUSTEE
SECTION 601. Notice of Defaults.
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee shall transmit in the manner and to the extent
provided in TIA Section 313(c), notice of such Default hereunder within 10 days
after such occurrence, unless such Default shall have been cured or waived;
provided, however, that, except (i) in the case of a Default in the payment of
the principal of (or premium, if any) or interest on any Note and (ii) except
with respect to notice of a Default or an Event of Default to be made to the
Holder or Holders of the Institutional Series B Notes, which shall in all cases
be made pursuant hereto, the Trustee shall be protected in withholding such
notice if and so long as the board of directors, the executive committee or a
trust committee of directors and/or Responsible Officers of the Trustee in good
faith determines that the withholding of such notice is in the interest of the
Holders.
SECTION 602. Certain Rights of Trustee.
Subject to the provisions of TIA Section 315(a) through 315(d)
(1) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document believed by it to be genuine and to have been signed or
presented by the proper party or parties;
(2) any request or direction of the Company mentioned herein shall
be sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a
Board Resolution;
(3) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless
other evidence be herein specifically prescribed) may, in the absence of
bad faith on its part, rely upon an Officers' Certificate;
(4) the Trustee may consult with counsel of its selection and the
written advice of such counsel or any opinion of Counsel shall be full
and complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon;
(5) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such
Holders shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;
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(6) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and
premises of the Company, personally or by agent or attorney;
(7) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care
by it hereunder; and
(8) the Trustee shall not be liable for any action taken, suffered
or omitted by it in good faith and believed by it to be authorized or
within the discretion or rights or powers conferred upon it by this
Indenture.
The Trustee shall not be required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its
duties hereunder, or in the exercise of any of its rights or powers, if
it shall have reasonable grounds for believing that repayment of such
funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
SECTION 603. Trustee Not Responsible for Recitals or Issuance of Notes.
The recitals contained herein and in the Notes, except for the Trustee's
certificates of authentication, shall be taken as the statements of the
Company, and the Trustee assumes no responsibility for their correctness. The
Trustee makes no representations as to the validity or sufficiency of this
Indenture or of the Notes, except that the Trustee represents that it is duly
authorized to execute and deliver this Indenture, authenticate the Notes and
perform its obligations hereunder. The Trustee shall not be accountable for
the use or application by the Company of Notes or the proceeds thereof.
SECTION 604. May Hold Notes.
The Trustee, any Paying Agent, any Note Registrar or any other agent of
the Company or of the Trustee, in its individual or any other capacity, may
become the owner or pledgee of Notes and, subject to TIA Sections 310(b) and
311, may otherwise deal with the Company with the same rights it would have if
it were not Trustee, Paying Agent, Note Registrar or such other agent.
SECTION 605. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated from
other funds except to the extent required by law. The Trustee shall be under
no liability for interest on any money received by it hereunder except as
otherwise agreed in writing with the Company.
SECTION 606. Compensation and Reimbursement.
The Company agrees:
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(1) to pay to the Trustee from time to time such compensation as the
Company and the Trustee shall from time to time agree in writing for all
services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a
trustee of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision
of this Indenture (including the reasonable compensation and the expenses
and disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or bad
faith; and
(3) to indemnify each of the Trustee or any predecessor Trustee for,
and to hold it harmless against, any loss, damages, claims or liability
or expense, including taxes (other than taxes based on the income of the
Trustee), incurred without negligence or bad faith on its part, arising
out of or in connection with the acceptance or administration of this
trust, including the costs and expenses of defending itself against any
claim or liability in connection with the exercise or performance of any
of its powers or duties hereunder.
The obligations of the Company under this Section to compensate the
Trustee, to pay or reimburse the Trustee for expenses, disbursements and
advances and to indemnify and hold harmless the Trustee shall constitute
additional indebtedness hereunder and shall survive the satisfaction and
discharge of this Indenture. As security for the performance of such
obligations of the Company, the Trustee shall have a claim prior to the Notes
upon all property and funds held or collected by the Trustee as such, except
funds held in trust for the payment of principal of (and premium, if any) or
interest on particular Notes.
When the Trustee incurs expenses or renders services in connection with an
Event of Default specified in Section 501(7) or Section 501(8), the expenses
(including the reasonable charges and expenses of its counsel) and the
compensation for the services are intended to constitute expenses of
administration under any applicable federal or state bankruptcy, insolvency or
other similar law.
SECTION 607. Conflicting Interests. The Trustee shall comply with the
provisions of Section 310(b) of the TIA.
SECTION 608. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be eligible to
act as Trustee under TIA Section 310(a)(1) and shall have a combined capital
and surplus of at least $100,000,000 and have its Corporate Trust Office in The
City of New York (or if its Corporate Trust Office shall not be located in The
City of New York, which shall maintain an office in The City of New York where
the Notes may be presented or surrendered and notices and demands hereunder may
be served or made); provided, however, that nothing hereunder shall be deemed
to prohibit Norwest Bank Minnesota, National Association from acting as Trustee
hereunder. If such corporation publishes reports of condition at least
annually, pursuant to law or to the requirements of federal, state, territorial
or District of Columbia supervising or examining authority, then for the
purposes of this Section, the combined capital and surplus of such corporation
shall be deemed to be its combined capital and surplus as set forth in its most
recent report of condition so published. If at any time the Trustee shall
cease to be eligible in accordance
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with the provisions of this Section, it shall resign immediately in the manner
and with the effect hereinafter specified in this Article.
SECTION 609. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until
the acceptance of appointment by the successor Trustee in accordance with
the applicable requirements of Section 610.
(b) The Trustee may resign at any time by giving written notice
thereof to the Company.
(c) The Trustee may be removed at any time by an Act of the Holders
of not less than a majority in principal amount of the Outstanding Notes
of any or both series, delivered to the Trustee and to the Company with
respect to such series or both series, as the case may be.
(d) If at any time:
(1) the Trustee shall fail to comply with the provisions of TIA
Section 310(b), or
(2) the Trustee shall cease to be eligible under Section 608, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company, by a Board Resolution, may remove the
Trustee, or (ii) subject to TIA Section 315(e), any Holder may, on behalf of
himself and all others similarly situated, petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any
cause, the Company, by a Board Resolution, shall promptly appoint a
successor Trustee. If, within one year after such resignation, removal
or incapability, or the occurrence of such vacancy, a successor Trustee
shall be appointed by Act of the Holders of a majority in principal
amount of the outstanding Notes delivered to the Company and the retiring
Trustee, the successor Trustee so appointed shall, forthwith upon its
acceptance of such appointment, become the successor Trustee and
supersede the successor Trustee appointed by the Company. If no
successor Trustee shall have been so appointed by the Company or the
Holders and accepted appointment in the manner hereinafter provided, the
Company or Holders of at least 25% in principal amount of the Notes then
Outstanding may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee to the
Holders of Notes in the manner provided for in Section 106. Each notice
shall include the name of the successor Trustee and the address of its
Corporate Trust Office.
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(g) If the instrument of acceptance by a successor Trustee required
by Section 610 shall not have been delivered to the Trustee within 90
days after the giving of such notice of resignation, the Trustee
resigning or being removed may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
SECTION 610. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute, acknowledge and
deliver to the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act,
deed or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee; but, on request of the Company or the successor
Trustee, such retiring Trustee shall, upon payment of its charges, execute and
deliver an instrument transferring to such successor Trustee all the rights,
powers and trusts of the retiring Trustee and shall duly assign, transfer and
deliver to such successor Trustee all property and money held by such retiring
Trustee hereunder. Upon request of any such successor Trustee, the Company
shall execute any and all instruments for more fully and certainly vesting in
and confirming to such successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.
SECTION 611. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Notes shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Notes so authenticated with the same effect
as if such successor Trustee had itself authenticated such Notes; and in case
at that time any of the Notes shall not have been authenticated, any successor
Trustee may authenticate such Notes either in the name of any predecessor
hereunder or in the name of the successor Trustee; and in all such cases such
certificates shall have the full force which it is anywhere in the Notes or in
this Indenture provided that the certificate of the Trustee shall have;
provided, however, that the right to adopt the certificate of authentication of
any predecessor Trustee or to authenticate Notes in the name of any predecessor
Trustee shall apply only to its successor or successors by merger, conversion
or consolidation.
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ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. Disclosure of Names and Addresses of Holders.
Every Holder of Notes, by receiving and holding the same, agrees with the
Company and the Trustee that none of the Company or the Trustee or any agent of
either of them shall be held accountable by reason of the disclosure of any
such information as to the names and addresses of the Holders in accordance
with TIA Section 312, regardless of the source from which such information was
derived, and that the Trustee shall not be held accountable by reason of
mailing any material pursuant to a request made under TIA Section 312.
SECTION 702. Reports by Trustee.
Within 60 days after May 15 of each year commencing with the first May 15
after the first issuance of Notes, the Trustee shall transmit to the Holders,
in the manner and to the extent provided in TIA Section 313(c), a brief report
dated as of such May 15 if required by TIA Section 313(a).
SECTION 703. Reports by Company.
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, as their names and addresses appear in the Note Register, 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.
Delivery of such reports, information and documents to the Trustee is for
informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801. Company May Consolidate, etc., Only on Certain Terms.
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 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
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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 this Indenture, and in each case, 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 Tangible Net Worth in an
amount which is not less than the Consolidated Tangible 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.
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 this Indenture.
SECTION 802. Successor Substituted.
Upon any consolidation of the Company with or merger of the Company with
or into any other corporation or any conveyance, transfer or lease of the
properties and assets of the Company substantially as an entirety to any person
in accordance with Section 801, the Surviving Entity shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such Surviving Entity had been named
as the Company herein, and in the event of any such conveyance or transfer, the
Company (which term shall for this purpose mean the person named as the
"Company" in the first paragraph of this Indenture or any Surviving Entity
which shall theretofore become such in the manner described in Section 801),
except in the case of a lease, shall
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be discharged of all obligations and covenants under this Indenture and the
Notes and may be dissolved and liquidated.
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. Supplemental Indentures without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a
Board Resolution, and the Trustee, at any time and from time to time, may enter
into one or more indentures supplemental hereto, in form satisfactory to the
Trustee, for any of the following purposes:
(1) to evidence the succession of another person to the Company and
the assumption by any such successor of the covenants of the Company
contained herein and in the Notes;
(2) to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power herein conferred upon the
Company;
(3) to add any additional Events of Default;
(4) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee pursuant to the requirements of Section
610;
(5) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein, or to
make any other provisions with respect to matters or questions arising
under this Indenture which shall not be inconsistent with the provisions
of this Indenture; provided, however, that such action shall not
adversely affect the interests of the Holders;
(6) to secure the Notes pursuant to the requirements of Section 1012
or otherwise;
(7) to make any other change that does not adversely affect the
rights of any Holder; or
(8) to comply with the TIA.
Notwithstanding the above, the Trustee and the Company may not make any
change that adversely affects the legal rights of any Holders hereunder. The
Company shall be required to deliver to the Trustee an Opinion of Counsel
stating that any such change under this Section 901 does not adversely affect
the rights of any Holder.
SECTION 902. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in principal
amount of the Outstanding Notes of any or all series which are 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), by
Act of said Holders
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delivered to the Company and the Trustee, the Company, when
authorized by a Board Resolution, and the Trustee may enter into an indenture
or indentures supplemental hereto for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of this
Indenture or of modifying in any manner the rights of the Holders of such
series of Notes or of all series of Notes, as the case may be, under this
Indenture; provided, however, that no such supplemental indenture shall,
without the consent of the Holder of each Outstanding Note affected thereby:
(1) reduce the principal amount outstanding of or extend the fixed
maturity of any Note or alter the redemption provisions with respect
thereto;
(2) make the principal of, premium, if any, or interest on any Note
payable in money other than that stated in the Note;
(3) reduce the percentage in outstanding aggregate principal amount
of Notes the Holders of which must consent to an amendment, supplement or
waiver of any provision of this Indenture or the Notes;
(4) impair the right to institute suit for the enforcement of any
payment on or with respect to the Notes;
(5) waive a default in the payment of the principal of, premium, if
any, or interest on, or redemption or an offer to purchase required
hereunder with respect to, any Note;
(6) reduce or change the rate or time for payment of interest on any
Note;
(7) modify or change any provision of this Indenture affecting the
subordination of the Notes in a manner adverse to the Holders;
(8) modify this Section 902 or Section 508 or Section 513.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it
shall be sufficient if such Act shall approve the substance thereof.
SECTION 903. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby
of the trusts created by this Indenture, the Trustee shall be entitled to
receive, and (subject to Section 602 hereof) shall be fully protected in
relying upon, an Officers' Certificate and an Opinion of Counsel stating that
the execution of such supplemental indenture is authorized or permitted by this
Indenture. The Trustee may, but shall not be obligated to, enter into any such
supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
SECTION 904. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for
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all purposes; and every Holder of Notes theretofore or thereafter authenticated
and delivered hereunder shall be bound thereby.
SECTION 905. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to the Article shall
conform to the requirements of the Trust Indenture Act as then in effect.
SECTION 906. Reference in Notes to Supplemental Indentures.
Notes authenticated and delivered after the execution of any supplemental
indenture pursuant to this Article may, and shall if required by the Trustee,
bear a notation in form approved by the Trustee as to any matter provided for
in such supplemental indenture. if the Company shall so determine, new Notes so
modified as to conform, in the opinion of the Trustee and the Company, to any
such supplemental indenture may be prepared and executed by the Company and
authenticated and delivered by the Trustee in exchange for outstanding Notes.
SECTION 907. Notice of Supplemental Indentures.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of Section 902, the Company
shall give notice thereof to the Holders of each Outstanding Note affected, in
the manner provided for in Section 106, setting forth in general terms the
substance of such supplemental indenture.
ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium, If Any, and Interest.
The Company covenants and agrees for the benefit of the Holders that it
will duly and punctually pay the principal of (and premium, if any) and
interest on the Notes in accordance with the terms of the Notes and this
Indenture.
The Company shall pay interest on overdue principal at the rate borne by
the Notes; it shall pay interest on overdue installments of interest at the
same rate to the extent lawful.
SECTION 1002. Maintenance of Office or Agency and Notice of Agent Address.
The Company will maintain in the City of Chicago an office or agency where
Notes may be presented or surrendered for payment, where Notes may be
surrendered for registration of transfer or exchange and where notices and
demands to or upon the Company in respect of the Notes and this Indenture may
be served. The Corporate Trust Office of the Trustee shall be such office or
agency of the Company, unless the Company shall designate and maintain some
other office or agency for one or more of such purposes. The Company will give
prompt written notice to the Trustee of any change in the location of any such
office or agency. If at any time the Company shall fail to maintain any such
required office or agency or shall fail to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be made or
served at the Corporate Trust Office of the Trustee, and
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the Company hereby appoints the Trustee as its agent to receive all such
presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other offices
or agencies (in or outside of the City of Chicago) where the Notes may be
presented or surrendered for any or all such purposes and may from time to time
rescind any such designation; provided, however, that no such designation or
rescission shall in any manner relieve the Company of its obligation to
maintain an office or agency in the City of Chicago for such purposes. The
Company will give prompt written notice to the Trustee of any such designation
or rescission and any change in the location of any such other office or
agency.
The Company agrees to promptly deliver to the Trustee and the Holder or
Holders of the Institutional Series B Notes, within not less than 10 Business
Days following any change in the Agent Address, written notice setting forth
the new Agent Address.
SECTION 1003. Money for Note Payments to Be Held in Trust.
Subject to Article Fourteen, whenever the Company shall have one or more
Paying Agents for the Notes, it will, on or before each due date of the
principal of (and premium, if any) or interest on, any Notes, deposit with a
Paying Agent a sum (and, if applicable, Secondary Notes) sufficient to pay the
principal (and premium, if any) or interest so becoming due, such sum (and, if
applicable, Secondary Notes) to be held in trust for the benefit of the persons
entitled to such principal, premium or interest, and, unless such Paying Agent
is the Trustee, the Company will promptly notify the Trustee of such action or
any failure so to act.
The Company will cause each Paying Agent (other than the Trustee) to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will, subject to Article Fourteen:
(1) hold all sums (and, if applicable, Secondary Notes) held by it
for the payment of the principal of (and premium, if any) or interest on
Notes in trust for the benefit of the persons entitled thereto until such
sums (and, if applicable, Secondary Notes) shall be paid to such persons
or otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or any
other obligor upon the Notes) in the making of any payment of principal
(and premium, if any) or interest; and
(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent.
Subject to Article Fourteen, the Company may by Company Order direct any Paying
Agent to pay, to the Trustee all sums (and, if applicable, Secondary Notes)
held in trust by such Paying Agent, such sums to be held by the Trustee upon
the same trusts as those upon which such sums were held by such Paying Agent;
and, upon such payment by any Paying Agent to the Trustee, such Paying Agent
shall be released from all further liability with respect to such sums (and, if
applicable, Secondary Notes).
Any money or Secondary Notes deposited with the Trustee or any Paying
Agent in trust for the payment of the principal of (and premium, if any) or
interest on any Note and remaining unclaimed for two years after such principal
(and premium, if any) or interest has become due and payable shall be paid
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to the Company on Company Request; and the Holder of such Note shall thereafter,
as an unsecured general creditor, look only to the Company for payment thereof,
and all liability of the Trustee or such Paying Agent with respect to such
trust money, and all liability of the Company as trustee thereof, shall
thereupon cease; provided, however, that the Trustee or such Paying Agent,
before being required to make any such repayment, may at the expense of the
Company cause to be published once, in a newspaper published in the English
language, customarily published on each Business Day and of general circulation
in the City of Chicago, notice that such money remains unclaimed and that,
after a date specified therein, which shall not be less than 30 days from the
date of such publication, any unclaimed balance of such money then remaining
will be repaid to the Company.
SECTION 1004. Corporate Existence.
Subject to Article Eight, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect the corporate
existence, material rights (charter and statutory) and franchises of the
Company and each Subsidiary; provided, however, that the Company shall not be
required to preserve any such existence (except of the Company), material right
or franchise if the Board of Directors shall determine that the preservation
thereof is no longer desirable in the conduct of the business of the Company
and its Subsidiaries as a whole and that the loss thereof is not
disadvantageous in any material respect to the Holders.
SECTION 1005. Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all material taxes, assessments
and governmental charges levied or imposed upon the Company or any Restricted
Subsidiary or upon the income, profits or property of the Company or any
Restricted Subsidiary and (b) all lawful and material claims for labor,
materials and supplies, which, if unpaid, might by law become a lien upon the
property of the Company or any Restricted Subsidiary; provided, however, that
the Company shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings.
SECTION 1006. Maintenance of Properties.
The Company will cause all properties owned by the Company or any
Restricted Subsidiary or used or held for use in the conduct of its business or
the business of any Restricted Subsidiary to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that
nothing in this Section shall prevent the Company from discontinuing the
maintenance of any of such properties if such discontinuance is, in the
judgment of the Company, desirable in the conduct of its business or the
business of any Restricted Subsidiary and not disadvantageous in any material
respect to the Holders.
SECTION 1007. Insurance.
The Company will at all times keep all of its and its Restricted
Subsidiaries, properties which are of an insurable nature insured with
insurers, believed by the Company to be responsible, against loss or
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damage to the extent that property of similar character is usually so insured by
corporations similarly situated and owning like properties.
SECTION 1008. Compliance Certificate.
The Company shall deliver to the Trustee within 60 days after the end of
each of the Company's first three fiscal quarters and within 120 days after the
end of each of the Company's fiscal years an Officers' Certificate stating
that, to the signers' knowledge, the Company is in compliance with all
conditions and covenants under this Indenture. If such signers have knowledge
of any Default or Event of Default, the certificate shall describe any such
Default or Event of Default and its status. The first certificate to be
delivered pursuant to this Section 1008 shall be for the first fiscal quarter
of the Company ending after the Issue Date and one of the signers of such
Officers' Certificate shall be the Company's principal executive, financial or
accounting officer. Such compliance shall be determined without regard to any
period of grace or requirement of notice provided herein.
SECTION 1009. Notice of Default.
The Company shall deliver to the Trustee within 30 days after the Company
becomes aware or should reasonably have become aware of the occurrence of any
event which is, or after notice or lapse of time or both would become, an Event
of Default, an Officers' Certificate specifying such Default or Event of
Default, the period of existence thereof and what action the Company is taking
or proposes to take with respect thereto.
SECTION 1010. 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:
<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>
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<PAGE> 62
SECTION 1011. Limitation on Restricted Payments.
(a) 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
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(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 (excluding any Investment made pursuant to clause (v)
of the following paragraph), an amount equal to the lesser of the return of
capital with respect to such Investment and the cost of such Investment, in
either case, less the cost of the disposition of such Investments. 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 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.
(b) 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 1012. 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 1013. 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.
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SECTION 1014. 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 obtain 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 this Indenture and listed on Schedule A
hereto.
SECTION 1015. 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 this Indenture and listed on Schedule B hereto 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 than those
existing under the agreement being extended, refinanced, renewed or replaced.
SECTION 1016. 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 subparagraphs (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 $1,000,000.
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SECTION 1017. Limitation on Certain Other Subordinated Indebtedness.
The Company will not issue, directly or indirectly, any Indebtedness which
is subordinated or junior in ranking in any respect to Senior Indebtedness
unless such Indebtedness is expressly pari passu with or subordinated in right
of payment to the Notes.
SECTION 1018. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any term,
provision or condition set forth in Sections 1010 through 1017, inclusive, and
1019 and 1020, if before or after the time for such compliance the Holders of
at least a majority in principal amount of the Outstanding Notes (including the
Holder of the Institutional Series B Notes), by Act of such Holders, waive such
compliance in such instance with such term, provision or condition, but no such
waiver shall extend to or affect such term, provision or condition except to
the extent so expressly waived, and until such waiver shall become effective,
the obligations of the Company and the duties of the Trustee in respect of any
such term, provision or condition shall remain in full force and effect.
SECTION 1019. Consolidated Tangible Net Worth.
The Company will not permit Consolidated Tangible Net Worth at any time
during any fiscal year set forth in the table below to be less than the amount
set forth opposite such fiscal year in such table:
<TABLE>
<CAPTION>
Fiscal Year Beginning February 1, Amount
--------------------------------- ------------
<S> <C>
1996 .......................................... ($ 7,000,000)
1997 .......................................... ($ 2,000,000)
1998 .......................................... $ 6,000,000
1999 .......................................... $12,000,000
2000 and fiscal years thereafter .............. $18,000,000
</TABLE>
SECTION 1020. Fixed Charge Coverage Ratio.
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 period 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 date in such table:
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<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
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>
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101. Right of Redemption -- Series A Notes.
(a) Subject to Article Fourteen hereof, the Series A Notes may be
redeemed, at the election of the Company, as a whole or from time to time in
part, at any time after July 31, 2001, subject to the conditions and at the
Redemption Prices which shall consist of the applicable percentage of the
principal amount of the Series A Notes so redeemed set forth below:
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, any interest accrued on the Series A Notes so redeemed to
the Redemption Date, exclusive of installments of interest whose Stated
Maturity is on or prior to the Redemption Date, payment of which shall have
been made or duly provided for to the registered Holders of Series A Notes on
relevant Record Dates in accordance with Section 307 hereof.
(b) The Series A Notes shall also be subject to redemption 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 as provided in Article Twelve,
in each case at a Redemption Price of 100% of the principal amount of the
Series A Notes so redeemed, plus any installments of interest thereon payable
on or prior to the Redemption Date if payment thereof shall not have been made
or duly provided for to the registered Holders of Series A Notes on relevant
Record Dates in accordance with Section 307 hereof.
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SECTION 1102. Right of Redemption -- Series B Notes.
(a) Subject to Article Fourteen hereof, the Series B Notes may be
redeemed, at the election of the Company, as a whole or from time to time in
part, at any time after the Issue Date, subject to the conditions and at the
Redemption Prices which shall consist of the applicable percentage of the
principal amount of the Series B Notes so redeemed set forth below:
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, any interest accrued on the Series B Notes so redeemed to
the Redemption Date (which interest so accrued shall be paid solely in cash),
exclusive of installments of interest whose Stated Maturity is on or prior to
the Redemption Date, payment of which shall have been made or duly provided for
to the registered Holders of Series B Notes on relevant Record Dates in
accordance with Section 307 hereof.
(b) The Series B Notes shall also be subject to redemption 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 as provided in Article Twelve,
in each case at a Redemption Price of 100% of the principal amount of the
Series B Notes so redeemed, plus any installments of interest thereon payable
on or prior to the Redemption Date if payment thereof shall not have been made
or duly provided for to the registered Holders of Series B Notes on relevant
Record Dates in accordance with Section 307 hereof.
SECTION 1103. Applicability of Article.
Redemption of Notes at the election of the Company or otherwise, as
permitted or required by any provision of this Indenture, shall be made in
accordance with such provision and this Article.
SECTION 1104. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Notes pursuant to Section 1101
or 1102, as the case may be, shall be evidenced by a Board Resolution. In case
of any redemption at the election of the Company, the Company shall, at least
60 days prior to the Redemption Date fixed by the Company (unless a shorter
notice shall be satisfactory to the Trustee), notify the Trustee of such
Redemption Date and of the principal amount of Notes to be redeemed and shall
deliver to the Trustee such documentation and records as shall enable the
Trustee to select the Notes to be redeemed pursuant to Section 1105.
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SECTION 1105. Selection by Trustee of Notes to Be Redeemed.
If less than all the Notes are to be redeemed, the particular Notes to be
redeemed shall be selected not more than 60 days prior to the Redemption Date
by the Trustee, from the Outstanding Notes not previously called for
redemption, 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 and which may
provide for the selection for redemption of portions of the principal amount of
Notes; provided, however, that no such partial redemption shall reduce the
portion of the principal amount of a Note not redeemed to less than $1,000.
The Trustee shall promptly notify the Company and the Note Registrar in
writing of the Notes selected for redemption and, in the case of any Notes
selected for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires,
all provisions relating to redemption of Notes shall relate, in the case of any
Note redeemed or to be redeemed only in part, to the portion of the principal
amount of such Note which has been or is to be redeemed.
SECTION 1106. Notice of Redemption.
Notice of redemption shall be given in the manner provided for in Section
106 not less than 30 nor more than 60 days prior to the Redemption Date, to
each Holder of Series A Notes or Series B Notes, as the case may be, to be
redeemed at such Holder's address appearing in the Note Register.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all Outstanding Notes are to be redeemed, the
identification (and, in the case of a partial redemption, the principal
amounts) of the particular Notes to be redeemed.
(4) that, on the Redemption Date, the Redemption Price (together
with accrued interest, if any, to the Redemption Date payable as provided
in Section 1108) will become due and payable upon each such Note, or the
portion thereof, to be redeemed, and that interest thereon will cease to
accrue on and after said date,
(5) the place or places where such Notes are to be surrendered for
payment of the Redemption Price, and
(6) the relevant CUSIP number(s).
Notice of redemption of Notes to be redeemed at the election of the
Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
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<PAGE> 69
SECTION 1107. Deposit of Redemption Price.
On or prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, segregate and hold in trust as provided in Section 1003) an amount of
money in same-day funds (or New York Clearing House funds if such deposit is
made prior to the applicable Redemption Date) sufficient to pay the Redemption
Price of, and accrued interest on, all the Notes or portions thereof which are
to be redeemed on that date.
SECTION 1108. Notes Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Notes so to be
redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified (together with accrued interest, if any, to
the Redemption Date, which interest, with respect to the Series B Notes, shall
be paid solely in cash), and from and after such date (unless the Company shall
default in the payment of the Redemption Price and accrued interest), such
Notes shall cease to bear interest. Upon surrender of any such Note for
redemption in accordance with said notice, such Note shall be paid by the
Company at the Redemption Price, together with accrued interest, if any, to the
Redemption Date; provided, however, that installments of interest whose Stated
Maturity is on or prior to the Redemption Date shall be payable to the Holders
of such Notes, or one or more Predecessor Notes, registered as such at the
close of business on the relevant Record Dates according to their terms and the
provisions of Section 307.
If any Note called for redemption shall not be so paid upon surrender
thereof for redemption, the principal (and premium, if any) shall, until paid,
bear interest from the Redemption Date at the rate borne by the Notes.
SECTION 1109. Notes Redeemed in Part.
Any Note which is to be redeemed only in part shall be surrendered at the
office or agency of the Company maintained for such purpose pursuant to Section
1002 (with, if the Company or the Trustee so requires, due endorsement by, or a
written instrument of transfer in form satisfactory to the Company and the
Trustee duly executed by, the Holder thereof or such Holder's attorney duly
authorized in writing), and the Company shall execute, and the Trustee shall
authenticate and deliver to the Holder of such Note without service charge, a
new Note or Notes, of any authorized denomination as requested by such Holder,
in aggregate principal amount equal to and in exchange for the unredeemed
portion of the principal amount of the Note so surrendered.
ARTICLE TWELVE
SINKING FUND PAYMENTS
SECTION 1201. Sinking Fund Payments -- Series A Notes.
As and for a Sinking Fund for the retirement of the Series A Notes, the
Company will deposit in accordance with Section 1107 hereof, prior to July 31,
October 31, January 31 and April 30 in each year, commencing with July 31, 2001
to and including July 31, 2004 (each such date being hereinafter referred to as
a Sinking Fund Payment Date), an amount in cash sufficient to redeem on such
Sinking Fund Payment Date $855,000 of the principal amount of Series A Notes,
at the Redemption Price set forth in Section 1101 for redemption through the
operation of the Sinking Fund. Each such Sinking Fund
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<PAGE> 70
Payment shall be applied to the redemption of Series A Notes on such
Sinking Fund Payment Date as herein provided. The Trustee shall, on or before
the thirtieth day prior to such Sinking Fund Payment Date, select, in the manner
provided in Section 1105, the Series A Notes to be redeemed on the next Sinking
Fund Payment Date and cause notice of the redemption thereof to be given in the
name of and at the expense of the Company in the manner provided in Section
1106. Such notice having been duly given, the redemption of such Series A Notes
shall be made upon the terms and in the manner stated in Sections 1108 and 1109.
SECTION 1202. Sinking Fund Payments -- Series B Notes.
As and for a Sinking Fund for the retirement of the Series B Notes, the
Company will deposit in accordance with Section 1107 hereof, prior to July 31,
October 31, January 31 and April 30 in each year, commencing with July 31, 2001
to and including July 31, 2004 (each such date being hereinafter referred to as
a Sinking Fund Payment Date), an amount in cash sufficient to redeem on such
Sinking Fund Payment Date the Sinking Fund Dollar Amount of the principal
amount of Series B Notes, at the Redemption Price set forth in Section 1102 for
redemption through the operation of the Sinking Fund. For purposes of this
Section 1202, the "Sinking Fund Dollar Amount" shall mean the quotient obtained
by dividing (a) the aggregate principal amount of Series B Notes Outstanding at
July 31, 2001 by (b) 14. Each such Sinking Fund Payment shall be applied to
the redemption of Series B Notes on such Sinking Fund Payment Date as herein
provided. The Trustee shall, on or before the thirtieth day prior to such
Sinking Fund Payment Date, select, in the manner provided in Section 1105, the
Series B Notes to be redeemed on the next Sinking Fund Payment Date and cause
notice of the redemption thereof to be given in the name of and at the expense
of the Company in the manner provided in Section 1106. Such notice having been
duly given, the redemption of such Series B Notes shall be made upon the terms
and in the manner stated in Sections 1108 and 1109.
ARTICLE THIRTEEN
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1301. Company's Option to Effect Defeasance or Covenant
Defeasance.
The Company may, at its option by Board Resolution, at any time, with
respect to the Notes, elect to have either Section 1302 or Section 1303 be
applied to all Outstanding Notes upon compliance with the conditions set forth
below in this Article Twelve.
SECTION 1302. Defeasance and Discharge.
Upon the Company's exercise under Section 1301 of the option applicable to
this Section 1302, the Company shall be deemed to have been discharged from
their obligations with respect to all Outstanding Notes on the date the
conditions set forth in Section 1304 are satisfied (hereinafter, "defeasance").
For this purpose, such defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the then
Outstanding Notes, which shall thereafter be deemed to be "Outstanding" only
for the purposes of Section 1305 and the other Sections of this Indenture
referred to in (A) and (B) below, and to have satisfied all its other
obligations under such Notes and this Indenture insofar as such Notes are
concerned (and the Trustee, at the expense of the Company, shall execute proper
instruments acknowledging the same), and Holders of the Notes and any amounts
deposited under Section 1304 shall cease to be subject to any obligations to,
or the rights of, any
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holder of Senior Indebtedness under Article Fourteen, Article Fifteen or
otherwise, except for the following which shall survive until otherwise
terminated or discharged hereunder: (A) the rights of Holders of Outstanding
Notes to receive, solely from the trust fund described in Section 1304 and as
more fully set forth in such Section, payments in respect of the principal of
(and premium, if any) and interest on such Notes when such payments are due, (B)
the Company's obligations with respect to such Notes under Sections 304, 305,
306, 1002 and 1003, (C) the rights, powers, trusts, duties and immunities of the
Trustee hereunder and (D) this Article Thirteen. Subject to compliance with this
Article Thirteen, the Company may exercise its option under this Section 1302
notwithstanding the prior exercise of its option under Section 1303 with respect
to the Notes.
SECTION 1303. Covenant Defeasance.
Upon the Company's exercise under Section 1301 of the option applicable to
this Section 1303, the Company shall be released from its obligations under any
covenant contained in Section 801 and in Sections 1007 through 1020 with
respect to the Outstanding Notes on and after the date the conditions set forth
below are satisfied (hereinafter, "covenant defeasance"), and the Notes shall
thereafter be deemed not to be "Outstanding" for the purposes of any direction,
waiver, consent or declaration or Act of Holders (and the consequences of any
thereof) in connection with such covenants, but shall continue to be deemed
"Outstanding" for all other purposes hereunder and Holders of the Notes and any
amounts deposited under Section 1304 shall cease to be subject to any
obligations to, or the rights of, any holder of Senior Indebtedness under
Article Fourteen, Article Fifteen or otherwise. For this purpose, such
covenant defeasance means that, with respect to the Outstanding Notes, the
Company may omit to comply with and shall have no liability in respect of any
term, condition or limitation set forth in any such covenant, whether directly
or indirectly, by reason of any reference elsewhere herein to any such covenant
or by reason of any reference in any such covenant to any other provision
herein or in any other document and such omission to comply shall not
constitute a Default or an Event of Default under Sections 501(3), 501(4) and
501(5), but, except as specified above, the remainder of this Indenture and
such Notes shall be unaffected thereby.
SECTION 1304. Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to application of either Section
1302 or Section 1303 to the Outstanding Notes:
(1) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the
requirements of Section 608 who shall agree to comply with the provisions
of this Article Thirteen applicable to it) as trust funds in trust for
the purpose of making the following payments, specifically pledged as
security for, and dedicated solely to, the benefit of the Holders of such
Notes, (A) cash in United States dollars in an amount, or (B) U.S.
Government obligations which through the scheduled payment of principal
and interest in respect thereof in accordance with their terms will
provide, not later than one day before the due date of any payment, money
in an amount, or (C) a combination thereof, sufficient, in the opinion of
a nationally recognized firm of independent public accountants expressed
in a written certification thereof delivered to the Trustee, to pay and
discharge, and which shall be applied by the Trustee (or other qualifying
trustee) to pay and discharge, the principal of (and premium, if any) and
interest on the Outstanding Notes on the Stated Maturity (or Redemption
Date, if applicable) of such principal (and premium, if any) or
installment of interest; provided, however, that the Trustee shall have
been irrevocably instructed to apply such money or the proceeds of such
U.S. Government Obligations to said payments with respect to
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<PAGE> 72
the Notes; and provided further that upon the effectiveness of this
Section 1304, the cash or U.S. Government Obligations deposited shall not
be subject to the rights of the holders of Senior Indebtedness pursuant to
the provisions of Article Fourteen. Prior to such a deposit, the Company
may give the Trustee, in accordance with Section 1103 hereof, a notice of
its election to redeem all of the outstanding Notes at a future date
pursuant to Article Eleven hereof, which notice shall be irrevocable.
Such irrevocable notice, if given, shall be given effect in applying the
foregoing. For this purpose, "U.S. Government Obligations" means
securities that are (x) direct obligations of the United States of America
for the timely payment of which its full faith and credit is pledged or
(y) obligations of a person controlled or supervised by and acting as an
agency or instrumentality of the United States of America the timely
payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Notes Act), as custodian with respect to any such U.S.
Government obligation or a specific payment of principal of or interest on
any such U.S. Government Obligation held by such custodian for the account
of the holder of such depository receipt, provided that (except as
required by law) such custodian is not authorized to make any deduction
from the amount payable to the holder of such depository receipt from any
amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of principal of or interest on the U.S.
Government Obligation evidenced by such depository receipt;
(2) No Default or Event of Default with respect to the Notes shall
have occurred and be continuing on the date of such deposit or, insofar
as Section 501(7) or 501(8) hereof are concerned, 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);
(3) Such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default: under, this Indenture or
any other material agreement or instrument to which the Company is a
party or by which it is bound;
(4) In the case of an election under Section 1302, the Company shall
have delivered to the Trustee an Opinion of Counsel stating that (x) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling, or (y) since date of the Indenture, there has
been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion shall confirm that, the
Holders of the Outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such 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 had
not occurred;
(5) Such defeasance or covenant defeasance shall not cause the
Trustee to have a conflicting interest with respect to any Notes of the
Company;
(6) In the case of an election under Section 1303, 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 such 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 covenant defeasance had not occurred;
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(7) The Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that (x) the trust funds will not be subject to any
rights of any holders of Senior Indebtedness of the Company, including,
without limitation, rights arising under this Indenture, and (y) after
the 91st day following the deposit, the trust funds will not be subject
to the effect of any applicable Federal Bankruptcy Code;
(8) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to either the defeasance under Section
1302 or the covenant defeasance under Section 1303 (as the case may be)
have been complied with;
(9) 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 or any Guarantor over the other
creditors of the Company with the intent of defeating, hindering or
delaying or defrauding creditors of the Company or others;
(10) 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
(11) 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 1305. Deposited Money and U.S. Government Obligations to Be Held
in Trust; Other Miscellaneous Provisions.
Subject to the provisions of the last paragraph of Section 1003, all money
and U.S. Government Obligations (including the proceeds thereof) deposited with
the Trustee (or other qualifying trustee--collectively for purposes of this
Section 1305, the "Trustee") pursuant to Section 1304 in respect of the
Outstanding Notes shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Notes and this Indenture, to the
payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent) as the Trustee may determine, to the Holders of
such Notes of all sums due and to become due thereon in respect of principal
(and premium, if any) and interest, but such money need not be segregated from
other funds except to the extent required by law. Money and U.S. Government
Obligations so held in trust are not subject to Article Fourteen.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the U.S. Government Obligations
deposited pursuant to Section 1304 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is
for the account of the Holders of the Outstanding Notes.
Anything in this Article Thirteen to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or U.S. Government Obligations held by it as provided in
Section 1304 which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, are
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<PAGE> 74
in excess of the amount thereof which would then be required to be deposited
to effect an equivalent defeasance or covenant defeasance, as applicable, in
accordance with this Article.
SECTION 1306. Reinstatement.
If the Trustee or any Paying Agent is unable to apply any money in
accordance with Section 1305 for any reason, then the obligations of the
Company under this Indenture and the Notes shall be revived and reinstated as
though no deposit had occurred pursuant to Section 1302 or 1303, as the case
may be, until such time as the Trustee or Paying Agent is permitted to apply
all such money in accordance with Section 1305; provided, however, that if the
Company makes any payment of principal of (or premium, if any) or interest on
any Note following the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Notes to receive such payment
from the money held by the Trustee or Paying Agent.
ARTICLE FOURTEEN
SUBORDINATION OF SECURITIES
SECTION 1401. Notes Subordinate to Senior Indebtedness.
The Company covenants and agrees, and each Holder of a Note, by his
acceptance thereof, likewise covenants and agrees, for the benefit of the
holders, from time to time, of Senior Indebtedness that, to the extent and in
the manner hereinafter set forth in this Article, the Indebtedness represented
by the Notes and the payment of the principal of (and premium, if any) and
interest on each and all of the Notes are hereby expressly made subordinate and
subject in right of payment as provided in this Article to the prior payment in
full in cash, Cash Equivalents or other form of payment acceptable to the
holders of Senior Indebtedness of all existing and future Senior Indebtedness
of the Company, which includes, without limitation, all obligations under the
Bank Credit Agreement; provided, however, that the Notes, the Indebtedness
represented thereby and the payment of the principal of (and premium, if any)
and interest on the Notes in all respects shall rank equal with all other
existing and future Pari Passu Indebtedness and senior to all future
Subordinated Indebtedness of the Company.
This Article shall constitute a continuing offer to all persons who, in
reliance upon such provisions, become holders of, or continue to hold, Senior
Indebtedness, and such provisions are made for the benefit of the holders of
Senior Indebtedness, and such holders are made obligees hereunder and they
and/or each of them may enforce such provisions.
SECTION 1402. Payment Over of Proceeds upon Dissolution, etc.
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, (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, then and in any such event
(1) the holders of Senior Indebtedness shall be entitled to receive
payment in full in cash, Cash Equivalents or other form of payment
acceptable to the holders of such Senior
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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 of any kind or character (other than any payment
or distribution in the form of equity securities or subordinated
securities of the Company or any successor obligor with respect to the
Senior Indebtedness provided for by a plan of reorganization or
readjustment that, in the case of any such subordinated securities, are
(A) subordinated in right of payment to all Senior Indebtedness that may
at the time be outstanding to substantially the same extent as, or to a
greater extent than, the Notes are so subordinated as provided in this
Article and (B) (i) if the original maturity or maturities of the Senior
Indebtedness outstanding under the Bank Credit Agreement shall not then
have been extended, such subordinated securities shall have no payments
prior to such maturity or maturities of such Senior Indebtedness, and (ii)
in all other cases such subordinated securities shall have an Average Life
to Maturity not less than or not prior to the Notes and a final maturity
not earlier than the final maturities as so extended of any Senior
Indebtedness or other debt securities exchanged for Senior Indebtedness
(such equity securities or subordinated securities of a person hereinafter
being "Permitted Junior Notes")) on account of the principal of (and
premium, if any) and interest on each and all of the Notes; and
(2) in the event that, notwithstanding the foregoing provisions of
this Section, 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, whether in
cash, property or securities, in respect of the principal of (and premium,
if any) and interest on each and all of the Notes 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 such
Senior Indebtedness, then and in such event such payment or distribution
(other than a payment or distribution in the form of Permitted Junior
Notes) shall be paid over or delivered forthwith to the agent or agents
for the Banks under the Bank Credit Agreement for the benefit of the
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 Senior Indebtedness, after giving
effect to any concurrent payment or distribution to or for the holders of
Senior Indebtedness.
The consolidation of the Company with, or the merger of the Company into,
another person or the liquidation or dissolution of the Company following the
conveyance, transfer or lease of its properties and assets substantially as an
entirety to another person upon the terms and conditions set forth in Article
Eight shall not be deemed a dissolution, winding up, liquidation,
reorganization, assignment for the benefit of creditors or marshalling of
assets and liabilities of the Company for the purposes of this Section if the
person formed by such consolidation or into which the Company is merged or the
person which acquires by conveyance, transfer or lease such properties and
assets substantially as an entirety, as the case may be, shall, as a part of
such consolidation, merger, conveyance, transfer or lease, comply with the
conditions set forth in Article Eight.
SECTION 1403. Suspension of Payment When Senior Indebtedness in Default.
(a) Unless Section 1402 shall be applicable, upon the occurrence of
a Payment Default, then no payment or distribution of any assets of the
Company of any kind or character (other than Permitted Junior Notes)
shall be made by the Company or the Trustee (if notice of such Payment
Default has been received by the Trustee pursuant to Section 1409) or
received by the Holders including without limitation amounts on account
of the principal of (and premium, if
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any) and interest on each and all of the Notes or on account of the
purchase or redemption or other acquisition of Notes unless and until such
Payment Default shall have been cured or waived or shall have ceased to
exist or such Senior Indebtedness shall have been discharged or paid in
full in cash, Cash Equivalents or other form of payment acceptable to the
holders of Senior Indebtedness, after which the Company shall resume
making any and all required payments in respect of the Notes, including
any missed payments.
(b) Unless the provisions of Section 1402 or Section 1403(a) shall
be applicable, upon (1) the occurrence of a Non-payment Default and (2)
receipt by the Trustee from the representative of holders of Designated
Senior Indebtedness of written notice of such occurrence, then no payment
or distribution of any assets of the Company of any kind or character
(other than Permitted Junior Notes) shall be made by the Company on
account of the principal of (and premium, if any) and interest on each
and all of the Notes or on account of the purchase or redemption or other
acquisition of Notes for a period ("Payment Blockage Period") commencing
on the date of receipt by the Trustee of such notice from such
representative unless and until (A) more than 179 days shall have elapsed
since receipt of such written notice by the Company or the Trustee
(provided such Designated Senior Indebtedness as to which notice was
given shall not theretofore have been accelerated), (B) such Non-payment
Default shall have been cured or waived in writing or shall have ceased
to exist (provided that no other Non-payment Default has occurred
subsequent to the commencement of such Payment Blockage Period and is
then continuing after giving effect to such cure or waiver, and the
notice provisions of clause (2) above shall have been complied with), (C)
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 such Designated Senior Indebtedness or (D) such Payment
Blockage Period shall have been terminated by written notice to the
Company or the Trustee from such representative initiating such Payment
Blockage Period, after which, in the case of clause (A), (B), (C) or (D),
whichever was earlier, the Company shall resume making any and all
required payments in respect of the Notes, including any missed payments.
Notwithstanding any other provision of this Agreement, only one Payment
Blockage Period may be commenced within any consecutive 360-day period,
and no Non-payment Default which 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
shall 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 event of default shall have 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.
(c) In the event that, notwithstanding the foregoing, the Trustee or
the Holder of any Note shall have received a payment prohibited by the
foregoing provisions of this Section, then and in such event such payment
shall be paid over and delivered forthwith by the Trustee (if the notice
required by Section 1409 has been received by the Trustee) or an amount
equal to such payment or distribution shall be paid over and delivered
forthwith by such Holder to the agent under the Bank Credit Agreement for
the benefit of, and distribution to, the holders of Designated Senior
Indebtedness or, if the Bank Credit Agreement has been terminated, to the
Company; provided that, in the event any Holder has received notice that
such payment is prohibited by the foregoing provisions of this Section
prior to the receipt of such payment by
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such Holders, any such Holders shall hold such payment in trust for the
benefit of the holders of Designated Senior Indebtedness.
SECTION 1404. Payment Permitted If No Default.
Nothing contained in this Article or elsewhere in this Indenture or in any
of the Notes shall prevent the Company, at any time except during the pendency
of any case, proceeding, dissolution, liquidation or other winding up,
assignment for the benefit of creditors or other marshalling of assets and
liabilities of the Company referred to in Section 1402 or under the conditions
described in Section 1403, from making payments at any time of principal of
(and premium, if any) or interest on the Notes.
SECTION 1405. Subrogation to Rights of Holders of Senior Indebtedness.
Subject to the payment in full in cash, Cash Equivalents or other form of
payment acceptable to the holders of Senior Indebtedness of all Senior
Indebtedness, the Holders of the Notes shall be subrogated to the rights of the
holders of such Senior Indebtedness to receive payments and distributions of
cash, property and securities applicable to the Senior Indebtedness until the
principal of (and premium, if any) and interest on the Notes shall be paid in
full. For purposes of such subrogation, no payments or distributions to the
holders of Senior Indebtedness of any cash, property or securities to which the
Holders of the Notes or the Trustee would be entitled except for the provisions
of this Article, and no payments pursuant to the provisions of this Article to
the holders of Senior Indebtedness by Holders of the Notes or the Trustee,
shall, as among the Company, its creditors other than holders of Senior
Indebtedness, and the Holders of the Notes, be deemed to be a payment or
distribution by the Company to or on account of the Senior Indebtedness.
SECTION 1406. Provisions Solely to Define Relative Rights.
The provisions of this Article are and are intended solely for the purpose
of defining the relative rights of the Holders of the Notes on the one hand and
the holders of Senior Indebtedness on the other hand. Nothing contained in
this Article or elsewhere in this Indenture or in the Notes is intended to or
shall (a) impair, as between the Company and the Holders of the Notes, the
obligation of the Company, which is absolute and unconditional, to pay to the
Holders of the Notes the principal of (and premium, if any) and interest on the
Notes as and when the same shall become due and payable in accordance with
their terms; or (b) affect the relative rights against the Company of the
Holders of the Notes and creditors of the Company other than the Holders of
Senior Indebtedness; or (c) prevent the Trustee or the holder of any Note from
exercising all remedies otherwise permitted by applicable law upon default
under this Indenture, subject to the rights, if any, under this Article of the
holders of .Senior Indebtedness, in respect of cash, property or securities of
the Company received upon exercise of any such remedy.
SECTION 1407. Trustee to Effectuate Subordination.
Each Holder of a Note by his acceptance thereof authorizes and directs the
Trustee on his behalf to take such action as may be necessary or appropriate to
effectuate the subordination provided in this Article and appoints the Trustee
his attorney-in-fact for any and all such purposes.
SECTION 1408. No Waiver of Subordination Provisions.
(a) No right of any present or future holder of any Senior
Indebtedness to enforce subordination as herein provided shall at any
time in any way be prejudiced or impaired by any
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act or failure to act on the part of the Company or by any act or failure
to act, in good faith, by any such holder, or by any non-compliance by the
Company with the terms, provisions and covenants of this Indenture,
regardless of any knowledge thereof any such holder may have or be
otherwise charged with.
(b) Without in any way limiting the generality of paragraph (a) of
this Section, the holders of Senior Indebtedness may, at any time and
from time to time, without the consent of or notice to the Trustee or the
Holders of the Notes, without incurring responsibility to the Holders of
the Notes and without impairing or releasing the subordination provided
in this Article or the obligations hereunder of the Holders of the Notes
to the holders of Senior Indebtedness, do any one or more of the
following: (1) change the manner, place or terms of payment or extend the
time of payment of, or renew or alter, Senior Indebtedness or any
instrument evidencing the same or any agreement under which Senior
Indebtedness is outstanding; (2) sell, exchange, release or otherwise
deal with any property pledged, mortgaged or otherwise securing Senior
Indebtedness; (3) release any person liable in any manner for the
collection of Senior Indebtedness; and (4) exercise or refrain from
exercising any rights against the Company and any other person.
SECTION 1409. Notice to Trustee.
(a) The Company shall give prompt written notice to the Trustee of
any fact known to the Company which would prohibit the making of any
payment to or by the Trustee in respect of the Notes. Notwithstanding
the provisions of this Article or any other provision of this Indenture,
the Trustee shall not be charged with knowledge of the existence of any
facts which would prohibit the making of any payment to or by the Trustee
in respect of the Notes, unless and until the Trustee shall have received
written notice thereof from the Company or a holder of Senior
Indebtedness or from any trustee, fiduciary or agent therefor; and, prior
to the receipt of any such written notice, the Trustee, subject to
Section 602 hereof, shall be entitled in all respects to assume that no
such facts exist; provided, however that, if the Trustee shall not have
received the notice provided for in this Section at least three Business
Days prior to the date upon which by the terms hereof any money may
become payable for any purpose (including, without limitation, the
payment of the principal of (and premium, if any) or interest on any
Note), then, anything herein contained to the contrary notwithstanding,
the Trustee shall have full power and authority to receive such money and
to apply the same to the purpose for which such money was received and
shall not be affected by any notice to the contrary which may be received
by it within three Business Days prior to such date.
(b) Subject to Section 602 hereof, the Trustee shall be entitled to
rely on the delivery to it of a written notice by a person representing
himself to be a holder of Senior Indebtedness (or a trustee, fiduciary or
agent therefor) to establish that such notice has been given by a holder
of Senior Indebtedness (or a trustee, fiduciary or agent therefor). In
the event that the Trustee determines in good faith that further evidence
is required with respect to the right of any person as a holder of Senior
Indebtedness to participate in any payment or distribution pursuant to
this Article, the Trustee may request such person to furnish evidence to
the reasonable satisfaction of the Trustee as to the amount of Senior
Indebtedness held by such person, the extent to which such person is
entitled to participate in such payment or distribution and any other
facts pertinent to the rights of such person under this Article and, if
such evidence is not furnished, the Trustee may defer any payment to such
person pending judicial determination as to the right of such person to
receive such payment.
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SECTION 1410. Reliance on Judicial Order or Certificate of Liquidating
Agent.
Upon any payment or distribution of assets of the Company referred to in
this Article, the Trustee, subject to Section 602 hereof, and the Holders of
the Notes shall be entitled to rely upon any order or decree entered by any
court of competent jurisdiction in which any insolvency, bankruptcy,
receivership, liquidation, reorganization, dissolution, winding-up or similar
case or proceeding is pending, or a certificate of the trustee in bankruptcy,
receiver, liquidating trustee, custodian, assignee for the benefit of
creditors, agent or other person making such payment or distribution, delivered
to the Trustee or to the Holders of Notes, for the purpose of ascertaining the
persons entitled to participate in such payment or distribution, the holders of
Senior Indebtedness and other Indebtedness of the Company, the amount thereof
or payable thereon, the amount or amounts paid or distributed thereon and all
other facts pertinent thereto or to this Article.
SECTION 1411. Rights of Trustee as a Holder of Senior Indebtedness;
Preservation of Trustee's Rights.
The Trustee in its individual capacity shall be entitled to all the rights
set forth in this Article with respect to any Senior Indebtedness which may at
any time be held by it, to the same extent as any other holder of Senior
Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of
its rights as such holder. Nothing in this Article shall apply to claims of,
or payments to, the Trustee under or pursuant to Section 606.
SECTION 1412. Article Applicable to Paying Agents.
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article shall in such case (unless the context otherwise
requires) be construed as extending to and including such Paying Agent within
its meaning as fully for all intents and purposes as if such Paying Agent were
named in this Article in addition to or in place of the Trustee.
SECTION 1413. No Suspension of Remedies.
Nothing contained in this Article shall limit the right of the Trustee or
the Holders of Notes to take any action to accelerate the maturity of the Notes
pursuant to Article Five or to pursue any rights or remedies hereunder or under
applicable law.
SECTION 1414. Trust Moneys Not Subordinated.
Notwithstanding anything contained herein to the contrary, payments from
cash or the proceeds of U.S. Government Obligations held in trust under Article
Thirteen hereof by the Trustee (or other qualifying trustee) and which were
deposited in accordance with the terms of Article Thirteen hereof and not in
violation of Section 1402 or 1403 hereof for the payment of principal of (and
premium, if any) and interest on the Notes shall not be subordinated to the
prior payment of any Senior Indebtedness or subject to the restrictions set
forth in this Article Fourteen, and none of the holders shall be obligated to
pay over any such amount to the Company or any holder of Senior Indebtedness or
any other creditor of the Company.
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SECTION 1415. Proof of Claim.
In the event of any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other judicial
proceeding relative to the Company or any other obligor upon the Notes or the
property of the Company or of such other obligor or their creditors, the
Holders irrevocably authorize and empower the agent under the Bank Credit
Agreement, if the Bank Credit Agreement is then in effect (but without imposing
any obligation on, or any duty to such agent), to file and prove all claims
therefor in the name of the Holders (or otherwise, as such agent may determine
to be necessary or appropriate for the enforcement of the provisions of this
Article Fourteen) if the Trustee or the Holders do not file a proper claim or
proof of debt in the form required in any such proceeding prior to 15 days
before the expiration of the time to file such claim or claims.
SECTION 1416. Trustee Not Fiduciary for Holders of Senior Indebtedness.
The Trustee shall not be deemed to owe any fiduciary duty to the holders
of Senior Indebtedness and shall not be liable (unless it shall have acted with
gross negligence) to any such holders if the Trustee shall in good faith
mistakenly pay over or distribute to Holders of Notes or to the Company or to
any other person cash, property or securities to which any holders of Senior
Indebtedness shall be entitled by virtue of this Article Fourteen or otherwise.
With respect to the holders of Senior Indebtedness, the Trustee undertakes to
perform or to observe only such of its covenants or obligations as are
specifically set forth in this Article Fourteen and no implied covenants or
obligations with respect to holders of Senior Indebtedness shall be read into
this Indenture against the Trustee.
This Indenture may be signed in any number of counterparts each of which
so executed shall be deemed to be an original, but all such counterparts shall
together constitute but one and the same Indenture.
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IN WITNESS WHEREOF, the parties hereto have caused this 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: /s/
-------------------------
Title:
-----------------
[SEAL]
Attest: /s/
---------------------
Title:
---------------
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Trustee
By: /s/
---------------------------------
Title: Corporate Trust Officer
-------------------------
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SCHEDULE A
CERTAIN AFFILIATE TRANSACTIONS
1) 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 form 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.
2) 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 in the future will be
approved by a majority of the Company's outside directors.
3) Certain Interested Parties have participated, or may participate, in the
Company's Employee Merchandise Discount Program. A copy of the Company's
Employee Merchandise Discount Policy is attached.
4) Executive Severance Agreements to be entered into between the Company and
each of Messrs. H. Patinkin, M. Patinkin, Desjardins and Eisenheim.
<PAGE> 83
11/95
EMPLOYEE MERCHANDISE DISCOUNT POLICY
All employees are entitled to an employee discount on the purchase of
merchandise from any Marks Bros. Jewelry store. Employees are entitled to a
merchandise discount that is applied to the every day selling price of the
piece according to the following guidelines:
POLICY GUIDELINES:
- Employees are allowed to purchase merchandise at a discount for
their own personal use or for gift giving.
- The immediate family members of an employee can make purchases for
their own use on that employee's Employee Discount benefit.
- "Immediate family members" refers to an employee's spouse and/or
dependents.
- An employee purchasing merchandise from a store other than their
base store is required to contact that store's Manager or Assistant
Manager in order to make arrangements that do not interfere with
that store's business.
- Employee purchases may be paid for with cash, check, or accepted
credit cards including in-house credit. Employees applying for
in-house credit must notify Bob Gilbert; VP Controller and
Security, at the Home Office by phone, and then fax their credit
application to his attention for processing.
- Employees can put merchandise into layaway for not more than 6
months with a required 20% deposit.
- To make a purchase using their employee discount, employees and
qualified dependents are required to immediately identify themselves
upon entering a store in order to allow the store staff to assist
waiting customers first.
- The appropriate percentage discount is applied to the advertised
selling price of the item.
- There is no employee discount given on Bonus Buy Merchandise.
Any employee wishing to purchase an item on their employee discount on behalf
of a relative or friend should contact a member of the Operations Committee.
* For POS Procedures on employee purchases see: POS User Manual; IV. Sales
Transactions; J., page 21.
H.R. 5.4
<PAGE> 84
11/95
Employee Merchandise Discount Policy
Regular Tagged Merchandise
All employees ........................................ 35% off the selling price
Assistant store managers ............................. 40% off the selling price
Store managers ....................................... 50% off the selling price
Supervisors, District Managers,
Regional Vice Presidents ............................. 50% off the selling price
Value Tagged Merchandise
All employees ........................................ 25% off the selling price
Assistant store managers ............................. 25% off the selling price
Store managers ....................................... 30% off the selling price
Supervisors, District Managers,
Regional Vice Presidents ............................. 30% off the selling price
Watches
All employees ........................................ 15% off the selling price
Assistant store managers ............................. 15% off the selling price
Store managers ....................................... 15% off the selling price
Supervisors, District Managers,
Regional Vice Presidents ............................. 15% off the selling price
Special Event (Remount) Merchandise
All employees ........................................ 15% off the selling price
Assistant store managers ............................. 15% off the selling price
Store managers ....................................... 15% off the selling price
Supervisors, District Managers,
Regional Vice Presidents ............................. 15% off the selling price
H.R. 5.5
<PAGE> 85
11/95
Employee Merchandise Discount Policy-continued
Clearance Merchandise
Employee's choice between: (1) The Advertised Clearance Price
or,
(2) Their regular allotted discount off the
original advertised selling price of
the item
Home Office Employee Purchase Procedure
All Home Office employees are entitled to an employee discount on the purchase
of merchandise from any MBJ store. The following procedures must be followed
when any Home Office employee requests to make a purchase in a MBJ store.
Employee Discount Cards are issued to Home Office employees and are color coded
indicating the percentage discount that the card holder is entitled to. An
employee must have their Employee Discount Card at the time of purchase in
order to be entitled to an employee discount. Any immediate family member not
named on the employee's discount card and entitled to make a discounted
purchase as outlined in the Policy Guidelines, must be accompanied by the
employee named on the card when making a purchase.
Whenever possible the employee must inform the store manager in advance that
they will be visiting the store to make a purchase. Once at the store, the
employee or family member named on the card, must identify themselves and
present a MBJ Employee Discount Card and a picture ID.
The following information is hand written on each employee discount card:
- The expiration date
- The name of the employee
- The employee's number
- The name of the employee's spouse, significant
other, or immediate family member.
Home Office Employee Discount Cards:
Pink ......... 35% off the Everyday Selling Price
Blue ......... 40% off the Everyday Selling Price
Gold ......... 50% off the Everyday Selling Price
H.R. 5.6
<PAGE> 86
SCHEDULE B
LIENS
1) Liens and security interest granted pursuant to Section 12 of that
certain Private Label Revolving Credit Plan Agreement, dated as of
March 23, 1993, among the Company and Bank One, Dayton, NA ("Bank
One"), as amended (the "Private Label Agreement") with respect to funds
deposited in the "Escrow Account" (as defined in the Private Label
Agreement), the "Merchant ACH Processing Account" (as defined in the
Private Label Agreement) and all other accounts maintained by the
Company at Bank One, and with respect to the Company's granting to Bank
One a non-exclusive license to use the Company's trademarks in
conjunction with the Private Label Agreement.
2) Lien in trade fixtures of the Borrower in favor of LaSalle National
Trust, N.A., as Successor Trustee, pursuant to a lease between LaSalle
National Bank, as Trustee, and LAC Corp., dated February 20, 1985, as
amended on September 10, 1992 between LaSalle National Trust, N.A., as
Successor Trustee, and the Borrower d/b/a Lundstrom Jewelers.
<PAGE> 1
EXHIBIT 10.10
REVOLVING CREDIT, TERM LOAN AND
GOLD CONSIGNMENT AGREEMENT
DATED as of May 3, 1996
by and among
MARKS BROS. JEWELERS, INC.
The BANKS listed on Schedule 1 hereto, and
THE FIRST NATIONAL BANK OF BOSTON, and
RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, as Agents for the
Banks
<PAGE> 2
TABLE OF CONTENTS
1. DEFINITIONS AND RULES OF INTERPRETATION. .............................. 1
1.1. Definitions. ................................................... 1
1.2. Rules of Interpretation. ....................................... 22
2. THE DOLLAR FACILITY - REVOLVING CREDIT LOANS. ......................... 23
2.1. Commitment to Lend. ............................................ 23
2.2. Commitment Fee. ................................................ 23
2.3. Reduction of Total Revolver Commitment. ........................ 24
2.4. The Revolving Credit Notes. .................................... 24
2.5. Interest on Revolving Credit Loans.............................. 25
2.6. Requests for Revolving Credit Loans; Conversion Options. ....... 25
2.7. Funds for Revolving Credit Loans. .............................. 25
2.8. Maturity. ...................................................... 25
2.9. Optional Repayments of Revolving Credit Loans. ................. 25
3. THE DOLLAR FACILITY - THE TERM LOAN. .................................. 25
3.1. Commitment to Lend. ............................................ 25
3.2. The Term Notes. ................................................ 25
3.3. Schedule of Installment Payments of Principal of Term Loan. .... 26
3.4. Optional Prepayment of Term Loan. .............................. 26
3.5. Interest on Term Loan. ......................................... 26
3.6. Excess Cash Flow Prepayment. ................................... 27
4. THE DOLLAR FACILITY - LETTERS OF CREDIT. .............................. 27
4.1. Letter of Credit Commitments.................................... 27
4.1.1. Commitment to Issue Letters of Credit. ................ 27
4.1.2. Letter of Credit Applications. ........................ 28
4.1.3. Terms of Letters of Credit. ........................... 28
4.1.4. Reimbursement Obligations of Dollar Banks. ............ 28
4.1.5. Participations of Dollar Banks. ....................... 28
4.2. Reimbursement Obligation of the Borrower. ...................... 28
4.3. Letter of Credit Payments. ..................................... 29
4.4. Obligations Absolute. .......................................... 30
4.5. Reliance by Issuer. ............................................ 30
4.6. Letter of Credit Fee. .......................................... 31
5. THE GOLD FACILITY - PURCHASES AND CONSIGNMENTS . ...................... 31
5.1. Commitment To Make Purchases and Consignments; Title To
Consigned Precious Metal. ........................................... 31
5.2. Consignment Fees. .............................................. 33
5.3. Requests For Purchases and Consignments. ....................... 33
5.4. Payment on Account Of Repurchase or Redelivery of Consigned
Precious Metal. ..................................................... 34
5.5. Conversion Options. ............................................ 36
5.6. Funds for Purchases and Consignments ........................... 37
<PAGE> 3
-ii-
5.7. Repurchase at Maturity. ....................................... 38
5.8. True Consignment. ............................................. 39
6. THE GOLD FACILITY - THE GOLD LOANS. .................................. 39
6.1. Commitment to Lend. ........................................... 39
6.2. The Gold Notes. ............................................... 40
6.3. Interest on Gold Loans. ....................................... 40
6.4. Requests for Gold Loans; Conversion Options. .................. 40
6.5. Funds for Gold Loans. ......................................... 40
6.6. Repayment of Gold Loans at Maturity. .......................... 40
6.7. Optional Repayments. .......................................... 41
7. CERTAIN COMMON PROVISIONS RELATING. .................................. 41
TO THE GOLD FACILITY. ................................................... 41
7.1. Commitment Fee. ............................................... 41
7.2. Reduction of Total Gold Commitment. ........................... 41
8. CERTAIN GENERAL PROVISIONS. .......................................... 41
8.1. Interest on Loans. ............................................ 41
8.2. Borrowing Base and Consignment Limitations. ................... 42
8.3. Requests for Loans. ........................................... 42
8.4. Conversion Options. ........................................... 44
8.4.1. Conversion to Different Type of Loan. ................. 44
8.4.2. Continuation of Type of Loan. ......................... 44
8.4.3. Eurodollar Rate Loans. ................................ 45
8.5. Funds for Loans. .............................................. 45
8.5.1. Funding Procedures. ................................... 45
8.5.2. Advances by Applicable Agent. ......................... 45
8.6. Settlements; Failure to Make Funds Available. ................. 46
8.7. Optional Repayments of Loans. ................................. 47
8.8. Repayments of Loans and Repurchases of Consigned Precious
Metals Prior to Event of Default. .................................. 48
8.9. Repayments of Loans and Repurchases of Consigned Precious
Metals and Distribution of Collateral Proceeds After Event of
Default. ........................................................... 50
8.10. Closing Fee. ................................................. 51
8.11. Agents' Fee. ................................................. 51
8.12. Funds for Payments. .......................................... 51
8.12.1. Payments to Agent. ................................... 51
8.12.2. No Offset, etc........................................ 51
8.13. Computations. ................................................ 52
8.14. Inability to Determine Eurodollar Rate or Consignment Fixed
Rate. ..............................................................
8.15. Illegality of Eurodollar Rate Loans or Consignment Fixed Rate
Amounts. ........................................................... 53
8.16. Additional Costs, etc. ....................................... 54
8.17. Capital Adequacy. ............................................ 55
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8.18. Certificate. ............................................. 56
8.19. Indemnity. ............................................... 56
8.20. Interest After Default. .................................. 56
8.21. Performance Adjustments. ................................. 57
9. COLLATERAL SECURITY. .............................................. 58
10. REPRESENTATIONS AND WARRANTIES . ................................. 58
1O.1. Corporate Authority. ..................................... 58
10.1.1. Incorporation; Good Standing. .................... 58
10.1.2. Authorization. ................................... 58
10.1.3. Enforceability. .................................. 59
10.2. Governmental Approvals. .................................. 59
10.3. Title to Properties; Leases. ............................. 59
10.4. Financial Statements and Projections. .................... 59
10.4.1. Financial Statements. ............................ 59
10.4.2. Projections. ..................................... 60
10.5. No Material Changes, etc. ................................ 60
10.6. Franchises, Patents, Copyrights, etc. .................... 60
10.7. Litigation. .............................................. 60
10.8. No Materially Adverse Contracts, etc. .................... 61
10.9. Compliance with Other Instruments, Laws, etc. ............ 61
10.10. Tax Status. .............................................. 61
10.11. No Event of Default. ..................................... 61
10.12. Holding Company and Investment Company Acts. ............. 61
10.13. Absence of Financing Statements, etc. .................... 62
10.14. Perfection of Security Interest. ......................... 62
10.15. Certain Transactions. .................................... 62
10.16. Employee Benefit Plans. .................................. 62
10.16.1. In General. ..................................... 62
10.16.2. Terminability of Welfare Plans. ................. 63
10.16.3. Guaranteed Pension Plans. ....................... 63
10.16.4 Multiemployer Plans. ............................ 63
10.17. Regulations U and X. ..................................... 63
10.18. Environmental Compliance. ................................ 64
10.19. Subsidiaries, etc. ....................................... 65
10.20. Bank Accounts. ........................................... 65
11. AFFIRMATIVE COVENANTS OF THE BORROWER. ........................... 66
11.1. Punctual Payment. ........................................ 66
11.2. Maintenance of Office. ................................... 66
11.3. Records and Accounts. .................................... 66
11.4. Financial Statements, Certificates and Information. ...... 66
11.5. Notices. ................................................. 69
11.5.1. Defaults. ........................................ 69
11.5.2. Environmental Events. ............................ 69
11.5.3. Notification of Claim against Collateral. ........ 69
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11.5.4. Notice of Litigation and Judgments. ............... 69
11.6. Corporate Existence; Maintenance of Properties. ........... 70
11.7. Insurance. ................................................ 70
11.8. Taxes. .................................................... 71
11.9. Inspection of Properties and Books, etc. .................. 71
11.9.1. General. .......................................... 71
11.9.2. Inventory Appraisals. ............................. 72
11.9.3. Appraisals. ....................................... 72
11.9.4. Communications with Accountants. .................. 72
11.10. Compliance with Laws, Contracts, Licenses, and Permits. .. 72
11.11. Employee Benefit Plans. .................................. 73
11.12. Use of Proceeds. ......................................... 73
11.13. Additional Mortgaged Property. ........................... 73
11.14. Bank Accounts. ........................................... 74
11.15. Inventory Restrictions. .................................. 75
11.16. Private Label Credit Card Program. ....................... 75
11.17. Further Assurances. ...................................... 75
12. CERTAIN NEGATIVE COVENANTS OF THE BORROWER. ....................... 75
12.1. Restrictions on Indebtedness. ............................. 75
12.2. Restrictions on Liens. .................................... 76
12.3. Restrictions on Investments. .............................. 77
12.4. Distributions. ............................................ 78
12.5. Merger, Consolidation and Disposition of Assets............ 78
12.5.1. Mergers and Acquisitions. ......................... 78
12.5.2. Disposition of Assets. ............................ 78
12.6. Sale and Leaseback. ....................................... 79
12.7. Compliance with Environmental Laws. ....................... 79
12.8. Indentures. ............................................... 79
12.9. Employee Benefit Plans. ................................... 80
12.10. Bank Accounts. ........................................... 80
12.11. Consignment Transactions. ................................ 81
12.12. Transactions with Affiliates. ............................ 81
12 13. Subsidiaries. ............................................ 81
13. FINANCIAL COVENANTS OF THE BORROWER. .............................. 81
13.1. Total Funded Debt to EBITDA. .............................. 81
13.2. Capital Expenditures. ..................................... 82
13.3. Consolidated Tangible Net Worth. .......................... 82
13.4. Fixed Charge Coverage Ratio. .............................. 82
13.5. Consolidated EBITDA. ...................................... 83
14. CLOSING CONDITIONS. ............................................... 83
14.1. Loan Documents, etc. ...................................... 83
14.2. Certified Copies of Charter Documents. .................... 83
14.3. Corporate, Action. ........................................ 83
14.4. Incumbency Certificate. ................................... 83
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14.5. Validity of Liens. ....................................... 84
14.6. Perfection Certificate and UCC Search Results............. 84
14.7. Certificates of Insurance. ............................... 84
14.8. FNBB Concentration Accounts; Agency Account Agreements. .. 84
14.9. Borrowing Base Report; Consigned Precious Metal Report;
Monthly Inventory Report. ...................................... 84
14.10. Accounts Payable Aging Report. .......................... 85
14.11. Opinion of Counsel. ..................................... 85
14.12. Payment of Fees. ........................................ 85
14.13. Payoff Letters. ......................................... 85
14.14. Terms of Consignment. ................................... 85
14.15. Consummation of Public Offering and Senior Subordinated
Note Issuance. ................................................. 85
14.16. Financial Statements. ................................... 86
14.17. Restructuring of ESOP. .................................. 86
15. CONDITIONS TO ALL BORROWINGS. ..................................... 86
15.1. Representations True; No Event of Default. ............... 86
15.2. No Legal Impediment. ..................................... 86
15.3. Governmental Regulation. ................................. 87
15.4. Proceedings and Documents. ............................... 87
15.5. Borrowing Base Report; Consigned Precious Metal Report. .. 87
16. EVENTS OF DEFAULT; ACCELERATION; ETC............................... 87
16.1. Events of Default and Acceleration. ...................... 87
16.2. Termination of Commitments. .............................. 91
16.3. Remedies.................................................. 91
17. SETOFF. ........................................................... 92
18. THE AGENT. ........................................................ 92
18.1. Authorization. ........................................... 92
18.2. Employees and Agents. .................................... 93
18.3. No Liability. ............................................ 93
18.4. No Representations. ...................................... 94
18.5. Payments. ................................................ 94
18.5.1. Payments to Agent. ............................... 94
18.5.2. Distribution by Agent. ........................... 94
18.5.3. Delinquent Banks.................................. 95
18.6. Holders of Notes. ........................................ 95
18.7. Indemnity. ............................................... 96
18.8. Agents as Banks........................................... 96
18.9. Resignation. ............................................. 96
18.10. Notification of Defaults and Events of Default. ......... 96
18.11. Duties in the Case of Enforcement. ...................... 97
19. EXPENSES. ......................................................... 97
20. INDEMNIFICATION. .................................................. 98
21. SURVIVAL OF COVENANTS, ETC. ....................................... 99
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22. ASSIGNMENT AND PARTICIPATION........................................ 99
22.1. Conditions to Assignment by Banks. ......................... 99
22.2. Certain Representations and Warranties; Limitations;
Covenants. ....................................................... 100
22.3. Register. .................................................. 101
22.4. New Notes. ................................................. 102
22.5. Participations. ............................................ 102
22.6. Disclosure. ................................................ 102
22.7. Assignee or Participant Affiliated with the Borrower. ...... 103
22.8. Miscellaneous Assignment Provisions. ....................... 103
22.9. Assignment by Borrower. .................................... 104
23. NOTICES, ETC. ...................................................... 104
24. GOVERNING LAW. ..................................................... 105
25. HEADINGS. .......................................................... 105
26. COUNTERPARTS. ...................................................... 105
27. ENTIRE AGREEMENT, ETC. ............................................. 105
28. WAIVER OF JURY TRIAL. .............................................. 106
29. CONSENTS, AMENDMENTS, WAIVERS, ETC. ................................ 106
30. SEVERABILITY. ...................................................... 107
<PAGE> 8
REVOLVING CREDIT, TERM LOAN AND
GOLD CONSIGNMENT AGREEMENT
This REVOLVING CREDIT, TERM LOAN AND GOLD CONSIGNMENT AGREEMENT is made as
of May 3, 1996, by and among MARKS BROS. JEWELERS, INC. (the "Borrower"), a
Delaware corporation having its principal place of business at 155 North Wacker
Drive, Suite 500, Chicago, Illinois 60606; THE FIRST NATIONAL BANK OF BOSTON, a
national banking association, RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, a
national banking association and the other lending institutions listed on
Schedule 1; and THE FIRST NATIONAL BANK OF BOSTON and RHODE ISLAND HOSPITAL
TRUST NATIONAL BANK as agents for themselves and such other lending
institutions.
1. DEFINITIONS AND RULES OF INTERPRETATION.
1.1. DEFINITIONS. The following terms shall have the meanings set forth in
this Section 1 or elsewhere in the provisions of this Credit Agreement
referred to below:
Accounts Receivable. All rights of the Borrower to payment for goods sold,
leased or otherwise marketed in the ordinary course of business and all rights
of the Borrower to payment for services rendered in the ordinary course of
business and all sums of money or other proceeds due thereon pursuant to
transactions with account debtors, except for that portion of the sum of money
or other proceeds due thereon that relate to sales, use or property taxes in
conjunction with such transactions, recorded on books of account in accordance
with generally accepted accounting principles.
Affiliate. Any Person that would be considered to be an affiliate of the
Borrower under Rule 144(a) of the Rules and Regulations of the Securities and
Exchange Commission, as in effect on the date hereof, if the Borrower were
issuing securities.
Agency Account Agreement. Any Agency Account Agreement in the form of
Exhibit A attached hereto (or a form otherwise approved by the Dollar Agent in
its sole discretion) entered into by the Borrower, the Dollar Agent and a
depository institution satisfactory to the Agents.
Agents. For the Dollar Facility, FNBB; for the Gold Facility, RIHT.
Agents' Special Counsel. Bingham, Dana & Gould LLP or such other counsel
as may be approved by the Agents.
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Applicable Agent. With respect to the Dollar Facility, the Revolving
Credit Loans, the Letters of Credit, the Term Loan or the Dollar Banks, the
Dollar Agent; with respect to the Gold Facility, the Purchases and
Consignments, the Gold Loans or the Gold Banks, the Gold Agent.
Applicable Banks. With respect to the Dollar Facility, the Revolving
Credit Loans, the Letters of Credit, the Term Loan or the Dollar Agent, the
Dollar Banks; with respect to the Gold Facility, the Purchases and
Consignments, the Gold Loans or the Gold Agent, the Gold Banks.
Approved Credit Programs. Any credit program entered into by the Borrower
with a bank or finance company in order to provide credit to the Borrower's
customers, which program is acceptable to and has been approved by each of the
Agents.
Assignment and Acceptance. See Section 22.1.
Balance Sheet Date. January 31, 1996.
Banks. Collectively, the Dollar Banks and the Gold Banks.
Base Rate. The higher of (i) the annual rate of interest announced from
time to time by FNBB at its head office in Boston, Massachusetts, as its "base
rate" and (ii) one-half of one percent (1/2%) above the Federal Funds Effective
Rate. For the purposes of this definition, "Federal Funds Effective Rate" shall
mean for any day, the rate per annum equal to the weighted average of the rates
on overnight federal funds transactions with members of the Federal Reserve
System arranged by federal funds brokers, as published for such day (or, if
such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day that is a Business Day, the average of the quotations for such day on such
transactions received by FNBB from three funds brokers of recognized standing
selected by FNBB.
Base Rate Applicable Margin. At all times from the Closing Date through
the first Performance Adjustment Date, one half of one percent (1/2%), and
thereafter, the percentage determined by reference to the provisions of Section
8.21.
Base Rate Loans. Revolving Credit Loans, Gold Loans and all or any portion
of the Term Loan bearing interest calculated by reference to the Base Rate.
Borrower. As defined in the preamble hereto.
Borrower's Precious Metal. Precious Metal owned by the Borrower and which
qualifies as Eligible Inventory, excluding Consigned Precious Metal and
Precious
<PAGE> 10
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Metal otherwise held by the Borrower on consignment other than pursuant to the
Gold Facility.
Borrowing Base. At the relevant time of reference thereto, an amount
determined by the Dollar Agent by reference to the most recent Borrowing Base
Report delivered to the Banks and the Agents pursuant to Section 11.4(f),
which is equal to (a) the Inventory Advance Rate Percentage of the result of
(i) the net book value (determined on an average cost basis at lower of cost
or market) of Eligible Inventory minus (ii) the Inventory Shrink Reserve plus
(b) 75% of Eligible Accounts Receivable.
Borrowing Base Report. A Borrowing Base Report signed by the Vice
President of Finance or principal financial or accounting officer of the
Borrower and in substantially the form of Exhibit B hereto.
Business Day. Any day, other than a Saturday or Sunday, on which banking
institutions in Boston, Massachusetts and Providence, Rhode Island, are open
for the transaction of banking business and, in the case of Eurodollar Rate
Loans, also a day which is a Eurodollar Business Day.
Capital Assets. Fixed assets, both tangible (such as land, buildings,
fixtures, machinery and equipment) and intangible (such as patents, copyrights,
trademarks, franchises and good will); provided that Capital Assets shall not
include any item customarily charged directly to expense or depreciated over a
useful life of twelve (12) months or less in accordance with generally accepted
accounting principles.
Capital Expenditures. Amounts paid or indebtedness incurred by the
Borrower or any of its Subsidiaries in connection with the purchase or lease by
the Borrower or any of its Subsidiaries of Capital Assets that would be
required to be capitalized and shown on the balance sheet of such Person in
accordance with generally accepted accounting principles.
Capitalized Leases. Leases under which the Borrower or any of its
Subsidiaries is the lessee or obligor, the discounted future rental payment
obligations under which are required to be capitalized on the balance sheet of
the lessee or obligor in accordance with generally accepted accounting
principles.
Cash Collateral Agreement. Any Cash Collateral Agreement to be entered
into between the Borrower and the Collateral Agent pursuant to Section 8.8(c)
hereof, such Cash Collateral Agreement to be in the form of Exhibit M attached
hereto.
CERCLA. See Section 10.18.
Closing Date. The first date on which the conditions set forth in Section
14 have been satisfied and any Revolving Credit Loans are to be made, the Term
Loan is to
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be made, any Gold Loans are to be made, any Purchases and Consignments are to
be made or any Letter of Credit is to be issued hereunder.
Code. The Internal Revenue Code of 1986.
Collateral. All of the property, rights and interests of the Borrower that
are or are intended to be subject to the security interests and mortgages
created by the Security Documents.
Collateral Agent. FNBB, in its capacity as collateral agent for the
benefit of Banks and the Agents under and with respect to the Security
Documents.
Commitment. With respect to each Dollar Bank, the amount set forth on Part
1 of Schedule 1 hereto as the amount of such Dollar Bank's commitment to make
Revolving Credit Loans to, and to participate in the issuance, extension and
renewal of Letters of Credit for the account of, the Borrower, as the same may
be reduced from time to time; or if such commitment is terminated pursuant to
the provisions hereof, zero.
Commitment Percentage. With respect to each Dollar Bank, the percentage
set forth on Part 1 of Schedule 1 hereto as such Dollar Bank's percentage of
the aggregate Commitments of all of the Dollar Banks.
Concentration Bank. FNBB, Citibank, N.A. or any other depository
institution which receives deposits directly, or indirectly (as a result of
interim concentration of depository accounts), from in aggregate eight or more
retail stores of the Borrower and its Subsidiaries.
Confirmation of Swap Agreement. The Confirmation of Swap Agreement dated
or to be dated on or prior to the Closing Date, between the Borrower and the
Gold Agent and in form and substance satisfactory to each of the Banks, the
Agents and the Borrower, pursuant to which the Borrower and the Gold Agent have
made certain arrangements in order to fix the price of Consigned Precious Metal
following an Event of Default.
Consigned Precious Metal. Precious Metal (a) located at Permitted
Inventory Locations, (b) subject to a Purchase and Consignment and consigned by
the Gold Banks to the Borrower pursuant to the terms of this Credit Agreement
and (c) for which the Gold Banks have not received payment or which has not
been Redelivered to the Gold Agent.
Consigned Precious Metal Report. A Consigned Precious Metal Report signed
by the Vice President of Finance or the principal financial or accounting
officer of the Borrower and in substantially the form of Exhibit C hereto.
<PAGE> 12
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Consignment Advance Rate Percentage. Ninety percent (90%); provided,
however, that if the Agents and their examiners, in their sole discretion,
shall not have determined, prior to September 30, 1996, that the Borrower's
ability to track all Precious Metal inventory in fine troy ounces and grams is
in all respects satisfactory to the Agents, then from and after September 30,
1996, the Consignment Advance Rate Percentage shall be equal to eighty-five
percent (85%) until such time as the Agents and their examiners shall have been
able to make such determination with respect to the Borrower's Precious Metal
tracking systems and procedures.
Consignment Base Rate. A rate determined by RIHT from time to time in its
sole discretion plus the Eurodollar Applicable Margin, which rate may be changed
by RIHT following seven (7) days' prior written notice to the Borrower and the
other Gold Banks.
Consignment Base Rate Amounts. Consigned Precious Metal which is accruing
a Consignment Fee calculated by reference to the Consignment Base Rate.
Consignment Conversion Request. A notice given by the Borrower to the Gold
Agent of the Borrower's election to convert or continue Consigned Precious
Metals in accordance with Section 5.5.
Consignment Dollar Cap. As defined in the definition of Consignment
Limit.
Consignment Fees. Consignment fees on Consigned Precious Metal at the
rates set forth in Section 5.2.
Consignment Fixed Rate. With respect to any Interest Period, the amount
equal to (a) the greater of (i) the Eurodollar Rate for such Interest Period
minus the average of rates quoted to RIHT as the London Interbank Bullion Rates
as displayed on Reuter's gold loan screen or, if Reuter's gold loan screen is
not available, as set by RIHT, for Precious Metal forwards for such period (the
"Contango Rate"), and (ii) zero (0), plus (b) the Eurodollar Applicable Margin.
Consignment Fixed Rate Amounts. Consigned Precious Metal which is accruing
a Consignment Fee calculated by reference to the Consignment Fixed Rate.
Consignment Limit. Either (a) 39,000 troy ounces of Precious Metal (the
"Consignment Ounce Cap") or (b) Consigned Precious Metal having a Fair Market
Value equal to $16,000,000.00 minus the aggregate outstanding amount of Gold
Loans (after giving effect to all amounts requested) (the "Consignment Dollar
Cap").
Consignment Ounce Cap. As defined in the definition of Consignment Limit.
<PAGE> 13
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Consolidated or consolidated. With reference to any term defined herein,
shall mean that term as applied to the accounts of the Borrower and its
Subsidiaries, consolidated in accordance with generally accepted accounting
principles.
Consolidated Adjusted EBITDA. With respect to the Borrower and its
Subsidiaries and any particular fiscal period, Consolidated EBITDA for such
period plus the amount of all extraordinary nonrecurring items of income during
such period.
Consolidated Cash Interest Expense. With respect to the Borrower and its
Subsidiaries and 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. With respect to the Borrower and its Subsidiaries and
any particular fiscal period, the consolidated earnings (or loss) from
operations of the Borrower and its 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 Excess Cash Flow. With respect to the Borrower and its
Subsidiaries and any particular fiscal period, an amount equal to (a)
Consolidated Adjusted EBITDA for such period less (b) the sum of (i) all taxes
(including interest and penalties) paid or accrued during such period (without
duplication of any such amounts paid or accrued in prior periods), plus (ii) the
amount of Capital Expenditures made during such period to the extent permitted
by the table appearing in Section 13.2, plus (iii) any payments or prepayments
of the principal of any Indebtedness of the Borrower (other than Revolving
Credit Loans or payments of the Term Loan pursuant to Section 3.6) made during
such period, plus (iv) Consolidated Cash Interest Expense for such period, plus
(v) increases in Consolidated Working Capital during such period, plus (vi) the
difference (not to exceed $1,500,000 during any such period and in no case to
be less than $0) of (A) Capital Expenditures permitted to be made during such
period pursuant to Section 13.2 minus (B) the amount of Capital Expenditures
actually made during such period, plus (c) decreases in Consolidated Working
Capital during such period.
Consolidated Minimum Store Rent. With respect to any fiscal period, the
aggregate amount of obligations of the Borrower and its 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,
calculated in a manner consistent with that reflected in the Borrower's audited
financial statements for the year ended on the Balance Sheet Date.
<PAGE> 14
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Consolidated Tangible Net Worth. 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 Borrower and its
Subsidiaries properly classified as intangible assets under generally accepted
accounting principles, including such items as good will, 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 Borrower and its Subsidiaries in connection with this
Credit Agreement and the transactions contemplated hereby 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 Borrower or its Subsidiaries resulting from a revaluation
thereof subsequent to the Balance Sheet Date; plus
(iii) to the extent otherwise includable in the computation of
Consolidated Tangible Net Worth, any subscriptions receivable.
Consolidated Total Assets. All assets of the Borrower and its Subsidiaries
determined on a consolidated basis in accordance with generally accepted
accounting principles.
Consolidated Total Funded Debt. With respect to any fiscal period, an
amount equal to the average aggregate principal amount outstanding during such
period in respect of all Indebtedness of the Borrower and its Subsidiaries
pursuant to any agreement or instrument to which the Borrower or any of its
Subsidiaries is a party relating to the borrowing of money or the obtaining of
credit (including, without limitation, Obligations under this Credit Agreement
and all Indebtedness in respect of the Senior Subordinated Notes) or in respect
of Capitalized Leases.
Consolidated Total Interest Expense. For any period, the aggregate amount
of interest required to be paid or accrued by the Borrower and its Subsidiaries
during such period on all Indebtedness of the Borrower and its 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 Leases 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. All liabilities of the Borrower and its
Subsidiaries determined on a consolidated basis in accordance with generally
<PAGE> 15
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accepted accounting principles and all Indebtedness of the Borrower and its
Subsidiaries, whether or not so classified.
Consolidated Working Capital. As of any date, the difference of (a) the
sum of (i) both billed and unbilled Accounts Receivable, plus (ii) inventory of
the Borrower and its Subsidiaries (including Consigned Precious Metal);
provided, however, that for purposes of determining inventory of the Borrower
and its Subsidiaries at the end of any period (without limiting the calculation
of inventory of the Borrower and its Subsidiaries at the beginning of any
period), the amount of inventory of the Borrower and its Subsidiaries shall not
exceed an amount equal to 280/365 multiplied by the Borrower's cost of goods
sold for the fiscal year then ended calculated in accordance with generally
accepted accounting principles, plus (iii) layaway receivables of the Borrower
calculated in a manner consistent with the financial statements of the Borrower
as of the Balance Sheet Date minus (b) the sum of (i) current accounts payable
of the Borrower and its Subsidiaries, plus (ii) current accruals and accretions
(exclusive of interest accruals and accretions and income taxes currently
payable but inclusive of accrued payroll) of the Borrower and its Subsidiaries.
Contango Rate. As defined in the definition of Consignment Fixed Rate.
Conversion Request. A notice given by the Borrower to the Dollar Agent
with respect to Dollar Facility Loans and to the Gold Agent with respect to
Gold Loans, of the Borrower's election to convert or continue a Dollar Facility
Loan or, as the case may be, a Gold Loan, in each case in accordance with
Sections 2.6, 3.5, 6.4 and 8.4.
Credit Agreement. This Revolving Credit, Term Loan and Gold Consignment
Agreement, including the Schedules and Exhibits hereto.
Default. See Section 16.1.
Distribution. The declaration or payment of any dividend on or in respect
of any shares of any class of capital stock of the Borrower, other than
dividends payable solely in shares of common stock of the Borrower; the
purchase, redemption, or other retirement of any shares of any class of capital
stock of the Borrower, directly or indirectly through a Subsidiary of the
Borrower or otherwise; the return of capital by the Borrower to its
shareholders as such; or any other distribution on or in respect of any shares
of any class of capital stock of the Borrower.
Dollar Agent. FNBB, acting as agent for the Dollar Banks.
Dollar Agent's Head Office. The Dollar Agent's head office located at 100
Federal Street, Boston, Massachusetts 02110, or at such other location as the
Dollar Agent may designate from time to time.
<PAGE> 16
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Dollar Banks. FNBB and the other lending institutions listed on Part
1 of Schedule 1 hereto and any other Person who becomes an assignee of any
rights and obligations of a Dollar Bank pursuant to Section 22.
Dollar Borrowing Base. At the relevant time of reference thereto, an
amount determined by the Dollar Agent by reference to the most recent Borrowing
Base Report delivered to the Banks and the Agents pursuant to Section 11.4(f),
which is equal to (a) 55% of the result of (i) the net book value (determined
on an average cost basis at lower of cost or market) of Eligible Inventory
minus (ii) an amount equal to 111% of the sum of (A) the Fair Market Value of
Consigned Precious Metal outstanding plus (B) the amount of Gold Loans
outstanding minus (iii) the Inventory Shrink Reserve plus (b) 75% of Eligible
Accounts Receivable minus (c) (i) from and after August 31, 1996 through
December 31, 1996, 50% of the amount of any Landlord Lien Reserve and (ii) at
all times after December 31, 1996, the amount of any Landlord Lien Reserve.
Dollar Facility. The Dollar Banks' commitments to make Dollar Facility
Loans and the Dollar Agent's agreement to issue, extend and renew Letters of
Credit.
Dollar Facility Loans. The Revolving Credit Loans and the Term Loan.
Dollars or $. Dollars in lawful currency of the United States of America.
Domestic Lending Office. Initially, the office of each Bank designated
as such in Schedule 1 hereto; thereafter, such other office of such Bank, if
any, located within the United States that will be making or maintaining Base
Rate Loans.
Drawdown Date. The date on which any Loan is made or is to be made, and the
date on which any Loan is converted or continued in accordance with Sections
2.6, 3.5, 6.4 or 8.4.
Eligible Assignee. Any of (i) a commercial bank or finance company
organized under the laws of the United States, or any State thereof or the
District of Columbia, and having total assets in excess of $1,000,000,000; (ii)
a savings and loan association or savings bank organized under the laws of the
United States, or any State thereof or the District of Columbia, and having a
net worth of at least $ 100,000,000, calculated in accordance with generally
accepted accounting principles; (iii) a commercial bank organized under the
laws of any other country which is a member of the Organization for Economic
Cooperation and Development (the "OECD"), or a political subdivision of any
such country, and having total assets in excess of $1,000,000,000, provided
that such bank is acting through a branch or agency located in the country in
which it is organized or another country which is also a member of the OECD;
(iv) the central bank of any country which is a member of the OECD; and (v) if,
but only if, any Event of Default has occurred and is continuing, any other
bank, insurance company, commercial finance company or
<PAGE> 17
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other financial institution or other Person approved by the Agents, such
approval not to be unreasonably withheld.
Eligible Accounts Receivable. The aggregate of the unpaid portions of
Accounts Receivable (net of any credits, rebates, offsets, holdbacks or other
adjustments or commissions payable to third parties that are adjustments to
such Accounts Receivable) which are generated in connection with Approved
Credit Programs entered into by the Borrower (i) that the Borrower reasonably
and in good faith determines to be collectible; (ii) that are with account
debtors that (A) are not Affiliates of the Borrower, (B) are not insolvent or
involved in any case or proceeding, whether voluntary or involuntary, under any
bankruptcy, reorganization, arrangement, insolvency, adjustment of debt,
dissolution, liquidation or similar law of any jurisdiction and (C) are, in the
Agents' reasonable judgment, creditworthy; (iii) that are in payment of
obligations that have been fully performed and are not subject to dispute or
any other similar claims that would reduce the cash amount payable therefor;
(iv) that are not subject to any pledge, security interest or other lien or
encumbrance other than those created by the Loan Documents; (v) in which the
Collateral Agent has a valid and perfected first priority security interest;
(vi) that call for payment not faster than fourteen (14) days past the date
that the account debtor has received the application documents; (vii) that are
not outstanding for more than forty-five (45) days past the date of sale of the
underlying goods; (viii) that are not due from an account debtor located in
Indiana, Minnesota or New Jersey unless the Borrower (A) has received a
certificate of authority to do business and is in good standing in such state
or (B) has filed a notice of business activities report with the appropriate
office or agency of such state for the current year; (ix) that are payable in
Dollars; (x) that are not payable from an office outside of the United States;
and (xi) that are not secured by a letter of credit unless the Collateral Agent
has a prior, perfected security interest in such letter of credit.
Eligible Inventory. With respect to the Borrower, finished goods, Precious
Metal and precious stone (whether or not placed in findings) inventory owned by
the Borrower or consigned pursuant to this Credit Agreement, including
inventory on layaway for customers up to a maximum amount of layaway inventory
not in excess of ten percent (10%) of the total amount of the net book value
(determined on an average cost basis at lower of cost or market) of the
Borrower's inventory; provided that Eligible Inventory shall not include any
inventory (i) held on consignment (other than inventory consigned pursuant to
the Gold Facility), or not otherwise owned by the Borrower, or of a type no
longer sold by the Borrower, (ii) which is damaged or not immediately saleable
or subject to any legal encumbrance other than Permitted Liens, (iii) which is
not in the possession of the Borrower unless it is in transit from one
Permitted Inventory Location within the United States of America to another
Permitted Inventory Location within the United States of America, (iv) as to
which appropriate Uniform Commercial Code financing statements showing the
Borrower as debtor and the Collateral Agent as secured party have not been
filed in the proper
<PAGE> 18
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filing office or offices in order to perfect the Collateral Agent's security
interest therein, (v) which has been shipped to a customer of the Borrower
regardless of whether such shipment is on a consignment basis, (vi) which is
not either (A) located at a Permitted Inventory Location within the United
States of America or (B) in transit from one Permitted Inventory Location
within the United States of America to another Permitted Inventory Location
within the United States of America, or (vii) which the Agents reasonably deem
to be obsolete or not marketable.
Employee Benefit Plan. Any employee benefit plan within the meaning of
Section 3(3) of ERISA maintained or contributed to by the Borrower or any ERISA
Affiliate, other than a Multiemployer Plan.
Environmental Laws. See Section 10.18(a).
ERISA. The Employee Retirement Income Security Act of 1974.
ERISA Affiliate. Any Person which is treated as a single employer with the
Borrower under Section 414 of the Code.
ERISA Reportable Event. A reportable event with respect to a Guaranteed
Pension Plan within the meaning of Section 4043 of ERISA and the regulations
promulgated thereunder as to which the requirement of notice has not been
waived.
Eurocurrency Reserve Rate. For any day with respect to a Eurodollar Rate
Loan or Consignment Fixed Rate Amount, the maximum rate (expressed as a
decimal) at which any lender subject thereto would be required to maintain
reserves under Regulation D of the Board of Governors of the Federal Reserve
System (or any successor or similar regulations relating to such reserve
requirements) against "Eurocurrency Liabilities" (as that term is used in
Regulation D), if such liabilities were outstanding. The Eurocurrency Reserve
Rate shall be adjusted automatically on and as of the effective date of any
change in the Eurocurrency Reserve Rate.
Eurodollar Applicable Margin. At all times from the Closing Date through
the first Performance Adjustment Date, two and one half percent (2-1/2%), and
thereafter, the percentage determined by reference to the provisions of 8.21.
Eurodollar Business Day. Any day, other than a Saturday or Sunday, on
which commercial banks are open for international business (including dealings
in Dollar deposits) in London or such other Eurodollar interbank market as may
be selected (a) with respect to Dollar Facility Loans which are also Eurodollar
Rate Loans, by the Dollar Agent, in its sole discretion acting in good faith or
(b) with respect to Gold Loans which are also Eurodollar Rate Loans or with
respect to Consignment Fixed Rate Amounts, by the Gold Agent, in its sole
discretion acting in good faith.
<PAGE> 19
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Eurodollar Lending Office. Initially, the office of each Bank designated
as such in Schedule 1 hereto; thereafter, such other office of such Bank, if
any, that shall be making or maintaining Eurodollar Rate Loans.
Eurodollar Rate. For any Interest Period with respect to a Eurodollar Rate
Loan or for purposes of determining the Consignment Fixed Rate, the rate of
interest equal to (a) the rate of interest for the Applicable Agent (rounded
upwards to the nearest 1/16 of one percent) of the rate at which such
Applicable Agent's Eurodollar Lending Office is offered Dollar deposits two
Eurodollar Business Days prior to the beginning of such Interest Period in the
interbank Eurodollar market where the Eurodollar and foreign currency and
exchange operations of such Eurodollar Lending Office are customarily
conducted, for delivery on the first day of such Interest Period for the number
of days impressed therein and in an amount comparable to the amount of the
Eurodollar Rate Loan or Consignment Fixed Rate Amount of the Applicable Agent
to which such Interest Period applies, divided by (b) a number equal to 1.00
minus the Eurocurrency Reserve Rate, if applicable.
Eurodollar Rate Loans. Revolving Credit Loans, Gold Loans and all or any
portion of the Term Loan bearing interest calculated by reference to the
Eurodollar Rate.
Event of Default. See Section 16.1.
Excess Cash Flow Prepayment. See Section 3.6.
Extension of Credit. The making of any Loan or Purchase and Consignment or
the issuance, extension or renewal of any Letter of Credit.
Fair Market Value. On any day, with respect to the calculation of the
Dollar value of Precious Metal, the Second London Gold Fixing for such day
times the number of ounces of Precious Metal for which such Dollar value is
being calculated If no such price is available for a particular day, the Fair
Market Value for such day shall be the price for the immediately preceding day
for which such price is available. In the event that the London Bullion Brokers
shall discontinue or alter its usual practice of quoting a price in Dollars for
gold, the Fair Market Value for such day shall be RIHT's Spot Value for that
day.
Fee Letter. See Section 8.10.
FNBB. The First National Bank of Boston, a national banking association,
in its individual capacity.
FNBB Concentration Accounts. See Section 11.14(a).
<PAGE> 20
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Generally accepted accounting principles. (i) When used in Section 13,
whether directly or indirectly through reference to a capitalized term used
therein, means (A) principles that are consistent with the principles
promulgated or adopted by the Financial Accounting Standards Board and its
predecessors, in effect for the fiscal year ended on the Balance Sheet Date,
and (B) to the extent consistent with such principles, the accounting practice
of the Borrower reflected in its financial statements for the year ended on the
Balance Sheet Date; provided, however, that if any change in such principles
promulgated by the Financial Accounting Standards Board and its predecessors
following the Balance Sheet Date would affect (or would result in a change in
the method of calculation of) any of the covenants set forth in Section 13 or
any definition related thereto, then the Borrower, the Agents and the Banks
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 this Credit
Agreement 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 Borrower, the Agents and the
Majority Banks, 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 Section 13 shall be construed in accordance with
generally accepted accounting principles as in effect immediately prior to such
amendment and consistently applied, and (ii) when used in general, other than
as provided above, means 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 Borrower adopting the same principles,
provided that in each case referred to in this definition of "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.
Gold Agent. RIHT, acting as agent for the Gold Banks.
Gold Agent's Head Office. The Gold Agent's head office located at One
Hospital Trust Plaza, Providence, Rhode Island 02903, or at such other location
as the Gold Agent may designate from time to time.
Gold Banks. RIHT and any other lending institution listed on Part 2 of
Schedule 1 hereto and any other Person who becomes an assignee of any rights
and obligations of a Gold Bank pursuant to Section 22.
Gold Commitment. With respect to each Gold Bank, either (a) the Dollar
amount set forth on Part 2 of Schedule 1 hereto as the amount of such Gold
Bank's commitment to make Purchases and Consignments of Precious Metal or Gold
Loans
<PAGE> 21
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or (b) the number of troy ounces set forth on Part 2 of Schedule 1 hereto as
the number of troy ounces of such Gold Bank's commitment to make Purchases and
Consignments of Precious Metal, as the same may be reduced from time to time;
or, if such commitment is terminated pursuant to the provisions hereof, zero.
Gold Commitment Percentage. With respect to each Gold Bank, the percentage
set forth on Part 2 of Schedule 1 hereto as such Gold Bank's percentage of the
aggregate Gold Commitment of all of the Gold Banks.
Gold Drawdown Date. The date on which any Purchase and Consignment is made
or is to be made.
Gold Facility. The Gold Banks' respective Gold Commitments to make
Purchases and Consignments and Gold Loans.
Gold Loans. Revolving credit loans made or to be made by the Gold Banks to
the Borrower pursuant to Section 6.1.
Gold Note Record. A Record with respect to a Gold Note.
Gold Notes. See Section 6.2.
Guaranteed Pension Plan. Any employee pension benefit plan within the
meaning of Section 3(2) of ERISA maintained or contributed to by the Borrower
or any ERISA Affiliate the benefits of which are guaranteed on termination in
full or in part by the PBGC pursuant to Title IV of ERISA, other than a
Multiemployer Plan.
Hazardous Substances. See Section 10.18(b).
Headquarters Landlord Consent. The Landlord Consent and Waiver, dated or
to be dated on or prior to the Closing Date, given by the lessor with respect
to the Borrower's leased real property located in Chicago, Illinois at which
the Borrower maintains its headquarters and central warehouse, such
Headquarters Landlord Consent being in form and substance satisfactory to the
Banks, the Collateral Agent and the Agents.
Indebtedness. 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,
<PAGE> 22
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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,
supplies, 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.
Indentures. The Indentures dated as of April 15, 1996 between the Borrower
and Norwest Bank Minnesota, National Association, as trustee.
Interest Payment Date. (i) As to any Base Rate Loan, the last day of any
calendar month; and (ii) as to any Eurodollar Rate Loan, the last day of the
applicable Interest Period.
Interest Period. With respect to each Dollar Facility Loan, Gold Loan or
Consignment Fixed Rate Amount, (a) initially, the period commencing on the
Drawdown Date of such Loan (or, as the case may be, the Gold Drawdown Date of
the Purchases and Consignments with respect to such Consignment Fixed Rate
Amounts) and ending on the last day of one of the periods set forth below, as
selected by the Borrower in a Loan Request (or, as the case may be, Purchase
and Consignment Request with respect to Consignment Fixed Rate Amounts) (i) for
any Base Rate Loan, the calendar month; and (ii) for any Eurodollar Rate Loan
or Consignment Fixed Rate Amount, 1, 2 or 3 months; and (b) thereafter, each
period commencing on the last day of the next preceding Interest Period
applicable to such Loan or Consignment Fixed Rate Amount and ending on the last
day of one of the periods set forth above, as selected by the Borrower in a
Conversion Request or Consignment Conversion Request; provided that all of the
foregoing provisions relating to Interest Periods are subject to the following:
(A) if any Interest Period with respect to a Eurodollar Rate Loan or
Consignment Fixed Rate Amount would otherwise end on a day that is not a
Eurodollar Business Day, that Interest Period shall be extended to the next
succeeding Eurodollar Business Day unless the result of such extension would be
to carry such Interest Period into another calendar month, in which event such
Interest Period shall end on the immediately preceding Eurodollar Business Day;
(B) if any Interest Period with respect to a Base Rate Loan would end on a
day that is not a Business Day, that Interest Period shall end on the next
succeeding Business Day;
(C) if the Borrower shall fail to give notice as provided in Sections 2.6,
3.5, 6.4 or 8.4, the Borrower shall be deemed to have requested a conversion
of the affected Eurodollar Rate Loan or Consignment Fixed Rate Amount to a Base
<PAGE> 23
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Rate Loan or Consignment Base Rate Amount, as applicable, on the last day of
the then current Interest Period with respect thereto;
(D) any Interest Period relating to any Eurodollar Rate Loan or
Consignment Fixed Rate Amount that begins on the last Eurodollar Business Day
of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall end on the last Eurodollar Business Day of a calendar month; and
(E) any Interest Period relating to any Eurodollar Rate Loan or
Consignment Fixed Rate Amount that would otherwise extend beyond the Maturity
Date shall end on the Maturity Date.
Inventory Advance Rate Percentage. (a) at all times through and including
December 31, 1996, 65%, and (b) at all times from and after January 1, 1997,
60%.
Inventory Shrink Reserve. As of any date, the product of (a) the amount of
Eligible Inventory as of such date times (b) 1.4%, as such amount may be
adjusted from time to time, on five (5) days' prior written notice given by the
Dollar Agent to the Borrower, as the Dollar Agent, in its reasonable discretion
consistent with its usual business practices and policies, shall determine.
Investments. 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 time: (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 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.
Landlord Lien Reserve. The sum of (a) all rent past due on any Specified
Lease at the time of reference and (b) all rent which may become due under any
Specified Lease during the twelve month period commencing at the time of
reference, in each case, unless otherwise requested by the Agents, calculated
on February 1 and
<PAGE> 24
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August 1 of each calendar year by reference to the average monthly rent on such
Specified Lease during the immediately preceding calendar year.
Landlord Waiver. A waiver from the lessor or sublessor of property leased
by the Borrower as lessee in substantially the form of Exhibit D hereto.
Letter of Credit. See Section 4.1.1.
Letter of Credit Application. See Section 4.1.1.
Letter of Credit Participation. See Section 4.1.4.
Loan Documents. This Credit Agreement, the Notes, the Letter of Credit
Applications, the Letters of Credit, the Fee Letter and the Security Documents.
Loan Request. See Section 8.3(a).
Loans. The Revolving Credit Loans, the Term Loan and the Gold Loans.
Majority Banks. As of any date, the Banks (other than Delinquent Banks)
whose aggregate portions of the outstanding amount of the Term Loan and whose
aggregate Commitments or, as the case may be, Gold Commitments together
constitute at least fifty-one percent (51%) of the Total Commitment.
Maturity Date. April 30, 2001.
Maximum Drawing Amount. The maximum aggregate amount that the
beneficiaries may at any time draw under outstanding Letters of Credit, as such
aggregate amount may be reduced from time to time pursuant to the terms of the
Letters of Credit.
Monthly Inventory Report. A Monthly Inventory Report signed by the Vice
President of Finance or principal financial or accounting officer of the
Borrower and in substantially the form of Exhibit N hereto.
Multiemployer Plan. Any multiemployer plan within the meaning of Section
3(37) of ERISA maintained or contributed to by the Borrower or any ERISA
Affiliate.
Notes. The Term Notes, the Gold Notes and the Revolving Credit Notes.
Obligations. All indebtedness, obligations and liabilities of any of the
Borrower and its Subsidiaries to any of the Banks, the Agents and the
Collateral Agent, individually or collectively, existing on the date of this
Credit Agreement or arising thereafter, direct or indirect, joint or several,
absolute or contingent, matured or unmatured, liquidated or unliquidated,
secured or unsecured, arising by contract, operation of law or otherwise,
arising or incurred under this Credit Agreement or any
<PAGE> 25
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of the other Loan Documents or in respect of any of the Loans or Purchases and
Consignments made or Reimbursement Obligations incurred or any of the Notes,
Letter of Credit Application, Letter of Credit or other instruments at any time
evidencing any thereof.
Operating Accounts. See Section 8.3(b).
Outstanding. With respect to the Loans, the aggregate unpaid principal
thereof as of any date of determination; with respect to Purchases and
Consignments, the aggregate Fair Market Value or number of troy ounces of
Consigned Precious Metal which, as of any date of determination, has not been
paid for by the Borrower or Redelivered.
Outstanding Dollar Facility Amounts. The sum of (a) the outstanding amount
of the Revolving Credit Loans (after giving effect to all amounts requested)
plus (b) the Maximum Drawing Amount and all Unpaid Reimbursement Obligations.
Outstanding Facility Amounts. The sum of (a) the outstanding amount of the
Revolving Credit Loans (after giving effect to all amounts requested) plus (b)
the outstanding amount of the Gold Loans (after giving effect to all amounts
requested) plus (c) the Fair Market Value of Consigned Precious Metal (after
giving effect to all Purchases and Consignments requested) plus (d) the Maximum
Drawing Amount and all Unpaid Reimbursement Obligations.
PBGC. The Pension Benefit Guaranty Corporation created by Section 4002 of
ERISA and any successor entity or entities having similar responsibilities.
Perfection Certificate. The Perfection Certificate as defined in the
Security Agreement.
Performance Adjustment. See Section 8.21.
Performance Adjustment Date. See Section 8.21.
Permitted Inventory Locations. The retail stores and distribution centers
of the Borrower and its Subsidiaries located in the United States of America
and listed on Schedule 2 hereto, as such Schedule 2 may be supplemented from
time to time in accordance with the provisions of Section 11.4(i).
Permitted Liens. Liens, security interests and other encumbrances permitted
by Section 12.2.
Person. Any individual, corporation, partnership, trust, unincorporated
association, business, or other legal entity, and any government or any
governmental agency or political subdivision thereof.
<PAGE> 26
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Precious Metal. Gold measured in troy ounces having a fineness of not less
than .9995, without regard to whether such gold is alloyed or unalloyed, in
bullion form or contained in or processed into other materials which contain
elements other than gold.
Purchase and Consignment. Purchases and consignments of the Borrower's
Precious Metal made or to be made by the Gold Banks pursuant to Section 5.1(a).
Purchase and Consignment Request. See Section 5.3.
Purchase Price. See Section 5.1 (b).
Real Estate. All real property at any time owned or leased (as lessee or
sublessee) by the Borrower or any of its Subsidiaries.
Record. The grid attached to a Note, or the continuation of such grid, or
any other similar record, including computer records, maintained by any Bank
with respect to any Loan referred to in such Note.
Redelivered or Redelivery. The delivery by the Borrower to the Gold
Agent's Head Office, at the Borrower's sole risk and expense, of Precious Metal
in bullion form of a type and quality which is acceptable to the Gold Agent.
Register. See Section 22.3.
Reimbursement Obligation. The Borrower's obligation to reimburse the
Dollar Agent and the Dollar Banks on account of any drawing under any Letter of
Credit as provided in Section 4.2.
Revolving Credit Loans. Revolving credit loans made or to be made by the
Dollar Banks to the Borrower pursuant to Section 2.
Revolving Credit Note Record. A Record with respect to a Revolving Credit
Note.
Revolving Credit Notes. See Section 2.4.
RIHT. Rhode Island Hospital Trust National Bank, a national banking
association, in its individual capacity.
Security Agreement. The Security Agreement, dated or to be dated on or
prior to the Closing Date, between the Borrower and the Collateral Agent and in
form and substance satisfactory to the Banks, the Collateral Agent and the
Agents.
Security Documents. The Security Agreement, the Landlord Lien Waivers, the
Headquarters Landlord Consent, the Trademark Assignment, the Trademark
<PAGE> 27
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Security Agreement, the Cash Collateral Agreement, all Agency Account
Agreements, the Confirmation of Swap Agreement, and the Swap Agreement.
Senior Subordinated Notes. The Borrower's (a) 12.15% Series A Senior
Subordinated Notes due 2004 and (b) 15.00% Series B Senior Subordinated Notes
due 2004 (including any Series B Senior Subordinated Notes issued by the
Borrower as payment of interest thereon), each issued by the Borrower pursuant
to the Indentures, as in effect on the Closing Date and as amended in
accordance with the provisions of Section 12.8 hereof, or any replacement
thereof entered into by the Borrower in accordance with the provisions of
Section 12.8.
Settlement. The making of, or receiving of payments, in immediately
available funds, by the Dollar Banks or, as the case may be, the Gold Banks, to
the extent necessary to cause each Applicable Bank's actual share of the
outstanding amount of Revolving Credit Loans (after giving effect to any Loan
Request) or, as the case may be, of Gold Loans (after giving effect to any Loan
Request) to be equal to each Dollar Bank's Commitment Percentage of the
outstanding amount of such Revolving Credit Loans (after giving effect to any
Loan Request) or, as the case may be, each Gold Bank's Gold Commitment
Percentage of the outstanding amount of such Gold Loans (after giving effect to
any Loan Request), in any case where, prior to such event or action, the actual
share is not so equal.
Settlement Amount. See Section 8.6(a).
Settlement Date. (a) The Drawdown Date relating to any Loan Request, (b)
Friday of each week, or if Friday is not a Business Day, the Business Day
immediately following such Friday, (c) the Business Day immediately following
either Agent becoming aware of the existence of an Event of Default, (d) any
Business Day on which (i) the amount of Revolving Credit Loans outstanding from
FNBB plus FNBB's Commitment Percentage of the sum of the Maximum Drawing Amount
and any Unpaid Reimbursement Obligations is equal to or greater than FNBB's
Commitment Percentage of the Total Revolver Commitment, or, as the case may be,
(ii) the amount of Gold Loans outstanding from RIHT plus RIHT's Gold
Commitment Percentage of the Fair Market Value of Consigned Precious Metal
outstanding is equal to or greater than RIHT's Gold Commitment Percentage of
the Total Gold Commitment, (e) the Business Day immediately following any
Business Day on which the amount of Loans outstanding increases or decreases by
more than $5,000,000 as compared to the previous Settlement Date, (f) any day
on which any conversion of a Base Rate Loan to a Eurodollar Rate Loan occurs,
or (g) any Business Day on which (i) the amount of outstanding Revolving Credit
Loans or, as the case may be, Gold Loans decreases and (ii) the amount of the
Applicable Agent's Loans outstanding equals Zero Dollars ($0).
Settling Bank. See Section 8.6(a).
<PAGE> 28
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Specified Lease. A lease by the Borrower as lessee of Real Estate at which
Eligible Inventory is held and as to which at any time either (a) the Borrower
and the Agents have not received a Landlord Waiver or (b) the Agents have not
received evidence, in form and substance satisfactory to the Agents, that,
based upon then existing law (as determined by the Agents in the exercise of
their reasonable discretion and on the advice of counsel), the landlord of such
property would not have a lien on inventory superior to the security interest
granted under the Security Agreement, securing rent obligations more than
thirty (30) days past due or securing future rent obligations accruing after
the Closing Date.
Spot Value: At any time, with respect to the calculation of the Dollar
value of Precious Metal, (a) in all cases in which the Borrower is purchasing
Precious Metal or in which the value of Consigned Precious Metal for purposes
of the Consignment Limit is being calculated, RIHT's "ask" spot quotation for
Precious Metal at such time times the number of ounces of such Precious Metal
and (b) in all cases in which Gold Banks are purchasing Precious Metal, RIHT's
"bid" spot quotation for Precious Metal at such time times the number of ounces
of such Precious Metal.
Store Accounts. Depository accounts in depository institutions for, or on
behalf of, the Borrower or any of its Subsidiaries and listed on Schedule 10.20
hereto (as such may be amended from time to time in accordance with Section
13.10 hereof).
Subsidiary. Any corporation, association, trust, or other business entity
of which the designated parent shall at any time own directly or indirectly
through a Subsidiary or Subsidiaries at least a majority (by number of votes)
of the outstanding Voting Stock.
Swap Agreement. The ISDA Master Agreement dated or to be dated on or prior
to the Closing Date, among the Borrower and the Agents and in form and
substance satisfactory to each of the Borrower, the Banks and the Agents.
Term Loan. The term loan made or to be made by the Dollar Banks to the
Borrower on the Closing Date in the aggregate principal amount of
$15,000,000.00 pursuant to Section 3.1.
Term Notes. See Section 3.2.
Term Note Record. A Record with respect to a Term Note.
Total Commitment. The sum of the Total Revolver Commitment, the Total Gold
Commitment and the outstanding principal amount of the Term Loan.
Total Gold Commitment. The sum of the Gold Commitments of the Gold Banks,
as in effect from time to time.
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Total Revolver Commitment. The sum of the Commitments of the Dollar Banks,
as in effect from time to time, such amount being equal to $29,000,000 as of
the Closing Date.
Trademark Assignment. The Trademark Assignment, dated or to be dated on or
prior to the Closing Date, made by the Borrower in favor of the Collateral
Agent and in form and substance satisfactory to the Banks, the Collateral Agent
and the Agents.
Trademark Security Agreement. The Trademark Collateral Security and Pledge
Agreement, dated or to be dated on or prior to the Closing Date, between the
Borrower and the Collateral Agent and in form and substance satisfactory to
the Banks, the Collateral Agent and the Agents.
Type. As to any Revolving Credit Loan, Gold Loan or all or any portion of
the Term Loan, its nature as a Base Rate Loan or a Eurodollar Rate Loan.
Uniform Customs. With respect to any Letter of Credit, the Uniform Customs
and Practice for Documentary Credits (1993 Revision), International Chamber of
Commerce Publication No. 500 or any successor version thereto adopted by the
Agent in the ordinary course of its business as a letter of credit issuer and
in effect at the time of issuance of such Letter of Credit.
Unpaid Reimbursement Obligation. Any Reimbursement Obligation for which
the Borrower does not reimburse the Dollar Agent and the Dollar Banks on the
date specified in, and in accordance with, Section 4.2.
Voting Stock. Stock or similar interests, of any class or classes (however
designated), the holders of which are at the time entitled, as such holders, to
vote for the election of a majority of the directors (or persons performing
similar functions) of the corporation, association, trust or other business
entity involved, whether or not the right so to vote exists by reason of the
happening of a contingency.
1.2. RULES OF INTERPRETATION.
(a) A reference to any document or agreement shall include such document
or agreement as amended, modified or supplemented from time to time in
accordance with its terms and the terms of this Credit Agreement.
(b) The singular includes the plural and the plural includes the
singular.
(c) A reference to any law includes any amendment or modification to
such law.
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(d) A reference to any Person includes its permitted successors and
permitted assigns.
(e) Accounting terms not otherwise defined herein have the meanings
assigned to them by generally accepted accounting principles applied on a
consistent basis by the accounting entity to which they refer.
(f) The words "include", "includes" and "including" are not limiting.
(g) All terms not specifically defined herein or by generally accepted
accounting principles, which terms are defined in the Uniform Commercial Code
as in effect in the Commonwealth of Massachusetts, have the meanings assigned
to them therein, with the term "instrument" being that defined under Article 9
of the Uniform Commercial Code.
(h) Reference to a particular "Section" refers to that section of this
Credit Agreement unless otherwise indicated.
(i) The words "herein", "hereof", "hereunder" and words of like import
shall refer to this Credit Agreement as a whole and not to any particular
section or subdivision of this Credit Agreement.
2. THE DOLLAR FACILITY - REVOLVING CREDIT LOANS.
2.1. COMMITMENT TO LEND. Subject to the terms and conditions set forth in
this Credit Agreement, each of the Dollar Banks severally agrees to lend to the
Borrower and the Borrower may borrow, repay, and reborrow from time to time
between the Closing Date and the Maturity Date upon notice by the Borrower to
the Dollar Agent given in accordance with Section 8.3, such sums as are
requested by the Borrower up to a maximum aggregate amount outstanding (after
giving effect to all amounts requested) at any one time equal to such Dollar
Bank's Commitment minus such Dollar Bank's Commitment Percentage of the sum of
the Maximum Drawing Amount and all Unpaid Reimbursement Obligations, provided
that the sum of the outstanding amount of the Revolving Credit Loans (after
giving effect to all amounts requested) plus the Maximum Drawing Amount and
all Unpaid Reimbursement Obligations shall not at any time exceed the Total
Revolver Commitment. The Revolving Credit Loans shall be made pro rata in
accordance with each Dollar Bank's Commitment Percentage. Each request for a
Revolving Credit Loan hereunder shall constitute a representation and warranty
by the Borrower that the conditions set forth in Section 14 and Section 15, in
the case of the initial Revolving Credit Loans to be made on the Closing Date,
and Section 15, in the case of all other Revolving Credit Loans, have been
satisfied on the date of such request.
2.2. COMMITMENT FEE. The Borrower agrees to pay to the Dollar Agent for
the accounts of the Dollar Banks in accordance with their respective Commitment
<PAGE> 31
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Percentages a commitment fee calculated at the rate of one half of one percent
(1/2%) per annum on the average daily amount during each calendar month or
portion thereof from the Closing Date to the Maturity Date by which the Total
Revolver Commitment minus the sum of the Maximum Drawing Amount and all Unpaid
Reimbursement Obligations exceeds the outstanding amount of Revolving Credit
Loans during such calendar month. The commitment fee shall be payable monthly
in arrears on the first day of each calendar month for the immediately
preceding calendar month commencing on the first such date following the date
hereof, with a final payment on the Maturity Date or any earlier date on which
the Commitments shall terminate.
2.3. REDUCTION OF TOTAL REVOLVER COMMITMENT. The Borrower shall have the
right at any time and from time to time upon five (5) Business Days prior
written notice to the Dollar Agent to reduce by $1,000,000.00 or an integral
multiple thereof or terminate entirely the Total Revolver Commitment, whereupon
the Commitments of the Dollar Banks shall be reduced pro rata in accordance with
their respective Commitment Percentages of the amount specified in such notice
or, as the case may be, terminated. Promptly after receiving any notice of the
Borrower delivered pursuant to this Section 2.3, the Dollar Agent will notify
the Dollar Banks of the substance thereof. Upon the effective date of any such
reduction or termination, the Borrower shall pay to the dollar agent for the
respective accounts of the Dollar Banks the full amount of any commitment fee
then accrued on the amount of the reduction. No reduction or termination of the
commitments may be reinstated.
2.4. THE REVOLVING CREDIT NOTES. The Revolving Credit Loans shall be
evidenced by separate promissory notes of the Borrower in substantially the
form of Exhibit E hereto (each a "Revolving Credit Note"), dated as of the
Closing Date and completed with appropriate insertions. One Revolving Credit
Note shall be payable to the order of each Dollar Bank in a principal amount
equal to such Dollar Bank's Commitment or, if less, the outstanding amount of
all Revolving Credit Loans made by such Dollar Bank, plus interest accrued
thereon, as set forth below. The Borrower irrevocably authorizes each Dollar
Bank to make or cause to be made, at or about the time of the Drawdown Date of
any Revolving Credit Loan or at the time of receipt of any payment of principal
on such Dollar Bank's Revolving Credit Note, an appropriate notation on such
Dollar Bank's Revolving Credit Note Record reflecting the making of such
Revolving Credit Loan or (as the case may be) the receipt of such payment. The
outstanding amount of the Revolving Credit Loans set forth on such Dollar
Bank's Revolving Credit Note Record shall be prima facie evidence of the
principal amount thereof owing and unpaid to such Dollar Bank, but the failure
to record, or any error in so recording, any such amount on such Dollar Bank's
Revolving Credit Note Record shall not limit or otherwise affect the
obligations of the Borrower hereunder or under any Revolving Credit Note to
make payments of principal of or interest on any Revolving Credit Note when
due.
<PAGE> 32
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2.5. INTEREST ON REVOLVING CREDIT LOANS. Except as otherwise provided in
Section 8.20, the Revolving Credit Loans shall bear interest in accordance with
the provisions of Section 8.1 hereof.
2.6. REQUESTS FOR REVOLVING CREDIT LOANS: CONVERSION OPTIONS. The Borrower
shall request Revolving Credit Loans by providing to the Dollar Agent Loan
Requests for Revolving Credit Loans in accordance with the requirements of
Section 8.3(a) hereof. The Dollar Agent may, in its sole discretion and without
conferring with the Dollar Banks, make Revolving Credit Loans to the Borrower
in accordance with the provisions of Section 8.3(b) hereof. The Borrower shall
be permitted to convert Revolving Credit Loans to Revolving Credit Loans of
different Types in accordance with the provisions of Section 8.4 hereof, and
such provisions of Section 8.4 shall apply mutatis mutandis with respect to the
Revolving Credit Loans so that the Borrower will have the same interest rate
options with respect to the Revolving Credit Loans as it would be entitled to
with respect to the Gold Loans and the Term Loan.
2.7. FUNDS FOR REVOLVING CREDIT LOANS. The provisions of Section 8.5 and
Section 8.6 with respect to the funding procedures and Settlement procedures
for the Loans shall apply to the Revolving Credit Loans
2.8. MATURITY. The Borrower promises to pay on the Maturity Date, and
there shall become absolutely due and payable on the Maturity Date, all of the
Revolving Credit Loans outstanding on such date, together with any and all
accrued and unpaid interest thereon.
2.9. OPTIONAL REPAYMENTS OF REVOLVING CREDIT LOANS. The Borrower shall
have the right, at its election, to repay the outstanding Revolving Credit
Loans in accordance with the provisions of Section 8.7 hereof.
3. THE DOLLAR FACILITY - THE TERM LOAN.
3.1. COMMITMENT TO LEND. Subject to the terms and conditions set forth in
this Credit Agreement, each Dollar Bank agrees to lend to the Borrower on the
Closing Date the amount of its Commitment Percentage of the principal amount of
$15,000,000.00.
3.2. THE TERM NOTES. The Term Loan shall be evidenced by separate
promissory notes of the Borrower in substantially the form of Exhibit E hereto
(each a "Term Note"), dated the Closing Date and completed with appropriate
insertions. One Term Note shall be payable to the order of each Dollar Bank in
a principal amount equal to such Dollar Bank's Commitment Percentage of the
Term Loan and representing the obligation of the Borrower to pay to such Dollar
Bank such principal amount or, if less, the outstanding amount of such Dollar
Bank's Commitment Percentage of the Term Loan, plus interest accrued thereon,
as set forth below. The Borrower irrevocably authorizes each Dollar Bank to
make or cause to be made a
<PAGE> 33
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notation on such Dollar Bank's Term Note Record reflecting the original
principal amount of such Dollar Bank's Commitment Percentage of the Term Loan
and, at or about the time of such Dollar Bank's receipt of any principal
payment on such Dollar Bank's Term Note, an appropriate notation on such Dollar
Bank's Term Note Record reflecting such payment. The aggregate unpaid amount
set forth on such Dollar Bank's Term Note Record shall be prima facie evidence
of the principal amount thereof owing and unpaid to such Dollar Bank, but the
failure to record, or any error in so recording, any such amount on such Dollar
Bank's Term Note Record shall not affect the obligations of the Borrower
hereunder or under any Term Note to make payments of principal of and interest
on any Term Note when due.
3.3. SCHEDULE OF INSTALLMENT PAYMENTS OF PRINCIPAL OF TERM LOAN. The
Borrower promises to pay to the Dollar Agent for the account of the Dollar
Banks the principal amount of the Term Loan in nineteen (19) consecutive
quarterly installment payments, payable on each fiscal quarter ending date and
each in the amount set forth in the table below opposite the period in such
table during which such fiscal quarter ending date occurs, with a final payment
on the Maturity Date in an amount equal to the unpaid balance of the Term Loan:
AMOUNT OF
PERIOD: QUARTERLY PAYMENT:
- ------ -----------------
July 31, 1996 - April 30, 1997 $250,000.00
July 31, 1997 - April 30, 1998 $500,000.00
July 31, 1998 - April 30, 1999 $750,000.00
July 31, 1999 - April 30, 2000 $1,000,000.00
July 31, 2000 - January 31, 2001 $1,250,000.00
3.4. OPTIONAL PREPAYMENT OF TERM LOAN. The Borrower shall have the right
at any time to prepay the Term Loan in accordance with the provisions of
Section 8.7. Any prepayment of principal of the Term Loan shall be applied
ratably against the remaining scheduled installments of principal due on the
Term Loan. No amount repaid with respect to the Term Loan may be reborrowed.
3.5. INTEREST ON TERM LOAN. Except as otherwise provided in Section 8.20,
the outstanding amount of the Term Loan shall bear interest in accordance with
the provisions of Section 8.1. The Borrower shall notify the Dollar Agent, such
notice to be irrevocable, at least two (2) Business Days prior to the Drawdown
Date of the Term Loan if all or any portion of the Term Loan is to bear
interest at the Eurodollar Rate. After the Term Loan has been made, the
provisions of Section 8.4 shall apply mutatis mutandis with respect to all or
any portion of the Term Loan so that the Borrower may have the same interest
rate options with respect to all or any portion of the Term
<PAGE> 34
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Loan as it would be entitled to with respect to the Revolving Credit Loans and
the Gold Loans. No Interest Period relating to the Term Loan or any portion
thereof bearing interest at the Eurodollar Rate shall extend beyond the date on
which a regularly scheduled installment payment of the principal of the Term
Loan is to be made unless a portion of the Term Loan at least equal to such
installment payment has an Interest Period ending on such date or is then
bearing interest at the Base Rate.
3.6. EXCESS CASH FLOW PREPAYMENT. The Borrower shall pay to the Dollar
Agent, for the accounts of the Dollar Banks (each, an "Excess Cash Flow
Prepayment"), annually in arrears within ninety (90) days after the end of each
fiscal year of the Borrower (or, if earlier, upon delivery of the annual
financial statements pursuant to Section 11.4(a) hereof), an amount equal to
fifty percent (50%) of the Consolidated Excess Cash Flow, if any, for such
fiscal year. Each such Excess Cash Flow Prepayment shall be applied to the
scheduled installments of principal due on the Term Loan in the inverse order of
maturity.
4. THE DOLLAR FACILITY - LETTERS OF CREDIT.
4.1. LETTER OF CREDIT COMMITMENTS.
4.1.1. COMMITMENT TO ISSUE LETTERS OF CREDIT. Subject to the terms
and conditions hereof and the execution and delivery by the Borrower of a
letter of credit application on the Dollar Agent's customary form (a
"Letter of Credit Application"), the Dollar Agent on behalf of the Dollar
Banks and in reliance upon the agreement of the Dollar Banks set forth in
Section 4.1.4 and upon the representations and warranties of the Borrower
contained herein, agrees, in its individual capacity, to issue, extend and
renew for the account of the Borrower one or more standby or documentary
letters of credit (individually, a "Letter of Credit"), in such form as
may be requested from time to time by the Borrower and agreed to by the
Dollar Agent; provided, however, that, after giving effect to such
request, (a) the sum of the aggregate Maximum Drawing Amount and all
Unpaid Reimbursement Obligations shall not exceed $5,000,000.00 at any one
time and (b) the sum of (i) the Maximum Drawing Amount on all Letters of
Credit, (ii) all Unpaid Reimbursement Obligations, and (iii) the amount of
all Revolving Credit Loans outstanding shall not exceed the Total Revolver
Commitment. Notwithstanding the foregoing, the Dollar Agent shall have no
obligation to issue any Letter of Credit to support or secure any
Indebtedness of the Borrower or any of its Subsidiaries to the extent that
such Indebtedness was incurred prior to the proposed issuance date of such
Letter of Credit, unless in any such case the Borrower demonstrates to the
satisfaction of the Dollar Agent that (x) such prior incurred Indebtedness
were then fully secured by a prior perfected and unavoidable security
interest in collateral provided by the Borrower or such Subsidiary to the
proposed beneficiary of such Letter of Credit or (y) such prior incurred
Indebtedness
<PAGE> 35
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were then secured or supported by a letter of credit issued for the
account of the Borrower or such Subsidiary and the reimbursement obligation
with respect to such letter of credit was fully secured by a prior
perfected and unavoidable security interest in collateral provided to the
issuer of such letter of credit by the Borrower or such Subsidiary.
4.1.2. LETTER OF CREDIT APPLICATIONS. Each Letter of Credit Application
shall be completed to the satisfaction of the Dollar Agent. In the event
that any provision of any Letter of Credit Application shall be
inconsistent with any provision of this Credit Agreement, then the
provisions of this Credit Agreement shall, to the extent of any such
inconsistency, govern.
4.1.3. TERMS OF LETTERS OF CREDIT. Each Letter of Credit issued,
extended or renewed hereunder shall, among other things, (a) provide for
the payment of sight drafts for honor thereunder when presented in
accordance with the terms thereof and when accompanied by the documents
described therein, and (b) have an expiry date (i) no later than the date
which is fourteen (14) days (or, if the Letter of Credit is confirmed by a
confirmer or otherwise provides for one or more nominated persons,
forty-five (45) days) prior to the Maturity Date, (ii) no more than one (1)
year from the issue date thereof with respect to standby Letters of Credit,
and (iii) no more than one hundred twenty (120) days from the issue date
thereof with respect to documentary Letters of Credit. Each Letter of
Credit so issued, extended or renewed shall be subject to the Uniform
Customs.
4.1.4. REIMBURSEMENT OBLIGATIONS OF DOLLAR BANKS. Each Dollar Bank
severally agrees that it shall be absolutely liable, without regard to the
occurrence of any Default or Event of Default or any other condition
precedent whatsoever, to the extent of such Dollar Bank's Commitment
Percentage, to reimburse the Dollar Agent on demand for the amount of each
draft paid by the Dollar Agent under each Letter of Credit to the extent
that such amount is not reimbursed by the Borrower pursuant to Section 4.2
(such agreement for a Dollar Bank being called herein the "Letter of Credit
Participation" of such Dollar Bank).
4.1.5. PARTICIPATIONS OF DOLLAR BANKS. Each such payment made by a
Dollar Bank shall be treated as the purchase by such Dollar Bank of a
participating interest in the Borrower's Reimbursement Obligation under
Section 4.2 in an amount equal to such payment. Each Dollar Bank shall
share in accordance with its participating interest in any interest which
accrues pursuant to Section 4.2.
4.2. REIMBURSEMENT OBLIGATION OF THE BORROWER. In order to induce the
Dollar Agent to issue, extend and renew each Letter of Credit and the Dollar
Banks
<PAGE> 36
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to participate therein, the Borrower hereby agrees to reimburse or pay to the
Dollar Agent, for the account of the Dollar Agent or (as the case may be) the
Dollar Banks, with respect to each Letter of Credit issued, extended or renewed
by the Dollar Agent hereunder,
(a) except as otherwise expressly provided in Section 4.2(b) and (c),
on each date that any draft presented under such Letter of Credit is
honored by the Dollar Agent, or the Dollar Agent otherwise makes a payment
with respect thereto, (i) the amount paid by the Dollar Agent under or with
respect to such Letter of Credit, and (ii) the amount of any taxes, fees,
charges or other costs and expenses whatsoever incurred by the Dollar Agent
or any Dollar Bank in connection with any payment made by the Dollar Agent
or any Dollar Bank under, or with respect to, such Letter of Credit,
(b) upon the reduction (but not termination) of the Total Revolver
Commitment to an amount less than the Maximum Drawing Amount, an amount
equal to such difference, which amount shall be held by the Dollar Agent for
the benefit of the Dollar Banks and the Dollar Agent as cash collateral for
all Reimbursement Obligations, and
(c) upon the termination of the Total Revolver Commitment, or the
acceleration of the Reimbursement Obligations with respect to all Letters
of Credit in accordance with Section 16, an amount equal to the then
Maximum Drawing Amount on all Letters of Credit, which amount shall be held
by Dollar Agent as cash collateral for all Reimbursement Obligations.
Each such payment shall be made to the Dollar Agent at the Dollar Agent's Head
Office in immediately available funds. Interest on any and all amounts remaining
unpaid by the Borrower under this Section 4.2 at any time from the date such
amounts become due and payable (whether as stated in this Section 4.2, by
acceleration or otherwise) until payment in full (whether before or after
judgment) shall be payable to the Dollar Agent on demand at the rate specified
in Section 8.20 for overdue principal on the Revolving Credit Loans.
4.3. LETTER OF CREDIT PAYMENTS. If any draft shall be presented or other
demand for payment shall be made under any Letter of Credit, the Dollar Agent
shall notify the Borrower of the date and amount of the draft presented or
demand for payment and of the date and time when it expects to pay such draft or
honor such demand for payment. If the Borrower fails to reimburse the Dollar
Agent as provided in Section 4.2 on or before the date that such draft is paid
or other payment is made by the Dollar Agent, the Dollar Agent may at any time
thereafter notify the Dollar Banks of the amount of any such Unpaid
Reimbursement Obligation. No later than 3:00 p.m. (Boston time) on the Business
Day next following the receipt of such notice, each Dollar Bank shall make
available to the Dollar Agent, at its Head Office, in immediately available
funds, such Dollar Bank's Commitment Percentage of such
<PAGE> 37
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Unpaid Reimbursement Obligation, together with an amount equal to the product
of (i) the average, computed for the period referred to in clause (iii) below,
of the weighted average interest rate paid by the Dollar Agent for federal
funds acquired by the Dollar Agent during each day included in such period,
times (ii) the amount equal to such Dollar Bank's Commitment Percentage of such
Unpaid Reimbursement Obligation, times (iii) a fraction, the numerator of which
is the number of days that elapse from and including the date the Dollar Agent
paid the draft presented for honor or otherwise made payment to the date on
which such Dollar Bank's Commitment Percentage of such Unpaid Reimbursement
obligation shall become immediately available to the Dollar Agent, and the
denominator of which is 360. The responsibility of the Dollar Agent to the
Borrower and the Dollar Banks shall be only to determine that the documents
(including each draft) delivered under each Letter of Credit in connection with
such presentment shall be in conformity in all material respects with such
Letter of Credit.
4.4. OBLIGATIONS ABSOLUTE. The Borrower's obligations under this Section 4
shall be absolute and unconditional under any and all circumstances and
irrespective of the occurrence of any Default or Event of Default or any
condition precedent whatsoever or any setoff, counterclaim or defense to
payment which the Borrower may have or have had against the Dollar Agent, any
Dollar Bank or any beneficiary of a Letter of Credit. The Borrower further
agrees with the Dollar Agent and the Dollar Banks that the Dollar Agent and the
Dollar Banks shall not be responsible for, and the Borrower's Reimbursement
Obligations under Section 4.2 shall not be affected by, among other things, the
validity or genuineness of documents or of any endorsements thereon, even if
such documents should in fact prove to be in any or all respects invalid,
fraudulent or forged, or any dispute between or among the Borrower, the
beneficiary of any Letter of Credit or any financing institution or other party
to which any Letter of Credit may be transferred or any claims or defenses
whatsoever of the Borrower against the beneficiary of any Letter of Credit or
any such transferee. The Dollar Agent and the Dollar Banks shall not be liable
for any error, omission, interruption or delay in transmission, dispatch or
delivery of any message or advice, however transmitted, in connection with any
Letter of Credit. The Borrower agrees that any action taken or omitted by the
Dollar Agent or any Dollar Bank under or in connection with each Letter of
Credit and the related drafts and documents, if done in good faith, shall be
binding upon the Borrower and shall not result in any liability on the part of
the Dollar Agent or any Dollar Bank to the Borrower.
4.5. RELIANCE BY ISSUER. To the extent not inconsistent with Section 4.4,
the Dollar Agent shall be entitled to rely, and shall be fully protected in
relying upon, any Letter of Credit, draft, writing, resolution, notice, consent,
certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype
message, statement, order or other document believed by it to be genuine and
correct and to have been signed, sent or made by the proper Person or Persons
and upon advice and statements of legal counsel, independent accountants and
other experts selected by the Dollar Agent.
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The Dollar Agent shall be fully justified in failing or refusing to take any
action under this Credit Agreement unless it shall first have received such
advice or concurrence of the Majority Banks as it reasonably deems appropriate
or it shall first be indemnified to its reasonable satisfaction by the Dollar
Banks against any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action. The Dollar Agent shall
in all cases be fully protected in acting, or in refraining from acting, under
this Credit Agreement in accordance with a request of the Majority Banks, and
such request and any action taken or failure to act pursuant thereto shall be
binding upon the Dollar Banks and all future holders of the Revolving Credit
Notes or of a Letter of Credit Participation.
4.6. LETTER OF CREDIT FEE. The Borrower shall pay to the Dollar Agent for
the account of the Dollar Banks a fee (in each case, a "Letter of Credit Fee")
in respect of Letters of Credit equal to the average daily Maximum Drawing
Amount at a rate per annum equal to the Eurodollar Applicable Margin payable
monthly in arrears on the last day of each month and on the Maturity Date. The
Borrower shall also pay to the Dollar Agent, at such time or times as such
charges are customarily made by the Dollar Agent, the Dollar Agent's customary
issuance fees or amendment fees, as the case may be, and the Dollar Agent's
customary time negotiation fees per document examination or other
administrative fees.
5. THE GOLD FACILITY - PURCHASES AND CONSIGNMENTS .
5.1. COMMITMENT TO MAKE PURCHASES AND CONSIGNMENTS; TITLE TO CONSIGNED
PRECIOUS METAL.
(a) Subject to the terms and conditions set forth in this Credit
Agreement, each of the Gold Banks severally agrees, at the option of the
Borrower, to require that the Gold Agent, on behalf of each Gold Bank,
purchase from and consign to the Borrower (a "Purchase and Consignment")
from time to time between the Closing Date and the Maturity Date upon
notice by the Borrower to the Gold Agent given in accordance with Section
5.3, such amounts of the Borrower's Precious Metal as are requested by
the Borrower up to a maximum aggregate amount of Consigned Precious Metal
outstanding (after giving effect to all amounts requested) equal to such
Gold Bank's Gold Commitment minus such Gold Bank's Gold Commitment
Percentage of all outstanding Gold Loans; provided that the sum of the
outstanding amount of troy ounces or, as the case may be, Fair Market
Value of Consigned Precious Metal which the Borrower requests that the
Gold Banks purchase, when added to the amount of troy ounces or, as the
case may be, the Fair Market Value of Consigned Precious Metal
outstanding, shall not exceed the Consignment Ounce Cap, in the case of
amounts of troy ounces of Consigned Precious Metal, or the Consignment
Dollar Cap, in the case of the Fair Market Value of
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Consigned Precious Metal. Purchases and Consignments shall be made pro
rata in accordance with each Gold Bank's Gold Commitment Percentage.
(b) The purchase price (the "Purchase Price") paid by the Gold Agent,
on behalf of each Gold Bank, for Consigned Precious Metal in respect of
each Purchase and Consignment shall be the Fair Market Value of Precious
Metal two (2) Business Days prior to the Gold Drawdown Date of any
Purchase and Consignment. Each request for a Purchase and Consignment
hereunder shall constitute a representation and warranty by the Borrower
that the conditions set forth in Section 14 and Section 15, in the case of
the initial Purchase and Consignment to be made on the Closing Date, and
Section 15, in the case of all other Purchases and Consignments, have
been satisfied on the date of such request.
(c) Upon each Purchase and Consignment, the Gold Agent shall take
title to such Borrower's Precious Metal for the benefit of the Gold
Banks in accordance with each Gold Bank's pro rata share thereof.
Thereafter, title to such Precious Metal shall remain in the Gold Agent
for the benefit of the Gold Banks in accordance with each Gold Bank's pro
rata share thereof and shall not vest in the Borrower until the Gold Agent
has received payment for such Consigned Precious Metal in accordance with
the requirements of Section 5.4 or Section 5.7, as applicable. Following
each Purchase and Consignment, the Borrower shall bear the entire risk of
loss, theft, damage or destruction of the Consigned Precious Metal from
any cause whatsoever, whether or not insured, and the Borrower agrees to
hold the Consigned Precious Metal in trust for the Gold Banks, and to
indemnify and hold harmless the Gold Banks against any and all
liabilities, damages, losses, costs, expenses, suits, claims, demands or
judgments of any nature (including, without limitation, attorneys' fees
and expenses) arising from or connected with any loss, theft, damage or
destruction of the Consigned Precious Metal.
(d) The Borrower irrevocably authorizes the Gold Agent and each Gold
Bank, at or about the time of the Gold Drawdown Date of any Purchase and
Consignment or at the time of any payment or Redelivery with respect to
Consigned Precious Metal, to make an appropriate notation in the records
of the Gold Agent or such Gold Bank customarily maintained by the Gold
Agent or such Gold Bank reflecting the making of such Purchase and
Consignment or the receipt of such payment or Redelivery. The outstanding
amount of Consigned Precious Metal set forth in the records of the Gold
Agent or such Gold Bank customarily maintained by the Gold Agent or such
Gold Bank shall be prima facie evidence of the amount thereof owing and
unpaid or not Redelivered, but the failure to record or any error in so
recording any such amount in the records of the Gold Agent or such Gold
Bank shall not limit or otherwise affect the obligations of the Borrower
hereunder to make payments or Redeliveries in accordance with the terms
hereof.
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5.2. CONSIGNMENT FEES. Except as otherwise provided in Section 8.20, with
respect to Consigned Precious Metal, the Borrower agrees to pay to the Gold
Agent, for the accounts of the Gold Banks in accordance with their respective
Gold Commitment Percentages, a Consignment Fee equal to:
(a) for each day with respect to Consignment Base Rate Amounts, the
product of the Consignment Base Rate times a fraction, the numerator of
which is one (1) and the denominator of which is three hundred and sixty
(360) times the Fair Market Value of Consigned Precious Metal outstanding
on such day which are Consignment Base Rate Amounts.
(b) for each day during each Interest Period with respect to
Consignment Fixed Rate Amounts, the product of the Consignment Fixed Rate
applicable to such Interest Period times a fraction, the numerator of which
is one (1) and the denominator of which is three hundred and sixty (360)
times the Fair Market Value (as of such date) of Consigned Precious Metal
outstanding for such Interest Period which are Consignment Fixed Rate
Amounts.
The Consignment Fee with respect to Consignment Base Rate Amounts shall be
payable monthly in arrears on the first Business Day of each calendar month,
commencing on the first such date following the Closing Date, with a final
payment on the Maturity Date or any earlier date on which the Gold Commitments
shall terminate. The Consignments Fee with respect to Consignment Fixed Rate
Amounts shall be payable on the last day of each Interest Period applicable
thereto.
5.3. REQUESTS FOR PURCHASES AND CONSIGNMENTS. The Borrower shall give to
the Gold Agent written notice in the form of Exhibit G hereto (or telephonic
notice confirmed in a writing in the form of Exhibit G hereto) of each
Purchase and Consignment requested hereunder (a "Purchase and Consignment
Request") no later than 2:00 p.m. three (3) Business Days prior to the proposed
Gold Drawdown Date of any Consignment Base Rate Amount or Consignment Fixed
Rate Amount. Each such notice shall specify (a) the number of troy ounces of
Borrower's Precious Metal to be purchased and consigned, (b) the proposed Gold
Drawdown Date of such Purchase and Consignment, (c) whether such Purchase and
Consignment is to be a Consignment Fixed Rate Amount or a Consignment Base Rate
Amount, and (d) if such Purchase and Consignment is to be a Consignment Fixed
Rate Amount, the Interest Period applicable to such Purchase and Consignment
Promptly upon receipt of any such Purchase and Consignment Request, the Gold
Agent shall notify each of the Gold Banks thereof. Each Purchase and
Consignment Request shall be irrevocable and binding on the Borrower and shall
obligate the Borrower to sell and take on consignment such Borrower's Precious
Metal on the proposed Gold Drawdown Date. Each Purchase and Consignment Request
for Consignment Base Rate Amounts shall be in a minimum aggregate amount of 300
troy aliases or an
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integral multiple of one hundred (100) in excess thereof, and each Purchase and
Consignment Request for Consignment Fixed Rate Amounts shall be in a minimum
aggregate amount of one thousand (1.000) troy ounces or an integral multiple of
one hundred (100) in excess thereof.
5.4. PAYMENT ON ACCOUNT OF REPURCHASE OR REDELIVERY OF CONSIGNED PRECIOUS
METAL.
(a) Notwithstanding the provisions of Section 6.1(b), upon the
occurrence of an Event of Default (other than an Event of Default
described in Section 16.1(g) or (h)) and upon notice from the Gold
Agent to the Borrower, unless the Borrower shall, on the date of dispatch
of such notice, immediately Redeliver to the Gold Agent for the accounts
of the Gold Banks an amount of Borrower's Precious Metal (measured in troy
ounces) equal to all outstanding Consigned Precious Metal, the Borrower
shall be deemed to have purchased from the Gold Agent, on the date of
dispatch of such notice, all outstanding Consigned Precious Metal at the
then applicable Spot Value thereof, and the Gold Banks shall
simultaneously be deemed to have made Gold Loans to the Borrower in
amounts equal to the Spot Value of Consigned Precious Metal, such Gold
Loans to be made pro rata based upon the amount of each Gold Bank's share
of Consigned Precious Metal outstanding immediately prior to such
conversion.
(b) If, on any date, the Fair Market Value of Consigned Precious Metal
shall exceed the Consignment Dollar Cap, the Gold Agent shall calculate the
amount of Consigned Precious Metal (measured in troy ounces and calculated
by reference to the Fair Market Value thereof on the date of determination)
of such excess, the Borrower shall either (i) pay to the Gold Agent an
amount in Dollars equal to the Fair Market Value (on the Business Day
following the date of determination) of such excess plus seventy-five cents
($0.75) per troy ounce of such excess, and the Gold Agent shall be deemed
to have sold to the Borrower an amount of Consigned Precious Metal equal to
such excess, or (ii) Redeliver to the Gold Agent for the accounts of the
Gold Banks Consigned Precious Metal in quantities (measured in troy ounces)
equal to such excess. If, on any date of determination, the number of troy
ounces of Consigned Precious Metal shall exceed the Consignment Ounce Cap,
the Borrower shall either (i) repurchase from the Gold Agent such excess at
the Fair Market Value thereof on the Business Day following the date of
determination, plus seventy-five cents ($0.75) per troy ounce, or (ii)
Redeliver to the Gold Agent for the accounts of the Gold Banks Consigned
Precious Metal in quantities (measured in troy ounces) equal to such
excess. If, on any date of determination, the Fair Market Value of
Consigned Precious Metal exceeds the Consignment Advance Rate Percentage
multiplied by the Fair Market Value of the sum of (A) Consigned Precious
Metal plus (B)
<PAGE> 42
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Borrower's Precious Metal, the Borrower shall pay to the Gold Agent an
amount in Dollars equal to the Fair Market Value (on the Business Day
following the date of determination) of such excess plus seventy-five cents
($0.75) per troy ounce of such excess, and the Gold Agent shall be deemed
to have sold to the Borrower an amount of Consigned Precious Metal equal to
such excess.
(c) In connection with any sale of Consigned Precious Metal by the
Borrower (other than as part of a Purchase and Consignment pursuant to the
terms hereof), the Borrower shall immediately either (i) pay to the Gold
Agent for the account of the Gold Banks an amount in Dollars equal to the
Fair Market Value (on the Business Day following the date of such sale) of
such Consigned Precious Metal plus seventy-five cents ($0.75) per troy
ounce of such sold Consigned Precious Metal, (ii) Redeliver to the Gold
Agent for the accounts of the Gold Banks an amount of Borrower's Precious
Metal (measured in troy ounces) equal to such sold Consigned Precious
Metal, or (iii) Redeliver to the Gold Agent, so long as no Event of
Default has occurred and is continuing, additional Precious Metal (which
Redelivery, if the Borrower shall not have purchased such sold Consigned
Precious Metal pursuant to clause (i) hereof or Redelivered Borrower's
Precious Metal pursuant to clause (ii) hereof, shall be automatic upon
such sale) which shall constitute Consigned Precious Metal in quantities
equal to any Consigned Precious Metal sold. At all times following the
occurrence and during the continuance of an Event of Default, upon any
sale by the Borrower of Precious Metal which prior to the Borrower's
purchase thereof pursuant to Section 5.4(a) constituted Consigned Precious
Metal, the Borrower shall hold the proceeds of such sale in trust for the
Gold Agent, on behalf of the Gold Banks, and shall immediately deliver to
the Gold Agent the proceeds of such sale to be applied to the Obligations
in accordance with Section 8.9 hereof. Prior to the occurrence of an Event
of Default and absent other instruction by the Borrower, the Gold Agent
shall apply Dollar amounts received to reduction of Consigned Precious
Metal, for application first to Consignment Base Rate Amounts and then to
Consignment Fixed Rate Amounts and for allocation among the Gold Banks in
accordance with their respective Gold Commitment Percentages of Consigned
Precious Metal.
(d) At any time before the Maturity Date, the Borrower may, at its
election, purchase any or all Consigned Precious Metal from the Gold Agent
in whole or in part, without penalty, provided that any full or partial
repurchase of the outstanding amount of Consignment Fixed Rate Amounts of
Consigned Precious Metal pursuant to this Section 5.4(d) may be made only
on the last day of the Interest Period relating thereto. The Borrower
shall give the Gold Agent, no later than 2:00 p.m., Boston time, three (3)
Business Days' prior written notice of any proposed repurchase of
Consigned Precious Metal
<PAGE> 43
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specifying the amount of Consigned Precious Metal to be so repurchased
and the proposed date of repurchase, which notice shall be irrevocable and
binding on the Borrower and shall obligate the Borrower to repurchase such
Consigned Precious Metal on the proposed date of repurchase. Each such
repurchase of Consignment Base Rate Amounts shall be in a minimum amount
of three hundred (300) troy ounces or an integral multiple of one hundred
(100) in excess thereof, with accrued Consignment Fees on the Consignment
Base Rate Amounts so purchased being due on the earliest to occur of a
Default or Event of Default and the first day of the calendar month
following the calendar month in which such purchase is made, and each such
purchase of Consignment Fixed Rate Amounts shall be in a minimum amount of
one thousand (1,000) troy ounces or an integral multiple of one hundred
(100) troy ounces in excess thereof and shall be accompanied by a payment
of all accrued but unpaid Consignment Fees on the amount so purchased.
Each such repurchase shall be at a price equal to, at the Borrower's
option, (i) the sum of (A) the Fair Market Value of Precious Metal two
Business Days prior to the date of the Borrower's purchase of Consigned
Precious Metal, plus (B) seventy-five cents ($0.75) per troy ounce of
Precious Metal being repurchased, or (ii) the Spot Value on the date of
the Gold Agent's receipt of the written notice described above, and, prior
to the occurrence of an Event of Default, shall be applied to effect a
reduction of Consigned Precious Metal, for application first to
Consignment Base Rate Amounts and then to Consignment Fixed Rate Amounts
and for allocation among the Gold Banks in accordance with their
respective Gold Commitment Percentages of Consigned Precious Metal;
provided, however, that, in lieu of paying in Dollars the Fair Market
Value, or Spot Value, as the case may be, of such Consigned Precious
Metal, the Borrower may, at its option, Redeliver to the Consignor
Borrower's Precious Metal in an amount (measured in troy ounces) equal to
the amount of Consigned Precious Metal being purchased.
(e) All purchases of Consignment Fixed Rate Amounts prior to the end
of an Interest Period shall obligate the Borrower to pay any breakage costs
associated with such Consignment Fixed Rate Amounts in accordance with
Section 8.19 hereof.
5.5. CONVERSION OPTIONS.
(a) The Borrower may elect from time to time to have the Consignment
Fee applicable to portions of Consigned Precious Metal outstanding
calculated based upon either the Consignment Base Rate or Consignment
Fixed Rate, provided that (i) with respect to any such conversion of
Consigned Precious Metal, the Borrower shall give the Gold Agent, no later
than 2:00 p.m. (Boston time), at least three (3) Eurodollar Business Days'
prior written notice of such election; and (ii) with respect to
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any such conversion of a Consignment Fixed Rate Amount into a Consignment
Base Rate Amount or another Consignment Fixed Rate Amount, such
conversion shall only be made on the last day of the Interest Period with
respect thereto. All or any part of outstanding Consigned Precious Metal
may be converted into a Consignment Fixed Rate Amount or Consignment Base
Rate Amount as provided herein, provided that any partial conversion of
Consignment Base Rate Amounts shall be for Precious Metal in a minimum
amount at least equal to three hundred (300) troy ounces or an integral
multiple of one hundred (100) in excess thereof and any partial conversion
of Consignment Fixed Rate Amounts shall be for Precious Metal in an amount
equal to one thousand (1,000) troy ounces or an integral multiple of one
hundred (100) in excess thereof. Each conversion request relating to the
conversion of Consigned Precious Metal to a Consignment Fixed Rate Amount
shall be irrevocable by the Borrower.
(b) Prior to the occurrence of a Default or an Event of Default,
Consigned Precious Metal may be continued as Consignment Fixed Rate
Amounts upon the expiration of an Interest Period with respect thereto by
compliance by the Borrower with the notice provisions contained in Section
5.5(a).
(c) Any conversion to or from Consignment Fixed Rate Amounts shall be
in such amounts and be made pursuant to such elections so that, after
giving effect thereto, the aggregate principal amount of all Consignment
Fixed Rate Amounts having the same Interest Period shall not be less than
one thousand (1,000) troy ounces or a whole multiple of one hundred (100)
troy ounces in excess thereof.
5.6. FUNDS FOR PURCHASES AND CONSIGNMENTS.
(a) Not later than 11:00 a.m. (Boston time) on the proposed Gold
Drawdown Date of any Purchase and Consignment, each of the Gold Banks will
make available to the Gold Agent, at the Gold Agent's Head Office, in
immediately available funds, an amount in Dollars equal to such Gold
Bank's Gold Commitment Percentage of the Purchase Price for the Precious
Metal to be purchased and consigned pursuant to such Purchase and
Consignment. Upon receipt from each Gold Bank of such amount, and upon
receipt of the documents required by Sections 14 and 15 and the
satisfaction of the other conditions set forth therein, to the extent
applicable, the Gold Agent will make available to the Borrower the
Purchase Price for such Purchase and Consignment made available to the
Gold Agent by the Gold Banks and, at such time, the Gold Agent shall be
deemed to have taken title to such Borrower's Precious Metal. The failure
or refusal of any Gold Bank to make available to the Gold Agent at the
aforesaid time and place on any Gold Drawdown Date the amount of its Gold
Commitment Percentage of the
<PAGE> 45
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Purchase Price for the requested Purchase and Consignment shall not
relieve any other Gold Bank from its several obligations hereunder to make
available to the Gold Agent the amount of such other Gold Bank's Gold
Commitment Percentage of the Purchase Price for any requested Purchase and
Consignment.
(b) The Gold Agent may, unless notified to the contrary by any Gold
Bank prior to a Gold Drawdown Date, assume that such Gold Bank has made
available to the Gold Agent on such Gold Drawdown Date the amount of such
Gold Bank's Gold Commitment Percentage of the Purchase Price for the
Purchase and Consignment to be made on such Gold Drawdown Date, and the
Gold Agent may (but it shall not be required to), in reliance upon such
assumption, make available to the Borrower a corresponding amount. If any
Gold Bank makes available to the Gold Agent such amount on a date after
such Gold Drawdown Date, such Gold Bank shall pay to the Gold Agent on
demand an amount equal to the product of (i) the average computed for the
period referred to in clause (iii) below, of the weighted average of (A)
for portions of the Purchase Price for Consignment Fixed Rate Amounts
which have not been made available, the Consignment Fee owed by the
Borrower with respect to each day included in such period minus the
Eurodollar Applicable Margin, and (B) for portions of the Purchase Price
for Consignment Base Rate Amounts which have not been made available, the
Eurodollar Rate for such Consignment Base Rate Amounts minus the Contango
Rate for such Consignment Base Rate Amounts one-half of one percent
(1/2%), times (ii) the amount of such Gold Bank's Gold Commitment
Percentage of the Purchase Price for such Purchase and Consignment, times
(iii) a fraction, the numerator of which is the number of days that elapse
from and including such Gold Drawdown Date to the date on which the amount
of such Gold Bank's Gold Commitment Percentage of the Purchase Price for
such Purchase and Consignment shall become immediately available to the
Gold Agent, and the denominator of which is 360. A statement of the Gold
Agent submitted to such Gold Bank with respect to any amounts owing under
this paragraph shall be prima facie evidence of the amount due and owing
to the Gold Agent by such Gold Bank. If the amount of such Gold Bank's
Commitment Percentage of the Purchase Price for such Purchase and
Consignment is not made available to the Gold Agent by such Gold Bank
within three (3) Business Days following such Gold Drawdown Date, the Gold
Agent shall be entitled to compel the Borrower to repurchase a portion of
such Purchase and Consignment equal to such Gold Bank's Commitment
Percentage on demand, with interest thereon at the rate per annum equal to
the Consignment Base Rate.
5.7. REPURCHASE AT MATURITY. The Borrower promises to (a) purchase from the
Gold Agent all Consigned Precious Metal on the Maturity Date, and there shall
<PAGE> 46
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become absolutely due and payable on the Maturity Date an amount in Dollars
equal to the Spot Value as of the Maturity Date of the outstanding amount of
Consigned Precious Metal (measured in troy ounces), together with any and all
accrued and unpaid Consignment Fees and other amounts accrued thereon, or (b)
Redeliver to the Gold Agent, for the accounts of the Gold Banks, Precious Metal
in an amount (measured in troy ounces) equal to all Consigned Precious Metal
outstanding, together with payment of all other amounts owed under the Gold
Facility.
5.8. TRUE CONSIGNMENT. This Credit Agreement is intended to be a true
consignment agreement, where, following a Purchase and Consignment, the Gold
Agent takes title to the Consigned Precious Metal, for the benefit of the Gold
Banks, until sold by the Borrower. If, notwithstanding the foregoing sentence,
it is determined for any reason that the consignment created hereby is one
intended as security or that the consignment is a sale or return or other sale,
the Consigned Precious Metal shall constitute Collateral under the terms of the
Security Agreements and the terms of the Security Agreement shall govern the
Banks' security interest therein.
6. THE GOLD FACILITY - THE GOLD LOANS.
6.1. COMMITMENT TO LEND.
(a) Subject to the terms and conditions set forth in this Credit
Agreement, each of the Gold Banks severally agrees to lend to the Borrower and
the Borrower may borrow, repay, and reborrow from time to time between the
Closing Date and the Maturity Date upon notice given in accordance with Section
6.4, such sums as are requested by the Borrower up to a maximum aggregate amount
outstanding (after giving effect to all amounts requested) at any one time
equal to the Dollar amount of such Gold Bank's Gold Commitment minus such Gold
Bank's Gold Commitment Percentage of the Fair Market Value of Consigned
Precious Metal outstanding; provided that the aggregate amount of Gold Loans
which the Borrower requests, when added to the principal amount of Gold Loans
outstanding, shall not exceed the Dollar amount of the Total Gold Commitment
minus the Fair Market Value of Consigned Precious Metal. Gold Loans shall be
made pro rata in accordance with each Gold Bank's Gold Commitment Percentage.
Each request for a Gold Loan hereunder shall constitute a representation and
warranty by the Borrower that the conditions set forth in Section 14 and
Section 15, in the case of the initial Gold Loan, if any, to be made on the
Closing Date, and Section 15, in the case of all other Gold Loans, have been
satisfied on the date of such request.
(b) Notwithstanding anything herein contained to the contrary, the
Borrower shall not be entitled to borrow any Gold Loans on any date on which
the sum of the outstanding amount of Revolving Credit Loans plus the
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Maximum Drawing Amount and all Unpaid Reimbursement Obligations is less
than the Total Revolver Commitment.
6.2. THE GOLD NOTES. The Gold Loans shall be evidenced by separate
promissory notes of the Borrower in substantially the form of Exhibit H hereto
(each a "Gold Note"), dated as of the Closing Date and completed with
appropriate insertions. One Gold Note shall be payable to the order of each
Gold Bank in a principal amount equal to the Dollar amount of such Gold Bank's
Gold Commitment or, if less, the outstanding amount of all Gold Loans made by
such Gold Bank, plus interest accrued thereon, as set forth below. The
Borrower irrevocably authorizes each Gold Bank to make or cause to be made, at
or about the time of the Drawdown Date of any Gold Loans made by such Gold Bank
or at the time of receipt of any payment of principal on such Gold Bank's Gold
Note, an appropriate notation on such Gold Bank's Gold Note Record reflecting
the making of such Gold Loan or (as the case may be) the receipt of such
payment. The outstanding amount of the Gold Loans set forth on such Gold Bank's
Gold Note Record shall be prima facie evidence of the principal amount thereof
owing and unpaid to such Gold Bank, but the failure to record, or any error
in so recording, any such amount on such Gold Bank's Gold Note Record shall not
limit or otherwise affect the obligations of the Borrower hereunder or under
any Gold Note to make payments of principal of or interest on any Gold Note
when due.
6.3. INTEREST ON GOLD LOANS. Except as otherwise provided in Section 8.20,
the Gold Loans shall bear interest in accordance with the provisions of Section
8.1 hereof.
6.4. REQUESTS FOR GOLD LOANS: CONVERSION OPTIONS. The Borrower shall
request Gold Loans by providing to the Gold Agent Loan Requests for Gold Loans
in accordance with the requirements of Section 8.3(a) hereof. The Gold Agent
may, in its sole discretion and without conferring with the Gold Banks, make
Gold Loans to the Borrower in accordance with the provisions of Section 8.3(b)
hereof. The Borrower shall be permitted to convert Gold Loans to Gold Loans of
different Types in accordance with the provisions of Section 8.4 hereof, and
such provisions of Section 8.4 shall apply mutatis mutandis with respect to the
Gold Loans so that the Borrower may have the same interest rate options with
respect to the Gold Loans as it would be entitled to with respect to the
Revolving Credit Loans and the Term Loan.
6.5. FUNDS FOR GOLD LOANS. The provisions of Section 8.5 and Section 8.6
with respect to the funding procedures and Settlement procedures for the Loans
shall apply to the Gold Loans.
6.6. REPAYMENT OF GOLD LOANS AT MATURITY. The Borrower promises to pay on
the Maturity Date, and there shall become absolutely due and payable on the
Maturity Date, all of the Gold Loans outstanding on such date, together with
any and all accrued and unpaid interest thereon.
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6.7. OPTIONAL REPAYMENTS. The Borrower shall have the right, at its
election, to repay Gold Loans in accordance with the provisions of Section 8.7
hereof.
7. CERTAIN COMMON PROVISIONS RELATING
TO THE GOLD FACILITY.
7.1. COMMITMENT FEE. The Borrower agrees to pay to the Gold Agent, for the
accounts of the Gold Banks in accordance with their receptive Gold Commitment
Percentages, a commitment fee calculated at the rate of one-half of one percent
(1/2%) per annum on the average daily amount during each calendar month or
portion thereof from the Closing Date to the Maturity Date by which the Dollar
amount of the Total Gold Commitment exceeds the sum of the Fair Market Value of
Consigned Precious Metal plus the aggregate outstanding amount of Gold Loans
during such calendar month. The commitment fee shall be payable monthly in
arrears on the first day of each calendar month for the immediately preceding
calendar month opening on the first such date following the date hereof, with a
final payment on the Maturity Date or any earlier date on which the Gold
Commitments shall terminate.
7.2. REDUCTION OF TOTAL GOLD COMMITMENT. The Borrower shall have the right
at any time and from time to time upon five (5) Business Days' prior written
notice to the Gold Agent to reduce by $1,000,000.00 or an integral multiple
thereof or terminate entirely the Total Gold Commitment, whereupon the Gold
Commitments of the Gold Banks shall be reduced pro rata in accordance with
their respective Gold Commitment Percentages of the amount specified in such
notice or, as the ease may be, terminated. Promptly after receiving any notice
of the Borrower delivered pursuant to this Section 7.2, the Gold Agent will
notify the Gold Banks of the substance thereof. Upon the effective date of any
such reduction or termination, the Borrower shall, at its option, (a) purchase
from the Gold Agent all Consigned Precious Metal outstanding in excess of such
reduced Total Gold Commitment by paying to the Gold Agent, for the respective
accounts of the Gold Banks, an amount equal to the Fair Market Value as of such
date of the amount of such excess Consigned Precious Metal plus seventy-five
cents ($0.75) per troy ounce of such excess Consigned Precious Metal, together
with the full amount of any Consignment Fee and commitment fee then accrued on
the amount of the reduction, or (b) Redeliver to the Gold Agent, for the
respective accounts of the Gold Banks, Borrower's Precious Metal in an amount
(measured in troy ounces) equal to all Consigned Precious Metal outstanding in
excess of such reduced Total Gold Commitment, together with the full amount of
any Consignment Fee and commitment fee then accrued on the amount of the
reduction. No reduction or termination of the Gold Commitments may be
reinstated.
8. CERTAIN GENERAL PROVISIONS.
8.1. INTEREST ON LOANS. Except as otherwise provided in Section 8.20,
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(a) Each Base Rate Loan shall bear interest for the period commencing with
the Drawdown Date thereof and ending on the last day of the Interest Period
with respect thereto at a rate per annum equal to the sum of (i) the Base Rate
plus (ii) the Base Rate Applicable Margin.
(b) Each Eurodollar Rate Loan shall bear interest for the period
commencing with the Drawdown Date thereof and ending on the last day of the
Interest Period with respect thereto at a rate per annum equal to the sum of
(i) the Eurodollar Rate plus (ii) the Eurodollar Applicable Margin.
(c) The Borrower promises to pay interest on each Loan in arrears on each
Interest Payment Date with respect thereto.
8.2. BORROWING BASE AND CONSIGNMENT LIMITATIONS.
(a) The Banks shall have no obligation to make any Extension of Credit if,
at any time the Outstanding Dollar Facility Amounts, after giving effect to
such Extension of Credit, would exceed the Dollar Borrowing Base. The Dollar
Borrowing Base shall be determined by the Agents by reference to the most
recent Borrowing Base Report delivered on a timely basis to the Agents in
accordance with Section 11.4(f).
(b) The Banks shall have no obligation to make any Extension of Credit if,
at any time the Outstanding Facility Amounts, after giving effect to such
Extension of Credit, would exceed the Borrowing Base. The Borrowing Base shall
be determined by the Agents by reference to the most recent Borrowing Base
Report delivered on a timely basis to the Agents in accordance with Section
11.4(f).
(c) None of the Gold Banks shall have any obligation to make any Purchase
and Consignments or Gold Loans if, at any time, the Fair Market Value of
Consigned Precious Metal (after giving effect to all amounts requested) the
outstanding principal amount of Gold Loans (after giving effect to all amounts
requested) exceeds the Consignment Advance Rate Percentage multiplied by the
Fair Market Value of the sum of (i) Consigned Precious Metal plus (ii)
Borrower's Precious Metal. The amounts of Consigned Precious Metal and of
Borrower's Precious Metal shall be determined by the Agents by reference to the
most recent Consigned Precious Metal Report delivered on a timely basis to the
Agents in accordance with Section 11.4(f).
8.3. REQUESTS FOR LOANS.
(a) The Borrower shall give to the Applicable Agent written notice in the
form of Exhibit I hereto (or telephonic notice confirmed in a writing in the
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form of Exhibit I hereto) of each Loan requested hereunder (a "Loan Request")
no less than (i) one (1) Business Days prior to the proposed Drawdown Date of
any Base Rate Loan and (ii) two (2) Eurodollar Business Days prior to the
proposed Drawdown Date of any Eurodollar Rate Loan. Each such notice shall
specify (A) the principal amount of the Loan requested, (B) the proposed
Drawdown Date of such Loan, (C) the Interest Period for such Loan, (D) the
nature of such Loan as a Dollar Facility Loan or a Gold Loan, and (E) the Type
of such Loan. Promptly upon receipt of any such notice, the Applicable Agent
shall notify each of the Applicable Banks thereof. Each Loan Request shall be
irrevocable and binding on the Borrower and shall obligate the Borrower to
accept the Loan requested from the Applicable Banks on the proposed Drawdown
Date. Each Loan Request for a Base Rate Loan shall be in a minimum aggregate
amount of $500,000.00 or an integral multiple thereof, and each Loan Request
for a Eurodollar Rate Loan shall be in a minimum aggregate amount of
$1,000,000.00 or an integral multiple of $500,000.00 in excess thereof.
(b) Notwithstanding the notice and minimum amount requirements set forth
in Section 8.3(a) but otherwise in accordance with the terms and conditions of
this Credit Agreement, the Applicable Agent may, in its sole discretion and
without conferring with the Applicable Banks, make Revolving Credit Loans or,
as the case may be, Gold Loans, to the Borrower (i) by entry of credits to the
Borrower's operating account(s) (No(s). 50318092) (the "Operating Accounts")
with the Dollar Agent to cover checks or other charges which the Borrower has
drawn or made against such account or (ii) in an amount as otherwise requested
by the Borrower. The Borrower hereby requests and authorizes the Applicable
Agent to make from time to time such Revolving Credit Loans or, as the case may
be, Gold Loans by means of appropriate entries of such credits sufficient to
cover checks and other charges then presented. The Borrower acknowledges and
agrees that the making of such Loans shall, in each case, be subject in all
respects to the provisions of this Credit Agreement as if they were Loans
covered by a Loan Request including, without limitation, the limitations set
forth in Sections 2.1 and 6.1 and the requirements that the applicable
provisions of Sections 14 (in the case of Loans made on the Closing Date) and
Section 15 be satisfied. All actions taken by either Agent pursuant to the
provisions of this Section 8.3(b) shall be conclusive and binding on the
Borrower absent such Agent's gross negligence or willful misconduct. Loans
made pursuant to this Section 8.3(b) shall be Base Rate Loans until converted
in accordance with the provisions of the Credit Agreement and, prior to a
Settlement, such interest shall be for the account of the Applicable Agent.
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8.4. CONVERSION OPTIONS.
8.4.1. CONVERSION TO DIFFERENT TYPE OF LOAN. The Borrower may elect from
time to time to convert any outstanding Loan to a Loan of another Type,
provided that (a) with respect to any such conversion of a Loan to a Base Rate
Loan, the Borrower shall give the Applicable Agent at least one (1) Business
Days prior written notice of such election; (b) with respect to any such
conversion of a Base Rate Loan to a Eurodollar Rate Loan, the Borrower shall
give the Applicable Agent at least two (2) Eurodollar Business Days prior
written notice of such election; (c) with respect to any such conversion of a
Eurodollar Rate Loan into a Base Rate Loan, such conversion shall only be made
on the last day of the Interest Period with respect thereto, and (d) no Loan
may be converted into a Eurodollar Rate Loan when any Default or Event of
Default has occurred and is continuing. On the date on which such conversion is
being made each Applicable Bank shall take such action, if any, as is necessary
to transfer its Commitment Percentage or Gold Commitment Percentage, as the
case may be, of such Loans to its Domestic Lending Office or its Eurodollar
Lending Office, as the case may be. All or any part of outstanding Loans of any
Type may be converted into a Loan of another Type as provided herein, provided
that (y) any partial conversion of any Loan to a Base Rate Loan shall be in an
aggregate principal amount of $500,000.00 or an integral multiple thereof and
(z) any partial conversion of any Loan to a Eurodollar Rate Loan shall be in an
aggregate principal amount of $1,000,000.00 or a whole multiple of $500,000.00
in excess thereof. Each Conversion Request relating to the conversion of a Loan
to a Eurodollar Rate Loan shall be irrevocable by the Borrower.
8.4.2. CONTINUATION OF TYPE OF LOAN. Any Loan of any Type may be continued
as a Loan of the same Type upon the expiration of an Interest Period with
respect thereto by compliance by the Borrower with the notice provisions
contained in Section 8.4.1; provided that no Eurodollar Rate Loan may be
continued as such when any Default or Event of Default has occurred and is
continuing, but shall be automatically converted to a Base Rate Loan on the
last day of the first Interest Period relating thereto ending during the
continuance of any Default or Event of Default of which officers of the
Applicable Agent active upon the Borrower's account have actual knowledge. In
the event that the Borrower fails to provide any such notice with respect to
the continuation of any Eurodollar Rate Loan as such, then such Eurodollar Rate
Loan shall be automatically converted to a Base Rate Loan on the last day of
the first Interest Period relating thereto. The Applicable Agent shall notify
the Applicable Banks promptly when any such automatic conversion contemplated
by this Section 8.4 is scheduled to occur.
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8.4.3. EURODOLLAR RATE LOANS. Any conversion to or from Eurodollar Rate
Loans shall be in such amounts and be made pursuant to such elections so that,
after giving effect thereto, the aggregate principal amount of all Eurodollar
Rate Loans having the same Interest Period shall not be less than $1,000,000.00
or a whole multiple of $500,000.00 in excess thereof. At no time shall there be
more than ten (10) Eurodollar Rate Loans outstanding.
8.5. FUNDS FOR LOANS.
8.5.1. FUNDING PROCEDURES. Not later than 11:00 a.m. (Boston time) on the
proposed Drawdown Date of any Loans, each of the Applicable Banks will make
available to the Applicable Agent, at its Head Office, in immediately available
funds, the amount of such Applicable Bank's Commitment Percentage or Gold
Commitment Percentage, as the case may be, of the amount of the requested
Loans. Upon receipt from each Applicable Bank of such amount, and upon receipt
of the documents required by Sections 14 and 15 and the satisfaction of
the other conditions set forth therein, to the extent applicable, the
Applicable Agent will make available to the Borrower the aggregate amount of
such Loans made available to the Applicable Agent by the Applicable Banks. The
failure or refusal of any Applicable Bank to make available to the Applicable
Agent at the aforesaid time and place on any Drawdown Date the amount of its
Commitment Percentage or Gold Commitment Percentage, as the case may be, of the
requested loans shall not relieve any other Applicable Bank from its several
obligation hereunder to make available to the Applicable Agent the amount of
such other Applicable Bank's Commitment Percentage or Gold Commitment
Percentage, as the case may be, of any requested loans.
8.5.2. ADVANCES BY APPLICABLE AGENT. The Applicable Agent may, unless
notified to the contrary by any Applicable Bank prior to a Drawdown Date,
assume that such Applicable Bank has made available to the Applicable Agent on
such Drawdown Date the amount of such Applicable Bank's Commitment Percentage
or Gold Commitment Percentage, as the case may be, of the Loans to be made on
such Drawdown Date, and the Applicable Agent may (but it shall not be required
to), in reliance upon such assumption, make available to the Borrower a
corresponding amount. If any Applicable Bank makes available to the Applicable
Agent such amount on a date after such Drawdown Date, such Applicable Bank
shall pay to the Applicable Agent on demand an amount equal to the product of
(i) the average computed for the period referred to in clause (iii) below, of
the weighted average interest rate paid by the Applicable Agent for federal
funds acquired by the Applicable Agent during each day included in such period,
times (ii) the amount of such Applicable Bank's Commitment Percentage or Gold
Commitment Percentage, as the case may be, of such loans, times (iii) a
fraction, the numerator of
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which is the number of days that elapse from and including such Drawdown Date
to the date on which the amount of such Applicable Bank's Commitment Percentage
or Gold Commitment Percentage, as the case may be, of such Loans shall become
immediately available to the Applicable Agent, and the denominator of which is
365. A statement of the Applicable Agent submitted to such Applicable Bank with
respect to any amounts owing under this paragraph shall be prima facie evidence
of the amount due and owing to the Applicable Agent by such Applicable Bank. If
the amount of such Applicable Bank's Commitment Percentage or Gold Commitment
Percentage, as the case may be, of such Loans is not made available to the
Applicable Agent by such Applicable Bank within three (3) Business Days
following such Drawdown Date, the Applicable Agent shall be entitled to recover
such amount from the Borrower on demand, with interest thereon at the rate per
annum applicable to the Loans made on such Drawdown Date.
8.6. SETTLEMENTS; FAILURE TO MAKE FUNDS AVAILABLE.
(a) On each Settlement Date, the Applicable Agent shall, not later than
11:00 a.m. (Boston time), give telephonic or facsimile notice (i) to the
Applicable Banks and the Borrower of the respective outstanding amount of Loans
made by the Applicable Agent on behalf of the Applicable Banks from the
immediately preceding Settlement Date through the close of business on the
prior day and the amount of any Eurodollar Rate Loans to be made (following the
giving of notice pursuant to Section 8.3(a)(ii)) on such date pursuant to a Loan
Request and (ii) to the Applicable Banks of the amount (a "Settlement Amount")
that each Applicable Bank (the "Settling Bank") shall pay to effect a
Settlement of any Loan. A statement of the Applicable Agent submitted to the
Applicable Banks and the Borrower or to the Applicable Banks with respect to
any amounts owing under this Section 8.6 shall be prima facie evidence of the
amount due and owing. The Settling Bank shall, not later than 3:00 p.m. (Boston
time) on such Settlement Date, effect a wire transfer of immediately available
funds to the Applicable Agent in the amount of the Settlement Amount. All funds
advanced by any Applicable Bank as a Settling Bank pursuant to this Section 8.6
shall for all purposes be treated as a Loan made by such Settling Bank to the
Borrower and all funds received by any Bank pursuant to this Section 8.6 shall
for all purposes be treated as repayment of amounts owed with respect to Loans
made by such Bank. In the event that any bankruptcy, reorganization,
liquidation, receivership or similar cases or proceedings in which the Borrower
is a debtor prevent a Settling Bank from making any Loan to effect a Settlement
as contemplated hereby, such Settling Bank will make such disposition and
arrangements with the other Applicable Banks with respect to such Loans, either
by way of purchase of participations, distribution, pro tanto assignment of
claims, subrogation or otherwise as shall result in each Applicable Bank's
share of the outstanding Revolving Credit
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Loans or, as the case may be, Gold Loans being equal, as nearly as may be, to
such Dollar Bank's Commitment Percentage of the outstanding amount of the
Revolving Credit Loans, or as the case may be, such Gold Bank's Commitment
Percentage of the outstanding amount of Gold Loans.
(b) The Applicable Agent may, unless notified to the contrary by any
Applicable Bank prior to a Settlement Date, assume that such Applicable Bank
has made or will make available to the Applicable Agent on such Settlement Date
the amount of such Applicable Bank's Settlement Amount, and the Applicable
Agent may (but it shall not be required to), in reliance upon such assumption,
make available to the Borrower a corresponding amount. If any Applicable Bank
makes available to the Applicable Agent such amount on a date after such
Settlement Date, such Applicable Bank shall pay to the Applicable Agent on
demand an amount equal to the product of (i) the average computed for the
period referred to in clause (iii) below, of the weighted average interest rate
paid by the Applicable Agent for federal funds acquired by such Applicable
Agent during each day included in such period, times (ii) the amount of such
Settlement Amount, times (iii) a fraction, the numerator of which is the number
of days that elapse from and including such Settlement Date to the date on
which the amount of such Settlement Amount shall become immediately available
to such Applicable Agent, and the denominator of which is 360. A statement of
the Applicable Agent submitted to such Applicable Bank with respect to any
amounts owing under this paragraph shall be prima facie evidence of the amount
due and owing to the Applicable Agent by such Applicable Bank. If such
Applicable Bank's Settlement Amount is not made available to the Applicable
Agent by such Applicable Bank within three (3) Business Days following such
Settlement Date, the Applicable Agent shall be entitled to recover such amount
from the Borrower on demand, with interest thereon at the rate per annum
applicable to the Revolving Credit Loans or, as the case may be, the Gold Loans
as of such Settlement Date.
(c) The failure or refusal of any Applicable Bank to make available to the
Applicable Agent at the aforesaid time and place on any Settlement Date the
amount of its Settlement Amount (i) shall not relieve any other Applicable Bank
from its several obligations hereunder to make available to the Applicable
Agent the amount of such other Applicable Bank's Settlement Amount and (ii)
shall not impose upon such other Applicable Bank any liability with respect to
such failure or refusal or otherwise increase the Commitment or, as the case
may be, the Gold Commitment, of such other Applicable Bank.
8.7. OPTIONAL REPAYMENTS OF LOANS. The Borrower shall have the right, at
its election, to repay the outstanding amount of any Loan, as a whole or in
part, at
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any time without penalty or premium, provided that any full or partial
prepayment of the outstanding amount of any Eurodollar Rate Loans pursuant to
this Section 8.7 may be made only on the last day of the Interest Period
relating thereto. The Borrower shall give the Agent, no later than 11:00 a.m.,
Boston time, at least three (3) Business Days prior written notice of any
proposed prepayment pursuant to this Section 8.7 of Base Rate Loans, and four
(4) Eurodollar Business Days notice of any proposed prepayment pursuant to this
Section 8.7 of Eurodollar Rate Loans, in each case specifying the proposed date
of prepayment of Loans, the nature of the Loan as a Revolving Credit Loan, the
Term Loan or a Gold Loan and the principal amount to be prepaid. Each such
partial prepayment of the Loans shall be in a minimum amount of $500,000.00 or
an integral multiple of $100,000.00 in excess thereof, shall be accompanied by
the payment of accrued interest on the principal prepaid to the date of
prepayment and shall be applied, in the absence of instruction by the Borrower,
first to the principal of Base Rate Loans and then to the principal of
Eurodollar Rate Loans. Each partial prepayment shall be allocated among the
Applicable Banks, in proportion, as nearly as practicable, to the respective
unpaid principal amount of each Applicable Bank's Notes, with adjustments to
the extent practicable to equalize any prior repayments not exactly in
proportion.
8.8. REPAYMENTS OF LOANS AND REPURCHASES OF CONSIGNED PRECIOUS METALS
PRIOR TO EVENT OF DEFAULT.
(a) Prior to the occurrence of an Event of Default as to which the
account officers of the Agents active upon the Borrower's account have
actual knowledge, (i) all funds and cash proceeds in the form of money,
checks and like items received in the FNBB Concentration Accounts as
contemplated by Section 11.14 shall be credited, on the same Business Day
on which the Dollar Agent determines that good collected funds have been
received, and, prior to the receipt of good collected funds, on a
provisional basis until final receipt of good collected funds, to the
Obligations or to the Operating Accounts as contemplated by Section
8.8(c), (ii) all funds and cash proceeds in the form of a wire transfer
received in the FNBB Concentration Accounts as contemplated by Section
11.14 shall be credited on the same Business Day as the Dollar Agent's
receipt of such amounts (or up to such later date as the Dollar Agent
determines that good collected funds have been received), to the
Obligations or to the Operating Accounts as contemplated by Section
8.8(c), and (iii) all funds and cash proceeds in the form of an automated
clearing house transfer received in the FNBB Concentration Accounts as
contemplated by Section 11.14 shall be credited on the next Business Day
following the Dollar Agent's receipt of such amounts (or up to such later
date as the Dollar Agent determines that good collected funds have been
received), to the Obligations or to the Operating Accounts as contemplated
by Section 8.8(c). For purposes of the foregoing provisions of this
Section 8.8(a) the Dollar Agent shall not be deemed to have received any
such cash proceeds on any day unless received by the
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Dollar Agent before 2:30 p.m. (Boston time) on such day. The Borrower further
acknowledges and agrees that any such provisional credit or credit in respect
of wire transfers shall be subject to reversal if final collection in good
funds of the related item is not received by the Dollar Agent in accordance
with the Dollar Agent's customary procedures and practices for collecting
provisional or wire transfer items.
(b) If at any time (i) the Outstanding Facility Amounts exceed the
Borrowing Base, (ii) the Outstanding Dollar Facility Amounts exceed the Dollar
Borrowing Base or (iii) the Fair Market Value of Consigned Precious Metal plus
the outstanding principal amount of Gold Loans exceeds the Consignment Advance
Rate Percentage multiplied by the Fair Market Value of the sum of (A)
Consigned Precious Metal plus (B) Borrower's Precious Metal, the Borrower shall
immediately pay the amount of such excess to the Agents for the respective
accounts of the Banks for application prior to the occurrence of an Event of
Default in accordance with Section 8.8(c).
(c) Prior to the occurrence of an Event of Default of which the account
officers of the Agents active on the Borrower's account have knowledge, all
funds transferred to the FNBB Concentration Accounts and any amounts required
to be repaid pursuant to Section 8.8(b) shall be applied to the Obligations as
follows:
(i) first, to pay amounts then due and payable under the Dollar
Facility and the Gold Facility;
(ii) second, to reduce Gold Loans which are Base Rate Loans;
(iii) third, to reduce Gold Loans which are Eurodollar Rate Loans;
(iv) fourth, to reduce Revolving Credit Loans which are Base Rate
Loans;
(v) fifth, to reduce Revolving Credit Loans which are Eurodollar Rate
Loans;
(vi) sixth, to the Borrower's Operating Accounts.
All prepayments of Eurodollar Rate Loans prior to the end of an Interest Period
shall obligate the Borrower to pay any breakage costs associated with such
Eurodollar Rate Loans in accordance with Section 8.19 hereof. Prior to the
occurrence of an Event of Default, the Borrower may elect to avoid such
breakage costs by providing to the Dollar Agent cash in an amount
sufficient
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to cash collateralize such Eurodollar Rate Loans, but in no event shall the
Borrower be deemed to have paid such Eurodollar Rate Loans until such cash
has been paid to the Dollar Agent for application to such Eurodollar Rate
Loans. The Agents may elect to cause such cash collateral to be deposited
into either (A) a cash collateral account pursuant to the terms of a Cash
Collateral Agreement entered into by the Borrower and the Collateral Agent
at the time of such deposit and such other documents or filings at the
time requested by the Collateral Agent in connection with such deposit or
(B) the Borrower's Operating Accounts. All prepayments of the Loans
pursuant to this Section 8.8(c) shall be allocated among the Banks making
such Loans, in proportion, as nearly as practicable, to the respective
unpaid principal amount of such Loans outstanding, with adjustments to the
extent practicable to equalize any prior payments or repayments not
exactly in proportion. Prior to any Settlement Date, all prepayments of
the Loans shall be applied in accordance with this Section 8.8(c), first
to outstanding Loans of the Applicable Agent.
8.9. REPAYMENTS OF LOANS AND REPURCHASES OF CONSIGNED PRECIOUS METALS AND
DISTRIBUTION OF COLLATERAL PROCEEDS AFTER EVENT OF DEFAULT. In the event that
following the occurrence and during the continuance of an Event of Default, the
Collateral Agent, either Agent or any Bank, as the case may be, receives any
monies, whether pursuant to Section 5.4(c), Section 11.14 or Section 16.4 or
otherwise with respect to the realization upon any of the Collateral,
such monies shall be distributed for application as follows:
(a) First, to the payment of, or (as the case may be) the
reimbursement of the Agents and the Collateral Agent for or in respect
of all reasonable costs, expenses, disbursements and losses which shall
have been incurred or sustained by the Agents and the Collateral Agent in
connection with the collection of such monies by the Agents, for the
exercise, protection or enforcement by the Collateral Agent of all or any
of the rights, remedies, powers and privileges of the Collateral Agent,
for the benefit of the Agents and the Banks, under this Credit Agreement
or any of the other Loan Documents or in respect of the Collateral or in
support of any provision of adequate indemnity to the Agents and the
Collateral Agent against any taxes or liens which by law shall have, or
may have, priority over the rights of the Agents and the Collateral Agent
to such monies;
(b) Second, to all other Obligations in such order or preference as
the Majority Banks may determine; provided, however, that distributions in
respect of (i) such Obligations shall be made pari passu among Obligations
with respect to the Agents' fees payable pursuant to Section 8.11 and all
other Obligations and (ii) Obligations owing to the Banks with respect to
each type of Obligation such as interest, principal, fees and expenses,
shall be made
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among the Banks pro rata, with the value of the Gold Banks' claims in
respect of Consigned Precious Metal equal to the Gold Loans made pursuant
to Section 5.4(a); and provided, further, that the agents may in their
discretion make proper allowance to take into account any Obligations not
then due and payable;
(c) third, upon payment and satisfaction in full or other provisions
for payment in full satisfactory to each of the Banks and the Agents of
all of the Obligations, to the payment of any obligations required to be
paid pursuant to Section 9-504(1)(c) of the Uniform Commercial Code of the
Commonwealth of Massachusetts; and
(d) Fourth, the excess, if any, shall be returned to the
Borrower or to such other Persons as are entitled thereto.
8.10. CLOSING FEE. The Borrower agrees to pay to the Dollar Agent a
closing fee according to the terms of a separate fee letter entered into on or
prior to the Closing Date (the "Fee Letter") among the Borrower and the Agents.
8.11. AGENTS' FEE. The Borrower shall pay to the Agents, for each Agent's
own account, an Agents' fee according to the terms of the Fee Letter.
8.12. FUNDS FOR PAYMENTS.
8.12.1. PAYMENTS TO AGENT. All payments of principal, interest,
Reimbursement Obligations, commitment fees, Letter of Credit Fees and
any other amounts due hereunder or under any of the other Loan Documents
with respect to the Dollar Facility shall be made to the Dollar Agent, for
the respective accounts of the Dollar Banks and the Dollar Agent, at the
Dollar Agent's Head Office or at such other location in the Boston,
Massachusetts, area that the Dollar Agent may from time to time designate,
in each case in immediately available funds in Dollars. All payments of
principal, interest, commitment fees, Consignment Fees and any other
amounts due hereunder or under any of the other Loan Documents with
respect to the Gold Facility shall be made to the Gold Agent, for the
respective accounts of the Gold Banks and the Gold Agent, at the Gold
Agent's Head Office or at such other location as the Gold Agent may from
time to time designate, in each case in immediately available funds in
Dollars.
8.12.2. NO OFFSET, ETC. All payments by the Borrower hereunder and
under any of the other Loan Documents shall be made without setoff or
counterclaim and free and clear of and without deduction for any taxes,
levies, imposts, duties, charges, fees, deductions, withholdings,
compulsory loans, restrictions or conditions of any nature now or
hereafter imposed or levied by any jurisdiction or any political
subdivision thereof or taxing or other
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authority therein unless the Borrower is compelled by law to make such
deduction or withholding. If any such obligation is imposed upon the
Borrower with respect to any amount payable by it hereunder or under any of
the other Loan Documents, the Borrower will pay to the Agents, for the
account of the Banks or (as the case may be) the Agents, on the date on
which such amount is due and payable hereunder or under such other Loan
Document, such additional amount in Dollars as shall be necessary to enable
the Banks or the Agents to receive the same net amount which the Banks or
the Agents would have received on such due date had no such obligation been
imposed upon the Borrower. The Borrower will deliver promptly to the Agents
certificates or other valid vouchers for all taxes or other charges
deducted from or paid with respect to payments made by the Borrower
hereunder or under such other Loan Document.
8.13. COMPUTATIONS. All computations of interest on the Loans and of
commitment fees, Letter of Credit Fees, Consignment Fees or other fees shall,
unless otherwise expressly provided herein, be based on a 360-day year and paid
for the actual number of days elapsed. Except as otherwise provided in the
definition of the term "Interest Period" with respect to Eurodollar Rate Loans
and Consignment Fixed Rate Amounts, whenever a payment hereunder or under any
of the other Loan Documents becomes due on a day that is not a Business Day,
the due date for such payment shall be extended to the next succeeding Business
Day, and interest shall accrue during such extension. The outstanding amount of
the Loans and Consigned Precious Metal as reflected on the Revolving Credit
Note Records, the Term Note Records, the Gold Note Records and the other
records maintained by the Agents and each Bank from time to time shall be
considered correct and binding on the Borrower unless within five (5) Business
Days after receipt of any notice by either of the Agents or any of the Banks of
such outstanding amount, the such Agent or such Bank shall notify the Borrower
to the contrary.
8.14. INABILITY TO DETERMINE EURODOLLAR RATE OR CONSIGNMENT FIXED RATE. In
the event, prior to the commencement of any Interest Period relating to any
Eurodollar Rate Loan or Consignment Fixed Rate Amount, the Dollar Agent, in the
case of Dollar Facility Loans, or the Gold Agent, in the case of Gold Loans or
Purchases and Consignments, shall determine in good faith that adequate and
reasonable methods do not exist for ascertaining (a) the Eurodollar Rate that
would otherwise determine the rate of interest to be applicable to any
Eurodollar Rate Loan during any Interest Period or (b) the Eurodollar Rate or
the Contango Rate that would otherwise determine the rate of interest to be
applicable to any Consignment Fixed Rate Amount during any Interest Period,
such Agent shall forthwith give notice of such determination and the basis
therefor (which shall be conclusive and binding on the Borrower and the
Applicable Banks) to the Borrower and the Applicable Banks. In such event (x)
any Loan Request or Conversion Request with respect to Eurodollar Rate Loans or
Purchase and Consignment Request with respect to Consignment
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Fixed Rate Amounts shall be automatically withdrawn and, shall be deemed a
request for Base Rate Loans or Consignment Base Rate Amounts, as applicable,
(y) each Eurodollar Rate Loan or Consignment Fixed Rate Amount, as applicable,
will automatically, on the last day of the then current Interest Period
relating thereto, become a Base Rate Loan or Consignment Base Rate Amount, as
applicable and (z) the obligations of the Applicable Banks to make Eurodollar
Rate Loans or Consignment Fixed Rate Amounts shall be suspended until such
Applicable Agent determines that the circumstances giving rise to such
suspension no longer exist, whereupon such Applicable Agent shall so notify the
Borrower and the Applicable Banks.
8.15. ILLEGALITY OF EURODOLLAR RATE LOANS OR CONSIGNMENT FIXED RATE AMOUNTS.
(a) Notwithstanding any other provisions herein, if any present or
future law, regulation, treaty or directive or in the interpretation
or application thereof shall make it unlawful for any Bank to make or
maintain Eurodollar Rate Loans, such Bank shall forthwith give notice of
such circumstances to the Borrower and the other Applicable Banks and
thereupon (i) the commitment of such Bank to make Eurodollar Rate Loans or
convert Loans of another Type to Eurodollar Rate Loans shall forthwith be
suspended and (ii) such Bank's Loans then outstanding as Eurodollar Rate
Loans, if any, shall be converted automatically to Base Rate Loans on the
last day of each Interest Period applicable to such Eurodollar Rate Loans
or within such earlier period as may be required by law. The Borrower
hereby agrees promptly to pay the Applicable Agent, for the account of
such Bank, upon demand by such Bank, any additional amounts necessary to
compensate such Bank for any reasonable costs incurred by such Bank in
making any conversion in accordance with this Section 8.15, including any
interest or fees payable by such Bank to lenders of funds obtained by
it in order to make or maintain its Eurodollar Rate Loans hereunder.
(b) Notwithstanding any other provisions herein, if any present or
future law, regulation, treaty or directive or in the interpretation
or application thereof shall make it unlawful for any Gold Bank to make or
maintain Consignment Fixed Rate Amounts, such Gold Bank shall forthwith
give notice of such circumstances to the Borrower and the other Gold Banks
and thereupon (i) the commitment of such Gold Bank to make Consignment
Fixed Rate Amounts or convert Consigned Precious Metal into Consignment
Fixed Rate Amounts shall forthwith be suspended, and (ii) such Gold Bank's
Consigned Precious Metal then outstanding as Consignment Fixed Rate
Amounts, if any, shall be converted automatically to Consignment Base Rate
Amounts on the last day of each Interest Period applicable to such
Consignment Fixed Rate Amounts or within such earlier period as may be
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required by law. The Borrower hereby agrees promptly to pay the Gold
Agent, for the account of such Gold Bank, upon demand by such Gold Bank,
any additional amounts necessary to compensate such Gold Bank for any
reasonable costs incurred by such Gold Bank in making any conversion in
accordance with this Section 8.15, including any interest or fees payable
by such Gold Bank to lenders of funds obtained by it in order to make or
maintain its Consignment Fixed Rate Amounts hereunder.
8.16. ADDITIONAL COSTS, ETC. If any present or future applicable law,
which expression, as used herein, includes statutes, rules and regulations
thereunder and interpretations thereof by any competent court or by any
governmental or other regulatory body or official charged with the
administration or the interpretation thereof and requests, directives,
instructions and notices at any time or from time to time hereafter made upon
or otherwise issued to any Bank or either Agent by any central bank or other
fiscal, monetary or other authority (whether or not having the force of law),
shall:
(a) subject any Bank or either Agent to any tax, levy, impost, duty,
charge, fee, deduction or withholding of any nature with respect to this
Credit Agreement, the other Loan Documents, any Letters of Credit, such
Bank's Commitment, Gold Commitment, the Purchases and Consignments or the
Loans (other than taxes based upon or measured by the income or profits of
such Bank or such Agent), or
(b) materially change the basis of taxation (except for changes in
taxes on income or profits) of payments to any Bank of the principal of or
the interest on any Loans or any other amounts payable to any Bank or
either Agent under this Credit Agreement or any of the other Loan
Documents, or
(c) impose or increase or render applicable (other than to the extent
specifically provided for elsewhere in this Credit Agreement) any special
deposit, reserve, assessment, liquidity, capital adequacy or other similar
requirements (whether or not having the force of law) against assets held
by, or deposits in or for the account of, or loans by, or letters of
credit issued by, or commitments of an office of any Bank, or
(d) impose on any Bank or either Agent any other conditions or
requirements with respect to this Credit Agreement, the other Loan
Documents, any Letters of Credit, the Loans, the Purchases and
Consignments, such Bank's Commitment or Gold Commitment, or any class of
loans, letters of credit or commitments of which any of the Loans,
Purchases and Consignments or such Bank's Commitment or Gold Commitment
forms a part, and the result of any of the foregoing is
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(i) to increase the cost to any Bank of making, funding, issuing,
renewing, extending or maintaining any of the Loans, any Purchase and
Consignment or such Bank's Commitment or Gold Commitment or any Letter of
Credit, or
(ii) to reduce the amount of principal, interest, Reimbursement
Obligation or other amount payable to such Bank or either Agent hereunder
on account of such Bank's Commitment, Gold Commitment, any Letter of
Credit, and Purchase and Consignment or any of the Loans, or
(iii) to require such Bank or either Agent to make any payment or to
forego any interest or Reimbursement Obligation or other sum payable
hereunder, the amount of which payment or foregone interest or
Reimbursement Obligation or other sum is calculated by reference to the
gross amount of any sum receivable or deemed received by such Bank or
either Agent from the Borrower hereunder,
then, and in each such case, the Borrower will, upon demand made by such Bank
or (as the case may be) such Agent at any time and from time to time and as
often as the occasion therefor may arise, pay to such Bank or such Agent such
additional amounts as will be sufficient to compensate such Bank or such Agent
for such additional cost, reduction, payment or foregone interest or
Reimbursement Obligation or other sum.
8.17. CAPITAL ADEQUACY. If after the date hereof any Bank or either Agent
determines that (a) the adoption of or change in any law, governmental rule,
regulation, policy, guideline or directive (whether or not having the force of
law) regarding capital requirements for banks or bank holding companies or any
change in the interpretation or application thereof by a court or governmental
authority with appropriate jurisdiction, or (b) compliance by such Bank or such
Agent or any corporation controlling such Bank or such Agent with any law,
governmental rule, regulation, policy, guideline or directive (whether or not
having the force of law) of any such entity regarding capital adequacy, has the
effect of reducing the return on such Bank's or such Agent's commitment with
respect to any Loans or any Purchases and Consignments to a level below that
which such Bank or such Agent could have achieved but for such adoption, change
or compliance (taking into consideration such Bank's or such Agent's then
existing policies with respect to capital adequacy and assuming full
utilization of such entity's capital) by any amount deemed by such Bank or (as
the case may be) such Agent to be material, then such Bank or such Agent may
notify the Borrower of such fact. To the extent that the amount of such
reduction in the return on capital is not reflected in the Base Rate or the
amount of Consignment Fees, as applicable, the Borrower agrees to pay such Bank
or (as the case may be) such Agent for the amount of such reduction in the
return on capital as and when such reduction is determined upon presentation by
such Bank or (as the
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case may be) such Agent of a certificate in accordance with Section 8.18
hereof. Each Bank shall allocate such cost increases among its customers in
good faith and on an equitable basis.
8.18. CERTIFICATE. A certificate setting forth any additional amounts
payable pursuant to Sections 8.16 or 8.17 and a brief explanation of such
amounts which are due, submitted by any Bank or either Agent to the Borrower,
shall be conclusive, absent manifest error, that such amounts are due and owing.
8.19. INDEMNITY.
(a) The Borrower agrees to indemnify each Bank and to hold each Bank
harmless from and against any loss, cost or expense (including loss of
anticipated profits) that such Bank may sustain or incur as a consequence
of (i) default by the Borrower in payment of the principal amount of or
any interest on any Eurodollar Rate Loans as and when due and payable,
including any such loss or expense arising from interest or fees payable
by such Bank to lenders of funds obtained by it in order to maintain its
Eurodollar Rate Loans, (ii) default by the Borrower in making a Borrowing
or conversion after the Borrower has given (or is deemed to have given) a
Loan Request, notice (in the case of all or any portion of the Term Loan
pursuant to Section 3.5), Conversion Request or Consignment Conversion
Request relating thereto in accordance with Sections 2.6, 3.5, 5.5, 5.4,
8.3 or 8.4 or (iii) the making of any payment of a Eurodollar Rate Loan
or the making of any conversion of any such Loan to a Base Rate Loan on a
day that is not the last day of the applicable Interest Period with
respect thereto, including interest or fees payable by such Bank to
lenders of funds obtained by it in order to maintain any such Loans.
(b) The Borrower agrees to indemnify each Gold Bank and to hold each
Gold Bank harmless from and against any loss, cost or expense (including
loss of anticipated profits) that such Gold Bank may sustain or incur as a
consequence of (i) default by the Borrower in making a Purchase and
Consignment, including a Purchase and Consignment as a Consignment Fixed
Rate Amount, or a conversion after the Borrower has given (or is deemed to
have given) a Purchase and Consignment Request or a conversion request
relating thereto in accordance with Section 5.3 or Section 5.5 or (ii)
the making of any payment of a Consignment Fixed Rate Amount or the
making of any conversion of any such Consignment Fixed Rate Amount to a
Consignment Base Rate Amount on a day that is not the last day of the
applicable Interest Period with respect thereto, including interest or
fees payable by such Gold Bank to lenders of funds obtained by it in
order to maintain any such Purchases and Consignments.
8.20. INTEREST AFTER DEFAULT. During the continuance of a Default or an
Event of Default the principal of the Loans, whether or not due, the Fair
Market
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Value of Consigned Precious Metal, whether or not due to be purchased
or Redelivered by the Borrower in accordance with the requirements of Section
5.4, (to the extent permitted by applicable law) interest on the Loans and all
other amounts, including Consignment Fees, payable hereunder or under any of
the other Loan Documents shall bear interest, compounded monthly and payable on
demand, at a rate per annum equal to two percent (2%) above the Base Rate.
8.21. PERFORMANCE ADJUSTMENTS. Based upon, and following receipt by the
Banks of (a) beginning with the Borrower's financial statements as hereafter
described for the fiscal quarter of the Borrower ending January 31, 1997, (i)
with respect to the first three fiscal quarters of each fiscal year, the
Borrower's quarterly unaudited consolidated financial statements pursuant to
Section 11.4(b) and (ii) with respect to the last fiscal quarter of each fiscal
year, the Borrowers' annual audited consolidated financial statements pursuant
to Section 11.4(a), and (b) a certificate of the chief financial officer of the
Borrower setting forth calculations of the financial information set forth
below, (the Borrower also hereby agreeing to provide to the Agents,
simultaneously with the delivery of such certificate, telephonic notice of any
Performance Adjustments based upon such calculations), the Base Rate Applicable
Margin and the Eurodollar Applicable Margin shall be subject to possible
adjustment in accordance with the provisions of this paragraph (each such
adjustment, a "Performance Adjustment"). Performance Adjustments shall be
effective (the date of the effectiveness of any Performance Adjustment, a
"Performance Adjustment Date") with respect to adjustments to the Base Rate
Applicable Margin and the Eurodollar Applicable Margin, three (3) Business Days
following receipt by the Agents of (y) (i) with respect to the first three
fiscal quarters of each fiscal year, the Borrower's quarterly unaudited
consolidated financial statements pursuant to Section 11.4(b) and (ii) with
respect to the last fiscal quarter of each fiscal year, the Borrower's annual
audited consolidated financial statements pursuant to Section 11.4(a), and (z)
a certificate of the chief financial officer of the Borrower setting forth
calculations of the financial information set forth below (the Borrowers also
hereby agreeing to provide to the Agents, simultaneously with the delivery of
such certificate, telephonic notice of any Performance Adjustments based upon
such calculations). The Eurodollar Applicable Margin and the Base Rate
Applicable Margin with respect to any period following any Performance
Adjustment Date until the next succeeding Performance Adjustment Date shall be
as set forth in the table below on the line furthest down in such table with
respect to which the Borrower's ratio of (A) Consolidated Total Funded Debt for
the fiscal quarter most recently ended prior to such possible Performance
Adjustment Date to (B) Consolidated EBITDA for the period of four consecutive
fiscal quarters most recently ended prior to such possible Performance
Adjustment Date, shall be less than the ratio set forth on such line in such
table:
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RATIO OF TOTAL BASE RATE
FUNDED DEBT TO EURODOLLAR APPLICABLE
EBITDA APPLICABLE MARGIN MARGIN
greater than
3.25:1.00 2.50% 0.50%
less than or equal to
3.25:1.00 but
greater than or
equal to 3.00:1.00 2.25% 0.25%
less than 3.00:1.00
but greater than or
equal to 2.75:1.00 2.00% 0.25%
less than
2.75:1.00 1.75% 0.00%
9. COLLATERAL SECURITY.
The Obligations shall be secured by a perfected first priority security
interest (subject only to Permitted Liens entitled to priority under applicable
law) in all of the assets of the Borrower, whether now owned or hereafter
acquired, pursuant to the terms of the Security Documents to which the Borrower
is a party.
10. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants to the Banks and the Agents as
follows:
10.1. CORPORATE AUTHORITY.
10.1.1. INCORPORATION; GOOD STANDING. Each of the Borrower and its
Subsidiaries (i) is a corporation duly organized, validly existing and in
good standing under the laws of its state of incorporation, (ii) has all
requisite corporate power to own its property and conduct its business as
now conducted and as presently contemplated, and (iii) is in good standing
as a foreign corporation and is duly authorized to do business in each
jurisdiction where such qualification is necessary except where a failure
to be so qualified would not have a materially adverse effect on the
business, assets or financial condition of the Borrower or such Subsidiary.
10.1.2. AUTHORIZATION. The execution, delivery and performance of this
Credit Agreement and the other Loan Documents to which the Borrower or any
of its Subsidiaries is or is to become a party and the transactions
contemplated hereby and thereby (i) are within the corporate authority of
such
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Person, (ii) have been duly authorized by all necessary corporate
proceedings, (iii) do not conflict with or result in any breach or
contravention of any provision of law, statute, rule or regulation to which
the Borrower or any of its Subsidiaries is subject or any judgment, order,
writ, injunction, license or permit applicable to the Borrower or any of
its Subsidiaries and (iv) do not conflict with any provision of the
corporate charter or bylaws of, or any agreement or other instrument
binding upon, the Borrower or any of its Subsidiaries.
10.1.3. ENFORCEABILITY. The execution and delivery of this Credit
Agreement and the other Loan Documents to which the Borrower or any of its
Subsidiaries is or is to become a party will result in valid and legally
binding obligations of such Person enforceable against it in accordance
with the respective terms and provisions hereof and thereof, except as
enforceability is limited by bankruptcy, insolvency, reorganization,
moratorium or other laws relating to or affecting generally the enforcement
of creditors' rights and except to the extent that availability of the
remedy of specific performance or injunctive relief is subject to the
discretion of the court before which any proceeding therefor may be
brought.
10.2. GOVERNMENTAL APPROVALS. The execution, delivery and performance by
the Borrower and any of its Subsidiaries of this Credit Agreement and the other
Loan Documents to which the Borrower or any of its Subsidiaries is or is to
become a party and the transactions contemplated hereby and thereby do not
require the approval or consent of, or filing with, any governmental agency or
authority other than those already obtained.
10.3. TITLE TO PROPERTIES; LEASES. Except as indicated on Schedule 11.3
hereto, the Borrower and its Subsidiaries own all of the assets reflected in the
consolidated balance sheet of the Borrower and its Subsidiaries as at the
Balance Sheet Date or acquired since that date (except property and assets sold
or otherwise disposed of in the ordinary course of business since that date),
subject to no rights of others, including any mortgages, leases, conditional
sales agreements, title retention agreements, liens or other encumbrances except
Permitted Liens.
10.4. FINANCIAL STATEMENTS AND PROJECTIONS.
10.4.1. FINANCIAL STATEMENTS. There has been furnished to each of the
Banks (a) a consolidated balance sheet of the Borrower and its Subsidiaries
as at the Balance Sheet Date, and a consolidated statement of income of the
Borrower and its Subsidiaries for the fiscal year then ended, certified by
Coopers & Lybrand LLP, and (b) a pro-forma consolidated balance sheet of
the Borrower and its Subsidiaries as at the Closing Date. Such balance
sheets and statement of income have been prepared in accordance with
generally accepted accounting principles and fairly present
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the financial condition of the Borrower as at the close of business on the
date thereof and the results of operations for the fiscal year then ended.
There are no contingent liabilities of the Borrower or any of its
Subsidiaries as of such date involving material amounts, known to the
officers of the Borrower, which were not disclosed in such balance sheets
and the notes related thereto.
10.4.2. PROJECTIONS. The projections of the annual operating budgets
of the Borrower and its Subsidiaries on a consolidated basis, balance
sheets and cash flow statements for the 1997 to 2001 fiscal years, copies
of which have been delivered to each Bank, are based on a variety of
assumptions with respect to general economic, financial and market
conditions used in formulating such projections which are believed by the
Borrower to be reasonable as of the date of such projections but that are
inherently subject to significant economic and competitive uncertainties,
all of which are difficult to predict and many of which are beyond the
control of the Borrower. To the knowledge of the Borrower or any of its
Subsidiaries, as of the Closing Date no facts exist that (individually or
in the aggregate) would result in any material change in any of such
projections. The projections have been prepared on the basis of the
assumptions stated therein and reflect the reasonable estimates of the
Borrower and its Subsidiaries of the results of operations and other
information projected therein.
10.5. NO MATERIAL CHANGES, ETC. Since the Balance Sheet Date there has
occurred no materially adverse change in the financial condition or business of
the Borrower and its Subsidiaries as shown on or reflected in the consolidated
balance sheet of the Borrower and its Subsidiaries as at the Balance Sheet Date,
or the consolidated statement of income for the fiscal year then ended, other
than changes in the ordinary course of business that have not had any materially
adverse effect either individually or in the aggregate on the business or
financial condition of the Borrower or any of its Subsidiaries. Since the
Balance Sheet Date, the Borrower has not made any Distribution.
10.6. FRANCHISES, PATENTS, COPYRIGHTS, ETC. Each of the Borrower and its
Subsidiaries possesses all franchises, patents, copyrights, trademarks, trade
names, licenses and permits, and rights in respect of the foregoing, adequate
for the conduct of its business substantially as now conducted without known
conflict with any rights of others.
10.7. LITIGATION. Except as set forth in Schedule 10.7 hereto, there are no
actions, suits, proceedings or investigations of any kind pending or threatened
against the Borrower or any of its Subsidiaries before any court, tribunal or
administrative agency or board that, if adversely determined, might, either in
any case or in the aggregate, reasonably be expected to materially adversely
affect the properties, assets, financial condition or business of the Borrower
and its Subsidiaries or
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materially impair the right of the Borrower and its Subsidiaries, considered as
a whole, to carry on business substantially as now conducted by them, or result
in any substantial liability not adequately covered by insurance, or for which
adequate reserves are not maintained on the consolidated balance sheet of the
Borrower and its Subsidiaries, or which question the validity of this Credit
Agreement or any of the other Loan Documents, or any action taken or to be
taken pursuant hereto or thereto.
10.8. NO MATERIALLY ADVERSE CONTRACTS, ETC. Neither the Borrower nor any of
its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation that has or is
expected in the future to have a materially adverse effect on the business,
assets or financial condition of the Borrower or any of its Subsidiaries.
Neither the Borrower nor any of its Subsidiaries is a party to any contract or
agreement that has or is expected, in the judgment of the Borrower's officers,
to have any materially adverse effect on the business of the Borrower or any of
its Subsidiaries.
10.9. COMPLIANCE WITH OTHER INSTRUMENTS, LAWS, ETC. Neither the Borrower
nor any of its Subsidiaries is in violation of any provision of its charter
documents, bylaws, or any agreement or instrument to which it may be subject or
by which it or any of its properties may be bound or any decree, order,
judgment, statute, license, rule or regulation, in any of the foregoing cases in
a manner that could reasonably be expected to result in the imposition of
substantial penalties or materially and adversely affect the financial
condition, properties or business of the Borrower or any of its Subsidiaries.
10.10. TAX STATUS. The Borrower and its Subsidiaries (a) have made or filed
all federal and state income and sales and all other material tax returns,
reports and declarations required by any jurisdiction to which any of them is
subject, (b) have paid all taxes and other governmental assessments and charges
shown or determined to be due on such returns, reports and declarations, except
those being contested in good faith and by appropriate proceedings and (c) have
set aside on their books provisions reasonably adequate for the payment of all
taxes for periods subsequent to the periods to which such returns, reports or
declarations apply. There are no unpaid taxes in any material amount claimed to
be due by the taxing authority of any jurisdiction, and the officers of the
Borrower know of no basis for any such claim.
10.11. NO EVENT OF DEFAULT. No Default or Event of Default has occurred and
is continuing.
10.12. HOLDING COMPANY AND INVESTMENT COMPANY ACTS. Neither the Borrower
nor any of its Subsidiaries is a "holding company", or a "subsidiary company"
of a "holding company", or an affiliate of a "holding company", as such terms
are defined in the Public Utility Holding Company Act of 1935; nor is it an
"investment company", or an "affiliated company" or a "principal underwriter"
of an
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"investment company", as such terms are defined in the Investment Company Act
of 1940.
10.13. ABSENCE OF FINANCING STATEMENTS, ETC. Except with respect to
Permitted Liens, there is no financing statement, security agreement, chattel
mortgage, real estate mortgage or other document filed or recorded with any
filing records, registry or other public office, that purports to cover, affect
or give notice of any present or possible future lien on, or security interest
in, any assets or property of the Borrower or any of its Subsidiaries or any
rights relating thereto.
10.14. PERFECTION OF SECURITY INTEREST. All filings, assignments, pledges
and deposits of documents or instruments have been made and all other actions
have been taken that are necessary or advisable, under applicable law, to
establish and perfect the Collateral Agent's security interest in the
Collateral. The Collateral and the Collateral Agent's rights with respect to
the Collateral are not subject to any setoff, claims, withholdings or other
defenses. The Borrower is the owner of the Collateral free from any lien,
security interest, encumbrance and any other claim or demand, except for
Permitted Liens.
10.15. CERTAIN TRANSACTIONS. Except as set forth on Schedule 10.15 hereto
and except for arm's length transactions pursuant to which the Borrower or any
of its Subsidiaries makes payments in the ordinary course of business upon
terms no less favorable than the Borrower or such Subsidiary could obtain from
third parties, none of the officers, directors, or employees of the Borrower or
any of its Subsidiaries is presently a party to any transaction with the
Borrower or any of its Subsidiaries (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Borrower, any
corporation, partnership, trust or other entity in which any officer, director,
or any such employee has a substantial interest or is an officer, director,
trustee or partner.
10.16. EMPLOYEE BENEFIT PLANS.
10.16.1. IN GENERAL. Each Employee Benefit Plan has been maintained
and operated in compliance in all material respects with the provisions of
ERISA and, to the extent applicable, the Code, including but not limited to
the provisions thereunder respecting prohibited transactions. The Borrower
has heretofore delivered to the Agents the most recently completed annual
report, Form 5500, with all required attachments, and actuarial statement
required to be submitted under Section 103(d) of ERISA, with respect to
each Guaranteed Pension Plan.
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10.16.2. TERMINABILITY OF WELFARE PLANS. Under each Employee Benefit
Plan which is an employee welfare benefit plan within the meaning of
Section 3(1) or Section 3(2)(B) of ERISA, no benefits are payable to
employees (or their dependents) after termination of employment (except as
required by Title I, Part 6 of ERISA). The Borrower or an ERISA Affiliate,
as appropriate, may terminate each such Plan at any time (or at any time
subsequent to the expiration of any applicable bargaining agreement) in
the discretion of the Borrower or such ERISA Affiliate without liability
to any Person.
10.16.3. GUARANTEED PENSION PLANS. Each contribution required to be
made to a Guaranteed Pension Plan, whether required to be made to avoid
the incurrence of an accumulated funding deficiency, the notice or lien
provisions of Section 302(f) of ERISA, or otherwise, has been timely made.
No waiver of an accumulated funding deficiency or extension of
amortization periods has been received with respect to any Guaranteed
Pension Plan. No liability to the PBGC (other than required insurance
premiums, all of which have been paid) has been incurred by the Borrower
or any ERISA Affiliate with respect to any Guaranteed Pension Plan and
there has not been any ERISA Reportable Event, or any other event or
condition which presents a material risk of termination of any Guaranteed
Pension Plan by the PBGC. Based on the latest valuation of each Guaranteed
Pension Plan (which in each case occurred within twelve months of the date
of this representation), and on the actuarial methods and assumptions
employed for that valuation, the aggregate benefit liabilities of all such
Guaranteed Pension Plans within the meaning of Section 4001 of ERISA did
not exceed the aggregate value of the assets of all such Guaranteed
Pension Plans, disregarding for this purpose the benefit liabilities and
assets of any Guaranteed Pension Plan with assets in excess of benefit
liabilities, by more than $500,000.00.
10.16.4. MULTIEMPLOYER PLANS. Neither the Borrower nor any ERISA
Affiliate has incurred any material liability (including secondary
liability) to any Multiemployer Plan as a result of a complete or partial
withdrawal from such Multiemployer Plan under Section 4201 of ERISA or as
a result of a sale of assets described in Section 4204 of ERISA. Neither
the Borrower nor any ERISA Affiliate has been notified that any
Multiemployer Plan is in reorganization or insolvent under and within the
meaning of Section 4241 or Section 4245 of ERISA or that any
Multiemployer Plan intends to terminate or has been terminated under
Section 4041A of ERISA.
10.17. REGULATIONS U AND X. The proceeds of the Loans and the Purchases and
Consignments shall be used to refinance certain existing Indebtedness of the
Borrower and for working capital and general corporate purposes. The Borrower
will obtain Letters of Credit solely for working capital and general corporate
purposes. No portion of any Loan or proceeds from any Purchase and Consignment
is to be
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used, and no portion of any Letter of Credit is to be obtained, for the purpose
of purchasing or carrying any "margin security" or "margin stock" as such
terms are used in Regulations U and X of the Board of Governors of the Federal
Reserve System, 12 C.F.R. Parts 221 and 224.
10.18. ENVIRONMENTAL COMPLIANCE. The Borrower has taken all necessary
steps to investigate the past and present condition and usage of the Real
Estate and the operations conducted thereon and, based upon such diligent
investigation, has determined that:
(a) none of the Borrower, its Subsidiaries or any operator of the Real
Estate or any operations thereon is in violation, or alleged violation, of
any judgment, decree, order, law, license, rule or regulation pertaining to
environmental matters, including without limitation, those arising under
the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 as amended
("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986
("SARA"), the Federal Clean Water Act, the Federal Clean Air Act, the Toxic
Substances Control Act, or any state or local statute, regulation,
ordinance, order or decree relating to health, safety or the environment
(hereinafter "Environmental Laws"), which violation would reasonably be
expected to have a material adverse effect on the environment or the
business, assets or financial condition of the Borrower or any of its
Subsidiaries;
(b) neither the Borrower nor any of its Subsidiaries has received
notice from any third party including, without limitation, any federal,
state or local governmental authority, (i) that any one of them has been
identified by the United States Environmental Protection Agency ("EPA") as
a potentially responsible party under CERCLA with respect to a site listed
on the National Priorities List, 40 C.F.R. Part 300 Appendix B; (ii) that
any hazardous waste, as defined by 42 U.S.C. Section 6903(5), any
hazardous substances as defined by 42 U.S.C. Section 9601(14), any
pollutant or contaminant as defined by 42 U.S.C. Section 9601(33) and any
toxic substances, oil or hazardous materials or other chemicals or
substances regulated by any Environmental Laws ("Hazardous Substances")
which any one of them has generated, transported or disposed of has been
found at any site at which a federal, state or local agency or other third
party has conducted or has ordered that any Borrower or any of its
Subsidiaries conduct a remedial investigation, removal or other response
action pursuant to any Environmental Law; or (iii) that it is or shall be
a named party to any claim, action, cause of action, complaint, or legal
or administrative proceeding (in each case, contingent or otherwise)
arising out of any third party's incurrence of costs, expenses, losses or
damages of any kind whatsoever in connection with the release of Hazardous
Substances;
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(c) except as set forth on Schedule 10.18 attached hereto: (i) no
portion of the Real Estate has been used for the handling, processing,
storage or disposal of Hazardous Substances except in accordance with
applicable Environmental Laws; and no underground tank or other
underground storage receptacle for Hazardous Substances is located on any
portion of the Real Estate; (ii) in the course of any activities conducted
by the Borrower, its Subsidiaries or operators of its properties, no
Hazardous Substances have been generated or are being used on the Real
Estate except in accordance with applicable Environmental Laws; (iii)
there have been no releases (i.e. any past or present releasing, spilling,
leaking, pumping, pouring, emitting, emptying, discharging, injecting,
escaping, disposing or dumping) or threatened releases of Hazardous
Substances on, upon, into or from the properties of the Borrower or its
Subsidiaries, which releases would have a material adverse effect on the
value of any of the Real Estate or adjacent properties or the environment;
(iv) to the best of the Borrower's knowledge, there have been no releases
on, upon, from or into any real property in the vicinity of any of the
Real Estate which, through soil or groundwater contamination, may have
come to be located on, and which would have a material adverse effect on
the value of, the Real Estate; and (v) in addition, any Hazardous
Substances that have been generated on any of the Real Estate have been
transported offsite only by carriers having an identification number
issued by the EPA, treated or disposed of only by treatment or disposal
facilities maintaining valid permits as required under applicable
Environmental Laws, which transporters and facilities have been and are,
to the best of the Borrower's knowledge, operating in compliance with such
permits and applicable Environmental Laws; and
(d) None of the Borrower and its Subsidiaries or any of the Real Estate
is subject to any applicable environmental law requiring the performance
of Hazardous Substances site assessments, or the removal or remediation of
Hazardous Substances, or the giving of notice to any governmental agency
or the recording or delivery to other Persons of an environmental
disclosure document or statement by virtue of the transactions set forth
herein and contemplated hereby, or as a condition to the effectiveness of
any other transactions contemplated hereby.
10.19. SUBSIDIARIES, ETC. The Borrower has no Subsidiaries. Except as set
forth on Schedule l0.19 hereto, neither the Borrower nor any Subsidiary of the
Borrower is engaged in any joint venture or partnership with any other Person.
10.20. BANK ACCOUNTS. Schedule 10.20 (as such may be amended from time
to time in accordance with Section 13.10 hereof) sets forth the account numbers
and location of all bank accounts of the Borrower or any of its Subsidiaries.
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11. AFFIRMATIVE COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that, so long as any Loan, Unpaid
Reimbursement Obligation, Letter of Credit, amount of Consigned Precious Metal
or Note is outstanding or any Bank has any obligation to make any Loans or
Purchases and Consignments or the Dollar Agent has any obligation to issue,
extend or renew any Letters of Credit:
11.1. PUNCTUAL PAYMENT. The Borrower will duly and punctually pay,
purchase or Redeliver, or cause to be paid, purchased or Redelivered, the
principal and interest on the Loans, all Consigned Precious Metal, all
Reimbursement Obligations, the Letter of Credit Fees, the commitment fees, the
Consignment Fees, the Agents' fee and all other amounts provided for in this
Credit Agreement and the other Loan Documents to which the Borrower or any of
its Subsidiaries is a party, all in accordance with the terms of this Credit
Agreement and such other Loan Documents.
11.2. MAINTENANCE OF OFFICE. The Borrower will maintain its chief
executive office in Chicago, Illinois, or at such other place in the United
States of America as the Borrower shall designate upon written notice to the
Agents, where notices, presentations and demands to or upon the Borrower in
respect of the Loan Documents to which the Borrower is a party may be given or
made.
11.3. RECORDS AND ACCOUNTS. The Borrower will (a) keep, and cause each of
its Subsidiaries to keep, true and accurate records and books of account in
which full, true and correct entries will be made in accordance with generally
accepted accounting principles and (b) maintain adequate accounts and reserves
for all taxes (including income taxes), depreciation, depletion, obsolescence
and amortization of its properties and the properties of its Subsidiaries,
contingencies, and other reserves in accordance with generally accepted
accounting principles.
11.4. FINANCIAL STATEMENTS, CERTIFICATES AND INFORMATION. The Borrower
will deliver to each of the Banks:
(a) as soon as practicable, but in any event not later than ninety (90)
days after the end of each fiscal year of the Borrower, the consolidated
balance sheet of the Borrower and its Subsidiaries and the consolidating
balance sheet of the Borrower and its Subsidiaries, each as at the end of
such year, and the related consolidated statement of income and
consolidated statement of cash flow and consolidating statement of income
and consolidating statement of cash flow for such year, each setting forth
in comparative form the figures for the previous fiscal year and all such
consolidated and consolidating statements to be in reasonable detail,
prepared in accordance with generally accepted accounting principles, and
certified without qualification by Coopers & Lybrand LLP or by another
"big six"
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certified public accounting firm or by other independent certified public
accountants satisfactory to the Agents, together with a written statement from
such accountants to the effect that they have read a copy of this Credit
Agreement, and that, in making the examination necessary to said certification,
they have obtained no knowledge of any Default or Event of Default, or, if such
accountants shall have obtained knowledge of any then existing Default or Event
of Default they shall disclose in such statement any such Default or Event of
Default; provided that such accountants shall not be liable to the Banks for
failure to obtain knowledge of any Default or Event of Default;
(b) as soon as practicable, but in any event not later than forty-five
(45) days after the end of each of the fiscal quarters of the Borrower, copies
of the unaudited consolidated balance sheet of the Borrower and its
Subsidiaries and the unaudited consolidating balance sheet of the Borrower and
its Subsidiaries, each as at the end of such quarter, and the related
consolidated statement of income and consolidated statement of cash flow and
consolidating statement of income and consolidating statement of cash flow for
the portion of the Borrower's fiscal year then elapsed, all in reasonable
detail and prepared in accordance with generally accepted accounting principles,
together with a certification by the principal financial or accounting officer
of the Borrower that the information contained in such financial statements
fairly presents the financial position of the Borrower and its Subsidiaries on
the date thereof (subject to year-end adjustments);
(e) as soon as practicable, but in any event within thirty (30) days after
the end of each month in each fiscal year of the Borrower, unaudited monthly
consolidated financial statements of the Borrower and its Subsidiaries for such
month and unaudited monthly consolidating financial statements of the Borrower
and its Subsidiaries for such month, each prepared in accordance with principal
opted accounting principles, together with a ratification by the principal
financial or accounting officer, or the Vice President of Finance, of the
Borrower that the information contained in such financial statements fairly
presents the financial condition of the Borrower and its Subsidiaries on the
date thereof (subject to quarterly and year-end adjustments);
(d) simultaneously with the delivery of the financial statements referred
to in subsections (a) and (b) above, a statement certified by the principal
financial or accounting officer of the Borrower in substantially the form of
Exhibit J hereto and setting forth in reasonable detail computations evidencing
compliance with the covenants contained in Section 13 and (if applicable)
reconciliations to reflect changes in generally accepted accounting principles
since the Balance Sheet Date;
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(e) contemporaneously with the filing or mailing thereof, copies of all
material of a financial nature filed with the Securities and Exchange
Commission or sent to the stockholders of the Borrower;
(f) within ten (10) Business Days after the end of each calendar month or
at such earlier time as the Agents may reasonably request, (i) a Borrowing Base
Report setting forth the Borrowing Base and the Dollar Borrowing Base as at the
end of such calendar month or other date so requested by the Agents, (ii) a
Consigned Precious Metal Report setting forth (A) the amount of Consigned
Precious Metal and Borrower's Precious Metal as of the end of such calendar
month or other date so requested by the Agents, and (B) a calculation of the
Consignment Advance Rate Percentage multiplied by the Fair Market Value of the
sum of (1) Borrower's Precious Metal plus (2) Consigned Precious Metal as of
the end of such calendar month or other date so requested by the Agents, and
(iii) a Monthly Inventory Report, in each case together with supporting
schedules and documentation, with each such Borrowing Base Report and Consigned
Precious Metal Report to be accompanied by a certification by the Vice
President of Finance or the principal financial or accounting officer of the
Borrower that the information contained therein is true and accurate in all
respects;
(g) within thirty (30) days after the end of each calendar month, an
accounts payable aging report;
(h) on or prior to April 30 of each calendar year, projections of the
Borrower and its Subsidiaries updating those projections delivered to the Banks
and referred to in Section 10.4.2 or, if applicable, updating any later such
projections delivered in response to a request pursuant to this Section 11.4(h);
(i) prior to the opening by the Borrower of any new retail store or
distribution center at which Eligible Inventory is to be located, a supplement
to Schedule 2 hereto in the form of Exhibit K hereto, listing any additions or
deletions to the list of retail stores and distribution centers of the Borrower
and its Subsidiaries located in the United States, which supplement, together
with Schedule 2 hereto and any prior supplements, shall be deemed to constitute
Schedule 2 for all purposes of this Credit Agreement;
(j) within forty-five (45) days after the completion of each of the
Borrower's semi-annual central warehouse inventory counts (which inventory
counts may be observed by the Agents or by an independent party acceptable to
the Agents) (i) a report with respect to the results of such inventory count
and (ii) a report with respect to the results of the Borrower's inventory
counts with respect to its retail store locations conducted since the last such
report delivered to the Agents and the Banks, each in form and detail
satisfactory to the Agents and the Banks; and
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(k) from time to time such other financial data and information (including
accountants, management letters) as either Agent or any Bank may reasonably
request.
11.5. Notices.
11.5.1. DEFAULTS. The Borrower will promptly notify each of the Agents and
each of the Banks in writing of the occurrence of any Default or Event of
Default. If any Person shall give any notice or take any other action in
respect of a claimed default (whether or not constituting an Event of Default)
under this Credit Agreement or any other note, evidence of indebtedness,
indenture or other obligation to which or with respect to which the Borrower or
any of its Subsidiaries is a party or obligor, whether as principal, guarantor,
surety or otherwise, the Borrower shall forthwith give written notice thereof
to each of the Agents and each of the Banks, describing the notice or action
and the nature of the claimed default.
11.5.2. ENVIRONMENTAL EVENTS. The Borrower will promptly give notice to
each of the Agents and each of the Banks (a) of any violation of any
Environmental Law that the Borrower or any of its Subsidiaries reports in
writing or is reportable by such Person in writing (or for which any written
report supplemental to any oral report is made) to any federal, state or local
environmental agency and (b) upon becoming aware thereof, of any inquiry,
proceeding, investigation, or other action, including a notice from any agency
of potential environmental liability, of any federal, state or local
environmental agency or board, that has the potential to materially affect the
assets, liabilities, financial conditions or operations of the Borrower or any
of its Subsidiaries, or the Collateral Agent's mortgages, deeds of trust or
security interests pursuant to the Security Documents.
11.5.3. NOTIFICATION OF CLAIM AGAINST COLLATERAL. The Borrower will,
immediately upon becoming aware thereof, notify each of the Collateral Agent,
the Agents and each of the Banks in writing of any setoff, claims (including,
with respect to the Real Estate, environmental claims), withholdings or other
defenses to which any of the Collateral, or the Collateral Agent's rights with
respect to the Collateral, are subject. The Borrower will, immediately upon
becoming aware thereof, notify each of the Collateral Agent, the Agents and
each of the Banks in writing of any proposed sale or transfer of any Permitted
Inventory Location by the owner thereof.
11.5.4. Notice of Litigation and Judgments. The Borrower will, and will
cause each of its Subsidiaries to, give notice to each of the Agents and each
of the Banks in writing within fifteen (15) days of becoming aware of any
litigation or proceedings threatened in writing or any pending litigation and
proceedings affecting the Borrower or any of its Subsidiaries or to which
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the Borrower or any of its Subsidiaries is or becomes a party involving an
uninsured claim against the Borrower or any of its Subsidiaries that could
reasonably be expected to have a materially adverse effect on the Borrower or
any of its Subsidiaries and stating the nature and status of such litigation or
proceedings. The Borrower will, and will cause each of its Subsidiaries to,
give notice to each of the Agents and each of the Banks, in writing, in form
and detail satisfactory to the Agents, within ten (10) days of any judgment not
covered by insurance, final or otherwise, against the Borrower or any of its
Subsidiaries in an amount in excess of $500,000.00.
11.6. CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES.
(a) The Borrower will do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence, rights and
franchises and those of its Subsidiaries and will not, and will not cause or
permit any of its Subsidiaries to, convert to a limited liability company.
(b) The Borrower (i) will cause all of its properties and those of its
Subsidiaries used or useful in the conduct of its business or the business of
its Subsidiaries to be maintained and kept in good condition, repair and
working order and supplied with all necessary equipment, (ii) will cause to be
made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the judgment of the Borrower may be necessary
so that the business carried on in connection therewith may be properly and
advantageously conducted at all times, and (iii) will, and will cause each of
its Subsidiaries to, continue to engage primarily in the businesses now
conducted by them; provided that nothing in this Section 11.6 shall prevent the
Borrower from discontinuing the operation and maintenance of any of its
properties or any of those of its Subsidiaries if such discontinuance is, in
the judgment of the Borrower, desirable in the conduct of its or their business
and that do not in the aggregate materially adversely affect the business of
the Borrower and its Subsidiaries on a consolidated basis.
11.7. INSURANCE.
(a) The Borrower will, and will cause each of its Subsidiaries to,
maintain with financially sound and reputable insurers insurance with respect
to its properties and business against such casualties and contingencies as
shall be in accordance with the general practices of businesses engaged in
similar activities in similar geographic areas and in amounts, containing such
terms, in such forms and for such periods as may be reasonable and prudent and
in accordance with the terms of the Security Agreement.
(b) Contemporaneously with the execution of this Credit Agreement, and
within fifteen (15) days of any date when any additional or replacement
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insurance coverage is obtained, the Borrower shall, and will cause each
of its Subsidiaries to, deliver to the Agents true copies of certificates
of insurance with respect to such additional insurance or replacement
policies and, upon request and to the extent not previously delivered to
the Agents, copies of the original insurance policies evidencing such
additional or replacement insurance, which certificates and policies (i) in
the case of property and casualty policies, shall contain an endorsement or
rider naming the Collateral Agent, for the benefit of the Collateral Agent,
the Agents and the Banks, as a mortgagee, loss payee and additional
insured, and (ii) in the case of liability policies, shall contain an
endorsement or rider naming the Collateral Agent, for the benefit of the
Collateral Agent, the Agents and the Banks, as an additional insured, with
each such policy providing that such insurance shall not be cancelled or
amended without thirty (30) days prior written notice to the Collateral
Agent, if applicable, and each of the Agents.
11.8. TAXES. The Borrower will, and will cause each of its Subsidiaries
to, duly pay and discharge, or cause to be paid and discharged, before the same
shall become overdue, all taxes, assessments and other governmental charges
imposed upon it and its real properties, sales and activities, or any part
thereof, or upon the income or profits therefrom, as well as all claims for
labor, materials, or supplies that if unpaid might by law become a lien or
charge upon any of its property; provided that any such tax, assessment,
charge, levy or claim need not be paid if the validity or amount thereof shall
currently be contested in good faith by appropriate proceedings and if the
Borrower or such Subsidiary shall have set aside on its books adequate reserves
with respect thereto; and provided further that the Borrower and each
Subsidiary of the Borrower will pay all such taxes, assessments, charges,
levies or claims forthwith upon the commencement of proceedings to foreclose
any lien that may have attached as security therefor.
11.9. INSPECTION OF PROPERTIES AND BOOKS, ETC.
11.9.1. GENERAL The Borrower shall permit the Banks, through the
Agents or any of the Banks' other designated representatives, to visit and
inspect any of the properties of the Borrower or any of its Subsidiaries,
to examine the books of account of the Borrower and its Subsidiaries (and
to make copies thereof and extracts therefrom), to discuss the affairs,
finances and accounts of the Borrower and its Subsidiaries with, and to be
advised as to the same by, its and their officers, and to conduct
examinations and verifications of the components of the Borrowing Base and
the Dollar Borrowing Base, the other assets of the Borrower and its
Subsidiaries and all systems and procedures of the Borrower and its
Subsidiaries, including those relating to cash management and those
relating to gold tracking and valuation, all at such reasonable times and
intervals as either of the Agents or any Bank may reasonably request.
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11.9.2. INVENTORY APPRAISALS. No more frequently than once each
calendar year, or more frequently as determined by the Agents if an Event
of Default shall have occurred and be continuing, upon the request of the
Agents, the Borrower will obtain and deliver to the Agents a report of an
independent collateral auditor or appraiser satisfactory to the Agents
(which may be affiliated with one of the Banks) with respect to the
inventory components included in the Borrowing Base and the Dollar
Borrowing Base and the amounts of Borrower's Precious Metal and Consigned
Precious Metal held by the Borrower, which report shall indicate (a)
whether or not the information set forth in the Borrowing Base Report and
the Consigned Precious Metal Report most recently delivered is accurate and
complete in all material respects based upon a review by such auditors of
the inventory (including verification as to the value, location and
respective types) or (b) in the case of an appraisal report by a collateral
appraiser, shall state the then current fair market value, orderly
liquidation and forced liquidation values of all or any portion of the
inventory owned by the Borrower and its Subsidiaries and of the Borrower's
Precious Metal and Consigned Precious Metal.
11.9.3. APPRAISALS. If an Event of Default shall have occurred and be
continuing, upon the request of the Agents, the Borrower will obtain and
deliver to the Agents appraisal reports in form and substance and from
appraisers satisfactory to the Agents, stating (i) the then current fair
market, orderly liquidation and forced liquidation values of all or any
portion of the equipment or real estate owned by the Borrower or any of its
Subsidiaries and (ii) the then current business value of each of the
Borrower and its Subsidiaries. All such appraisals shall be conducted and
made at the expense of the Borrower.
11.9.4. COMMUNICATIONS WITH ACCOUNTANTS. The Borrower authorizes the
Agents and, if accompanied by the Agents, the Banks to communicate directly
with the Borrower's independent certified public accountants and authorizes
such accountants to disclose to the Agents and the Banks any and all
financial statements and other supporting financial documents and schedules
including copies of any management letter with respect to the business,
financial condition and other affairs of the Borrower or any of its
Subsidiaries. At the request of the Agents, the Borrower shall deliver a
letter addressed to such accountants instructing them to comply with the
provisions of this Section 11.9.4
11.10. COMPLIANCE WITH LAWS, CONTRACTS, LICENSES, AND PERMITS. The
Borrower will, and will cause each of its subsidiaries to, comply with (a) the
applicable laws and regulations wherever its business is conducted, including
all Environmental Laws, except where the failure to so comply would not
reasonably be expected to have a materially adverse effect either individually
or in the aggregate
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upon the business, assets or financial condition of the Borrower or any of its
Subsidiaries, (b) the provisions of its charter documents and by-laws, (c) all
agreements and instruments by which it or any of its properties may be bound,
except where the failure to so comply would not reasonably be expected to have
a materially adverse effect either individually or in the aggregate upon the
business, assets or financial condition of the Borrower or any of its
Subsidiaries, and (d) all applicable decrees, orders, and judgments. If any
authorization, consent, approval, permit or license from any officer, agency or
instrumentality of any government shall become necessary or required in order
that the Borrower or any of its Subsidiaries may fulfill any of its obligations
hereunder or any of the other Loan Documents to which the Borrower or such
Subsidiary is a party, the Borrower will, or (as the case may be) will cause
such Subsidiary to, immediately take or cause to be taken all reasonable steps
within the power of the Borrower or such Subsidiary to obtain such
authorization, consent, approval, permit or license and furnish the Agents and
the Banks with evidence thereof.
11.11. EMPLOYEE BENEFIT PLANS. The Borrower will (a) promptly upon filing
the same with the Department of Labor or Internal Revenue Service upon request
of the Agents, furnish to each of the Agents a copy of the most recent actuarial
statement required to be submitted under Section 103(d) of ERISA and Annual
Report, Form 5500, with all required attachments, in respect of each Guaranteed
Pension Plan and (b) promptly upon receipt or dispatch, furnish to each of the
Agents any notice, report or demand sent or received in respect of a Guaranteed
Pension Plan under Sections 302, 4041, 4042, 4043, 4063, 4066 and 4068 of ERISA,
or in respect of a Multiemployer Plan, under Sections 4041A, 4202, 4219, 4242,
or 4245 of ERISA.
11.12. USE OF PROCEEDS. The Borrower will use the proceeds of the Loans
and the Purchases and Consignments solely for refinancing certain existing
indebtedness of the Borrower and for working capital and general corporate
purposes. The Borrower will obtain Letters of Credit solely for working capital
and general corporate purposes.
11.13. ADDITIONAL MORTGAGED PROPERTY. If, after the closing date, the
Borrower or any of its Subsidiaries acquires or leases for a term in excess of
five (5) years real estate used as a manufacturing or warehouse facility, the
Borrower shall notify the Agents promptly thereof, and upon the request of the
Lenders, the Borrower shall, or shall cause such Subsidiary to, forthwith
deliver to the Collateral Agent a fully executed mortgage or deed of trust over
such real estate, in form and substance satisfactory to the Collateral Agent
and the Agents, together with title insurance policies, surveys, evidences of
insurances with the Collateral Agent named as loss payee and additional
insured, legal opinions and other documents and certificates with respect to
such real estate as shall be reasonably satisfactory to the Collateral Agent
and the Agents. The Borrower further agrees that, following the taking of such
actions with respect to such real estate, the Collateral Agent shall have
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for the benefit of the Banks, the Agents and the Collateral Agent a valid and
enforceable first priority mortgage or deed of trust over such real estate,
free and clear of all defects and encumbrances except for Permitted Liens.
11.14. BANK ACCOUNTS.
(a) On or prior to the Closing Date, the Borrower will, and
will cause each of its Subsidiaries to, (i) establish depository
accounts (the "FNBB Concentration Accounts") under the control of the
Dollar Agent for the benefit of the Banks and the Agents, in the name
of the Borrower, (ii) direct all depository institutions with Store
Accounts to cause all funds in excess of $1,000 held in each such Store
Account to be transferred no less frequently than twice each week, and
in any event within one Business Day following any day during which the
Borrower has knowledge that the amounts in any such Store Account are
in excess $10,000, to, and only to Concentration Banks, (iii) direct
all Concentration Banks (other than FNBB) to cause all funds of the
Borrower and its Subsidiaries held in such Concentration Banks to be
transferred daily to, and only to, the FNBB Concentration Account or
such other location as the Dollar Agent shall designate, (iv) cause all
proceeds of Accounts Receivable of the Borrower to be deposited only
into depository accounts with financial institutions which have entered
into Agency Account Agreements, and (v) except for amounts in any Store
Account which are less than $1,000, at all times ensure that, within
five (5) days following the Borrower's or any of its Subsidiaries'
receipt of any cash or cash equivalents or any other proceeds of
Collateral, all such amounts shall have been deposited in the FNBB
Concentration Accounts.
(b) The Borrower will, and will cause each of its Subsidiaries
to, use its best efforts to obtain Agency Account Agreements (whereby
such depository institution shall, among other things, waive any right
to set-off, other than for service charges and returns incurred in
connection therewith) from each depository institution at which a Store
Account is located.
(c) The Borrower hereby agrees that all amounts belonging to
the Borrower and received by the Dollar Agent in the FNBB Concentration
Account will be the sole and exclusive property of the Collateral
Agent, for the accounts of the Banks and the Agents, to be applied in
accordance with (i) Section 8.8(c) prior to the occurrence of an Event
of Default and (ii) Section 8.9 after the occurrence and during the
continuance of a Default or an Event of Default.
11.15. INVENTORY RESTRICTIONS. The Borrower shall cause, and shall cause
each of its Subsidiaries to cause, Consigned Precious Metal and all Eligible
Inventory to be located at all times solely at Permitted Inventory Locations,
and to be sold or otherwise disposed of in the ordinary course of the
Borrower's or such Subsidiary's
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business, consistent with past practices or as required pursuant to the terms
of this Credit Agreement.
11.16. PRIVATE LABEL CREDIT CARD PROGRAM. The Borrower will maintain in
effect at all times credit programs provided by Persons other than the Borrower
and its Subsidiaries which (a) are non-recourse to the Borrower and its
Subsidiaries and (b) during any period of four consecutive fiscal quarters of
the Borrower, are used to finance not less than twenty-five percent (25%) of
the Borrower's gross sales during such period of four consecutive fiscal
quarters.
11.17. FURTHER ASSURANCES. The Borrower will, and will cause each of its
Subsidiaries to, cooperate with the Banks, the Collateral Agent and the Agents
and execute such further instruments and documents as any of the Banks, the
Collateral Agent or the Agents shall reasonably request to carry out to their
satisfaction the transactions contemplated by this Credit Agreement and the
other Loan Documents.
12. CERTAIN NEGATIVE COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that, so long as any Loan, Unpaid
Reimbursement Obligation, Letter of Credit, amount of Consigned Precious Metal
or Note is outstanding or any Bank has any obligation to make any Loans or
Purchases and Consignments or the Dollar Agent has any obligation to issue,
extend or renew any Letters of Credit:
12.1. RESTRICTIONS ON INDEBTEDNESS. The Borrower will not, and will not
permit any of its Subsidiaries to, create, incur, assume, guarantee or be or
remain liable, contingently or otherwise, with respect to any Indebtedness
other than:
(a) Indebtedness to the Banks, the Agents and the Collateral Agent
arising under any of the Loan Documents;
(b) current liabilities of the Borrower or such Subsidiary incurred in
the ordinary course of business not incurred through (i) the borrowing of
money, or (ii) the obtaining of credit except for credit on an open
account basis customarily extended and in fact extended in connection with
normal purchases of goods and services;
(c) Indebtedness in respect of taxes, assessments, governmental charges
or levies and claims for labor, materials and supplies to the extent that
payment therefor shall not at the time be required to be made in
accordance with the provisions of Section 11.8;
(d) Indebtedness in respect of judgments or awards that have been in
force for less than the applicable period for taking an appeal so long as
execution is not levied thereunder or in respect of which the Borrower or
such
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Subsidiary shall at the time in good faith be prosecuting an appeal or
proceedings for review and in respect of which a stay of execution shall
have been obtained pending such appeal or review;
(e) endorsements for collection, deposit or negotiation and warranties
of products or services, in each case incurred in the ordinary course of
business;
(f) Indebtedness evidenced by the Senior Subordinated Notes;
(g) Indebtedness existing on the date hereof and listed and described
on Schedule 12.1 hereto;
(h) Indebtedness owed by the Borrower or any of its Subsidiaries to
trade vendors, in the amount of the cost to the Borrower or such
Subsidiary of inventory held on consignment from such trade vendors; and
(i) Indebtedness of the Borrower and its Subsidiaries other than that
permitted elsewhere in this Section 12.1 in an aggregate principal amount
not to exceed $5,000,000.00 at any time outstanding.
12.2. RESTRICTIONS ON LIENS. The Borrower will not, and will not permit
any of its Subsidiaries to, (i) create or incur or suffer to be created or
incurred or to exist any lien, encumbrance, mortgage, pledge, charge,
restriction or other security interest of any kind upon any of its property or
assets of any character whether now owned or hereafter acquired, or upon the
income or profits therefrom; (ii) transfer any of such property or assets or
the income or profits therefrom for the purpose of subjecting the same to the
payment of indebtedness or performance of any other obligation in priority to
payment of its general creditors; (iii) acquire, or agree or have an option to
acquire, any property or assets upon conditional sale or other title retention
or purchase money security agreement, device or arrangement; (iv) suffer to
exist for a period of more than thirty (30) days after the same shall have been
incurred any indebtedness or claim or demand against it that if unpaid might by
law or upon bankruptcy or insolvency, or otherwise, be given any priority
whatsoever over its general creditors; or (v) sell, assign, pledge or otherwise
transfer any accounts, contract rights, general intangibles, chattel paper or
instruments, with or without recourse; provided that the Borrower and any
Subsidiary of the Borrower may create or incur or suffer to be created or
incurred or to exist:
(a) liens in favor of the Borrower on all or part of the assets of
Subsidiaries of the Borrower securing Indebtedness owing by Subsidiaries
of the Borrower to the Borrower;
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(b) liens to secure taxes, assessments and other government charges in
respect of obligations not overdue or liens on properties to secure claims
for labor, material or supplies in respect of obligations not overdue;
(c) deposits or pledges made in connection with, or to secure payment
of, workmen's compensation, unemployment insurance, old age pensions or
other social security obligations;
(d) liens on properties in respect of judgments or awards, the
indebtedness with respect to which is permitted by Section 12.1(d);
(e) liens of carriers, warehouse men, mechanics and materialmen, and
other like liens on properties, in existence less than 120 days from the
date of creation thereof in respect of obligations not overdue;
(f) encumbrances on Real Estate consisting of easements, rights of way,
zoning restrictions, restrictions on the use of real property and defects
and irregularities in the title thereto, landlord's or lessor's liens
under leases to which the Borrower or a Subsidiary of the Borrower is a
party, and other minor liens or encumbrances none of which in the opinion
of the Borrower interferes materially with the use of the property
affected in the ordinary conduct of the business of the Borrower and its
Subsidiaries, which defects do not individually or in the aggregate have a
materially adverse effect on the business of the Borrower individually or
of the Borrower and its Subsidiaries on a consolidated basis;
(g) liens existing on the date hereof and listed on Schedule 12.2
hereto;
(h) purchase money security interests in or purchase money mortgages on
real or personal property acquired after the date hereof to secure
purchase money Indebtedness in an amount permitted by Section 12.1(i),
incurred in connection with the acquisition of such property, which
security interests or mortgages cover only the real or personal property
so acquired;
(i) liens in favor of the Collateral Agent, for the benefit of the
Banks, the Agents and the Collateral Agent, under the Loan Documents; and
(j) liens on inventory and proceeds thereof (up to the cost thereof to
the Borrower or such Subsidiary) held on consignment from trade vendors
securing obligations to return or pay the purchase price of such
inventory.
12.3. RESTRICTIONS ON INVESTMENTS. The Borrower will not, and will not
permit any of its Subsidiaries to, make or permit to exist or to remain
outstanding any Investment except Investments in:
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(a) marketable direct or guaranteed obligations of the United States of
America that mature within one (1) year from the date of purchase by the
Borrower or such Subsidiary;
(b) demand deposits, certificates of deposit, bankers acceptances and
time deposits of United States banks having total assets in excess of
$1,000,000,000;
(c) securities commonly known as "commercial paper" issued by a
corporation organized and existing under the laws of the United States of
America or any state thereof that at the time of purchase have been rated
and the ratings for which are not less than "P 1" if rated by Moody's
Investors Services, Inc., and not less than "A 1" if rated by Standard and
Poor's;
(d) Investments existing on the date hereof and listed on Schedule 12.3
hereto; and
(e) Investments consisting of loans, advances or guaranties to or for
the benefit of employees in the ordinary course of business not to exceed
$250,000.00 in the aggregate at any time outstanding;
provided, however, that, with the exception of demand deposits referred to in
Section 12.3(b) and loans and advances referred to in Section 12.3(e), such
Investments will be considered Investments permitted by this Section 12.3 only
if all actions have been taken to the satisfaction of the Agents and the
Collateral Agent to provide to the Collateral Agent, for the benefit of the
Banks, the Agents and the Collateral Agent, a first priority perfected security
interest in all of such Investments free of all encumbrances other than
Permitted Liens.
12.4. DISTRIBUTIONS. The Borrower will not make any Distributions except
for repurchases of the Borrower's Class B common stock in an aggregate amount
not to exceed $150,000 for all such repurchases.
12.5. MERGER, CONSOLIDATION AND DISPOSITION OF ASSETS.
12.5.1. MERGERS AND ACQUISITIONS. The Borrower will not, and will not
permit any of its Subsidiaries to, become a party to any merger or
consolidation, or agree to or effect any asset acquisition or stock
acquisition (other than the acquisition of assets in the ordinary course
of business consistent with past practices) except the merger or
consolidation of one or more of the Subsidiaries of the Borrower with and
into the Borrower, or the merger or consolidation of two or more
Subsidiaries of the Borrower.
12.5.2. DISPOSITION OF ASSETS. The Borrower will not, and will not
permit any of its Subsidiaries to, become a party to or agree to or effect
any
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disposition of assets, other than the disposition of (a) inventory in the
ordinary course of business, consistent with past practices, (b)
inventory, equipment, fixtures and leasehold interests of the Borrower in
connection with the sale by the Borrower in the ordinary course of
business of any retail store locations, (c) obsolete equipment in
connection with the replacement thereof provided that such assets shall
not have an aggregate value in excess of $750,000.00 for all such sales
occurring in any fiscal year, and (d) other assets pursuant to sale
transactions or sale and leaseback transactions provided that such assets
so sold or sold and leased back by the Borrower or such Subsidiary shall
not have an aggregate value in excess of $500,000.00 for all such sale and
sale and leaseback transactions occurring in any fiscal year.
12.6. SALE AND LEASEBACK. The Borrower will not, and will not permit any
of its Subsidiaries to, enter into any arrangement, directly or indirectly,
whereby the Borrower or any Subsidiary of the Borrower shall sell or transfer
any property owned by it in order then or thereafter to lease such property or
lease other property that the Borrower or any Subsidiary of the Borrower
intends to use for substantially the same purpose as the property being sold or
transferred except for sale and leaseback transactions permitted by Section
12.5(d) above.
12.7. COMPLIANCE WITH ENVIRONMENTAL LAWS. The Borrower will not, and will
not permit any of its Subsidiaries to, (a) use any of the Real Estate or any
portion thereof for the handling, processing, storage or disposal of hazardous
substances, (b) cause or permit to be located on any of the Real Estate any
underground tank or other underground storage receptacle for hazardous
substances, (c) generate any hazardous substances on any of the Real Estate,
(d) conduct any activity at any Real Estate or use any Real Estate in any
manner so as to cause a release (i.e. releasing, spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
disposing or dumping) or threatened release of hazardous substances on, upon or
into the Real Estate or (e) otherwise conduct any activity at any Real Estate
or use any Real Estate in any manner that would violate any Environmental Law
or bring such Real Estate in violation of any Environmental Law, where, in the
case of any such violation described in this clause (e), such violation could
reasonably be expected to have a materially adverse effect, either individually
or in the aggregate, upon the business, assets or financial condition of the
Borrower or any of its Subsidiaries.
12.8. INDENTURES. The Borrower will not amend, supplement or otherwise
modify the terms of the Indentures or any of the Senior Subordinated Notes or
prepay, redeem, cause the defeasance of or repurchase any of the Senior
Subordinated Notes; provided, however, the Borrower may amend or modify the
Senior Subordinated Notes or refinance, refund or replace the Senior
Subordinated Notes with new notes (any such amended, modified or new notes
resulting from any such amendment, modification, refinancing, refunding or
replacement being herein
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referred to as the "New Notes") so long as (a) such New Notes are on
substantially identical terms as the Senior Subordinated Notes (including
without limitation, terms relating to subordination and covenants), provided
that such New Notes may have a longer maturity, lower interest rates, less
restrictive covenants, slower sinking fund payments and lower prepayment
premiums and (b) the Agents shall have reviewed such New Notes prior to their
issuance. The Borrower will not pay any interest in cash on the Senior
Subordinated Notes in excess of fifteen percent (15%) per annum in the
aggregate with any interest in excess of fifteen percent (15%) per annum to be
payable only in Senior Subordinated Notes.
12.9. EMPLOYEE BENEFIT PLANS. Neither the Borrower nor any ERISA Affiliate
will
(a) engage in any non-exempt "prohibited transaction" within the
meaning of Section 406 of ERISA or Section 4975 of the Code which could
reasonably be expected to result in a material liability for the Borrower
or any of its Subsidiaries; or
(b) permit any Guaranteed Pension Plan to incur an "accumulated funding
deficiency", as such term is defined in Section 302 of ERISA, whether or
not such deficiency is or may be waived; or
(c) fail to contribute to any Guaranteed Pension Plan to an extent
which, or terminate any Guaranteed Pension Plan in a manner which, could
reasonably be expected to result in the imposition of a lien or
encumbrance on the assets of the Borrower or any of its Subsidiaries
pursuant to Section 302(f) or Section 4068 of ERISA; or
(d) permit or take any action which would result in the aggregate
benefit liabilities (with the meaning of Section 4001 of ERISA) of all
Guaranteed Pension Plans exceeding the value of the aggregate assets of
such Plans, disregarding for this purpose the benefit liabilities and
assets of any such Plan with assets in excess of benefit liabilities, by
more than the amount set forth in Section 10.16.3.
12.10. BANK ACCOUNTS. The Borrower will not, and will not permit any of
its Subsidiaries to, (a) establish any bank accounts other than those listed on
Schedule 10.20 (as such may be amended from time to time to include those
depository institutions acceptable to the Agents which have executed and
delivered Agent Agency Account Agreements in the form of Exhibit A hereto)
without the Agents' prior written consent, (b) violate directly or indirectly
any bank agency or lock box agreement in favor of the Collateral Agent for the
benefit of the Banks, the Agents and the Collateral Agent with respect to such
account.
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12.11. CONSIGNMENT TRANSACTIONS. Except pursuant to this Credit Agreement,
the Borrower will not, nor will the Borrower permit or suffer any of its
Subsidiaries to, enter into any consignment transactions, including
consignments of Precious Metal; provided, that the Borrower or its Subsidiaries
may enter into arrangements for consignments of inventory from vendors in the
ordinary course of business, consistent with past practices.
12.12. TRANSACTIONS WITH AFFILIATES. Except for transactions which are
described on Schedule 10.15 hereto, the Borrower will not, nor will the
Borrower permit or suffer any of its Subsidiaries to, conduct any transactions
among themselves or with any Affiliates of the Borrower, other than
transactions in the ordinary course of the Borrower's or such Subsidiary's
business, consistent with past practices, and upon terms not materially less
favorable to such Borrower or Subsidiary than it could obtain in a comparable
arm's-length transaction with a party other than the Borrower, such Subsidiary
or such Affiliate.
12.13. SUBSIDIARIES. The Borrower will not create any Subsidiaries.
13. FINANCIAL COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that, so long as any Loan, Unpaid
Reimbursement Obligation, Letter of Credit, amount of Consigned Precious Metal
or Note is outstanding or any Bank has any obligation to make any Loans or
Purchases and Consignments or the Dollar Agent has any obligation to issue,
extend or renew any Letters of Credit:
13.1. TOTAL FUNDED DEBT TO EBITDA. The Borrower will not permit the ratio
of Consolidated Total Funded Debt for any fiscal quarter ending on any date set
forth in the table below to Consolidated EBITDA for the period of four
consecutive fiscal quarters ending on such date in such table to exceed the
ratio set forth opposite such date in such table:
Fiscal Quarter
Ending Date RATIO
-------------- -----
1/31/97 4.4:1.0
4/30/97 4.4:1.0
7/31/97 4.3:1.0
10/31/97 4.2:1.0
1/31/98 4.0:1.0
4/30/98 3.8:1.0
7/31/98 3.6:1.0
10/31/98 3.5:1.0
1/31/99 3.2:1.0
4/30/99 3.2:1.0
7/31/99 3.1:1.0
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10/31/99
and thereafter 3.0:1.0
13.2. CAPITAL EXPENDITURES. The Borrower will not make, or permit any
Subsidiary of the Borrower to make, Capital Expenditures during any fiscal year
set forth in the table below that exceed, in the aggregate, the amount set
forth opposite such fiscal year in such table; provided, however, that, if
during any such fiscal year set forth below the amount of Capital Expenditures
permitted for that fiscal year is not so utilized, a portion of such unutilized
amount not to exceed $1,500,000 may be utilized in the next succeeding fiscal
year set forth below but not in any subsequent fiscal year; provided further,
that in no event shall the amount carried forward from any prior fiscal years
ever exceed $1,500,000 for any such fiscal year set forth below.
Fiscal Year Amount
2/1/96 - 1/31/97 $ 6,500,000
2/1/97 - 1/31/98 $ 8,500,000
2/1/98 - 1/31/99 $10,500,000
2/1/99 - 1/31/00 $11,500,000
2/1/00 - 1/31/01 $11,500,000
2/1/01 - Maturity Date $ 3,500,000
13.3. CONSOLIDATED TANGIBLE NET WORTH. The Borrower will not permit
Consolidated Tangible Net Worth at any time during any fiscal year ending on
any date set forth in the table below to be less than the amount set forth
opposite such date in such table.
Fiscal Year
Ending Date Amount
1/31/97 ($ 5,000,000)
1/31/98 $1
1/31/99 $10,000,000
1/31/00 $20,000,000
1/31/01 $30,000,000
13.4. FIXED CHARGE COVERAGE RATIO. The Borrower will not permit, for any
period of four consecutive fiscal 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 period 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 date in such table:
Date Ratio
1/31/97 1.5:1.0
4/30/97 1.5:1.0
7/31/97 1.5:1.0
10/31/97 1.5:1.0
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<TABLE>
<S> <C>
1/31/98 1.7:1.0
4/30/98 1.7:1.0
7/31/98 1.7:1.0
10/31/98 1.7:1.0
1/31/99 1.9:1.0
4/30/99 1.9:1.0
7/31/99 1.9:1.0
10/31/99 1.9:1.0
1/31/00
and thereafter 2.0:1.0
</TABLE>
13.5. CONSOLIDATED EBITDA. The Borrower will not permit Consolidated
EBITDA in the aggregate for any period of two consecutive fiscal quarters
ending on July 31 and October 31 of each fiscal year to be less than
$1,500,000.
14. CLOSING CONDITIONS.
The obligations of the Applicable Banks to make the initial Revolving
Credit Loans, the initial Gold Loans, the initial Purchases and Consignments
and the Term Loan and of the Dollar Agent to issue any initial Letters of
Credit shall be subject to the satisfaction of the following conditions
precedent on or prior to May 10, 1996:
14.1. LOAN DOCUMENTS, ETC. Each of the Loan Documents shall have been duly
executed and delivered by the respective parties thereto, shall be in full
force and effect and shall be in form and substance satisfactory to each of the
Banks. Each Bank shall have received a fully executed copy of each such
document.
14.2. CERTIFIED COPIES OF CHARTER DOCUMENTS. Each of the Banks shall have
received from the Borrower and each of its Subsidiaries a copy, certified by a
duly authorized officer of such Person to be true and complete on the Closing
Date, of each of (a) its charter or other incorporation documents as in effect
on such date of certification, and (b) its by-laws as in effect on such date.
14.3. CORPORATE, ACTION. All corporate action necessary for the valid
execution, delivery and performance by the Borrower and each of its
Subsidiaries of this Credit Agreement and the other Loan Documents to which it
is or is to become a party shall have been duly and effectively taken, and
evidence thereof satisfactory to the Banks shall have been provided to each of
the Banks.
14.4. INCUMBENCY CERTIFICATE. Each of the Banks shall have received from
the Borrower and each of its Subsidiaries an incumbency certificate, dated as
of the Closing Date, signed by a duly authorized officer of the Borrower or
such Subsidiary, and giving the name and bearing a specimen signature of each
individual who shall be authorized: (a) to sign, in the name and on behalf of
each of the Borrower of such Subsidiary, each of the Loan Documents to which
the Borrower or such Subsidiary is or is to become a party; (b) in the case of
the Borrower, to make Loan Requests,
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Purchase and Consignment Requests, Conversion Requests and Consignment
Conversion Requests and to apply for Letters of Credit; and (c) to give notices
and to take other action on its behalf under the Loan Documents.
14.5. VALIDITY OF LIENS. The Security Documents shall be effective to
create in favor of the Collateral Agent a legal, valid and enforceable first
(except for Permitted Liens entitled to priority under applicable law) security
interest in and lien upon the Collateral. All filings, recordings, deliveries
of instruments and other actions necessary or desirable in the opinion of the
Collateral Agent and the Agents to protect and preserve such security interests
shall have been duly effected including, without limitation, all notices
required to be filed under Section 9-114 or Section 9-312(3) of the Uniform
Commercial Code in effect in the Commonwealth of Massachusetts or any then
applicable jurisdiction. The Collateral Agent shall have received evidence
thereof in form and substance satisfactory to the Collateral Agent, the Agent
and the Banks.
14.6. PERFECTION CERTIFICATE AND UCC SEARCH RESULTS. The Collateral Agent
shall have received from the Borrower a completed and fully executed Perfection
Certificate and the results of current UCC searches with respect to the
Collateral, indicating no liens other than Permitted Liens and otherwise in
form and substance satisfactory to the Collateral Agent, the Agent and the
Banks. The Agents shall have received and shall be satisfied with the form and
substance of all consignment financing statements filed or to be filed on
behalf of trade vendors as consignors.
14.7. CERTIFICATES OF INSURANCE. The Agents shall have received (a) a
certificate of insurance from an independent insurance broker dated as of the
Closing Date, identifying insurers, types of insurance, insurance limits, and
policy terms, and otherwise describing the insurance obtained in accordance
with the provisions of the Security Agreement and (b) certified copies of all
policies evidencing such insurance (or certificates therefore signed by the
insurer or an agent authorized to bind the insurer).
14.8. FNBB CONCENTRATION ACCOUNTS; AGENCY ACCOUNT AGREEMENTS. The Borrower
shall have established the FNBB Concentration Accounts, and the Agents shall
have received an Agency Account Agreement, in form and substance satisfactory
to the Agents, from (a) each Concentration Bank (other than FNBB) and (b) each
other bank at which the Borrower maintains depository accounts into which
proceeds of Accounts Receivable of the Borrower are deposited, in each case
concerning the Collateral Agent's interest for the benefit of the Banks, the
Agents and the Collateral Agent, in the depository accounts maintained by the
Borrower with such Concentration Banks or, as the case may be, such other
banks.
14.9. BORROWING BASE REPORT: CONSIGNED PRECIOUS METAL REPORT: MONTHLY
INVENTORY REPORT. The Agents shall have received from the Borrower the
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initial Borrowing Base Report, the initial Consigned Precious Metal Report, and
the initial Monthly Inventory Report, each dated as of the Closing Date.
14.10. ACCOUNTS PAYABLE AGING REPORT. The Agents shall have received from
the Borrower the most recent accounts payable aging report of the Borrower
dated as of a date which shall be no more than fifteen (15) days prior to the
Closing Date and the Borrower shall have notified the Agents in writing on the
Closing Date of any material deviation from the accounts payable values
reflected in such accounts payable aging report and shall have provided the
Agents with such supplementary documentation as the Agents may reasonably
request.
14.11. OPINION OF COUNSEL. Each of the Banks and the Agents shall have
received a favorable legal opinion addressed to the Banks and the Agents, dated
as of the Closing Date, in form and substance satisfactory to the Banks and the
Agents, from Sidley & Austin, counsel to the Borrower and its Subsidiaries.
14.12. PAYMENT OF FEES. The Borrower shall have paid to the Banks or the
Agents, as appropriate, the closing fee, and the Agents' fee pursuant to
Sections 8.10 and 8.11.
14.13. PAYOFF LETTERS. The Agents shall have received a payoff letter from
Citibank, N.A., as agent for the lenders under the Borrower's existing working
capital credit facility, indicating the amount of the loan obligations of the
Borrower to such lenders to be discharged on the Closing Date and an
acknowledgment by Citibank, N.A. that upon receipt of such funds it will
forthwith execute and deliver to the Agents for filing all termination
statements and take such other actions as may be necessary to discharge all
mortgages, deeds of trust and security interests granted by the Borrower in
favor of Citibank, N.A., as agent for such lenders. The Agents shall also have
received payoff letters from each of the following Persons, in each case
indicating the amount of the obligations of the Borrower to such Persons to be
discharged on the Closing Date: (a) Teachers' Retirement System of the State of
Illinois ("Teachers") pursuant to that certain Note and Warrant Purchase
Agreement between the Borrower and Teachers, dated as of November 6, 1989 and
that certain Amended and Restated Note dated November 6, 1989 payable to EMP &
Co.; and (b) Frontenac Diversified III Limited Partnership ("Diversified")
pursuant to that certain Term Loan Agreement between the Borrower and
Diversified dated March 5, 1993, that certain Promissory Note of the Borrower
dated June 3, 1993 and that certain Promissory Note of the Borrower dated July
21, 1993, each payable to Diversified.
14.14. TERMS OF CONSIGNMENT. Each of the Agents and each of the Banks
shall be satisfied with the terms of all consignment, leasing, "lay away" and
purchase and sale arrangements of the Borrower and each of its Subsidiaries.
14.15. CONSUMMATION OF PUBLIC OFFERING AND SENIOR SUBORDINATED NOTE
ISSUANCE. The Borrower shall have consummated the initial public offering of its
<PAGE> 93
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common stock, and such initial public offering shall have yielded net cash
proceeds to the Borrower in an aggregate amount not less than $34,000,000. The
Borrower shall have issued the Senior Subordinated Notes, and such issuance
shall have yielded net cash proceeds to the Borrower in an aggregate amount,
when combined with the net cash proceeds received by the Borrower in connection
with the initial public offering described above, not less than $57,000,000.
The Senior Subordinated Notes shall have been issued on terms and conditions
satisfactory in all respects to the Agents and the Banks.
14.16. FINANCIAL STATEMENTS. The Agents and the Banks shall have received
the financial statements required to be delivered to them by Section 10.4.
14.17. RESTRUCTURING OF ESOP. The Borrower shall have provided evidence
satisfactory to the Agents of the restructuring of its existing employee stock
option plan on terms satisfactory in form and substance to the Agents and the
Banks.
15. CONDITIONS TO ALL BORROWINGS.
The obligations of the Applicable Banks to make any Loans, including the
initial Revolving Credit Loans, Gold Loans and the Term Loan, or any Purchases
and Consignments, including the initial Purchases and Consignments, and of the
Dollar Agent to issue, extend or renew any Letter of Credit, in each case
whether on or after the Closing Date, shall also be subject to the satisfaction
of the following conditions precedent:
15.1. REPRESENTATIONS TRUE: NO EVENT OF DEFAULT. Each of the
representations and warranties of any of the Borrower and its Subsidiaries
contained in this Credit Agreement, the other Loan Documents or in any document
or instrument delivered pursuant to or in connection with this Credit Agreement
shall be true as of the date as of which they were made and shall also be true
at and as of the time of the making of such Loan or Purchase and Consignment or
the issuance, extension or renewal of such Letter of Credit, with the same
effect as if made at and as of that time (except to the extent of changes
resulting from transactions contemplated or permitted by this Credit Agreement
and the other Loan Documents and changes occurring in the ordinary course of
business that singly or in the aggregate are not materially adverse, and to the
extent that such representations and warranties relate expressly to an earlier
date) and no Default or Event of Default shall have occurred and be continuing.
15.2. NO LEGAL IMPEDIMENT. No change shall have occurred in any law or
regulations thereunder or interpretations thereof that in the reasonable
opinion of any Bank would make it illegal for such Bank to make such Loan or
Purchase and Consignment or to participate in the issuance, extension or
renewal of such Letter of Credit or in the reasonable opinion of the Dollar
Agent would make it illegal for the Dollar Agent to issue, extend or renew such
Letter of Credit.
<PAGE> 94
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15.3. GOVERNMENT REGULATIONS. Each Bank shall have received such statements
in substance and form reasonably satisfactory to such Bank as such Bank shall
require for the purpose of compliance with any appealable regulations of the
Comptroller of the Currency or the Board of Governors of the Federal Reserve
System.
15.4. PROCEEDINGS AND DOCUMENTS. All proceedings in connection with the
transactions contemplated by this Credit Agreement, the other Loan Documents and
all other documents incident thereto shall be satisfactory in substance and in
form to the Banks and to the Agents and the Agents' Special Counsel, and the
Banks, the Agents and such counsel shall have received all information and such
counterpart originals or certified or other copies of such documents as the
Agents or such Banks may reasonably request.
15.5. BORROWING BASE REPORT; CONSIGNED PRECIOUS METAL REPORT. The Agents
and the Banks shall have received the most recent Borrowing Base Report
required to be delivered to the Agents and the Banks in accordance with Section
11.4(f) and the most recent Consigned Precious Metal Report required to be
delivered to the Agents and the Banks in accordance with Section 11.4(f), and
if requested by the Applicable Agent, a Borrowing Base Report or, as the case
may be, a Consigned Precious Metal Report, dated within five (5) days of the
Drawdown Date or, as the case may be, the Gold Drawdown Date of such Loan or
such Purchase and Consignment or of the date of issuance, extension or renewal
of such Letter of Credit.
16. EVENTS OF DEFAULT; ACCELERATION; ETC.
16.1. EVENTS OF DEFAULT AND ACCELERATION. If any of the following events
("Events of Default" or, if the giving of notice or the lapse of time or both
is required, then, prior to such notice or lapse of time, "Defaults") shall
occur:
(a) the Borrower shall fail to pay any principal of the Loans or any
Reimbursement Obligation or fail to purchase and pay for or Redeliver
Consigned Precious Metal when the same shall become due and payable or
required, whether at the stated date of maturity or any accelerated
date of maturity or at any other date fixed for payment or Redelivery;
(b) the Borrower or any of its Subsidiaries (i) shall fail to pay any
interest on the Loans or Consignment Fees on Consigned Precious Metal
(A) within one (1) day following the date when the same shall become
due and payable, other than at the stated date of maturity or any
accelerated date of maturity or (B) when the same shall become due and
payable at the stated date of maturity or any accelerated date of
maturity, or (ii) shall fail to pay the commitment fees, any Letter of
Credit Fee, the Agents' fee, or other sums due hereunder or under any
of the other Loan Documents, when the same shall
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become due and payable, whether at the stated date of maturity or any
accelerated date of maturity or at any other date fixed for payment;
(c) the Borrower shall fail to comply with any of its covenants
contained in Section 11 (other than Sections 11.6(b), 11.13 and
11.17), 12 or 13;
(d) the Borrower or any of its Subsidiaries shall fail to perform
any term, covenant or agreement contained herein or in any of the other
Loan Documents (other than those specified elsewhere in this Section
16.1) for fifteen (15) days after written notice of such failure has
been given to the Borrower by the Agents;
(e) any representation or warranty of the Borrower or any of its
Subsidiaries in this Credit Agreement or any of the other Loan
Documents or in any other document or instrument delivered pursuant to
or in connection with this Credit Agreement shall prove to have been
false in any material respect upon the date when made or deemed to have
been made or repeated;
(f) the Borrower or any of its Subsidiaries shall (i) fail to pay
at maturity, or within any applicable period of grace, (A) any
obligation in respect of the Senior Subordinated Notes or (B) any other
obligation for borrowed money or credit received or in respect of any
Capitalized Leases, in each case under this clause (B) in excess of
$1,000,000.00, or (ii) fail to observe or perform any material term,
covenant or agreement contained (A) in the Indentures or the Senior
Subordinated Notes or (B) in any agreement by which it is bound,
evidencing or securing borrowed money or credit received or in respect
of any Capitalized Leases, in each case under this clause (B) in excess
of $1,000,000.00, for such period of time as would permit (assuming the
giving of appropriate notice if required) the holder or holders thereof
or of any obligations issued thereunder to accelerate the maturity
thereof;
(g) the Borrower or any of its Subsidiaries shall make an
assignment for the benefit of creditors, or admit in writing its
inability to pay or generally fail to pay its debts as they mature or
become due, or shall petition or apply for the appointment of a trustee
or other custodian, liquidator or receiver of the Borrower or any of
its Subsidiaries or of any substantial part of the assets of the
Borrower or any of its Subsidiaries or shall commence any case or other
proceeding relating to the Borrower or any of its Subsidiaries under
any bankruptcy, reorganization, arrangement, insolvency, readjustment
of debt, dissolution or liquidation or similar law of any jurisdiction,
now or hereafter in effect, or shall take any action to authorize or in
furtherance of any of the foregoing, or if any such petition or
application shall be filed or any such case or other proceeding shall
be commenced against the Borrower or any of its Subsidiaries and the
Borrower or any of its Subsidiaries shall indicate its approval
thereof, consent thereto or acquiescence therein or such petition or
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application shall not have been dismissed within forty-five (45) days
following the filing thereof;
(h) a decree or order is entered appointing any such trustee,
custodian, liquidator or receiver or adjudicating the Borrower or any
of its Subsidiaries bankrupt or insolvent, or approving a petition in
any such case or other proceeding, or a decree or order for relief is
entered in respect of the Borrower or any Subsidiary of the Borrower in
an involuntary case under federal bankruptcy laws as now or hereafter
constituted;
(i) there shall remain in force, undischarged, unsatisfied and
unstayed, for more than thirty days, whether or not consecutive, any
final judgment against the Borrower or any of its Subsidiaries that,
with other outstanding final judgments, undischarged, against the
Borrower or any of its Subsidiaries exceeds in the aggregate
$750,000.00;
(j) if any of the Loan Documents shall be cancelled, terminated,
revoked or rescinded or the Collateral Agent's security interests,
mortgages or liens in a substantial portion of the Collateral shall
cease to be perfected, or shall cease to have the priority contemplated
by the Security Documents, in each case otherwise than in accordance
with the terms thereof or with the express prior written agreement,
consent or approval of the Banks, or any action at law, suit or in
equity or other legal proceeding to cancel, revoke or rescind any of
the Loan Documents shall be commenced by or on behalf of the Borrower
or any of its Subsidiaries party thereto or any of their respective
stockholders, or any court or any other governmental or regulatory
authority or agency of competent jurisdiction shall make a
determination that, or issue a judgment, order, decree or ruling to the
effect that, any one or more of the Loan Documents is illegal, invalid
or unenforceable in accordance with the terms thereof;
(k) with respect to any Guaranteed Pension Plan, an ERISA
Reportable Event shall have occurred and the Majority Banks shall have
determined in their reasonable discretion that such event reasonably
could be expected to result in liability of the Borrower or any of its
Subsidiaries to the PBGC or such Guaranteed Pension Plan in an
aggregate amount exceeding $750,000.00 and such event in the
circumstances occurring reasonably could constitute grounds for the
termination of such Guaranteed Pension Plan by the PBGC or for the
appointment by the appropriate United States District Court of a
trustee to administer such Guaranteed Pension Plan; or a trustee shall
have been appointed by the United States District Court to administer
such Plan; or the PBGC shall have instituted proceedings to terminate
such Guaranteed Pension Plan;
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(l) the Borrower or any of its Subsidiaries shall be enjoined,
restrained or in any way prevented by the order of any court or any
administrative or regulatory agency from conducting any material part
of its business and such order shall continue in effect for more than
thirty (30) days;
(m) there shall occur any material damage to, or loss, theft or
destruction of, any Collateral, whether or not insured, or any strike,
lockout, labor dispute, embargo, condemnation, act of God or public
enemy, or other casualty, which in any such case causes, for more than
ten (10) consecutive days, the cessation or substantial curtailment of
revenue producing activities at retail locations of the Borrower or any
of its Subsidiaries constituting twenty-five percent (25%) or more of
the Borrower's and its Subsidiaries retail locations if such event or
circumstance is not covered by business interruption insurance;
(n) there shall occur the loss, suspension or revocation of, or
failure to renew, any license or permit now held or hereafter acquired
by the Borrower or any of its Subsidiaries if such loss, suspension,
revocation or failure to renew would have a material adverse effect on
the business or financial condition of the Borrower or such Subsidiary;
(o) the Borrower or any of its Subsidiaries shall be indicted for
a state or federal crime, or any civil or criminal action shall
otherwise have been brought against the Borrower or any of its
Subsidiaries, a punishment for which in any such case could include the
forfeiture of any assets of the Borrower or such Subsidiary included in
the Borrowing Base or the Dollar Borrowing Base or any assets of the
Borrower or such Subsidiary not included in the Borrowing Base or the
Dollar Borrowing Base but having a fair market value in excess of
$500,000.00; or
(p) any person or group of persons (within the meaning of Section
13 or 14 of the Securities Exchange Act of 1934, as amended) shall
have acquired beneficial ownership (within the meaning of Rule 13d-3
promulgated by the Securities and Exchange Commission under said Act)
of 30% or more of the outstanding shares of common stock of the
Borrower; or, during any period of twelve consecutive calendar months,
indviduals who were directors of the Borrower on the first day of such
period shall cease to constitute a majority of the board of directors
of the Borrower;
then, and in any such event (i) the Borrower shall purchase all Consigned
Precious Metal in accordance with the provisions of Section 5.4 hereof and
(ii) so long as the same may be continuing, the Agents may, and upon the
request of the Majority Banks shall, by notice in writing to the Borrower
declare all amounts owing with respect to this Credit Agreement, the Notes and
the other Loan Documents and all Reimbursement Obligations to be, and they
shall thereupon forthwith become,
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immediately due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby expressly waived by the Borrower;
provided that in the event of any Event of Default specified in Sections
16.1(g) or 16.1(h), all such amounts shall become immediately due and payable
automatically and without any requirement of notice from the Agents or any
Bank.
16.2. TERMINATION OF COMMITMENTS. If any one or more of the Events of
Default specified in Section 16.1(g) or Section 16.1(h) shall occur, any unused
portion of the credit hereunder shall forthwith terminate and each of the Banks
shall be relieved of all further obligations to make Loans and Purchases and
Consignments to the Borrower and the Dollar Agent shall be relieved of all
further obligations to issue, extend or renew Letters of Credit. If any other
Event of Default shall have occurred and be continuing, or if on any Drawdown
Date, Gold Drawdown Date or other date for issuing, extending or renewing any
Letter of Credit the conditions precedent to the making of the Loans to be made
on such Drawdown Date, to the making of the Purchases and Consignments to be
made on such Gold Drawdown Date, or (as the case may be) to issuing, extending
or renewing such Letter of Credit on such other date are not satisfied, the
Agents may and, upon the request of the Majority Banks, shall, by notice to the
Borrower, terminate the unused portion of the credit hereunder, and upon such
notice being given such unused portion of the credit hereunder shall terminate
immediately and each of the Banks shall be relieved of all further obligations
to make Loans and Purchases and Consignments and the Dollar Agent shall be
relieved of all further obligations to issue, extend or renew Letters of Credit.
No termination of the credit hereunder shall relieve the Borrower or any of its
Subsidiaries of any of the Obligations.
16.3. REMEDIES. In case any one or more of the Events of Default shall
have occurred and be continuing, and whether or not the Banks shall have
accelerated the maturity of the Loans pursuant to Section 16.1, each Bank, if
owed any amount with respect to the Loans, Purchases and Consignments or the
Reimbursement Obligations, may, with the consent of the Majority Banks but not
otherwise, proceed to protect and enforce its rights by suit in equity, action
at law or other appropriate proceeding, whether for the specific performance of
any covenant or agreement contained in this Credit Agreement and the other Loan
Documents or any instrument pursuant to which the Obligations to such Bank are
evidenced, including as permitted by applicable law the obtaining of the ex-
parte appointment of a receiver, and, if such amount shall have become due, by
declaration or otherwise, proceed to enforce the payment thereof or any other
legal or equitable right of such Bank. No remedy herein conferred upon any Bank
or the Agents or the holder of any Note or of any rights in the Consigned
Precious Metal or the purchaser of any Letter of Credit Participation is
intended to be exclusive of any other remedy and each and every remedy shall be
cumulative and shall be in addition to every other remedy given hereunder or
now or hereafter existing at law or in equity or by statute or any other
provision of law.
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17. SET OFF.
Regardless of the adequacy of any collateral, during the continuance of
any Event of Default, any deposits or other sums credited by or due from any of
the Banks to the Borrower and any securities or other property of the Borrower
in the possession of such Bank may be applied to or set off by such Bank
against the payment of Obligations and any and all other liabilities, direct,
or indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, of the Borrower to such Bank. Each of the Banks agrees with
each other Bank that (a) if an amount to be setoff is to be applied to
Indebtedness of the Borrower to such Bank, other than Indebtedness evidenced by
the Notes held by such Bank or constituting Reimbursement Obligations owed to,
or, as the case may be, constituting obligations in respect of Consigned
Precious Metal owed to, such Bank, such amount shall be applied ratably to such
other Indebtedness and to the Indebtedness evidenced by all such Notes held by
such Bank or constituting Reimbursement Obligations owed to, or, as the case
may be, constituting obligations in respect of Consigned Precious Metal owed
to, such Bank, and (b) if such Bank shall receive from the Borrower, whether by
voluntary payment, exercise of the right of setoff, counterclaim, cross
action, enforcement of the claim evidenced by the Notes held by, or
constituting Reimbursement Obligations owed to, or, as the case may be,
constituting obligations in respect of Consigned Precious Metal owed to, such
Bank by proceedings against the Borrower at law or in equity or by proof
thereof in bankruptcy, reorganization, liquidation, receivership or similar
proceedings, or otherwise, and shall retain and apply to the payment of the
Note or Notes held by, or Reimbursement Obligations owed to, or, as the case
may be, constituting obligations in respect of Consigned Precious Metal owed
to, such Bank any amount in excess of its ratable portion of the payments
received by all of the Applicable Banks with respect to the Notes held by, and
Reimbursement Obligations owed to, or, as the case may be, constituting
obligations in respect of Consigned Precious Metal owed to, all of the
Applicable Banks, such Bank will make such disposition and arrangements with
the other Banks with respect to such excess, either by way of distribution, pro
tanto assignment of claims, subrogation or otherwise as shall result in each
Bank receiving in respect of the Notes held by it or Reimbursement obligations
owed it, or, as the case may be, obligations in respect of Consigned Precious
Metal owed to it, its proportionate payment as contemplated by this Credit
Agreement; provided that if all or any part of such excess payment is
thereafter recovered from such Bank, such disposition and arrangements shall be
rescinded and the amount restored to the extent of such recovery, but without
interest.
18. THE AGENT.
18.1. AUTHORIZATION.
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(a) Each of the Agents is authorized to take such action on behalf of
each of the Applicable Banks and to exercise all such powers as are
hereunder and under any of the other Loan Documents and any related
documents delegated to such Agent, together with such powers as are
reasonably incident thereto, provided that no duties or responsibilities
not expressly assumed herein or therein shall be implied to have been
assumed by the Agents.
(b) The relationship between the Agents and each of the Banks is that
of an independent contractor. The use of the terms "Agent" and "Collateral
Agent" is for convenience only and is used to describe, as a form of
convention, the independent contractual relationship between the Agents and
each of the Banks. Nothing contained in this Credit Agreement nor the other
Loan Documents shall be construed to create an agency, trust or other
fiduciary relationship between the Agents and any of the Banks.
(c) As independent contractors empowered by the Banks to exercise
certain rights and perform certain duties and responsibilities hereunder
and under the other Loan Documents, each of the Agents and the Collateral
Agent is nevertheless a "representative" of the Banks, as that term is
defined in Article 1 of the Uniform Commercial Code, for purposes of
actions for the benefit of the Banks and the Agents with respect to all
collateral security and guaranties contemplated by the Loan Documents. Such
actions include the designation of the Collateral Agent as "secured party",
"mortgagee" or the like on all financing statements and other documents and
instruments, whether recorded or otherwise, relating to the attachment,
perfection, priority or enforcement of any security interests, mortgages or
deeds of trust in collateral security intended to secure the payment or
performance of any of the Obligations, all for the benefit of the Banks,
the Agents and the Collateral Agent.
18.2. EMPLOYEES AND AGENTS. The Agents may exercise their powers and
execute its duties by or through employees or agents and shall be entitled to
take, and to rely on, advice of counsel concerning all matters pertaining to its
rights and duties under this Credit Agreement and the other Loan Documents. The
Agents may utilize the services of such Persons as the Agents in their sole
discretion may reasonably determine, and all reasonable fees and expenses of any
such Persons shall be paid by the Borrower.
18.3. NO LIABILITY. Neither the Agents nor any of their shareholders,
directors, officers or employees nor any other Person assisting them in their
duties nor any agent or employee thereof, shall be liable for any waiver,
consent or approval given or any action taken, or omitted to be taken, in good
faith by them hereunder or under any of the other Loan Documents, or in
connection herewith or therewith, or be responsible for the consequences of any
oversight or error of judgment whatsoever,
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except that the Agents or such other Person, as the case may be, may be liable
for losses due to its willful misconduct or gross negligence.
18.4. NO. REPRESENTATIONS. The Agents shall not be responsible for the
execution or validity or enforceability of this Credit Agreement, the Notes,
the Letters of Credit, any of the other Loan Documents or any instrument at any
time constituting, or intended to constitute, collateral security for the Notes
or the obligations in respect of Consigned Precious Metal, or for the
value of any such collateral security or for the validity, enforceability or
collectability of any such amounts owing with respect to the Notes or the
obligations in respect of Consigned Precious Metal, or for any recitals or
statements, warranties or representations made herein or in any of the other
Loan Documents or in any certificate or instrument hereafter furnished to it by
or on behalf of the Borrower or any of its Subsidiaries, or be bound to
ascertain or inquire as to the performance or observance of any of the terms,
conditions, covenants or agreements herein or in any instrument at any time
constituting, or intended to constitute, collateral security for the Notes or
the obligations in respect of Consigned Precious Metal or to inspect any of the
properties, books or records of the Borrower or any of its Subsidiaries. The
Agents shall not be bound to ascertain whether any notice, consent, waiver or
request delivered to it by the Borrower or any holder of any of the Notes or of
any right in respect of Consigned Precious Metal shall have been duly
authorized or is true, accurate and complete. The Agents have not made nor do
they now make any representations or warranties, express or implied, nor do
they assume any liability to the Banks, with respect to the credit worthiness
or financial conditions of the Borrower or any of its Subsidiaries. Each Bank
acknowledges that it has, independently and without reliance upon either of the
Agents or any other Bank, and based upon such information and documents as it
has deemed appropriate, made its own credit analysis and decision to enter into
this Credit Agreement.
18.5. PAYMENTS.
18.5.1. PAYMENTS TO AGENT. A payment by the Borrower to the Applicable
Agent hereunder or any of the other Loan Documents for the account of any
Applicable Bank shall constitute a payment to such Applicable Bank. Each of
the Agents agrees promptly to distribute to each Applicable Bank such
Applicable Bank's pro rata share of payments received by such Agent for the
account of the such Applicable Banks except as otherwise expressly provided
herein or in any of the other Loan Documents.
18.5.2. DISTRIBUTION BY AGENT. If in the opinion of either of the
Agents the distribution of any amount received by it in such capacity
hereunder, under the Notes or under any of the other Loan Documents might
involve it in liability, it may refrain from making distribution until its
right to make distribution shall have been adjudicated by a court of
competent
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jurisdiction. If a court of competent jurisdiction shall adjudge that any
amount received and distributed by either of the Agents is to be repaid,
each Person to whom any such distribution shall have been made shall either
repay to such Agent its proportionate share of the amount so adjudged to be
repaid or shall pay over the same in such manner and to such Persons as
shall be determined by such court.
18.5.3. DELINQUENT BANKS. Notwithstanding anything to the contrary
contained in this Credit Agreement or any of the other Loan Documents, any
Bank that fails (i) to make available to the Applicable Agent its Agent
its pro rata share of any Loan or Purchase and Consignment or to purchase
any Letter of Credit Participation or (ii) to comply with the provisions
of Section 17 with respect to making dispositions and arrangements with
the other Applicable Banks, where such Bank's share of any payment
received, whether by setoff or otherwise, is in excess of its pro rata
share of such payments due and payable to all of the Applicable Banks, in
each case as, when and to the full extent required by the provisions of
this Credit Agreement, shall be deemed delinquent (a "Delinquent Bank")
and shall be deemed a Delinquent Bank until such time as such delinquency
is satisfied. A Delinquent Bank shall be deemed to have assigned any and
all payments due to it from the Borrower, whether on account of
outstanding Loans, Consigned Precious Metal, Unpaid Reimbursement
Obligations, interest, Consignment Fees, other fees or otherwise, to the
remaining nondelinquent Applicable Banks for application to, and reduction
of, their respective pro rata shares of all outstanding Dollar Facility
Loans and Unpaid Reimbursement Obligations or, as the case may be,
Consigned Precious Metal and Gold Loans. The Delinquent Bank hereby
authorizes the Applicable Agent to distribute such payments to the
nondelinquent Applicable Banks in proportion to their respective pro rata
shares of all outstanding Dollar Facility Loans and Unpaid Reimbursement
Obligations or, as the case may be, Consigned Precious Metal and Gold
Loans. A Delinquent Bank shall be deemed to have satisfied in full a
delinquency when and if, as a result of application of the assigned
payments to all outstanding Dollar Facility Loans and Unpaid Reimbursement
Obligations or, as the case may be, Consigned Precious Metal and Gold
Loans, of the nondelinquent Applicable Banks, the Applicable Banks'
respective pro rata shares of all outstanding Dollar Facility Loans and
Unpaid Reimbursement Obligations or, as the case may be, Consigned
Precious Metal and Gold Loans, have returned to those in effect
immediately prior to such delinquency and without giving effect to the
nonpayment causing such delinquency.
18.6. HOLDERS OF NOTES. The Agents may deem and treat the payee of any
Note or the purchaser of any Letter of Credit Participation as the absolute
owner or purchaser thereof for all purposes hereof until it shall have been
furnished in writing
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with a different name by such payee or by a subsequent holder, assignee or
transferee.
18.7. INDEMNITY. The Banks ratably agree hereby to indemnify and hold
harmless each of the Applicable Agents (including, without limitation, the
Dollar Agent acting in its capacity as the Collateral Agent) from and against
any and all claims, actions and suits (whether groundless or otherwise),
losses, damages, costs, expenses (including any expenses for which such Agent
has not been reimbursed by the Borrower as required by Section 19), and
liabilities of every nature and character arising out of or related to this
Credit Agreement, the Notes, or any of the other Loan Documents or the
transactions contemplated or evidenced hereby or thereby, or such Agent's
actions taken hereunder or thereunder, except to the extent that any of the
same shall be directly caused by such Agent's willful misconduct or gross
negligence.
18.8. AGENTS AS BANKS. In their individual capacities, each of FNBB and
RIHT shall have the same obligations and the same rights, powers and privileges
in respect to its Commitment or, as the case may be, Gold Commitment and the
Loans made by it, and as the holder of any of the Notes or of any obligations
in respect of Consigned Precious Metal and as the purchaser of any Letter of
Credit Participations, as it would have were it not also an Agent.
18.9. RESIGNATION. Either or both of the Agents may resign at any time by
giving sixty (60) days' prior written notice thereof to the Banks and the
Borrower. Upon any such resignation, the Majority Banks shall have the right to
appoint a successor Dollar Agent or, as the case may be, Gold Agent. Unless a
Default or an Event of Default shall have occurred and be continuing, such
successor Agent shall be reasonably acceptable to the Borrower. If no successor
Agent shall have been so appointed by the Majority Banks and shall have
accepted such appointment within thirty (30) days after the retiring Agent's
giving of notice of resignation, then the retiring Agent may, on behalf of the
Applicable Banks, appoint a successor Applicable Agent, which shall be a
financial institution having a rating of not less than A or its equivalent by
Standard & Poor's Corporation. Upon the acceptance of any appointment as an
Agent hereunder by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring Agent, and the retiring Agent shall be discharged from its
duties and obligations hereunder. After any retiring Agent's resignation, the
provisions of this Credit Agreement and the other Loan Documents shall continue
in effect for its benefit in respect of any actions taken or omitted to be
taken by it while it was acting as agent.
18.10. NOTIFICATION OF DEFAULTS AND EVENTS OF DEFAULT. Each Bank hereby
agrees that, upon learning of the existence of a Default or an Event of
Default, it shall promptly notify the Agents thereof. The Agents hereby agree
that upon receipt of
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any notice under this Section 18.10 they shall promptly notify the other Banks
of the existence of such Default or Event of Default.
18.11. DUTIES IN THE CASE OF ENFORCEMENT. In case one of more Events of
Default have occurred and shall be continuing, and whether or not acceleration
of the Obligations shall have occurred, the Collateral Agent shall, if (a) so
requested by the Majority Banks and (b) the Banks have provided to the
Collateral Agent such additional indemnities and assurances against expenses
and liabilities as the Collateral Agent may reasonably request, proceed to
enforce the provisions of the Security Documents authorizing the sale or other
disposition of all or any part of the Collateral and exercise all or any such
other legal and equitable and other rights or remedies as it may have in
respect of such Collateral. The Majority Banks may direct the Collateral Agent
in writing as to the method and the extent of any such sale or other
disposition, the Banks hereby agreeing to indemnify and hold the Collateral
Agent, harmless from all liabilities incurred in respect of all actions taken
or omitted in accordance with such directions, provided that the Collateral
Agent need not comply with any such direction to the extent that the Collateral
Agent reasonably believes the Collateral Agent's compliance with such direction
to be unlawful or commercially unreasonable in any applicable jurisdiction.
19. EXPENSES.
The Borrower agrees to pay (a) the reasonable costs of producing and
reproducing this Credit Agreement, the other Loan Documents and the other
agreements and instruments mentioned herein, (b) any taxes (including taxes
incurred in connection with the purchase, consignment and repurchase of
Consigned Precious Metal and including any interest and penalties in respect
thereto) payable by either of the Agents, the Collateral Agent or any of the
Banks (other than taxes based upon either of the Agent's, the Collateral
Agent's or any Bank's net income) on or with respect to the transactions
contemplated by this Credit Agreement (the Borrower hereby agreeing to
indemnify each of the Agents, the Collateral Agent and each Bank with respect
thereto), (c) the reasonable fees, expenses and disbursements of the Agents'
Special Counsel or any local counsel to the Agents incurred in connection with
the preparation, administration or interpretation of the Loan Documents and
other instruments mentioned herein, each closing hereunder, and amendments,
modifications, approvals, consents or waivers hereto or hereunder, (d) the
fees, expenses and disbursements of each of the Agents and the Collateral Agent
incurred by such Agent or the Collateral Agent in connection with the
preparation, administration or interpretation of the Loan Documents and other
instruments mentioned herein, including all title insurance premiums and
surveyor, engineering and appraisal charges, (e) any fees, costs, expenses and
bank charges, including bank charges for returned checks, incurred by the
Agents in establishing, maintaining or handling agency accounts, lock box
accounts and other accounts for the collection of any of the Collateral; (f)
all reasonable out-of pocket expenses incurred by the
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Agents, the Collateral Agent or, after the occurrence and during the
continuance of a Default or an Event of Default, any Bank, in connection with
periodic field examinations, monitoring of Collateral and other assets, sale of
Precious Metal Redelivered by the Borrower and otherwise in maintaining and
monitoring the transactions contemplated hereby, and in each case in accordance
with the terms of this Credit Agreement; (g) all reasonable out-of-pocket
expenses (including without limitation reasonable attorneys' fees and costs,
which attorneys may be employees of any Bank, the Collateral Agent or either of
the Agents, and reasonable consulting, accounting, appraisal, investment
banking and similar professional fees and charges) incurred by any Bank, the
Collateral Agent or either Agent in connection with (i) the enforcement of or
preservation of rights under any of the Loan Documents against the Borrower or
any of its Subsidiaries or the administration thereof after the occurrence of a
Default or Event of Default and (ii) any litigation, proceeding or dispute
whether arising hereunder or otherwise, in any way related to any Bank's, the
Collateral Agent's or either Agent's relationship with the Borrower or any of
its Subsidiaries and (h) all reasonable fees, expenses and disbursements of the
Collateral Agent or the Agents incurred in connection with UCC searches, UCC
filings or mortgage recordings. The covenants of this Section 19 shall survive
payment or satisfaction of all other Obligations.
20. INDEMNIFICATION.
The Borrower agrees to indemnify and hold harmless each of the Agents, the
Collateral Agent and the Banks from and against any and all claims, actions and
suits whether groundless or otherwise, and from and against any and all
liabilities, losses, damages and expenses of every nature and character arising
out of this Credit Agreement or any of the other Loan Documents or the
transactions contemplated hereby including, without limitation, (a) any actual
or proposed use by the Borrower or any of its Subsidiaries of the proceeds of
any of the Loans, Purchases and Consignments or Letters of Credit, (b) the
reversal or withdrawal of any provisional credits granted by the either Agent
upon the transfer of funds to the FNBB Concentration Account from bank agency
or lock box accounts or in connection with the provisional honoring of checks
or other items, (c) any actual or alleged infringement of any patent,
copyright, trademark, service mark or similar right of the Borrower or any of
its Subsidiaries comprised in the Collateral, (d) the Borrower or any of its
Subsidiaries entering into or performing this Credit Agreement or any of the
other Loan Documents, (e) with respect to the Borrower and its Subsidiaries and
their respective properties and assets, the violation of any Environmental Law,
the presence, disposal, escape, seepage, leakage, spillage, discharge,
emission, release or threatened release of any Hazardous Substances or any
action, suit, proceeding or investigation brought or threatened with respect to
any Hazardous Substances (including, but not limited to, claims with respect to
wrongful death, personal injury or damage to property), or (f) any sales, use,
transfer, documentary and stamp taxes (but excluding any taxes based upon or
measured by the income or profits of any
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Bank or either Agent) and any recording and filing fees paid by the Agents, the
Collateral Agent or the Banks and which arise by reason of the transactions
contemplated hereby, by the Purchases and Consignments or by any of the Loan
Documents, in each case including, without limitation, the reasonable fees and
disbursements of counsel and allocated costs of internal counsel incurred in
connection with any such investigation, litigation or other proceeding. In
litigation, or the preparation therefor, the Banks, the Collateral Agent and
the Agents shall be entitled to select their own counsel and, in addition to
the foregoing indemnity, the Borrower agrees to pay promptly the reasonable
fees and expenses of such counsel. If, and to the extent that the obligations
of the Borrower under this Section 20 are unenforceable for any reason, the
Borrower hereby agrees to make the maximum contribution to the payment in
satisfaction of such obligations which is permissible under applicable law. The
covenants contained in this Section 20 shall survive payment or satisfaction
in full of all other Obligations.
21. SURVIVAL OF COVENANTS, ETC.
All covenants, agreements, representations and warranties made herein, in
the Notes, in any of the other Loan Documents or in any documents or other
papers delivered by or on behalf of the Borrower or any of its Subsidiaries
pursuant hereto shall be deemed to have been relied upon by the Banks, the
Collateral Agent and each of the Agents, notwithstanding any investigation
heretofore or hereafter made by any of them, and shall survive the making by
the Banks of any of the Loans or Purchases and Consignments and the issuance,
extension or renewal of any Letters of Credit, as herein contemplated, and
shall continue in full force and effect so long as any Letter of Credit or any
amount due under this Credit Agreement or the Notes or any of the other Loan
Documents remains outstanding or any Bank has any obligation to make any Loans
or Purchases and Consignments or the Dollar Agent has any obligation to issue,
extend or renew any Letter of Credit, and for such further time as may be
otherwise expressly specified in this Credit Agreement. All statements
contained in any certificate or other paper delivered to any Bank, the
Collateral Agent or either of the Agents at any time by or on behalf of the
Borrower or any of its Subsidiaries pursuant hereto or in connection with the
transactions contemplated hereby shall constitute representations and
warranties by the Borrower or such Subsidiary hereunder.
22. ASSIGNMENT AND PARTICIPATION.
22.1. CONDITIONS TO ASSIGNMENT BY BANKS. Except as provided herein, each
Bank may assign to one or more Eligible Assignees all or a portion of its
interests, rights and obligations under this Credit Agreement (including all or
a portion of its Commitment Percentage and Commitment or Gold Commitment and
Gold Commitment Percentage, as the case may be, and the same portion of the
Loans or Fair Market Value of Consigned Precious Metal at the time owing to it,
the Notes
<PAGE> 107
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held by it and its participating interest in the risk relating to any Letters
of Credit); provided that (a) each of the Agents and, unless a Default or an
Event of Default shall have occurred and be continuing, the Borrower, shall
have given its prior written consent to such assignment, which consent, in the
case of the Borrower, will not be unreasonably withheld, (b) each such
assignment shall be of a constant, and not a varying, percentage of all the
assigning Bank's rights and obligations under the Dollar Facility or, as the
case may be, the Gold Facility, (c) each assignment shall be in an amount that
is at least equal to $5,000,000, and (d) the parties to such assignment shall
execute and deliver to the Agents, for recording in the Register (as
hereinafter defined), an Assignment and Acceptance, substantially in the form
of Exhibit L hereto (an "Assignment and Acceptance"), together with any Notes
subject to such assignment. Upon such execution, delivery, acceptance and
recording, from and after the effective date specified in each Assignment and
Acceptance, which effective date shall be at least five (5) Business Days after
the execution thereof, (i) the assignee thereunder shall be a party hereto
and, to the extent provided in such Assignment and Acceptance, have the rights
and obligations of a Bank hereunder, and (ii) the assigning Bank shall, to the
extent provided in such assignment and upon payment to the Agents of the
registration fee referred to in Section 22.3, be released from its obligations
under this Credit Agreement.
22.2. CERTAIN REPRESENTATIONS AND WARRANTIES; LIMITATIONS; COVENANTS. By
executing and delivering an Assignment and Acceptance, the parties to the
assignment thereunder confirm to and agree with each other and the other
parties hereto as follows:
(a) other than the representation and warranty that it is the legal
and beneficial owner of the interest being assigned thereby free and clear
of any adverse claim, the assigning Bank makes no representation or
warranty, express or implied, and assumes no responsibility with respect
to any statements, warranties or representations made in or in connection
with this Credit Agreement or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Credit
Agreement, the other Loan Documents or any other instrument or document
furnished pursuant hereto or the attachment. perfection or priority of any
security interest or mortgage;
(b) the assigning Bank makes no representation or warranty and
assumes no responsibility with respect to the financial condition of the
Borrower and its Subsidiaries or any other Person primarily or
secondarily liable in respect of any of the Obligations, or the
performance or observance by the Borrower and its Subsidiaries or any
other Person primarily or secondarily liable in respect of any of the
Obligations of any of their obligations under this Credit Agreement or any
of the other Loan Documents or any other instrument or document furnished
pursuant hereto or thereto;
<PAGE> 108
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(c) such assignee confirms that it has received a copy of this Credit
Agreement, together with copies of the most recent financial statements
referred to in Section 10.4 and Section 11.4 and such other documents and
information as it has deemed appropriate to make its own credit analysis
and decision to enter into such Assignment and Acceptance;
(d) such assignee will, independently and without reliance upon the
assigning Bank, the Agents or any other Bank and based on such documents
and information as it shall deem appropriate at the time, continue to make
its own credit decisions in taking or not taking action under this Credit
Agreement;
(e) such assignee represents and warrants that it is an Eligible
Assignee;
(f) such assignee appoints and authorizes the Agents to take such
action as agents on its behalf and to exercise such powers under this
Credit Agreement and the other Loan Documents as are delegated to the
Agents by the terms hereof or thereof, together with such powers as are
reasonably incidental thereto;
(g) such assignee agrees that it will perform in accordance with their
terms all of the obligations that by the terms of this Credit Agreement
are required to be performed by it as a Bank;
(h) such assignee represents and warrants that it is legally authorized
to enter into such Assignment and Acceptance; and
(i) if applicable, such assignee acknowledges that it has made
arrangements with the assigning Bank satisfactory to such assignee with
respect to its pro rata share of Letter of Credit Fees in respect of
outstanding Letters of Credit.
22.3. REGISTER. The Agents shall maintain a copy of each Assignment and
Acceptance delivered to them and a register or similar list (the "Register")
for the recordation of the names and addresses of the Banks and as applicable,
the Commitment Percentage or the Gold Commitment Percentage of, and principal
amount of the Loans, owing to, Purchases and Consignments made by, and Letter
of Credit Participations purchased by, the Banks from time to time. The entries
in the Register shall be conclusive, in the absence of manifest error, and the
Borrower, the Agents and the Banks may treat each Person whose name is recorded
in the Register as a Bank hereunder for all purposes of this Credit Agreement.
The Register shall be available for inspection by the Borrower and the Banks at
any reasonable time and from time to time upon reasonable prior notice. Upon
each such recordation, the
<PAGE> 109
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assignee Bank agrees to pay to the Applicable Agent a registration fee in the
sum of $3,000.
22.4. NEW NOTES. Upon their receipt of an Assignment and Acceptance
executed by the parties to such assignment, together with each Note subject to
such assignment, the Agents shall (a) record the information contained therein
in the Register, and (b) give prompt notice thereof to the Borrower and the
Banks (other than the assigning Bank). Within five (5) Business Days after
receipt of such notice, the Borrower, at its own expense, shall execute and
deliver to the Agents, in exchange for each surrendered Note, a new Note or
Notes to the order of such Eligible Assignee in an amount equal to the amount
assumed by such Eligible Assignee pursuant to such Assignment and Acceptance
and, if the assigning Bank has retained some portion of its obligations
hereunder, a new Note or Notes to the order of the assigning Bank in an amount
equal to the amount retained by it hereunder. Such new Notes shall provide that
they are replacements for the surrendered Notes, shall be in an aggregate
principal amount equal to the aggregate principal amount of the surrendered
Notes, shall be dated the effective date of such Assignment and Acceptance and
shall otherwise be substantially in the form of the assigned Notes. Within five
(5) days of issuance of any new Notes pursuant to this Section 22.4, the
Borrower shall deliver an opinion of counsel, addressed to the Banks and the
Agents, relating to the due authorization, execution and delivery of such new
Notes and the legality, validity and binding effect thereof, in form and
substance satisfactory to the Banks. The surrendered Notes shall be cancelled
and returned to the Borrower.
22.5. PARTICIPATIONS. Each Bank may sell participations to one or more
banks or other entities in all or a portion of such Bank's rights and
obligations under this Credit Agreement and the other Loan Documents; provided
that (a) each such participation shall be in an amount of not less than
$5,000,000.00, (b) any such sale or participation shall not affect the rights
and duties of the selling Bank hereunder to the Borrower and (c) the only
rights granted to the participant pursuant to such participation arrangements
with respect to waivers, amendments or modifications of the Loan Documents
shall be the rights to approve waivers, amendments or modifications that would
reduce the principal of or the interest rate on any Loans, reduce the Fair
Market Value of Consigned Precious Metal or Consignment Fees, extend the term
or increase the amount of the Commitment or Gold Commitment of such Bank as it
relates to such participant, reduce the amount of any commitment fees or Letter
of Credit Fees to which such participant is entitled or extend any regularly
scheduled payment date for principal or interest or any scheduled payment or
Redelivery date for Consigned Precious Metal or Consignment Fees.
22.6. DISCLOSURE. The Borrower agrees that, in addition to disclosures
made in accordance with standard and customary banking practices, any Bank may
disclose information obtained by such Bank pursuant to this Credit Agreement to
assignees or participants and potential assignees or participants hereunder;
provided that such
<PAGE> 110
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assignees or participants or potential assignees or participants shall agree
(a) to treat in confidence such information unless it otherwise becomes public
knowledge, (b) not to disclose such information to a third party, except as
required by law or legal process, and (c) not to make use of such information
for purposes of transactions unrelated to such contemplated assignment or
participation.
22.7. ASSIGNEE OR PARTICIPANT AFFILIATED WITH THE BORROWER. If any
assignee Bank is an Affiliate of the Borrower, then any such assignee Bank
shall have no right to vote as a Bank hereunder or under any of the other Loan
Documents for purposes of granting consents or waivers or for purposes of
agreeing to amendments or other modifications to any of the Loan Documents or
for purposes of making requests to the Agents pursuant to Section 16.1 or
Section 16.2, and the determination of the Majority Banks shall for all
purposes of this Credit Agreement and the other Loan Documents be made without
regard to such assignee Bank's interest in any of the Loans. If any Bank sells
a participating interest in any of the Loans, Consigned Precious Metal or
Reimbursement Obligations to a participant, and such participant is the
Borrower or an Affiliate of the Borrower, then such transferor Bank shall
promptly notify the Agents of the sale of such participation. A transferor Bank
shall have no right to vote as a Bank hereunder or under any of the other Loan
Documents for purposes of granting consents or waivers or for purposes of
agreeing to amendments or modifications to any of the Loan Documents or for
purposes of making requests to the Agents pursuant to Section 16.1 or Section
16.2 to the extent that such participation is beneficially owned by the
Borrower or any Affiliate of the Borrower, and the determination of the
Majority Banks shall for all purposes of this Credit Agreement and the other
Loan Documents be made without regard to the interest of such transferor Bank
in the Loans to the extent of such participation.
22.8. MISCELLANEOUS ASSIGNMENT PROVISIONS. Any assigning Bank shall retain
its rights to be indemnified pursuant to Section 19 with respect to any claims
or actions arising prior to the date of such assignment. If any assignee Bank
is not incorporated under the laws of the United States of America or any state
thereof, it shall, prior to the date on which any interest or fees are payable
hereunder or under any of the other Loan Documents for its account, deliver to
the Borrower and the Agents certification as to its exemption from deduction or
withholding of any United States federal income taxes. Anything contained in
this Section 22 to the contrary notwithstanding, any Bank may at any time
pledge all or any portion of its interest and rights under this Credit
Agreement (including all or any portion of its Notes) to any of the twelve
Federal Reserve Banks organized under Section 4 of the Federal Reserve Act,
12 U.S.C. Section 341. No such pledge or the enforcement thereof shall release
the pledgor Bank from its obligations hereunder or under any of the other Loan
Documents.
<PAGE> 111
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22.9. ASSIGNMENT BY BORROWER. The Borrower shall not assign or transfer
any of its rights or obligations under any of the Loan Documents without the
prior written consent of each of the Banks.
23. NOTICES, ETC.
Except as otherwise expressly provided in this Credit Agreement, all
notices and other communications made or required to be given pursuant to this
Credit Agreement or the Notes or any Letter of Credit Applications shall be in
writing and shall be delivered in hand, mailed by United States registered or
certified first class mail, postage prepaid, sent by overnight courier, or sent
by telegraph, telecopy, facsimile or telex and confirmed by delivery via
courier or postal service, addressed as follows:
(a) if to the Borrower, at 155 North Wacker Drive, Suite 500, Chicago,
Illinois 6-0606-1719, Attention: John R. Desjardins, Executive Vice
President-Finance, or at such other address for notice as the Borrower
shall last have furnished in writing to the Person giving the notice;
(b) if to the Dollar Agent, the Collateral Agent or FNBB, at 100
Federal Street, Boston, Massachusetts 02110, Attention: Elizabeth A.
Ratto, Vice President, or such other address for notice as the Dollar
Agent, the Collateral Agent or, as the case may be, FNBB shall last have
furnished in writing to the Person giving the notice;
(c) if to the Gold Agent or RIHT, at One Hospital Trust Plaza,
R-W09-01, Providence, Rhode Island 02903, Attention: Denis D. Hamboyan,
Senior Vice President, or such other address for notice as the Gold Agent
or, as the case may be, RIHT shall last have furnished in writing to the
Person giving the notice; and
(d) if to any Bank, at such Bank's address set forth on Schedule 1
hereto, or such other address for notice as such Bank shall have last
furnished in writing to the Person giving the notice.
Any such notice or demand shall be deemed to have been duly given or made
and to have become effective (i) if delivered by hand, overnight courier or
facsimile to a responsible officer of the party to which it is directed, at the
time of the receipt thereof by such officer or the sending of such facsimile
and (ii) if sent by registered or certified first-class mail, postage prepaid,
on the third Business Day following the mailing thereof.
<PAGE> 112
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24. GOVERNING LAW.
THIS CREDIT AGREEMENT AND, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED
THEREIN, EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID COMMONWEALTH OF MASSACHUSETTS
(EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE BORROWER
AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS CREDIT AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE
NONEXCLUSIVE JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT
BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS SPECIFIED IN SECTION 23. THE
BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE
VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN
INCONVENIENT COURT.
25. HEADINGS.
The captions in this Credit Agreement are for convenience of reference
only and shall not define or limit the provisions hereof.
26. COUNTERPARTS.
This Credit Agreement and any amendment hereof may be executed in several
counterparts and by each party on a separate counterpart, each of which when
executed and delivered shall be an original, and all of which together shall
constitute one instrument. In proving this Credit Agreement it shall not be
necessary to produce or account for more than one such counterpart signed by
the party against whom enforcement is sought.
27. ENTIRE AGREEMENT, ETC.
The Loan Documents and any other documents executed in connection herewith
or therewith express the entire understanding of the parties with respect to
the transactions contemplated hereby. Neither this Credit Agreement nor any
term hereof may be changed, waived, discharged or terminated, except as
provided in Section 29.
<PAGE> 113
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28. WAIVER OF JURY TRIAL.
The Borrower hereby waives its right to a jury trial with respect to any
action or claim arising out of any dispute in connection with this Credit
Agreement, the Notes or any of the other Loan Documents, any rights or
obligations hereunder or thereunder or the performance of which rights and
obligations. Except as prohibited by law, the Borrower hereby waives any right
it may have to claim or recover in any litigation referred to in the preceding
sentence any special, exemplary, punitive or consequential damages or any
damages other than, or in addition to, actual damages. The Borrower (a)
certifies that no representative, agent or attorney of any Bank or either of
the Agents has represented, expressly or otherwise, that such Bank or such
Agent would not, in the event of litigation, seek to enforce the foregoing
waivers and (b) acknowledges that the Agents and the Banks have been induced to
enter into this Credit Agreement, the other Loan Documents to which it is a
party by, among other things, the waivers and certifications contained herein.
29. CONSENTS, AMENDMENTS, WAIVERS, ETC.
Any consent or approval required or permitted by this Credit Agreement to
be given by all of the Banks may be given, and any term of this Credit
Agreement, the other Loan Documents or any other instrument related hereto or
mentioned herein may be amended, and the performance or observance by the
Borrower or any of its Subsidiaries of any terms of this Credit Agreement, the
other Loan Documents or such other instrument or the continuance of any Default
or Event of Default may be waived (either generally or in a particular instance
and either retroactively or prospectively) with, but only with, the written
consent of the Borrower and the written consent of the Majority Banks.
Notwithstanding the foregoing (a) without the written consent of the Borrower
and the written consent of each Bank affected thereby, the rate of interest on
the Notes (other than interest accruing pursuant to Section 8.20 following the
effective date of any waiver by the Majority Banks of the Default or Event of
Default relating thereto) may not be decreased, the definition of Maturity Date
may not be changed, no rates of interest may be decreased, the basis for
calculation of Consignment Fees may not be decreased, the amounts of the
Commitments of the Dollar Banks may not be increased, the amounts of the Gold
Commitments of the Gold Banks may not be increased, the amounts of the
commitment fees and the Letter of Credit Fees (including those payable for the
Dollar Agent's own account) hereunder may not be decreased, and the advance
rates set forth in the definitions of Borrowing Base and Dollar Borrowing Base
and in Section 8.2 may not be increased; (b) the definition of Majority Banks
may not be amended without the written consent of all of the Banks; and (c) the
amount of the Agents' fees and Section 18 may not be amended without the
written consent of each of the Agents. No waiver shall extend to or affect any
obligation not expressly waived or impair any right consequent thereon. No
course of dealing or delay or omission on the part of either of the Agents or
any Bank in exercising any right shall operate as a waiver
<PAGE> 114
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thereof or otherwise be prejudicial thereto. No notice to or demand upon the
Borrower shall entitle the Borrower to other or further notice or demand in
similar or other circumstances.
30. SEVERABILITY.
The provisions of this Credit Agreement are severable and if any one
clause or provision hereof shall be held invalid or unenforceable in whole or
in part in any jurisdiction, then such invalidity or unenforceability shall
affect only such clause or provision, or part thereof, in such jurisdiction,
and shall not in any manner affect such clause or provision in any other
jurisdiction, or any other clause or provision of this Credit Agreement in any
jurisdiction.
<PAGE> 115
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IN WITNESS WHEREOF, the undersigned have duly executed this Credit
Agreement as a sealed instrument as of the date first set forth above.
MARKS BROS. JEWELERS, INC.
By: John R. DesJardins
------------------------
Name: John R. DesJardins
Title: Executive Vice President, Finance
and Administration, Treasurer and
Secretary
THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By:
------------------------
Name:
Title:
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK, individually and as
Agent
By:
------------------------
Name:
Title:
<PAGE> 116
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IN WITNESS WHEREOF, the undersigned have duly executed this Credit
Agreement as a sealed instrument as of the date first set forth above.
MARKS BROS. JEWELERS, INC.
By:
--------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By: Elizabeth A.Ratto
--------------------------
Name: Elizabeth A.Ratto
Title: Vice President
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK, individually and as
Agent
By:
--------------------------
Name:
Title:
<PAGE> 117
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IN WITNESS WHEREOF, the undersigned have duly executed this Credit
Agreement as a sealed instrument as of the date first set forth above.
MARKS BROS. JEWELERS, INC.
By:
------------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By:
------------------------------
Name:
Title:
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK, individually and as
Agent
By: DENIS D. HAMBOYAN
-------------------------------
Name: DENIS D. HAMBOYAN
Title: SENIOR VICE PRESIDENT
<PAGE> 1
EXHIBIT 10.11
SEVERANCE AGREEMENT
THIS AGREEMENT is entered into as of the 7th day of May, 1996
by and between Marks Bros. Jewelers, Inc., a Delaware corporation, and Hugh M.
Patinkin ("Executive").
W I T N E S S E T H
WHEREAS, Executive currently serves as a key employee of the
Company (as defined in Section 1) and his or her services and knowledge are
valuable to the Company in connection with the management of one or more of the
Company's principal operating facilities, divisions, departments or
subsidiaries;
WHEREAS, concurrently with the execution hereof Executive and
the Company are terminating Executive's employment agreement with the Company,
which employment agreement provided for substantial benefits (including
severance); and
WHEREAS, the Board (as defined in Section 1) has determined
that it is in the best interests of the Company and its stockholders to secure
Executive's continued services, and to encourage Executive's full attention and
dedication to the Company, the Board has authorized the Company to enter into
this Agreement.
NOW, THEREFORE, for and in consideration of the premises and
the mutual covenants and agreements herein contained, the Company and Executive
hereby agree as follows:
1. Definitions. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means (1) the commission by Executive of a
felony involving moral turpitude or (2) any material breach of any statutory or
common law duty to the Company or any subsidiary involving wilful malfeasance.
Activities undertaken by Executive in accordance with the letter from the
Company to Executive dated February 12, 1996 and the related amendment of such
date to Executive's prior Employment Agreement dated August 30, 1995 (as
amended) with the Company (notwithstanding the fact that such Employment
Agreement was terminated) shall not constitute "Cause."
<PAGE> 2
(c) "Change in Control" means:
(1) 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 Securities Exchange Act of 1934, as amended (the "Exchange
Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated
under the Exchange Act, of 25% or more of either (i) the then outstanding
shares of common stock of the Company (the "Outstanding Company Common Stock")
or (ii) 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"); provided, however, that the following
acquisitions shall not constitute a Change in Control: (A) any acquisition
directly from the Company (excluding any acquisition resulting from the
exercise of a conversion or exchange privilege in respect of outstanding
convertible or exchangeable securities), (B) any acquisition by an employee
benefit plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, (C) any acquisition by an Exempt Person,
or (D) any acquisition by any corporation pursuant to a reorganization, merger
or consolidation involving the Company, if, immediately after such
reorganization, merger or consolidation, each of the conditions described in
clauses (i), (ii) and (iii) of subsection (3) of this Section (1)(c) shall be
satisfied;
(2) individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of such Board; provided, however, that any individual who becomes a
director of the Company subsequent to the 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 to have been a member of the Incumbent Board; and provided
further, that no 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 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 be deemed to have been a member
of the Incumbent Board;
(3) approval by the stockholders of the Company of a
reorganization, merger or consolidation unless, in any such case, immediately
after such reorganization, merger or consolidation, (i) more than 60% of the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and more than 60% of the combined
voting power of the then outstanding securities of such corporation entitled to
vote generally in the election of directors is then beneficially
-2-
<PAGE> 3
owned, directly or indirectly, by all or substantially all of the individuals
or entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and the Outstanding Company Voting Securities immediately
prior to such reorganization, merger or consolidation and in substantially the
same proportions relative to each other as their ownership, immediately prior
to such reorganization, merger or consolidation, of the Outstanding Company
Common Stock and the Outstanding Company Voting Securities, as the case may be,
(ii) no Person (other than the Company, any employee benefit plan (or related
trust) sponsored or maintained by the Company or the corporation resulting from
such reorganization, merger or consolidation (or any corporation controlled by
the Company) and any Person which beneficially owned, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, 25% or more of
the Outstanding Company Common Stock or the Outstanding Company Voting
Securities, as the case may be) beneficially owns, directly or indirectly, 25%
or more of the then outstanding shares of common stock of such corporation or
25% or more of the combined voting power of the then outstanding securities of
such corporation entitled to vote generally in the election of directors and
(iii) at least a majority of the members of the board of directors of the
corporation resulting from such reorganization, merger or consolidation were
members of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such reorganization, merger or
consolidation; or
(4) approval by the stockholders of the Company of (i) a plan
of complete liquidation or dissolution of the Company or (ii) the sale or other
disposition of all or substantially all of the assets of the Company other than
to a corporation with respect to which, immediately after such sale or other
disposition, (A) more than 60% of the then outstanding shares of common stock
thereof and more than 60% of the combined voting power of the then outstanding
securities thereof entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and the Outstanding Company Voting
Securities immediately prior to such sale or other disposition and in
substantially the same proportions relative to each other as their ownership,
immediately prior to such sale or other disposition, of the Outstanding Company
Common Stock and the Outstanding Company Voting Securities, as the case may be,
(B) no Person (other than the Company, any employee benefit plan (or related
trust) sponsored or maintained by the Company or such corporation (or any
corporation controlled by the Company) and any Person which beneficially owned,
immediately prior to such sale or other disposition, directly or indirectly,
25% or more of the Outstanding Company Common Stock or the Outstanding Company
-3-
<PAGE> 4
Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 25% or more of the then outstanding shares of common stock thereof
or 25% or more of the combined voting power of the then outstanding securities
thereof entitled to vote generally in the election of directors and (C) at
least a majority of the members of the board of directors thereof were members
of the Incumbent Board at the time of the execution of the initial agreement or
action of the Board providing for such sale or other disposition.
(d) "Company" means Marks Bros. Jewelers, Inc., a
Delaware corporation.
(e) "Date of Termination" means (1) the effective date on
which Executive's employment by the Company terminates as specified in a prior
written notice by the Company or Executive, as the case may be, to the other,
delivered pursuant to Section 11 or (2) if Executive's employment by the
Company terminates by reason of death, the date of death of Executive.
(f) "Exempt Person" means each of Hugh M. Patinkin, John
R. Desjardins, Matthew M. Patinkin and any Affiliate (as such term is defined
in Rule 12b-1 under the Securities Exchange Act of 1934, as in effect on the
date hereof, "Affiliate) thereof and, until consummation of the Company's
initial public offering, Frontenac Company and any Affiliate thereof.
(g) "Good Reason" means, without Executive's express
written consent, the occurrence of any of the following events:
(1) any of (i) the assignment to Executive of any duties
inconsistent in any material respect with Executive's position(s), duties,
responsibilities or status with the Company as of the date of this Agreement
or, if a Change in Control has occurred, immediately prior to such Change in
Control, (ii) a change in Executive's reporting responsibilities, titles or
offices with the Company as in effect on the date of this Agreement or, if a
Change in Control has occurred, immediately prior to such Change in Control or
(iii) any removal or involuntary termination of Executive from the Company
otherwise than as expressly permitted by this Agreement or any failure to
re-elect Executive to any position with the Company held by Executive on the
date of this Agreement or, if a Change in Control has occurred, immediately
prior to such Change in Control;
(2) a reduction by the Company in Executive's rate of annual
base salary as in effect on the date of this Agreement or, if a Change in
Control has occurred, immediately prior to such Change in Control or as the
same may be increased from time to time thereafter;
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<PAGE> 5
(3) any requirement of the Company that Executive (i) be
based anywhere other than at the facility where the Executive is located on the
date of this Agreement (or a new headquarters facility in downtown Chicago) or
(ii) travel on Company business to an extent substantially more burdensome than
the travel obligations of Executive immediately prior to the date hereof or, if
a Change in Control has occurred, immediately prior to such Change in Control;
(4) the failure of the Company to (i) continue in effect any
employee benefit plan or compensation plan in which Executive is participating
immediately prior to the date of this Agreement or, if a Change in Control has
occurred, prior to such Change in Control, unless Executive is permitted to
participate in other plans providing Executive with substantially comparable
benefits, or the taking of any action by the Company which would adversely
affect Executive's participation in or materially reduce Executive's benefits
under any such plan, (ii) provide Executive and Executive's dependents welfare
benefits (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for Executive immediately prior to the date of
this Agreement or, if a Change in Control has occurred, prior to such Change in
Control or, if more favorable to Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies, (iii) provide fringe benefits in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for Executive immediately prior to the date of
this Agreement or, if a Change in Control has occurred, prior to such Change in
Control or, if more favorable to Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies, (iv) provide an office or offices of a size and with
furnishings and other appointments, together with personal secretarial and
other assistance, at least equal to the most favorable of the foregoing
provided to Executive by the Company and its affiliated companies immediately
prior to the date of this Agreement or, if a Change in Control has occurred,
prior to such Change in Control or, if more favorable to Executive, as provided
generally at any time thereafter with respect to other peer executives of the
Company
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<PAGE> 6
and its affiliated companies, (v) provide Executive with paid vacation in
accordance with the most favorable plans, policies, programs and practices of
the Company and its affiliated companies as in effect for Executive immediately
prior to the date of this Agreement or, if a Change in Control has occurred,
prior to such Change in Control or, if more favorable to Executive, as in
effect generally at any time thereafter with respect to other peer executives
of the Company and its affiliated companies, or (vi) reimburse Executive
promptly for all reasonable employment expenses incurred by Executive in
accordance with the most favorable policies, practices and procedures of the
Company and its affiliated companies in effect for Executive immediately prior
to the date of this Agreement or, if a Change in Control has occurred, prior to
such Change in Control, or if more favorable to Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies; or
(5) the failure of the Company to obtain the assumption
agreement from any successor as contemplated in Section 9(b).
For purposes of this Agreement, any good faith determination
of Good Reason made by Executive shall be conclusive; provided, however, that
an isolated, insubstantial and inadvertent action taken in good faith and which
is remedied by the Company promptly after receipt of notice thereof given by
Executive shall not constitute Good Reason.
(h) "Nonqualifying Termination" means a termination of
Executive's employment (1) by the Company for Cause, (2) by Executive for any
reason other than a Good Reason, (3) as a result of Executive's death or (4) by
the Company due to Executive's absence from his duties with the Company on a
full-time basis for at least 180 consecutive days as a result of Executive's
incapacity due to physical or mental illness; provided, however, that a
termination of Executive's employment for any reason whatsoever during the
"Window Period" (hereinafter defined) shall not constitute a Nonqualifying
Termination.
(i) "Termination Period" means the period of time
beginning with the date hereof and ending on the earliest to occur of (1)
Executive's 70th birthday, (2) Executive's death and (3) three years following
a Change in Control.
(j) "Window Period" means the 30-day period commencing
six months after the date of a Change in Control.
2. Payments Upon Termination of Employment.
(a) If during the Termination Period the employment of
Executive shall terminate, other than by reason of a
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<PAGE> 7
Nonqualifying Termination, then the Company shall pay to Executive (or
Executive's beneficiary or estate) within 30 days following the Date of
Termination, as compensation for services rendered to the Company:
(1) a lump sum cash amount equal to the sum of (i)
Executive's full annual base salary from the Company and its affiliated
companies through the Date of Termination, to the extent not theretofore paid,
(ii) Executive's annual bonus in an amount at least equal to the higher of (x)
one-half of the maximum bonus the Executive could earn during the fiscal year
during which such Change in Control occurs and (y) the average of the
Executive's annual bonus (annualized for any fiscal year consisting of less
than 12 full months) with respect to which bonus paid or payable, including by
reason of any deferral, to Executive by the Company and its affiliated
companies in respect of the two fiscal years of the Company (or such portion
thereof during which Executive performed services for the Company if Executive
shall have been employed by the Company for less than such two fiscal year
period) immediately preceding the fiscal year in which the Change in Control
occurs, multiplied by a fraction, the numerator of which is the number of days
in the fiscal year in which the Change in Control occurs through the Date of
Termination and the denominator of which is 365 or 366, as applicable, and
(iii) any compensation previously deferred by Executive (together with any
interest and earnings thereon) and any accrued vacation pay, in each case to
the extent not theretofore paid; plus
(2) a lump-sum cash amount (subject to any applicable payroll
or other taxes required to be withheld pursuant to Section 4) in an amount
equal to (i) 2.5 times (1.5 times if a Change in Control has not occurred)
Executive's highest annual base salary from the Company and its affiliated
companies in effect during the 12-month period prior to the Date of Termination
plus (ii) 2.5 times (1.5 times if a Change in Control has not occurred)
Executive's highest annualized (for any fiscal year consisting of less than 12
full months or with respect to which Executive has been employed by the Company
for less than 12 full months), bonus paid or payable, including by reason of
any deferral, to Executive by the Company and its affiliated companies in
respect of the five fiscal years of the Company (or such portion thereof during
which Executive performed services for the Company if Executive shall have been
employed by the Company for less than such five fiscal year period) immediately
preceding the fiscal year in which the Change in Control occurs, provided,
however, that in the event there are fewer than 30 whole months (18 whole
months if a Change in Control has not occurred) remaining from the Date of
Termination to the date of Executive's 70th birthday, the amount calculated in
accordance with this Section 3(a)(2) shall be reduced by multiplying such
amount by a fraction the numerator of which is the number of
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<PAGE> 8
months, including a partial month (with a partial month being expressed as a
fraction the numerator of which is the number of days remaining in such month
and the denominator of which is the number of days in such month), so remaining
and the denominator of which is 30 (18 if a Change in Control has not
occurred); provided further, that any amount paid pursuant to this Section
3(a)(2) shall be paid in lieu of any other amount of severance relating to
salary or bonus continuation to be received by Executive upon termination of
employment of Executive under any severance plan, policy or arrangement of the
Company.
(b) For a period of 2.5 years (18 months if a Change in
Control has not occurred) commencing on the Date of Termination, the Company
shall continue to keep in full force and effect all policies of medical,
accident, disability and life insurance with respect to Executive and his
dependents with the same level of coverage, upon the same terms and otherwise
to the same extent as such policies shall have been in effect immediately prior
to the Date of Termination or, if more favorable to Executive, as provided
generally with respect to other peer executives of the Company and its
affiliated companies, and the Company and Executive shall share the costs of
the continuation of such insurance coverage in the same proportion as such
costs were shared immediately prior to the Date of Termination.
(c) If during the Termination Period the employment of
Executive shall terminate by reason of a Nonqualifying Termination, then the
Company shall pay to Executive within 30 days following the Date of
Termination, a cash amount equal to the sum of (1) Executive's full annual base
salary from the Company through the Date of Termination, to the extent not
theretofore paid and (2) any compensation previously deferred by Executive
(together with any interest and earnings thereon) and any accrued vacation pay,
in each case to the extent not theretofore paid.
3. Certain Additional Payments by the Company. (a)
Anything in this Agreement to the contrary notwithstanding, in the event it
shall be determined that any payment, benefit or distribution by the Company or
its affiliated companies to or for the benefit of Executive (whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise, but determined without regard to any additional payments required
under this Section 3) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the Code, or any successor provision, or any interest or
penalties are incurred by Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then Executive shall be entitled
to receive an additional payment (a "Gross-Up Payment") in an amount such that
after payment by
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<PAGE> 9
Executive of all taxes (including any interest or penalties imposed with
respect to such taxes), including, without limitation, any income taxes (and
any interest and penalties imposed with respect thereto) and Excise Tax imposed
upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 3(c), all
determinations required to be made under this Section 3, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the Company's public accounting firm (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Company and Executive
within 15 business days of the receipt of notice from Executive that there has
been a Payment, or such earlier time as is requested by the Company. In the
event that the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting the Change in Control, Executive shall
appoint another nationally recognized public accounting firm to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined
pursuant to this Section 3, shall be paid by the Company to Executive within
five days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by Executive, it shall
furnish Executive with a written opinion that failure to report the Excise Tax
on Executive's applicable federal income tax return would not result in the
imposition of a negligence or similar penalty. Any determination by the
Accounting Firm shall be binding upon the Company and Executive. As a result
of the uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is possible
that Gross-Up Payments which will not have been made by the Company should have
been made, including subsequent interest and penalties ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 3(c) and Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Executive.
(c) Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than 10 business days after Executive
is informed in writing of such claim and shall apprise the Company of the
nature
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<PAGE> 10
of such claim and the date on which such claim is requested to be paid.
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies Executive in writing prior to the
expiration of such period that it desires to contest such claim, Executive
shall:
(1) give the Company any information reasonably requested by
the Company relating to such claim,
(2) take such action in connection with contesting such
claim as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by the Company,
(3) cooperate with the Company in good faith in order
effectively to contest such claim, and
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Section 3(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and Executive agrees to prosecute such contest
to a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided further, that if the Company directs Executive to pay such
claim and sue for a refund, the Company shall advance the amount of such
payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such
advance; and provided further, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of Executive with respect to
which such contested amount is claimed to be due
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<PAGE> 11
is limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced
by the Company pursuant to Section 3(c), Executive becomes entitled to receive,
and receives, any refund with respect to such claim, Executive shall (subject
to the Company's complying with the requirements of Section 3(c)) promptly pay
to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by
Executive of an amount advanced by the Company pursuant to Section 3(c), a
determination is made that Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify Executive in writing of
its intent to contest such denial of refund prior to the expiration of 30 days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid.
4. Withholding Taxes. The Company may withhold from all
payments due to Executive (or his beneficiary or estate) hereunder all taxes
which, by applicable federal, state, local or other law, the Company is
required to withhold therefrom.
5. Reimbursement of Expenses. If any contest or dispute
shall arise under this Agreement involving termination of Executive's
employment with the Company (which shall be deemed to include, without
limitation, issues relating to Executive's stock options) or involving the
failure or refusal of the Company to perform fully in accordance with the terms
hereof, the Company shall reimburse Executive, on a current basis, for all
legal fees and expenses, if any, incurred by Executive in connection with such
contest or dispute, together with interest in an amount equal to the base rate
of The First National Bank of Boston from time to time in effect, but in no
event higher than the maximum legal rate permissible under applicable law, such
interest to accrue from the date the Company receives Executive's statement for
such fees and expenses through the date of payment thereof; provided, however,
that in the event the resolution of any such contest or dispute includes a
finding denying, in total, Executive's claims in such contest or dispute,
Executive shall be required to reimburse the Company, over a period of 12
months from the date of such resolution, for all sums advanced to Executive
pursuant to this Section 5; provided, further, that no such reimbursement shall
be required if Executive had a reasonable basis for the position taken by
Executive with respect to such claims.
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<PAGE> 12
6. Termination of Agreement. This Agreement shall be
effective on the date hereof and shall terminate upon the first to occur of (i)
Executive's 70th birthday and (ii) Executive's death.
7. Scope of Agreement. Nothing in this Agreement shall
be deemed to entitle Executive to continued employment with the Company or its
subsidiaries.
8. Directors and Officers Liability Insurance;
Indemnification. The Company agrees that, notwithstanding a Termination of
Executive's employment with the Company, the Company shall, for at least three
years after the Date of Termination, use all reasonable efforts to have
Executive included as a named insured or otherwise covered for actions or
failures to act by Executive in his capacity as a director or officer of the
Company to at least the same extent as other executive officers or directors,
as the case may be, of the Company under any directors and officers liability
insurance policies maintained by the Company; provided that the additional cost
of providing coverage with a retroactive date including Executive's period of
service or with an extended reporting period or a combination of both does not
materially increase the cost of the Company's directors and officers insurance.
The Company agrees that it will not alter the indemnification provisions in its
charter or by-laws so as to give Executive less protection thereunder with
respect to periods during which Executive serves or served the Company as an
executive officer or other employee as is afforded other executive officers or
peer employees, as the case may be, with respect to periods during which they
serve the Company.
9. Successors; Binding Agreement.
(a) This Agreement shall not be terminated by any merger or
consolidation of the Company whereby the Company is or is not the surviving or
resulting corporation or as a result of any transfer of all or substantially
all of the assets of the Company. In the event of any such merger,
consolidation or transfer of assets, the provisions of this Agreement shall be
binding upon the surviving or resulting corporation or the person or entity to
which such assets are transferred.
(b) The Company agrees that concurrently with any merger,
consolidation or transfer of assets referred to in paragraph (a) of this
Section 10, it will cause any successor or transferee unconditionally to
assume, by written instrument delivered to Executive (or his beneficiary or
estate), all of the obligations of the Company hereunder. Failure of the
Company to obtain such assumption prior to the effectiveness of any such
merger, consolidation or transfer of assets shall be a breach of this Agreement
and shall entitle Executive to compensation and
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<PAGE> 13
other benefits from the Company in the same amount and on the same terms as
Executive would be entitled hereunder if Executive's employment were terminated
following a Change in Control other than by reason of a Nonqualifying
Termination. For purposes of implementing the foregoing, the date on which any
such merger, consolidation or transfer becomes effective shall be deemed the
Date of Termination.
(c) This Agreement shall inure to the benefit of and be
enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive shall die while any amounts would be payable to Executive hereunder
had Executive continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to such
person or persons appointed in writing by Executive to receive such amounts or,
if no person is so appointed, to Executive's estate.
10. Notice. (a) For purposes of this Agreement, all notices
and other communications required or permitted hereunder shall be in writing
and shall be deemed to have been duly given when delivered or five days after
deposit in the United States mail, certified and return receipt requested,
postage prepaid, addressed (1) if to the Executive, to
_________________________, and if to the Company, to Marks Bros. Jewelers,
Inc., 155 N. Wacker Drive, Chicago, Illinois 60606, attention: Secretary, or
(2) to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
(b) A written notice of Executive's Date of Termination
by the Company or Executive, as the case may be, to the other, shall (i)
indicate the specific termination provision in this Agreement relied upon, (ii)
to the extent applicable, set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated and (iii) specify the termination
date (which date shall be not less than 15 days after the giving of such
notice). The failure by Executive or the Company to set forth in such notice
any fact or circumstance which contributes to a showing of Good Reason or Cause
shall not waive any right of Executive or the Company hereunder or preclude
Executive or the Company from asserting such fact or circumstance in enforcing
Executive's or the Company's rights hereunder.
11. Full Settlement; Resolution of Disputes. (a) The
Company's obligation to make any payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim, right or action
which the Company may have against Executive or others. In no event shall
Executive be
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<PAGE> 14
obligated to seek other employment or take any other action by way of
mitigation of the amounts payable to Executive under any of the provisions of
this Agreement and, such amounts shall not be reduced whether or not Executive
obtains other employment.
(b) If there shall be any dispute between the Company and
Executive in the event of any termination of Executive's employment (which
shall be deemed to include, without limitation, issues relating to Executive's
options), then, unless and until there is a final, nonappealable judgment by a
court of competent jurisdiction declaring that such termination was for Cause,
that the determination by Executive of the existence of Good Reason was not
made in good faith, or that the Company is not otherwise obligated to pay any
amount or provide any benefit to Executive and his dependents or other
beneficiaries, as the case may be, under paragraphs (a) and (b) of Section 3,
the Company shall pay all amounts, and provide all benefits, to Executive and
his dependents or other beneficiaries, as the case may be, that the Company
would be required to pay or provide pursuant to paragraphs (a) and (b) of
Section 3 as though such termination were by the Company without Cause or by
Executive with Good Reason; provided, however, that the Company shall not be
required to pay any disputed amounts pursuant to this paragraph except upon
receipt of an undertaking by or on behalf of Executive to repay all such
amounts to which Executive is ultimately adjudged by such court not to be
entitled.
12. Governing Law; Validity. The interpretation,
construction and performance of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Illinois without regard to the principle of conflicts of laws. The invalidity
or unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which
other provisions shall remain in full force and effect.
13. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original and all of
which together shall constitute one and the same instrument.
14. Miscellaneous. No provision of this Agreement may be
modified or waived unless such modification or waiver is agreed to in writing
and signed by Executive and by a duly authorized officer of the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. Failure by Executive or the Company to insist upon strict compliance
with any provision of this Agreement or to assert any right Executive or the
Company
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<PAGE> 15
may have hereunder, including, without limitation, the right of Executive to
terminate employment for Good Reason, shall not be deemed to be a waiver of
such provision or right or any other provision or right of this Agreement. The
rights of, and benefits payable to, Executive, his estate or his beneficiaries
pursuant to this Agreement are in addition to any rights of, or benefits
payable to, Executive, his estate or his beneficiaries under any other employee
benefit plan or compensation program of the Company.
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IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by a duly authorized officer of the Company and Executive has
executed this Agreement as of the day and year first above written.
MARKS BROS. JEWELERS, INC.
By: /s/ John R. Desjardins
----------------------------------
John R. Desjardins
Executive Vice President
Finance and Administration,
Treasurer and Secretary
/s/ Hugh M. Patinkin
----------------------------------
Hugh M. Patinkin
Chairman, President and Chief
Executive Officer
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<PAGE> 17
SEVERANCE AGREEMENT
THIS AGREEMENT is entered into as of the 7th day of May, 1996
by and between Marks Bros. Jewelers, Inc., a Delaware corporation, and John R.
Desjardins ("Executive").
W I T N E S S E T H
WHEREAS, Executive currently serves as a key employee of the
Company (as defined in Section 1) and his or her services and knowledge are
valuable to the Company in connection with the management of one or more of the
Company's principal operating facilities, divisions, departments or
subsidiaries;
WHEREAS, concurrently with the execution hereof Executive and
the Company are terminating Executive's employment agreement with the Company,
which employment agreement provided for substantial benefits (including
severance); and
WHEREAS, the Board (as defined in Section 1) has determined
that it is in the best interests of the Company and its stockholders to secure
Executive's continued services, and to encourage Executive's full attention and
dedication to the Company, the Board has authorized the Company to enter into
this Agreement.
NOW, THEREFORE, for and in consideration of the premises and
the mutual covenants and agreements herein contained, the Company and Executive
hereby agree as follows:
1. Definitions. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means (1) the commission by Executive of a
felony involving moral turpitude or (2) any material breach of any statutory or
common law duty to the Company or any subsidiary involving wilful malfeasance.
Activities undertaken by Executive in accordance with the letter from the
Company to Executive dated February 12, 1996 and the related amendment of such
date to Executive's prior Employment Agreement dated August 30, 1995 (as
amended) with the Company (notwithstanding the fact that such Employment
Agreement was terminated) shall not constitute "Cause."
<PAGE> 18
(c) "Change in Control" means:
(1) 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 Securities Exchange Act of 1934, as amended (the "Exchange
Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated
under the Exchange Act, of 25% or more of either (i) the then outstanding
shares of common stock of the Company (the "Outstanding Company Common Stock")
or (ii) 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"); provided, however, that the following
acquisitions shall not constitute a Change in Control: (A) any acquisition
directly from the Company (excluding any acquisition resulting from the
exercise of a conversion or exchange privilege in respect of outstanding
convertible or exchangeable securities), (B) any acquisition by an employee
benefit plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, (C) any acquisition by an Exempt Person,
or (D) any acquisition by any corporation pursuant to a reorganization, merger
or consolidation involving the Company, if, immediately after such
reorganization, merger or consolidation, each of the conditions described in
clauses (i), (ii) and (iii) of subsection (3) of this Section (1)(c) shall be
satisfied;
(2) individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of such Board; provided, however, that any individual who becomes a
director of the Company subsequent to the 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 to have been a member of the Incumbent Board; and provided
further, that no 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 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 be deemed to have been a member
of the Incumbent Board;
(3) approval by the stockholders of the Company of a
reorganization, merger or consolidation unless, in any such case, immediately
after such reorganization, merger or consolidation, (i) more than 60% of the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and more than 60% of the combined
voting power of the then outstanding securities of such corporation entitled to
vote generally in the election of directors is then beneficially
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<PAGE> 19
owned, directly or indirectly, by all or substantially all of the individuals or
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and the Outstanding Company Voting Securities immediately
prior to such reorganization, merger or consolidation and in substantially the
same proportions relative to each other as their ownership, immediately prior
to such reorganization, merger or consolidation, of the Outstanding Company
Common Stock and the Outstanding Company Voting Securities, as the case may be,
(ii) no Person (other than the Company, any employee benefit plan (or related
trust) sponsored or maintained by the Company or the corporation resulting from
such reorganization, merger or consolidation (or any corporation controlled by
the Company) and any Person which beneficially owned, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, 25% or more of
the Outstanding Company Common Stock or the Outstanding Company Voting
Securities, as the case may be) beneficially owns, directly or indirectly, 25%
or more of the then outstanding shares of common stock of such corporation or
25% or more of the combined voting power of the then outstanding securities of
such corporation entitled to vote generally in the election of directors and
(iii) at least a majority of the members of the board of directors of the
corporation resulting from such reorganization, merger or consolidation were
members of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such reorganization, merger or
consolidation; or
(4) approval by the stockholders of the Company of (i) a plan of
complete liquidation or dissolution of the Company or (ii) the sale or other
disposition of all or substantially all of the assets of the Company other than
to a corporation with respect to which, immediately after such sale or other
disposition, (A) more than 60% of the then outstanding shares of common stock
thereof and more than 60% of the combined voting power of the then outstanding
securities thereof entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and the Outstanding Company Voting
Securities immediately prior to such sale or other disposition and in
substantially the same proportions relative to each other as their ownership,
immediately prior to such sale or other disposition, of the Outstanding Company
Common Stock and the Outstanding Company Voting Securities, as the case may be,
(B) no Person (other than the Company, any employee benefit plan (or related
trust) sponsored or maintained by the Company or such corporation (or any
corporation controlled by the Company) and any Person which beneficially owned,
immediately prior to such sale or other disposition, directly or indirectly,
25% or more of the Outstanding Company Common Stock or the Outstanding Company
- 3 -
<PAGE> 20
Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 25% or more of the then outstanding shares of common stock thereof
or 25% or more of the combined voting power of the then outstanding securities
thereof entitled to vote generally in the election of directors and (C) at
least a majority of the members of the board of directors thereof were members
of the Incumbent Board at the time of the execution of the initial agreement or
action of the Board providing for such sale or other disposition.
(d) "Company" means Marks Bros. Jewelers, Inc., a
Delaware corporation.
(e) "Date of Termination" means (1) the effective date on
which Executive's employment by the Company terminates as specified in a prior
written notice by the Company or Executive, as the case may be, to the other,
delivered pursuant to Section 11 or (2) if Executive's employment by the
Company terminates by reason of death, the date of death of Executive.
(f) "Exempt Person" means each of Hugh M. Patinkin, John
R. Desjardins, Matthew M. Patinkin and any Affiliate (as such term is defined
in Rule 12b-1 under the Securities Exchange Act of 1934, as in effect on the
date hereof, "Affiliate) thereof and, until consummation of the Company's
initial public offering, Frontenac Company and any Affiliate thereof.
(g) "Good Reason" means, without Executive's express
written consent, the occurrence of any of the following events:
(1) any of (i) the assignment to Executive of any duties
inconsistent in any material respect with Executive's position(s), duties,
responsibilities or status with the Company as of the date of this Agreement
or, if a Change in Control has occurred, immediately prior to such Change in
Control, (ii) a change in Executive's reporting responsibilities, titles or
offices with the Company as in effect on the date of this Agreement or, if a
Change in Control has occurred, immediately prior to such Change in Control or
(iii) any removal or involuntary termination of Executive from the Company
otherwise than as expressly permitted by this Agreement or any failure to
re-elect Executive to any position with the Company held by Executive on the
date of this Agreement or, if a Change in Control has occurred, immediately
prior to such Change in Control;
(2) a reduction by the Company in Executive's rate of annual
base salary as in effect on the date of this Agreement or, if a Change in
Control has occurred, immediately prior to such Change in Control or as the
same may be increased from time to time thereafter;
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<PAGE> 21
(3) any requirement of the Company that Executive (i) be
based anywhere other than at the facility where the Executive is located on the
date of this Agreement (or a new headquarters facility within a 30-mile radius
of the Company's current headquarters) or (ii) travel on Company business to an
extent substantially more burdensome than the travel obligations of Executive
immediately prior to the date hereof or, if a Change in Control has occurred,
immediately prior to such Change in Control;
(4) the failure of the Company to (i) continue in effect any employee benefit
plan or compensation plan in which Executive is participating immediately prior
to the date of this Agreement or, if a Change in Control has occurred, prior to
such Change in Control, unless Executive is permitted to participate in other
plans providing Executive with substantially comparable benefits, or the taking
of any action by the Company which would adversely affect Executive's
participation in or materially reduce Executive's benefits under any such plan,
(ii) provide Executive and Executive's dependents welfare benefits (including,
without limitation, medical, prescription, dental, disability, salary
continuance, employee life, group life, accidental death and travel accident
insurance plans and programs) in accordance with the most favorable plans,
practices, programs and policies of the Company and its affiliated companies in
effect for Executive immediately prior to the date of this Agreement or, if a
Change in Control has occurred, prior to such Change in Control or, if more
favorable to Executive, as in effect generally at any time thereafter with
respect to other peer executives of the Company and its affiliated companies,
(iii) provide fringe benefits in accordance with the most favorable plans,
practices, programs and policies of the Company and its affiliated companies in
effect for Executive immediately prior to the date of this Agreement or, if a
Change in Control has occurred, prior to such Change in Control or, if more
favorable to Executive, as in effect generally at any time thereafter with
respect to other peer executives of the Company and its affiliated companies,
(iv) provide an office or offices of a size and with furnishings and other
appointments, together with personal secretarial and other assistance, at least
equal to the most favorable of the foregoing provided to Executive by the
Company and its affiliated companies immediately prior to the date of this
Agreement or, if a Change in Control has occurred, prior to such Change in
Control or, if more favorable to Executive, as provided generally at any time
thereafter with respect to other peer executives of the Company
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<PAGE> 22
and its affiliated companies, (v) provide Executive with paid vacation in
accordance with the most favorable plans, policies, programs and practices of
the Company and its affiliated companies as in effect for Executive immediately
prior to the date of this Agreement or, if a Change in Control has occurred,
prior to such Change in Control or, if more favorable to Executive, as in
effect generally at any time thereafter with respect to other peer executives
of the Company and its affiliated companies, or (vi) reimburse Executive
promptly for all reasonable employment expenses incurred by Executive in
accordance with the most favorable policies, practices and procedures of the
Company and its affiliated companies in effect for Executive immediately prior
to the date of this Agreement or, if a Change in Control has occurred, prior to
such Change in Control, or if more favorable to Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies; or
(5) the failure of the Company to obtain the assumption
agreement from any successor as contemplated in Section 9(b).
For purposes of this Agreement, any good faith determination
of Good Reason made by Executive shall be conclusive; provided, however, that
an isolated, insubstantial and inadvertent action taken in good faith and which
is remedied by the Company promptly after receipt of notice thereof given by
Executive shall not constitute Good Reason.
(h) "Nonqualifying Termination" means a termination of
Executive's employment (1) by the Company for Cause, (2) by Executive for any
reason other than a Good Reason, (3) as a result of Executive's death or (4) by
the Company due to Executive's absence from his duties with the Company on a
full-time basis for at least 180 consecutive days as a result of Executive's
incapacity due to physical or mental illness; provided, however, that a
termination of Executive's employment for any reason whatsoever during the
"Window Period" (hereinafter defined) shall not constitute a Nonqualifying
Termination.
(i) "Termination Period" means the period of time
beginning with the date hereof and ending on the earliest to occur of (1)
Executive's 70th birthday, (2) Executive's death and (3) three years following
a Change in Control.
(j) "Window Period" means the 30-day period commencing
six months after the date of a Change in Control.
2. Payments Upon Termination of Employment.
(a) If during the Termination Period the employment of
Executive shall terminate, other than by reason of a
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<PAGE> 23
Nonqualifying Termination, then the Company shall pay to Executive (or
Executive's beneficiary or estate) within 30 days following the Date of
Termination, as compensation for services rendered to the Company:
(1) a lump sum cash amount equal to the sum of (i)
Executive's full annual base salary from the Company and its affiliated
companies through the Date of Termination, to the extent not theretofore paid,
(ii) Executive's annual bonus in an amount at least equal to the higher of (x)
one-half of the maximum bonus the Executive could earn during the fiscal year
during which such Change in Control occurs and (y) the average of the
Executive's annual bonus (annualized for any fiscal year consisting of less
than 12 full months) with respect to which bonus paid or payable, including by
reason of any deferral, to Executive by the Company and its affiliated
companies in respect of the two fiscal years of the Company (or such portion
thereof during which Executive performed services for the Company if Executive
shall have been employed by the Company for less than such two fiscal year
period) immediately preceding the fiscal year in which the Change in Control
occurs, multiplied by a fraction, the numerator of which is the number of days
in the fiscal year in which the Change in Control occurs through the Date of
Termination and the denominator of which is 365 or 366, as applicable, and
(iii) any compensation previously deferred by Executive (together with any
interest and earnings thereon) and any accrued vacation pay, in each case to
the extent not theretofore paid; plus
(2) a lump-sum cash amount (subject to any applicable payroll
or other taxes required to be withheld pursuant to Section 4) in an amount
equal to (i) 2.5 times (1.5 times if a Change in Control has not occurred)
Executive's highest annual base salary from the Company and its affiliated
companies in effect during the 12-month period prior to the Date of Termination
plus (ii) 2.5 times (1.5 times if a Change in Control has not occurred)
Executive's highest annualized (for any fiscal year consisting of less than 12
full months or with respect to which Executive has been employed by the Company
for less than 12 full months), bonus paid or payable, including by reason of
any deferral, to Executive by the Company and its affiliated companies in
respect of the five fiscal years of the Company (or such portion thereof during
which Executive performed services for the Company if Executive shall have been
employed by the Company for less than such five fiscal year period) immediately
preceding the fiscal year in which the Change in Control occurs, provided,
however, that in the event there are fewer than 30 whole months (18 whole
months if a Change in Control has not occurred) remaining from the Date of
Termination to the date of Executive's 70th birthday, the amount calculated in
accordance with this Section 3(a)(2) shall be reduced by multiplying such
amount by a fraction the numerator of which is the number of
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<PAGE> 24
months, including a partial month (with a partial month being expressed as a
fraction the numerator of which is the number of days remaining in such
month and the denominator of which is the number of days in such month), so
remaining and the denominator of which is 30 (18 if a Change in Control has not
occurred); provided further, that any amount paid pursuant to this Section
3(a)(2) shall be paid in lieu of any other amount of severance relating to
salary or bonus continuation to be received by Executive upon termination of
employment of Executive under any severance plan, policy or arrangement of the
Company.
(b) For a period of 2.5 years (18 months if a Change in
Control has not occurred) commencing on the Date of Termination, the Company
shall continue to keep in full force and effect all policies of medical,
accident, disability and life insurance with respect to Executive and his
dependents with the same level of coverage, upon the same terms and otherwise
to the same extent as such policies shall have been in effect immediately prior
to the Date of Termination or, if more favorable to Executive, as provided
generally with respect to other peer executives of the Company and its
affiliated companies, and the Company and Executive shall share the costs of
the continuation of such insurance coverage in the same proportion as such
costs were shared immediately prior to the Date of Termination.
(c) If during the Termination Period the employment of
Executive shall terminate by reason of a Nonqualifying Termination, then the
Company shall pay to Executive within 30 days following the Date of
Termination, a cash amount equal to the sum of (1) Executive's full annual base
salary from the Company through the Date of Termination, to the extent not
theretofore paid and (2) any compensation previously deferred by Executive
(together with any interest and earnings thereon) and any accrued vacation pay,
in each case to the extent not theretofore paid.
3. Certain Additional Payments by the Company. (a)
Anything in this Agreement to the contrary notwithstanding, in the event it
shall be determined that any payment, benefit or distribution by the Company or
its affiliated companies to or for the benefit of Executive (whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise, but determined without regard to any additional payments required
under this Section 3) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the Code, or any successor provision, or any interest or
penalties are incurred by Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then Executive shall be entitled
to receive an additional payment (a "Gross-Up Payment") in an amount such that
after payment by
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<PAGE> 25
Executive of all taxes (including any interest or penalties
imposed with respect to such taxes), including, without limitation, any income
taxes (and any interest and penalties imposed with respect thereto) and Excise
Tax imposed upon the Gross-Up Payment, Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 3(c), all
determinations required to be made under this Section 3, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the Company's public accounting firm (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Company and Executive
within 15 business days of the receipt of notice from Executive that there has
been a Payment, or such earlier time as is requested by the Company. In the
event that the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting the Change in Control, Executive shall
appoint another nationally recognized public accounting firm to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined
pursuant to this Section 3, shall be paid by the Company to Executive within
five days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by Executive, it shall
furnish Executive with a written opinion that failure to report the Excise Tax
on Executive's applicable federal income tax return would not result in the
imposition of a negligence or similar penalty. Any determination by the
Accounting Firm shall be binding upon the Company and Executive. As a result
of the uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is possible
that Gross-Up Payments which will not have been made by the Company should have
been made, including subsequent interest and penalties ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 3(c) and Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Executive.
(c) Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than 10 business days after Executive
is informed in writing of such claim and shall apprise the Company of the
nature
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<PAGE> 26
of such claim and the date on which such claim is requested to be paid.
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies Executive in writing prior to the
expiration of such period that it desires to contest such claim, Executive
shall:
(1) give the Company any information reasonably requested by
the Company relating to such claim,
(2) take such action in connection with contesting such
claim as the Company shall reasonably request in
writing from time to time, including, without limitation,
accepting legal representation with respect to such claim
by an attorney reasonably selected by the Company,
(3) cooperate with the Company in good faith in order
effectively to contest such claim, and
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Section 3(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and Executive agrees to prosecute such contest
to a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided further, that if the Company directs Executive to pay such
claim and sue for a refund, the Company shall advance the amount of such
payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such
advance; and provided further, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of Executive with respect to
which such contested amount is claimed to be due
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<PAGE> 27
is limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced
by the Company pursuant to Section 3(c), Executive becomes entitled to receive,
and receives, any refund with respect to such claim, Executive shall (subject
to the Company's complying with the requirements of Section 3(c)) promptly pay
to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by
Executive of an amount advanced by the Company pursuant to Section 3(c), a
determination is made that Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify Executive in writing of
its intent to contest such denial of refund prior to the expiration of 30 days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid.
4. Withholding Taxes. The Company may withhold from all
payments due to Executive (or his beneficiary or estate) hereunder all taxes
which, by applicable federal, state, local or other law, the Company is
required to withhold therefrom.
5. Reimbursement of Expenses. If any contest or dispute
shall arise under this Agreement involving termination of Executive's
employment with the Company (which shall be deemed to include, without
limitation, issues relating to Executive's stock options) or involving the
failure or refusal of the Company to perform fully in accordance with the terms
hereof, the Company shall reimburse Executive, on a current basis, for all
legal fees and expenses, if any, incurred by Executive in connection with such
contest or dispute, together with interest in an amount equal to the base rate
of The First National Bank of Boston from time to time in effect, but in no
event higher than the maximum legal rate permissible under applicable law, such
interest to accrue from the date the Company receives Executive's statement for
such fees and expenses through the date of payment thereof; provided, however,
that in the event the resolution of any such contest or dispute includes a
finding denying, in total, Executive's claims in such contest or dispute,
Executive shall be required to reimburse the Company, over a period of 12
months from the date of such resolution, for all sums advanced to Executive
pursuant to this Section 5; provided, further, that no such reimbursement shall
be required if Executive had a reasonable basis for the position taken by
Executive with respect to such claims.
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<PAGE> 28
6. Termination of Agreement. This Agreement shall be
effective on the date hereof and shall terminate upon the first to occur of (i)
Executive's 70th birthday and (ii) Executive's death.
7. Scope of Agreement. Nothing in this Agreement shall be
deemed to entitle Executive to continued employment with the Company or its
subsidiaries.
8. Directors and Officers Liability Insurance;
Indemnification. The Company agrees that, notwithstanding a Termination of
Executive's employment with the Company, the Company shall, for at least three
years after the Date of Termination, use all reasonable efforts to have
Executive included as a named insured or otherwise covered for actions or
failures to act by Executive in his capacity as a director or officer of the
Company to at least the same extent as other executive officers or directors,
as the case may be, of the Company under any directors and officers liability
insurance policies maintained by the Company; provided that the additional cost
of providing coverage with a retroactive date including Executive's period of
service or with an extended reporting period or a combination of both does not
materially increase the cost of the Company's directors and officers insurance.
The Company agrees that it will not alter the indemnification provisions in its
charter or by-laws so as to give Executive less protection thereunder with
respect to periods during which Executive serves or served the Company as an
executive officer or other employee as is afforded other executive officers or
peer employees, as the case may be, with respect to periods during which they
serve the Company.
9. Successors; Binding Agreement.
(a) This Agreement shall not be terminated by any merger or
consolidation of the Company whereby the Company is or is not the surviving or
resulting corporation or as a result of any transfer of all or substantially
all of the assets of the Company. In the event of any such merger,
consolidation or transfer of assets, the provisions of this Agreement shall be
binding upon the surviving or resulting corporation or the person or entity to
which such assets are transferred.
(b) The Company agrees that concurrently with any merger,
consolidation or transfer of assets referred to in paragraph (a) of this
Section 10, it will cause any successor or transferee unconditionally to
assume, by written instrument delivered to Executive (or his beneficiary or
estate), all of the obligations of the Company hereunder. Failure of the
Company to obtain such assumption prior to the effectiveness of any such
merger, consolidation or transfer of assets shall be a breach of this Agreement
and shall entitle Executive to compensation and
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<PAGE> 29
other benefits from the Company in the same amount and on the same terms as
Executive would be entitled hereunder if Executive's employment were
terminated following a Change in Control other than by reason of a
Nonqualifying Termination. For purposes of implementing the foregoing, the
date on which any such merger, consolidation or transfer becomes effective
shall be deemed the Date of Termination.
(c) This Agreement shall inure to the benefit of and be
enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive shall die while any amounts would be payable to Executive hereunder
had Executive continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to such
person or persons appointed in writing by Executive to receive such amounts or,
if no person is so appointed, to Executive's estate.
10. Notice. (a) For purposes of this Agreement, all notices
and other communications required or permitted hereunder shall be in writing
and shall be deemed to have been duly given when delivered or five days after
deposit in the United States mail, certified and return receipt requested,
postage prepaid, addressed (1) if to the Executive, to
_________________________, and if to the Company, to Marks Bros. Jewelers,
Inc., 155 N. Wacker Drive, Chicago, Illinois 60606, attention: Secretary, or
(2) to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
(b) A written notice of Executive's Date of Termination
by the Company or Executive, as the case may be, to the other, shall (i)
indicate the specific termination provision in this Agreement relied upon, (ii)
to the extent applicable, set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated and (iii) specify the termination
date (which date shall be not less than 15 days after the giving of such
notice). The failure by Executive or the Company to set forth in such notice
any fact or circumstance which contributes to a showing of Good Reason or Cause
shall not waive any right of Executive or the Company hereunder or preclude
Executive or the Company from asserting such fact or circumstance in enforcing
Executive's or the Company's rights hereunder.
11. Full Settlement; Resolution of Disputes. (a) The
Company's obligation to make any payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim, right or action
which the Company may have against Executive or others. In no event shall
Executive be
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<PAGE> 30
obligated to seek other employment or take any other action by way
of mitigation of the amounts payable to Executive under any of the provisions
of this Agreement and, such amounts shall not be reduced whether or not
Executive obtains other employment.
(b) If there shall be any dispute between the Company and
Executive in the event of any termination of Executive's employment (which
shall be deemed to include, without limitation, issues relating to Executive's
options), then, unless and until there is a final, nonappealable judgment by a
court of competent jurisdiction declaring that such termination was for Cause,
that the determination by Executive of the existence of Good Reason was not
made in good faith, or that the Company is not otherwise obligated to pay any
amount or provide any benefit to Executive and his dependents or other
beneficiaries, as the case may be, under paragraphs (a) and (b) of Section 3,
the Company shall pay all amounts, and provide all benefits, to Executive and
his dependents or other beneficiaries, as the case may be, that the Company
would be required to pay or provide pursuant to paragraphs (a) and (b) of
Section 3 as though such termination were by the Company without Cause or by
Executive with Good Reason; provided, however, that the Company shall not be
required to pay any disputed amounts pursuant to this paragraph except upon
receipt of an undertaking by or on behalf of Executive to repay all such
amounts to which Executive is ultimately adjudged by such court not to be
entitled.
12. Governing Law; Validity. The interpretation,
construction and performance of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Illinois without regard to the principle of conflicts of laws. The invalidity
or unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which
other provisions shall remain in full force and effect.
13. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original and all of
which together shall constitute one and the same instrument.
14. Miscellaneous. No provision of this Agreement may be
modified or waived unless such modification or waiver is agreed to in writing
and signed by Executive and by a duly authorized officer of the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. Failure by Executive or the Company to insist upon strict compliance
with any provision of this Agreement or to assert any right Executive or the
Company
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<PAGE> 31
may have hereunder, including, without limitation, the right of Executive to
terminate employment for Good Reason, shall not be deemed to be a waiver of
such provision or right or any other provision or right of this Agreement.
The rights of, and benefits payable to, Executive, his estate or his
beneficiaries pursuant to this Agreement are in addition to any rights of, or
benefits payable to, Executive, his estate or his beneficiaries under any
other employee benefit plan or compensation program of the Company.
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<PAGE> 32
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by a duly authorized officer of the Company and Executive has
executed this Agreement as of the day and year first above written.
MARKS BROS. JEWELERS, INC.
By: /s/ Hugh M. Patinkin
-------------------------------
Hugh M. Patinkin
Chairman, President and
Chief Executive Officer
/s/ John R. Desjardins
-------------------------------
John R. Desjardins
Executive Vice President,
Finance & Administration,
Treasurer and Secretary
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<PAGE> 33
SEVERANCE AGREEMENT
THIS AGREEMENT is entered into as of the 7th day of May, 1996
by and between Marks Bros. Jewelers, Inc., a Delaware corporation, and Matthew
M. Patinkin ("Executive").
W I T N E S S E T H
WHEREAS, Executive currently serves as a key employee of the
Company (as defined in Section 1) and his or her services and knowledge are
valuable to the Company in connection with the management of one or more of the
Company's principal operating facilities, divisions, departments or
subsidiaries;
WHEREAS, concurrently with the execution hereof Executive and
the Company are terminating Executive's employment agreement with the Company,
which employment agreement provided for substantial benefits (including
severance); and
WHEREAS, the Board (as defined in Section 1) has determined
that it is in the best interests of the Company and its stockholders to secure
Executive's continued services, and to encourage Executive's full attention and
dedication to the Company, the Board has authorized the Company to enter into
this Agreement.
NOW, THEREFORE, for and in consideration of the premises and
the mutual covenants and agreements herein contained, the Company and Executive
hereby agree as follows:
1. Definitions. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause means (1) the commission by Executive of a
felony involving moral turpitude or (2) any material breach of any statutory or
common law duty to the Company or any subsidiary involving wilful malfeasance.
Activities undertaken by Executive in accordance with the letter from the
Company to Executive dated February 12, 1996 and the related amendment of such
date to Executive's prior Employment Agreement dated August 30, 1995 (as
amended) with the Company (notwithstanding the fact that such Employment
Agreement was terminated) shall not constitute "Cause."
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(c) "Change in Control" means:
(1) 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 Securities Exchange Act of 1934, as amended (the "Exchange
Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated
under the Exchange Act, of 25% or more of either (i) the then outstanding
shares of common stock of the Company (the "Outstanding Company Common Stock")
or (ii) 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"); provided, however, that the following
acquisitions shall not constitute a Change in Control: (A) any acquisition
directly from the Company (excluding any acquisition resulting from the
exercise of a conversion or exchange privilege in respect of outstanding
convertible or exchangeable securities), (B) any acquisition by an employee
benefit plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, (C) any acquisition by an Exempt Person,
or (D) any acquisition by any corporation pursuant to a reorganization, merger
or consolidation involving the Company, if, immediately after such
reorganization, merger or consolidation, each of the conditions described in
clauses (i), (ii) and (iii) of subsection (3) of this Section (1)(c) shall be
satisfied;
(2) individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of such Board; provided, however, that any individual who becomes a
director of the Company subsequent to the 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 to have been a member of the Incumbent Board; and provided
further, that no 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 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 be deemed to have been a member
of the Incumbent Board;
(3) approval by the stockholders of the Company of a
reorganization, merger or consolidation unless, in any such case, immediately
after such reorganization, merger or consolidation, (i) more than 60% of the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and more than 60% of the combined
voting power of the then outstanding securities of such corporation entitled to
vote generally in the election of directors is then beneficially
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owned, directly or indirectly, by all or substantially all of the
individuals or entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities
immediately prior to such reorganization, merger or consolidation and in
substantially the same proportions relative to each other as their ownership,
immediately prior to such reorganization, merger or consolidation, of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities,
as the case may be, (ii) no Person (other than the Company, any employee
benefit plan (or related trust) sponsored or maintained by the Company or the
corporation resulting from such reorganization, merger or consolidation (or any
corporation controlled by the Company) and any Person which beneficially owned,
immediately prior to such reorganization, merger or consolidation, directly or
indirectly, 25% or more of the Outstanding Company Common Stock or the
Outstanding Company Voting Securities, as the case may be) beneficially owns,
directly or indirectly, 25% or more of the then outstanding shares of common
stock of such corporation or 25% or more of the combined voting power of the
then outstanding securities of such corporation entitled to vote generally in
the election of directors and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such reorganization,
merger or consolidation were members of the Incumbent Board at the time of the
execution of the initial agreement or action of the Board providing for such
reorganization, merger or consolidation; or
(4) approval by the stockholders of the Company of (i) a plan of
complete liquidation or dissolution of the Company or (ii) the sale or other
disposition of all or substantially all of the assets of the Company other than
to a corporation with respect to which, immediately after such sale or other
disposition, (A) more than 60% of the then outstanding shares of common stock
thereof and more than 60% of the combined voting power of the then outstanding
securities thereof entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and the Outstanding Company Voting
Securities immediately prior to such sale or other disposition and in
substantially the same proportions relative to each other as their ownership,
immediately prior to such sale or other disposition, of the Outstanding Company
Common Stock and the Outstanding Company Voting Securities, as the case may be,
(B) no Person (other than the Company, any employee benefit plan (or related
trust) sponsored or maintained by the Company or such corporation (or any
corporation controlled by the Company) and any Person which beneficially owned,
immediately prior to such sale or other disposition, directly or indirectly,
25% or more of the Outstanding Company Common Stock or the Outstanding Company
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Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 25% or more of the then outstanding shares of common stock thereof
or 25% or more of the combined voting power of the then outstanding securities
thereof entitled to vote generally in the election of directors and (C) at
least a majority of the members of the board of directors thereof were members
of the Incumbent Board at the time of the execution of the initial agreement or
action of the Board providing for such sale or other disposition.
(d) "Company" means Marks Bros. Jewelers, Inc., a
Delaware corporation.
(e) "Date of Termination" means (1) the effective date on
which Executive's employment by the Company terminates as specified in a prior
written notice by the Company or Executive, as the case may be, to the other,
delivered pursuant to Section 11 or (2) if Executive's employment by the
Company terminates by reason of death, the date of death of Executive.
(f) "Exempt Person" means each of Hugh M. Patinkin, John
R. Desjardins, Matthew M. Patinkin and any Affiliate (as such term is defined
in Rule 12b-1 under the Securities Exchange Act of 1934, as in effect on the
date hereof, "Affiliate) thereof and, until consummation of the Company's
initial public offering, Frontenac Company and any Affiliate thereof.
(g) "Good Reason" means, without Executive's express
written consent, the occurrence of any of the following events:
(1) any of (i) the assignment to Executive of any duties
inconsistent in any material respect with Executive's position(s), duties,
responsibilities or status with the Company as of the date of this Agreement
or, if a Change in Control has occurred, immediately prior to such Change in
Control, (ii) a change in Executive's reporting responsibilities, titles or
offices with the Company as in effect on the date of this Agreement or, if a
Change in Control has occurred, immediately prior to such Change in Control or
(iii) any removal or involuntary termination of Executive from the Company
otherwise than as expressly permitted by this Agreement or any failure to
re-elect Executive to any position with the Company held by Executive on the
date of this Agreement or, if a Change in Control has occurred, immediately
prior to such Change in Control;
(2) a reduction by the Company in Executive's rate of annual
base salary as in effect on the date of this Agreement or, if a Change in
Control has occurred, immediately prior to such Change in Control or as the
same may be increased from time to time thereafter;
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(3) any requirement of the Company that Executive (i) be
based anywhere other than at the facility where the Executive is located on the
date of this Agreement (or a new headquarters facility within a 30-mile radius
of the Company's current headquarters) or (ii) travel on Company business to an
extent substantially more burdensome than the travel obligations of Executive
immediately prior to the date hereof or, if a Change in Control has occurred,
immediately prior to such Change in Control;
(4) the failure of the Company to (i) continue in effect any
employee benefit plan or compensation plan in which Executive is participating
immediately prior to the date of this Agreement or, if a Change in Control has
occurred, prior to such Change in Control, unless Executive is permitted to
participate in other plans providing Executive with substantially comparable
benefits, or the taking of any action by the Company which would adversely
affect Executive's participation in or materially reduce Executive's benefits
under any such plan, (ii) provide Executive and Executive's dependents welfare
benefits (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for Executive immediately prior to the date of
this Agreement or, if a Change in Control has occurred, prior to such Change in
Control or, if more favorable to Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies, (iii) provide fringe benefits in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for Executive immediately prior to the date of
this Agreement or, if a Change in Control has occurred, prior to such Change in
Control or, if more favorable to Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies, (iv) provide an office or offices of a size and with
furnishings and other appointments, together with personal secretarial and
other assistance, at least equal to the most favorable of the foregoing
provided to Executive by the Company and its affiliated companies immediately
prior to the date of this Agreement or, if a Change in Control has occurred,
prior to such Change in Control or, if more favorable to Executive, as provided
generally at any time thereafter with respect to other peer executives of the
Company
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and its affiliated companies, (v) provide Executive with paid vacation in
accordance with the most favorable plans, policies, programs and practices of
the Company and its affiliated companies as in effect for Executive immediately
prior to the date of this Agreement or, if a Change in Control has occurred,
prior to such Change in Control or, if more favorable to Executive, as in
effect generally at any time thereafter with respect to other peer executives
of the Company and its affiliated companies, or (vi) reimburse Executive
promptly for all reasonable employment expenses incurred by Executive in
accordance with the most favorable policies, practices and procedures of the
Company and its affiliated companies in effect for Executive immediately prior
to the date of this Agreement or, if a Change in Control has occurred, prior to
such Change in Control, or if more favorable to Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies; or
(5) the failure of the Company to obtain the assumption
agreement from any successor as contemplated in Section 9(b).
For purposes of this Agreement, any good faith determination
of Good Reason made by Executive shall be conclusive; provided, however, that
an isolated, insubstantial and inadvertent action taken in good faith and which
is remedied by the Company promptly after receipt of notice thereof given by
Executive shall not constitute Good Reason.
(h) "Nonqualifying Termination" means a termination of
Executive's employment (1) by the Company for Cause, (2) by Executive for any
reason other than a Good Reason, (3) as a result of Executive's death or (4) by
the Company due to Executive's absence from his duties with the Company on a
full-time basis for at least 180 consecutive days as a result of Executive's
incapacity due to physical or mental illness; provided, however, that a
termination of Executive's employment for any reason whatsoever during the
"Window Period" (hereinafter defined) shall not constitute a Nonqualifying
Termination.
(i) "Termination Period" means the period of time
beginning with the date hereof and ending on the earliest to occur of (1)
Executive's 70th birthday, (2) Executive's death and (3) three years following
a Change in Control.
(j) "Window Period" means the 30-day period commencing
six months after the date of a Change in Control.
2. Payments Upon Termination of Employment.
(a) If during the Termination Period the employment of
Executive shall terminate, other than by reason of a
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Nonqualifying Termination, then the Company shall pay to Executive (or
Executive's beneficiary or estate) within 30 days following the Date of
Termination, as compensation for services rendered to the Company:
(1) a lump sum cash amount equal to the sum of (i)
Executive's full annual base salary from the Company and its affiliated
companies through the Date of Termination, to the extent not theretofore paid,
(ii) Executive's annual bonus in an amount at least equal to the higher of (x)
one-half of the maximum bonus the Executive could earn during the fiscal year
during which such Change in Control occurs and (y) the average of the
Executive's annual bonus (annualized for any fiscal year consisting of less
than 12 full months) with respect to which bonus paid or payable, including by
reason of any deferral, to Executive by the Company and its affiliated
companies in respect of the two fiscal years of the Company (or such portion
thereof during which Executive performed services for the Company if Executive
shall have been employed by the Company for less than such two fiscal year
period) immediately preceding the fiscal year in which the Change in Control
occurs, multiplied by a fraction, the numerator of which is the number of days
in the fiscal year in which the Change in Control occurs through the Date of
Termination and the denominator of which is 365 or 366, as applicable, and
(iii) any compensation previously deferred by Executive (together with any
interest and earnings thereon) and any accrued vacation pay, in each case to
the extent not theretofore paid; plus
(2) a lump-sum cash amount (subject to any applicable payroll
or other taxes required to be withheld pursuant to Section 4) in an amount
equal to (i) 2.5 times (1.5 times if a Change in Control has not occurred)
Executive's highest annual base salary from the Company and its affiliated
companies in effect during the 12-month period prior to the Date of Termination
plus (ii) 2.5 times (1.5 times if a Change in Control has not occurred)
Executive's highest annualized (for any fiscal year consisting of less than 12
full months or with respect to which Executive has been employed by the Company
for less than 12 full months), bonus paid or payable, including by reason of
any deferral, to Executive by the Company and its affiliated companies in
respect of the five fiscal years of the Company (or such portion thereof during
which Executive performed services for the Company if Executive shall have been
employed by the Company for less than such five fiscal year period) immediately
preceding the fiscal year in which the Change in Control occurs, provided,
however, that in the event there are fewer than 30 whole months (18 whole
months if a Change in Control has not occurred) remaining from the Date of
Termination to the date of Executive's 70th birthday, the amount calculated in
accordance with this Section 3(a)(2) shall be reduced by multiplying such
amount by a fraction the numerator of which is the number of
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months, including a partial month (with a partial month being expressed as a
fraction the numerator of which is the number of days remaining in such
month and the denominator of which is the number of days in such month), so
remaining and the denominator of which is 30 (18 if a Change in Control has not
occurred); provided further, that any amount paid pursuant to this Section
3(a)(2) shall be paid in lieu of any other amount of severance relating to
salary or bonus continuation to be received by Executive upon termination of
employment of Executive under any severance plan, policy or arrangement of the
Company.
(b) For a period of 2.5 years (18 months if a Change in
Control has not occurred) commencing on the Date of Termination, the Company
shall continue to keep in full force and effect all policies of medical,
accident, disability and life insurance with respect to Executive and his
dependents with the same level of coverage, upon the same terms and otherwise
to the same extent as such policies shall have been in effect immediately prior
to the Date of Termination or, if more favorable to Executive, as provided
generally with respect to other peer executives of the Company and its
affiliated companies, and the Company and Executive shall share the costs of
the continuation of such insurance coverage in the same proportion as such
costs were shared immediately prior to the Date of Termination.
(c) If during the Termination Period the employment of
Executive shall terminate by reason of a Nonqualifying Termination, then the
Company shall pay to Executive within 30 days following the Date of
Termination, a cash amount equal to the sum of (1) Executive's full annual base
salary from the Company through the Date of Termination, to the extent not
theretofore paid and (2) any compensation previously deferred by Executive
(together with any interest and earnings thereon) and any accrued vacation pay,
in each case to the extent not theretofore paid.
3. Certain Additional Payments by the Company. (a)
Anything in this Agreement to the contrary notwithstanding, in the event it
shall be determined that any payment, benefit or distribution by the Company or
its affiliated companies to or for the benefit of Executive (whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise, but determined without regard to any additional payments required
under this Section 3) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the Code, or any successor provision, or any interest or
penalties are incurred by Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then Executive shall be entitled
to receive an additional payment (a "Gross-Up Payment") in an amount such that
after payment by
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Executive of all taxes (including any interest or penalties imposed with
respect to such taxes), including, without limitation, any income taxes (and
any interest and penalties imposed with respect thereto) and Excise Tax imposed
upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 3(c), all
determinations required to be made under this Section 3, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the Company's public accounting firm (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Company and Executive
within 15 business days of the receipt of notice from Executive that there has
been a Payment, or such earlier time as is requested by the Company. In the
event that the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting the Change in Control, Executive shall
appoint another nationally recognized public accounting firm to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined
pursuant to this Section 3, shall be paid by the Company to Executive within
five days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by Executive, it shall
furnish Executive with a written opinion that failure to report the Excise Tax
on Executive's applicable federal income tax return would not result in the
imposition of a negligence or similar penalty. Any determination by the
Accounting Firm shall be binding upon the Company and Executive. As a result
of the uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is possible
that Gross-Up Payments which will not have been made by the Company should have
been made, including subsequent interest and penalties ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 3(c) and Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Executive.
(c) Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than 10 business days after Executive
is informed in writing of such claim and shall apprise the Company of the
nature
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of such claim and the date on which such claim is requested to be paid.
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies Executive in writing prior to the
expiration of such period that it desires to contest such claim, Executive
shall:
(1) give the Company any information reasonably requested by
the Company relating to such claim,
(2) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by the Company,
(3) cooperate with the Company in good faith in order
effectively to contest such claim, and
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Section 3(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and Executive agrees to prosecute such contest
to a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided further, that if the Company directs Executive to pay such
claim and sue for a refund, the Company shall advance the amount of such
payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such
advance; and provided further, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of Executive with respect to
which such contested amount is claimed to be due
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is limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced
by the Company pursuant to Section 3(c), Executive becomes entitled to receive,
and receives, any refund with respect to such claim, Executive shall (subject
to the Company's complying with the requirements of Section 3(c)) promptly pay
to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by
Executive of an amount advanced by the Company pursuant to Section 3(c), a
determination is made that Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify Executive in writing of
its intent to contest such denial of refund prior to the expiration of 30 days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid.
4. Withholding Taxes. The Company may withhold from all
payments due to Executive (or his beneficiary or estate) hereunder all taxes
which, by applicable federal, state, local or other law, the Company is
required to withhold therefrom.
5. Reimbursement of Expenses. If any contest or dispute
shall arise under this Agreement involving termination of Executive's
employment with the Company (which shall be deemed to include, without
limitation, issues relating to Executive's stock options) or involving the
failure or refusal of the Company to perform fully in accordance with the terms
hereof, the Company shall reimburse Executive, on a current basis, for all
legal fees and expenses, if any, incurred by Executive in connection with such
contest or dispute, together with interest in an amount equal to the base rate
of The First National Bank of Boston from time to time in effect, but in no
event higher than the maximum legal rate permissible under applicable law, such
interest to accrue from the date the Company receives Executive's statement for
such fees and expenses through the date of payment thereof; provided, however,
that in the event the resolution of any such contest or dispute includes a
finding denying, in total, Executive's claims in such contest or dispute,
Executive shall be required to reimburse the Company, over a period of 12
months from the date of such resolution, for all sums advanced to Executive
pursuant to this Section 5; provided, further, that no such reimbursement shall
be required if Executive had a reasonable basis for the position taken by
Executive with respect to such claims.
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6. Termination of Agreement. This Agreement shall be
effective on the date hereof and shall terminate upon the first to occur of (i)
Executive's 70th birthday and (ii) Executive's death.
7. Scope of Agreement. Nothing in this Agreement shall be
deemed to entitle Executive to continued employment with the Company or its
subsidiaries.
8. Directors and Officers Liability Insurance;
Indemnification. The Company agrees that, notwithstanding a Termination of
Executive's employment with the Company, the Company shall, for at least three
years after the Date of Termination, use all reasonable efforts to have
Executive included as a named insured or otherwise covered for actions or
failures to act by Executive in his capacity as a director or officer of the
Company to at least the same extent as other executive officers or directors,
as the case may be, of the Company under any directors and officers liability
insurance policies maintained by the Company; provided that the additional cost
of providing coverage with a retroactive date including Executive's period of
service or with an extended reporting period or a combination of both does not
materially increase the cost of the Company's directors and officers insurance.
The Company agrees that it will not alter the indemnification provisions in its
charter or by-laws so as to give Executive less protection thereunder with
respect to periods during which Executive serves or served the Company as an
executive officer or other employee as is afforded other executive officers or
peer employees, as the case may be, with respect to periods during which they
serve the Company.
9. Successors; Binding Agreement.
(a) This Agreement shall not be terminated by any merger or
consolidation of the Company whereby the Company is or is not the surviving or
resulting corporation or as a result of any transfer of all or substantially
all of the assets of the Company. In the event of any such merger,
consolidation or transfer of assets, the provisions of this Agreement shall be
binding upon the surviving or resulting corporation or the person or entity to
which such assets are transferred.
(b) The Company agrees that concurrently with any merger,
consolidation or transfer of assets referred to in paragraph (a) of this
Section 10, it will cause any successor or transferee unconditionally to
assume, by written instrument delivered to Executive (or his beneficiary or
estate), all of the obligations of the Company hereunder. Failure of the
Company to obtain such assumption prior to the effectiveness of any such
merger, consolidation or transfer of assets shall be a breach of this Agreement
and shall entitle Executive to compensation
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and other benefits from the Company in the same amount and on the same
terms as Executive would be entitled hereunder if Executive's employment were
terminated following a Change in Control other than by reason of a
Nonqualifying Termination. For purposes of implementing the foregoing, the
date on which any such merger, consolidation or transfer becomes effective
shall be deemed the Date of Termination.
(c) This Agreement shall inure to the benefit of and be
enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive shall die while any amounts would be payable to Executive hereunder
had Executive continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to such
person or persons appointed in writing by Executive to receive such amounts or,
if no person is so appointed, to Executive's estate.
10. Notice. (a) For purposes of this Agreement, all notices
and other communications required or permitted hereunder shall be in writing
and shall be deemed to have been duly given when delivered or five days after
deposit in the United States mail, certified and return receipt requested,
postage prepaid, addressed (1) if to the Executive, to
_________________________, and if to the Company, to Marks Bros. Jewelers,
Inc., 155 N. Wacker Drive, Chicago, Illinois 60606, attention: Secretary, or
(2) to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
(b) A written notice of Executive's Date of Termination
by the Company or Executive, as the case may be, to the other, shall (i)
indicate the specific termination provision in this Agreement relied upon, (ii)
to the extent applicable, set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated and (iii) specify the termination
date (which date shall be not less than 15 days after the giving of such
notice). The failure by Executive or the Company to set forth in such notice
any fact or circumstance which contributes to a showing of Good Reason or Cause
shall not waive any right of Executive or the Company hereunder or preclude
Executive or the Company from asserting such fact or circumstance in enforcing
Executive's or the Company's rights hereunder.
11. Full Settlement; Resolution of Disputes. (a) The
Company's obligation to make any payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim, right or action
which the Company may have against Executive or others. In no event shall
Executive be
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obligated to seek other employment or take any other action by way
of mitigation of the amounts payable to Executive under any of the provisions
of this Agreement and, such amounts shall not be reduced whether or not
Executive obtains other employment.
(b) If there shall be any dispute between the Company and
Executive in the event of any termination of Executive's employment (which
shall be deemed to include, without limitation, issues relating to Executive's
options), then, unless and until there is a final, nonappealable judgment by a
court of competent jurisdiction declaring that such termination was for Cause,
that the determination by Executive of the existence of Good Reason was not
made in good faith, or that the Company is not otherwise obligated to pay any
amount or provide any benefit to Executive and his dependents or other
beneficiaries, as the case may be, under paragraphs (a) and (b) of Section 3,
the Company shall pay all amounts, and provide all benefits, to Executive and
his dependents or other beneficiaries, as the case may be, that the Company
would be required to pay or provide pursuant to paragraphs (a) and (b) of
Section 3 as though such termination were by the Company without Cause or by
Executive with Good Reason; provided, however, that the Company shall not be
required to pay any disputed amounts pursuant to this paragraph except upon
receipt of an undertaking by or on behalf of Executive to repay all such
amounts to which Executive is ultimately adjudged by such court not to be
entitled.
12. Governing Law; Validity. The interpretation,
construction and performance of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Illinois without regard to the principle of conflicts of laws. The invalidity
or unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which
other provisions shall remain in full force and effect.
13. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original and all of
which together shall constitute one and the same instrument.
14. Miscellaneous. No provision of this Agreement may be
modified or waived unless such modification or waiver is agreed to in writing
and signed by Executive and by a duly authorized officer of the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. Failure by Executive or the Company to insist upon strict compliance
with any provision of this Agreement or to assert any right Executive or the
Company
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may have hereunder, including, without limitation, the right of Executive to
terminate employment for Good Reason, shall not be deemed to be a waiver of
such provision or right or any other provision or right of this Agreement. The
rights of, and benefits payable to, Executive, his estate or his beneficiaries
pursuant to this Agreement are in addition to any rights of, or benefits
payable to, Executive, his estate or his beneficiaries under any other employee
benefit plan or compensation program of the Company.
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IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by a duly authorized officer of the Company and Executive has
executed this Agreement as of the day and year first above written.
MARKS BROS. JEWELERS, INC.
By: /s/ Hugh M. Patinkin
-----------------------------
Hugh M. Patinkin
Chairman, President and
Chief Executive Officer
/s/ Matthew M. Patinkin
-----------------------------
Matthew M. Patinkin
Executive Vice President,
Store Operations
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SEVERANCE AGREEMENT
THIS AGREEMENT is entered into as of the 7th day of May, 1996
by and between Marks Bros. Jewelers, Inc., a Delaware corporation, and Lynn D.
Eisenheim ("Executive").
W I T N E S S E T H
WHEREAS, Executive currently serves as a key employee of the
Company (as defined in Section 1) and his or her services and knowledge are
valuable to the Company in connection with the management of one or more of the
Company's principal operating facilities, divisions, departments or
subsidiaries;
WHEREAS, concurrently with the execution hereof Executive and
the Company are terminating Executive's employment agreement with the Company,
which employment agreement provided for substantial benefits (including
severance); and
WHEREAS, the Board (as defined in Section 1) has determined
that it is in the best interests of the Company and its stockholders to secure
Executive's continued services, and to encourage Executive's full attention and
dedication to the Company, the Board has authorized the Company to enter into
this Agreement.
NOW, THEREFORE, for and in consideration of the premises and
the mutual covenants and agreements herein contained, the Company and Executive
hereby agree as follows:
1. Definitions. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means (1) the commission by Executive of a
felony involving moral turpitude or (2) any material breach of any statutory or
common law duty to the Company or any subsidiary involving wilful malfeasance.
Activities undertaken by Executive in accordance with the letter from the
Company to Executive dated February 12, 1996 and the related amendment of such
date to Executive's prior Employment Agreement dated August 30, 1995 (as
amended) with the Company (notwithstanding the fact that such Employment
Agreement was terminated) shall not constitute "Cause."
<PAGE> 50
(c) "Change in Control" means:
(1) 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 Securities Exchange Act of 1934, as amended (the "Exchange
Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated
under the Exchange Act, of 25% or more of either (i) the then outstanding
shares of common stock of the Company (the "Outstanding Company Common Stock")
or (ii) 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"); provided, however, that the following
acquisitions shall not constitute a Change in Control: (A) any acquisition
directly from the Company (excluding any acquisition resulting from the
exercise of a conversion or exchange privilege in respect of outstanding
convertible or exchangeable securities), (B) any acquisition by an employee
benefit plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, (C) any acquisition by an Exempt Person,
or (D) any acquisition by any corporation pursuant to a reorganization, merger
or consolidation involving the Company, if, immediately after such
reorganization, merger or consolidation, each of the conditions described in
clauses (i), (ii) and (iii) of subsection (3) of this Section (1)(c) shall be
satisfied;
(2) individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of such Board; provided, however, that any individual who becomes a
director of the Company subsequent to the 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 to have been a member of the Incumbent Board; and provided
further, that no 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 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 be deemed to have been a member
of the Incumbent Board;
(3) approval by the stockholders of the Company of a
reorganization, merger or consolidation unless, in any such case, immediately
after such reorganization, merger or consolidation, (i) more than 60% of the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and more than 60% of the combined
voting power of the then outstanding securities of such corporation entitled to
vote generally in the election of directors is then beneficially
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owned, directly or indirectly, by all or substantially all of the individuals
or entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and the Outstanding Company Voting Securities immediately
prior to such reorganization, merger or consolidation and in substantially the
same proportions relative to each other as their ownership, immediately prior
to such reorganization, merger or consolidation, of the Outstanding Company
Common Stock and the Outstanding Company Voting Securities, as the case may be,
(ii) no Person (other than the Company, any employee benefit plan (or related
trust) sponsored or maintained by the Company or the corporation resulting from
such reorganization, merger or consolidation (or any corporation controlled by
the Company) and any Person which beneficially owned, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, 25% or more of
the Outstanding Company Common Stock or the Outstanding Company Voting
Securities, as the case may be) beneficially owns, directly or indirectly, 25%
or more of the then outstanding shares of common stock of such corporation or
25% or more of the combined voting power of the then outstanding securities of
such corporation entitled to vote generally in the election of directors and
(iii) at least a majority of the members of the board of directors of the
corporation resulting from such reorganization, merger or consolidation were
members of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such reorganization, merger or
consolidation; or
(4) approval by the stockholders of the Company of (i) a plan of
complete liquidation or dissolution of the Company or (ii) the sale or other
disposition of all or substantially all of the assets of the Company other than
to a corporation with respect to which, immediately after such sale or other
disposition, (A) more than 60% of the then outstanding shares of common stock
thereof and more than 60% of the combined voting power of the then outstanding
securities thereof entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and the Outstanding Company Voting
Securities immediately prior to such sale or other disposition and in
substantially the same proportions relative to each other as their ownership,
immediately prior to such sale or other disposition, of the Outstanding Company
Common Stock and the Outstanding Company Voting Securities, as the case may be,
(B) no Person (other than the Company, any employee benefit plan (or related
trust) sponsored or maintained by the Company or such corporation (or any
corporation controlled by the Company) and any Person which beneficially owned,
immediately prior to such sale or other disposition, directly or indirectly,
25% or more of the Outstanding Company Common Stock or the Outstanding Company
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Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 25% or more of the then outstanding shares of common stock thereof
or 25% or more of the combined voting power of the then outstanding securities
thereof entitled to vote generally in the election of directors and (C) at
least a majority of the members of the board of directors thereof were members
of the Incumbent Board at the time of the execution of the initial agreement or
action of the Board providing for such sale or other disposition.
(d) "Company" means Marks Bros. Jewelers, Inc., a
Delaware corporation.
(e) "Date of Termination" means (1) the effective date on
which Executive's employment by the Company terminates as specified in a prior
written notice by the Company or Executive, as the case may be, to the other,
delivered pursuant to Section 11 or (2) if Executive's employment by the
Company terminates by reason of death, the date of death of Executive.
(f) "Exempt Person" means each of Hugh M. Patinkin, John
R. Desjardins, Matthew M. Patinkin and any Affiliate (as such term is defined
in Rule 12b-1 under the Securities Exchange Act of 1934, as in effect on the
date hereof, "Affiliate) thereof and, until consummation of the Company's
initial public offering, Frontenac Company and any Affiliate thereof.
(g) "Good Reason" means, without Executive's express
written consent, the occurrence of any of the following events:
(1) any of (i) the assignment to Executive of any duties
inconsistent in any material respect with Executive's position(s), duties,
responsibilities or status with the Company as of the date of this Agreement
or, if a Change in Control has occurred, immediately prior to such Change in
Control, (ii) a change in Executive's reporting responsibilities, titles or
offices with the Company as in effect on the date of this Agreement or, if a
Change in Control has occurred, immediately prior to such Change in Control or
(iii) any removal or involuntary termination of Executive from the Company
otherwise than as expressly permitted by this Agreement or any failure to
re-elect Executive to any position with the Company held by Executive on the
date of this Agreement or, if a Change in Control has occurred, immediately
prior to such Change in Control;
(2) a reduction by the Company in Executive's rate of annual
base salary as in effect on the date of this Agreement or, if a Change in
Control has occurred, immediately prior to such Change in Control or as the
same may be increased from time to time thereafter;
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<PAGE> 53
(3) any requirement of the Company that Executive (i) be
based anywhere other than at the facility where the Executive is located on the
date of this Agreement (or a new headquarters facility within a 30-mile radius
of the Company's current headquarters) or (ii) travel on Company business to an
extent substantially more burdensome than the travel obligations of Executive
immediately prior to the date hereof or, if a Change in Control has occurred,
immediately prior to such Change in Control;
(4) the failure of the Company to (i) continue in effect any
employee benefit plan or compensation plan in which Executive is participating
immediately prior to the date of this Agreement or, if a Change in Control has
occurred, prior to such Change in Control, unless Executive is permitted to
participate in other plans providing Executive with substantially comparable
benefits, or the taking of any action by the Company which would adversely
affect Executive's participation in or materially reduce Executive's benefits
under any such plan, (ii) provide Executive and Executive's dependents welfare
benefits (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for Executive immediately prior to the date of
this Agreement or, if a Change in Control has occurred, prior to such Change in
Control or, if more favorable to Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies, (iii) provide fringe benefits in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for Executive immediately prior to the date of
this Agreement or, if a Change in Control has occurred, prior to such Change in
Control or, if more favorable to Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies, (iv) provide an office or offices of a size and with
furnishings and other appointments, together with personal secretarial and
other assistance, at least equal to the most favorable of the foregoing
provided to Executive by the Company and its affiliated companies immediately
prior to the date of this Agreement or, if a Change in Control has occurred,
prior to such Change in Control or, if more favorable to Executive, as provided
generally at any time thereafter with respect to other peer executives of the
Company
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<PAGE> 54
and its affiliated companies, (v) provide Executive with paid vacation in
accordance with the most favorable plans, policies, programs and practices of
the Company and its affiliated companies as in effect for Executive immediately
prior to the date of this Agreement or, if a Change in Control has occurred,
prior to such Change in Control or, if more favorable to Executive, as in
effect generally at any time thereafter with respect to other peer executives
of the Company and its affiliated companies, or (vi) reimburse Executive
promptly for all reasonable employment expenses incurred by Executive in
accordance with the most favorable policies, practices and procedures of the
Company and its affiliated companies in effect for Executive immediately prior
to the date of this Agreement or, if a Change in Control has occurred, prior to
such Change in Control, or if more favorable to Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies; or
(5) the failure of the Company to obtain the assumption
agreement from any successor as contemplated in Section 9(b).
For purposes of this Agreement, any good faith determination
of Good Reason made by Executive shall be conclusive; provided, however, that
an isolated, insubstantial and inadvertent action taken in good faith and which
is remedied by the Company promptly after receipt of notice thereof given by
Executive shall not constitute Good Reason.
(h) "Nonqualifying Termination" means a termination of
Executive's employment (1) by the Company for Cause, (2) by Executive for any
reason other than a Good Reason, (3) as a result of Executive's death or (4) by
the Company due to Executive's absence from his duties with the Company on a
full-time basis for at least 180 consecutive days as a result of Executive's
incapacity due to physical or mental illness; provided, however, that a
termination of Executive's employment for any reason whatsoever during the
"Window Period" (hereinafter defined) shall not constitute a Nonqualifying
Termination.
(i) "Termination Period" means the period of time
beginning with the date hereof and ending on the earliest to occur of (1)
Executive's 70th birthday, (2) Executive's death and (3) three years following
a Change in Control.
(j) "Window Period" means the 30-day period commencing
six months after the date of a Change in Control.
2. Payments Upon Termination of Employment.
(a) If during the Termination Period the employment of
Executive shall terminate, other than by reason of a
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<PAGE> 55
Nonqualifying Termination, then the Company shall pay to Executive (or
Executive's beneficiary or estate) within 30 days following the Date of
Termination, as compensation for services rendered to the Company:
(1) a lump sum cash amount equal to the sum of (i)
Executive's full annual base salary from the Company and its affiliated
companies through the Date of Termination, to the extent not theretofore paid,
(ii) Executive's annual bonus in an amount at least equal to the higher of (x)
one-half of the maximum bonus the Executive could earn during the fiscal year
during which such Change in Control occurs and (y) the average of the
Executive's annual bonus (annualized for any fiscal year consisting of less
than 12 full months) with respect to which bonus paid or payable, including by
reason of any deferral, to Executive by the Company and its affiliated
companies in respect of the two fiscal years of the Company (or such portion
thereof during which Executive performed services for the Company if Executive
shall have been employed by the Company for less than such two fiscal year
period) immediately preceding the fiscal year in which the Change in Control
occurs, multiplied by a fraction, the numerator of which is the number of days
in the fiscal year in which the Change in Control occurs through the Date of
Termination and the denominator of which is 365 or 366, as applicable, and
(iii) any compensation previously deferred by Executive (together with any
interest and earnings thereon) and any accrued vacation pay, in each case to
the extent not theretofore paid; plus
(2) a lump-sum cash amount (subject to any applicable payroll
or other taxes required to be withheld pursuant to Section 4) in an amount
equal to (i) 2.5 times (1.5 times if a Change in Control has not occurred)
Executive's highest annual base salary from the Company and its affiliated
companies in effect during the 12-month period prior to the Date of Termination
plus (ii) 2.5 times (1.5 times if a Change in Control has not occurred)
Executive's highest annualized (for any fiscal year consisting of less than 12
full months or with respect to which Executive has been employed by the Company
for less than 12 full months), bonus paid or payable, including by reason of
any deferral, to Executive by the Company and its affiliated companies in
respect of the five fiscal years of the Company (or such portion thereof during
which Executive performed services for the Company if Executive shall have been
employed by the Company for less than such five fiscal year period) immediately
preceding the fiscal year in which the Change in Control occurs, provided,
however, that in the event there are fewer than 30 whole months (18 whole
months if a Change in Control has not occurred) remaining from the Date of
Termination to the date of Executive's 70th birthday, the amount calculated in
accordance with this Section 3(a)(2) shall be reduced by multiplying such
amount by a fraction the numerator of which is the number of
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months, including a partial month (with a partial month being expressed as a
fraction the numerator of which is the number of days remaining in such
month and the denominator of which is the number of days in such month), so
remaining and the denominator of which is 30 (18 if a Change in Control has not
occurred); provided further, that any amount paid pursuant to this Section
3(a)(2) shall be paid in lieu of any other amount of severance relating to
salary or bonus continuation to be received by Executive upon termination of
employment of Executive under any severance plan, policy or arrangement of the
Company.
(b) For a period of 2.5 years (18 months if a Change in
Control has not occurred) commencing on the Date of Termination, the Company
shall continue to keep in full force and effect all policies of medical,
accident, disability and life insurance with respect to Executive and his
dependents with the same level of coverage, upon the same terms and otherwise
to the same extent as such policies shall have been in effect immediately prior
to the Date of Termination or, if more favorable to Executive, as provided
generally with respect to other peer executives of the Company and its
affiliated companies, and the Company and Executive shall share the costs of
the continuation of such insurance coverage in the same proportion as such
costs were shared immediately prior to the Date of Termination.
(c) If during the Termination Period the employment of
Executive shall terminate by reason of a Nonqualifying Termination, then the
Company shall pay to Executive within 30 days following the Date of
Termination, a cash amount equal to the sum of (1) Executive's full annual base
salary from the Company through the Date of Termination, to the extent not
theretofore paid and (2) any compensation previously deferred by Executive
(together with any interest and earnings thereon) and any accrued vacation pay,
in each case to the extent not theretofore paid.
3. Certain Additional Payments by the Company. (a)
Anything in this Agreement to the contrary notwithstanding, in the event it
shall be determined that any payment, benefit or distribution by the Company or
its affiliated companies to or for the benefit of Executive (whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise, but determined without regard to any additional payments required
under this Section 3) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the Code, or any successor provision, or any interest or
penalties are incurred by Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then Executive shall be entitled
to receive an additional payment (a "Gross-Up Payment") in an amount such that
after payment by
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Executive of all taxes (including any interest or penalties imposed
with respect to such taxes), including, without limitation, any income taxes
(and any interest and penalties imposed with respect thereto) and Excise Tax
imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 3(c), all
determinations required to be made under this Section 3, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the Company's public accounting firm (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Company and Executive
within 15 business days of the receipt of notice from Executive that there has
been a Payment, or such earlier time as is requested by the Company. In the
event that the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting the Change in Control, Executive shall
appoint another nationally recognized public accounting firm to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined
pursuant to this Section 3, shall be paid by the Company to Executive within
five days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by Executive, it shall
furnish Executive with a written opinion that failure to report the Excise Tax
on Executive's applicable federal income tax return would not result in the
imposition of a negligence or similar penalty. Any determination by the
Accounting Firm shall be binding upon the Company and Executive. As a result
of the uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is possible
that Gross-Up Payments which will not have been made by the Company should have
been made, including subsequent interest and penalties ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 3(c) and Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Executive.
(c) Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than 10 business days after Executive
is informed in writing of such claim and shall apprise the Company of the
nature
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of such claim and the date on which such claim is requested to be paid.
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies Executive in writing prior to the
expiration of such period that it desires to contest such claim, Executive
shall:
(1) give the Company any information reasonably requested by
the Company relating to such claim,
(2) take such action in connection with contesting such
claim as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by the Company,
(3) cooperate with the Company in good faith in order
effectively to contest such claim, and
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Section 3(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and Executive agrees to prosecute such contest
to a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided further, that if the Company directs Executive to pay such
claim and sue for a refund, the Company shall advance the amount of such
payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such
advance; and provided further, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of Executive with respect to
which such contested amount is claimed to be due
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is limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced
by the Company pursuant to Section 3(c), Executive becomes entitled to receive,
and receives, any refund with respect to such claim, Executive shall (subject
to the Company's complying with the requirements of Section 3(c)) promptly pay
to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by
Executive of an amount advanced by the Company pursuant to Section 3(c), a
determination is made that Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify Executive in writing of
its intent to contest such denial of refund prior to the expiration of 30 days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid.
4. Withholding Taxes. The Company may withhold from all
payments due to Executive (or his beneficiary or estate) hereunder all taxes
which, by applicable federal, state, local or other law, the Company is
required to withhold therefrom.
5. Reimbursement of Expenses. If any contest or dispute
shall arise under this Agreement involving termination of Executive's
employment with the Company (which shall be deemed to include, without
limitation, issues relating to Executive's stock options) or involving the
failure or refusal of the Company to perform fully in accordance with the terms
hereof, the Company shall reimburse Executive, on a current basis, for all
legal fees and expenses, if any, incurred by Executive in connection with such
contest or dispute, together with interest in an amount equal to the base rate
of The First National Bank of Boston from time to time in effect, but in no
event higher than the maximum legal rate permissible under applicable law, such
interest to accrue from the date the Company receives Executive's statement for
such fees and expenses through the date of payment thereof; provided, however,
that in the event the resolution of any such contest or dispute includes a
finding denying, in total, Executive's claims in such contest or dispute,
Executive shall be required to reimburse the Company, over a period of 12
months from the date of such resolution, for all sums advanced to Executive
pursuant to this Section 5; provided, further, that no such reimbursement shall
be required if Executive had a reasonable basis for the position taken by
Executive with respect to such claims.
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<PAGE> 60
6. Termination of Agreement. This Agreement shall be
effective on the date hereof and shall terminate upon the first to occur of (i)
Executive's 70th birthday and (ii) Executive's death.
7. Scope of Agreement. Nothing in this Agreement shall be
deemed to entitle Executive to continued employment with the Company or its
subsidiaries.
8. Directors and Officers Liability Insurance;
Indemnification. The Company agrees that, notwithstanding a Termination of
Executive's employment with the Company, the Company shall, for at least three
years after the Date of Termination, use all reasonable efforts to have
Executive included as a named insured or otherwise covered for actions or
failures to act by Executive in his capacity as a director or officer of the
Company to at least the same extent as other executive officers or directors,
as the case may be, of the Company under any directors and officers liability
insurance policies maintained by the Company; provided that the additional cost
of providing coverage with a retroactive date including Executive's period of
service or with an extended reporting period or a combination of both does not
materially increase the cost of the Company's directors and officers insurance.
The Company agrees that it will not alter the indemnification provisions in its
charter or by-laws so as to give Executive less protection thereunder with
respect to periods during which Executive serves or served the Company as an
executive officer or other employee as is afforded other executive officers or
peer employees, as the case may be, with respect to periods during which they
serve the Company.
9. Successors; Binding Agreement.
(a) This Agreement shall not be terminated by any merger or
consolidation of the Company whereby the Company is or is not the surviving or
resulting corporation or as a result of any transfer of all or substantially
all of the assets of the Company. In the event of any such merger,
consolidation or transfer of assets, the provisions of this Agreement shall be
binding upon the surviving or resulting corporation or the person or entity to
which such assets are transferred.
(b) The Company agrees that concurrently with any merger,
consolidation or transfer of assets referred to in paragraph (a) of this
Section 10, it will cause any successor or transferee unconditionally to
assume, by written instrument delivered to Executive (or his beneficiary or
estate), all of the obligations of the Company hereunder. Failure of the
Company to obtain such assumption prior to the effectiveness of any such
merger, consolidation or transfer of assets shall be a breach of this Agreement
and shall entitle Executive to compensation and
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<PAGE> 61
other benefits from the Company in the same amount and on the same terms as
Executive would be entitled hereunder if Executive's employment were
terminated following a Change in Control other than by reason of a
Nonqualifying Termination. For purposes of implementing the foregoing, the
date on which any such merger, consolidation or transfer becomes effective
shall be deemed the Date of Termination.
(c) This Agreement shall inure to the benefit of and be
enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive shall die while any amounts would be payable to Executive hereunder
had Executive continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to such
person or persons appointed in writing by Executive to receive such amounts or,
if no person is so appointed, to Executive's estate.
10. Notice. (a) For purposes of this Agreement, all notices
and other communications required or permitted hereunder shall be in writing
and shall be deemed to have been duly given when delivered or five days after
deposit in the United States mail, certified and return receipt requested,
postage prepaid, addressed (1) if to the Executive, to
_________________________, and if to the Company, to Marks Bros. Jewelers,
Inc., 155 N. Wacker Drive, Chicago, Illinois 60606, attention: Secretary, or
(2) to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
(b) A written notice of Executive's Date of Termination
by the Company or Executive, as the case may be, to the other, shall (i)
indicate the specific termination provision in this Agreement relied upon, (ii)
to the extent applicable, set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated and (iii) specify the termination
date (which date shall be not less than 15 days after the giving of such
notice). The failure by Executive or the Company to set forth in such notice
any fact or circumstance which contributes to a showing of Good Reason or Cause
shall not waive any right of Executive or the Company hereunder or preclude
Executive or the Company from asserting such fact or circumstance in enforcing
Executive's or the Company's rights hereunder.
11. Full Settlement; Resolution of Disputes. (a) The
Company's obligation to make any payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim, right or action
which the Company may have against Executive or others. In no event shall
Executive be
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<PAGE> 62
obligated to seek other employment or take any other action by way
of mitigation of the amounts payable to Executive under any of the provisions
of this Agreement and, such amounts shall not be reduced whether or not
Executive obtains other employment.
(b) If there shall be any dispute between the Company and
Executive in the event of any termination of Executive's employment (which
shall be deemed to include, without limitation, issues relating to Executive's
options), then, unless and until there is a final, nonappealable judgment by a
court of competent jurisdiction declaring that such termination was for Cause,
that the determination by Executive of the existence of Good Reason was not
made in good faith, or that the Company is not otherwise obligated to pay any
amount or provide any benefit to Executive and his dependents or other
beneficiaries, as the case may be, under paragraphs (a) and (b) of Section 3,
the Company shall pay all amounts, and provide all benefits, to Executive and
his dependents or other beneficiaries, as the case may be, that the Company
would be required to pay or provide pursuant to paragraphs (a) and (b) of
Section 3 as though such termination were by the Company without Cause or by
Executive with Good Reason; provided, however, that the Company shall not be
required to pay any disputed amounts pursuant to this paragraph except upon
receipt of an undertaking by or on behalf of Executive to repay all such
amounts to which Executive is ultimately adjudged by such court not to be
entitled.
12. Governing Law; Validity. The interpretation,
construction and performance of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Illinois without regard to the principle of conflicts of laws. The invalidity
or unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which
other provisions shall remain in full force and effect.
13. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original and all of
which together shall constitute one and the same instrument.
14. Miscellaneous. No provision of this Agreement may be
modified or waived unless such modification or waiver is agreed to in writing
and signed by Executive and by a duly authorized officer of the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. Failure by Executive or the Company to insist upon strict compliance
with any provision of this Agreement or to assert any right Executive or the
Company
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<PAGE> 63
may have hereunder, including, without limitation, the right of Executive to
terminate employment for Good Reason, shall not be deemed to be a waiver
of such provision or right or any other provision or right of this Agreement.
The rights of, and benefits payable to, Executive, his estate or his
beneficiaries pursuant to this Agreement are in addition to any rights of, or
benefits payable to, Executive, his estate or his beneficiaries under any other
employee benefit plan or compensation program of the Company.
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<PAGE> 64
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by a duly authorized officer of the Company and Executive has
executed this Agreement as of the day and year first above written.
MARKS BROS. JEWELERS, INC.
By: /s/ Hugh M. Patinkin
------------------------------
Hugh M. Patinkin
Chairman, President and
Chief Executive Officer
/s/ Lynn D. Eisenheim
------------------------------
Lynn D. Eisenheim
Executive Vice President,
Merchandise
-16-
<PAGE> 1
EXHIBIT 10.12
ESOP RESTRUCTURING AGREEMENT
This ESOP Restructuring Agreement (this "Agreement") dated as of March 29,
1996 is made by and between Marks Bros. Jewelers, Inc., a Delaware
corporation (the "Company"), and Marks Bros. Jewelers, Inc. Employee Stock
Ownership Plan Trust (the "Trust"), forming part of the Marks Bros. Jewelers,
Inc. Employee Stock Ownership Plan (the "ESOP").
The Trust is the record owner of 25,924 shares of Class B Common Stock,
par value $1.00 per share, of the Company (the "ESOP Shares"). The Trust
borrowed an aggregate of $70 million (the "ESOP Debt") from the Company in 1988
to purchase the ESOP Shares (the "ESOP Purchase"). The ESOP Shares were placed
in a suspense account and pledged to the Company as security for the ESOP Debt.
The ESOP Shares were released from the pledge and from the suspense account, in
accordance with applicable regulations, as the ESOP Debt was repaid.
Approximately $33 million of the ESOP Debt remains outstanding. As of the date
hereof 17,605.58 ESOP Shares have been released from the suspense account and
allocated to the accounts of ESOP participants (the "Allocated ESOP Shares")
and 8,318.42 ESOP Shares remain in the ESOP suspense account (the "Unallocated
ESOP Shares").
The Company has proposed that subject to, and upon consummation of, a
proposed initial public offering of stock of the Company by the Company and
certain selling stockholders (the "Public Offering"), the ESOP's equity
ownership and the related
<PAGE> 2
ESOP Debt be restructured (the "ESOP Restructuring"). The Trust has agreed to
the ESOP Restructuring upon the terms and subject to the conditions set forth
in this Agreement.
Accordingly, intending to be legally bound hereby, the parties hereto
agree as follows:
ARTICLE I
THE ESOP RESTRUCTURING
1.1 EFFECTIVENESS OF ESOP RESTRUCTURING. The transactions constituting the
ESOP Restructuring set forth in this Article I shall become effective on the
date (the "Effective Date") when all the conditions to effectiveness set forth
in Article II have been satisfied or waived in accordance with the terms
thereof.
1.2 EXCHANGE OF ALLOCATED ESOP SHARES. The Allocated ESOP Shares shall be
exchanged for and become approximately 616,195 validly issued, fully paid and
nonassessable shares of Common Stock. Upon such exchange, the Trust shall
deliver to the Company a certificate or certificates representing the Allocated
ESOP Shares duly endorsed for transfer or accompanied by stock powers duly
executed in blank and the Company shall issue and deliver to the Trust a
certificate representing the 616,195 shares of Common Stock.
1.3 CANCELLATION OF ESOP DEBT. All outstanding principal and accrued
interest owed by the ESOP to the Company pursuant to the Limited Recourse
Non-Negotiable Note dated March 9, 1988, amended effective October 31, 1992, in
the original principal amount of $30,449,930.00 and the Limited Recourse
Non-Negotiable Note
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<PAGE> 3
dated March 9, 1988, amended effective October 31, 1992, in the original
principal amount of $17,500,000.00 (together, the "ESOP Notes") shall
automatically be canceled. The Company shall promptly deliver the canceled ESOP
Notes to the Trust. As consideration for the cancellation of the remaining ESOP
Debt the Trust shall transfer to the Company the Unallocated ESOP Shares held
in the ESOP suspense account and pledged as collateral for the ESOP Debt
pursuant to the Stock Pledge Agreement dated as of March 9, 1988 (the "Pledge
Agreement").
1.4 CANCELLATION OF DIVIDEND PREFERENCE; ISSUANCE OF ADDITIONAL STOCK. In
connection with the foregoing, all accrued and unpaid dividends on the
Allocated ESOP Shares as of February 1, 1996 arising as a result of the
dividend preference and other preferences and rights associated with the ESOP
Shares shall be canceled. As consideration for such cancellation, the Company
shall issue to the Trust 217,665 shares of Common Stock (the "Newly Issued
Shares"). The Newly Issued Shares shall be allocated, as of February 1, 1996,
proportionately to the accounts of ESOP participants and beneficiaries from
whose accounts Allocated ESOP Shares were exchanged for Common Stock pursuant
to Section 1.2 hereof. The ESOP participants and beneficiaries shall be fully
vested in the Newly Issued Shares allocated to their accounts.
-3-
<PAGE> 4
ARTICLE II
CONDITIONS TO EFFECTIVENESS
The effectiveness of this Agreement is subject to the satisfaction of all
the following conditions; provided that the effectiveness of this Agreement and
any one or more of the agreements or conditions referred to in this Article II
may be simultaneous:
2.1 CORPORATE AND STOCKHOLDER APPROVALS; EXCHANGE. The Stock Split (as
hereinafter defined) and the Company's Restated Certificate of Incorporation
each shall have been approved and authorized by all requisite corporate and
shareholder action. In addition, all Class A and Class C stockholders shall
have become or shall have been exchanged for shares of Common Stock on terms
comparable to the exchange of Allocated ESOP Shares by the Trust.
2.2 PUBLIC OFFERING. The Company's Registration Statement on Form S-1 File
No. 333-1794 (the "Registration Statement") relating to the Public Offering and
all posteffective amendments, if any, shall have become effective under the
Securities Act of 1933, as amended (the "1933 Act"), and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall be pending before or
contemplated by the Securities and Exchange Commission. The closing with
respect to the Public Offering of Common Stock registered pursuant to such
Registration Statement shall have occurred.
2.3 STOCK SPLIT. The Company shall have effected an approximate 35 to 1
stock split (the "Stock Split") of all outstanding capital stock of the
Company. After giving effect to the Stock Split, the Trust will own
approximately 616,195 Allocated
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<PAGE> 5
ESOP Shares and approximately 291,144 Unallocated ESOP Shares. In the event the
stock split ratio is different than 35 to 1, the number of shares held by the
ESOP will be adjusted accordingly.
2.4 RESTATED CERTIFICATE OF INCORPORATION. The Company shall have filed a
Restated Certificate of Incorporation consistent with the Registration
Statement, authorizing 2,000,000 shares of Preferred Stock, with an anticipated
par value of $.001 per share, issuable in series, 30,000,000 shares of Common
Stock, with an anticipated par value $.001 per share and 3,810 shares, together
with a number of shares equal to the Allocated ESOP Shares, of Class B Common
Stock, par value $1.00 per share.
2.5 FINANCING. All of the conditions to the refinancing of the Company's
debt shall have been satisfied and such refinancing shall have been effected.
2.6 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company and the Trust set forth in this Agreement shall be true and correct
on the Effective Date as if made on and as of the Effective Date and each party
shall have been furnished with a certificate dated the Effective Date to such
effect, signed by an authorized officer of the other party.
2.7 REGISTRATION RIGHTS AGREEMENT AND LOCK-UP AGREEMENTS. The Company and
the Trust shall have executed and delivered the Registration Rights Agreements
and Lock-up Agreements described in Article V hereof.
2.8 SECRETARY'S CERTIFICATE. The Trust shall have received from the
Secretary of the Company, a certificate with (i) certified copies of
resolutions adopted by the Board
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<PAGE> 6
relating to this Agreement and the transactions contemplated hereby, and (ii) a
copy of the Company's Restated Certificate of Incorporation and By-Laws then in
effect.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.1 ORGANIZATION. The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware. The
Company has all requisite corporate power and authority required to own or
lease its properties and assets as now owned or leased, to carry on its
business as and where now being conducted and to enter into this Agreement and
perform its obligations hereunder.
3.2 CAPITALIZATION. As of the date hereof, the Company's authorized
capital is as set forth on Schedule 3.2 hereof. On the Effective Date, the
Company's authorized capital shall consist of 2,000,000 shares of Preferred
Stock, with an anticipated par value of $.001 per share of which no shares
shall be outstanding, 30,000,000 shares of Common Stock, with an anticipated
par value of $.001 per share of which approximately 7.9 million shares shall be
issued and outstanding and 3,810 shares of Class B Common Stock of which
approximately 3,810 shares shall be issued and outstanding. All current
commitments by the Company to sell or otherwise issue stock are as described in
the Registration Statement.
3.3 AUTHORIZATION AND ENFORCEABILITY. The execution and delivery of this
Agreement are and, as of the Effective Date, the consummation of the
transactions contemplated hereby will be within the corporate powers of the
Company and will have been duly authorized by all necessary corporate and
shareholder action on the part of
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<PAGE> 7
the Company and the stockholders. This Agreement has been duly executed and
delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable in accordance with its terms, except as
(i) the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally or (ii) the availability of equitable remedies may be limited by
equitable principles of general applicability (regardless of whether
enforcement is sought in equity or at law).
3.4 NO VIOLATION OF LAWS OR AGREEMENTS. The execution and delivery of this
Agreement do not, and, as of the Effective Date, the consummation of the
transactions contemplated by this Agreement and the compliance with the terms,
conditions and provisions of this Agreement by the Company will not, (i)
contravene any provision of the Company's Restated Certificate of Incorporation
or Bylaws; (ii) conflict with or result in a breach of or constitute a default
or otherwise require the consent of any person or entity under any of the
terms, conditions or provisions of any indenture, mortgage, loan or credit
agreement or any other agreement or instrument to which the Company is a party
or by which the Company or its assets may be bound or affected, or any
judgment, order, ruling or agreement or undertaking with any court or
governmental department, commission, board, agency or instrumentality, domestic
or foreign or any applicable law, rule or regulation; or (iii) except for any
liens arising from the financing transactions described in Section 2.5 hereof,
result in the creation or imposition of any lien, charge or encumbrance of any
nature whatsoever upon the Company's assets or give to others any
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<PAGE> 8
interests or rights therein. The Registration Statement will comply, as of its
effective date, in all material respects with all applicable federal securities
laws.
3.5 CONSENTS. No consent, approval or authorization of, or registration or
filing with, any person, including any governmental body or other regulatory
authority, is required as a condition to the lawful execution and delivery of
this Agreement or, as of the Effective Date, the consummation of the
transactions contemplated hereby.
3.6 FULLY PAID SHARES. The Common Stock issued in exchange for the
Allocated ESOP Shares and the Newly Issued Shares will be, when issued,
validly issued, fully paid and nonassessable.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE TRUSTEE AND THE TRUST
4.1 REPRESENTATIONS OF U.S. TRUST. U.S. Trust Company of California, N.A.
("U.S. Trust") represents and warrants to the Company that (i) it is a national
association duly organized, validly existing and in good standing under the
laws of the United States, (ii) it possesses all requisite association power to
enter into and perform its obligations under this Agreement, (iii) the
execution and delivery of this Agreement by U.S. Trust and the performance of
its obligations hereunder have been duly authorized by all necessary
association action on the part of U.S. Trust and (iv) this Agreement has been
duly executed and delivered by U.S. Trust.
4.2 AUTHORIZATION AND ENFORCEABILITY. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby are
within the powers of the Trustee and have been duly authorized by all necessary
corporate action
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<PAGE> 9
on the part of the Trust. This Agreement has been duly executed and delivered
on behalf of the Trust and constitutes the legal, valid and binding obligation
of the Trust, enforceable in accordance with its terms, except as (i) the
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally or (ii) the availability of equitable remedies may be limited by
equitable principles of general applicability (regardless of whether
enforcement is sought in equity or at law).
4.3 NO VIOLATION OF LAWS OR AGREEMENTS. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated by this
Agreement and the compliance with the terms, conditions and provisions of this
Agreement by the Trust will not, (i) contravene any provision of the Trust
Agreement; (ii) conflict with or result in a breach of or constitute a default
or otherwise require the consent of any person or entity under any of the
terms, conditions or provisions of any indenture, mortgage, loan or credit
agreement or any other agreement or instrument to which the Trust is a party or
by which the Trust or its assets may be bound or affected, or any judgment,
order, ruling or agreement or undertaking with any court or governmental
department, commission, board, agency or instrumentality, domestic or foreign
or any applicable law, rule or regulation; or (iii) result in the creation or
imposition of any lien, charge or encumbrance of any nature whatsoever upon the
Trust's assets or give to others any interests or rights therein.
4.4 CONSENTS. No consent, approval or authorization of, or registration
or filing on behalf of the Trust with, any person, including any governmental
body or other
9
<PAGE> 10
regulatory authority, is required as a condition to the lawful execution and
delivery of this Agreement or the consummation of the transactions
contemplated hereby.
4.5 FAIRNESS OPINION. The Trust has received the opinion of Willamette
Management Associates to the effect that the transactions contemplated by this
Agreement are fair to the ESOP and its participants from a financial point of
view.
4.6 OWNERSHIP OF ESOP SHARES. The Trust is the record owner of and, on the
Effective Date, will deliver good and marketable title to the ESOP Shares free
and clear of all claims, liens and encumbrances except as provided in the
Pledge Agreement, which agreement will be terminated as of the Effective Date.
ARTICLE V
CERTAIN OTHER AGREEMENTS
5.1 REGISTRATION RIGHTS. The Trust and the Company will enter into a
Registration Rights Agreement providing it with one demand registration right
exercisable at any time after January 31, 1997; provided that such right will
not be exercised for fewer than 25% of the shares of Common Stock owned by the
ESOP at the time of such exercise.
5.2 LOCK-UP AGREEMENTS. The Trust will enter into Lock-up Agreements on
terms substantially similar to those entered into by other significant
stockholders of the Company, agreeing inter alia, (i) with the Underwriter that
it will not offer, sell, buy, contract to sell or otherwise dispose of any
shares of Common Stock owned by it for a period of 180 days after the Public
Offering, and (ii) with the Company that it will not offer, sell, contract to
sell or buy or otherwise dispose of or acquire Common Stock
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<PAGE> 11
owned by it until after January 31, 1997, except, in each case, as provided in
the relevant Lock-up Agreement.
5.3 TERMINATION OF ESOP PURCHASE AGREEMENTS. At the Effective Date, all
rights and obligations of the parties hereto arising in connection with
the ESOP Purchase, including, without limitation, those arising pursuant
to the terms of the Stock Purchase Agreement, Pledge Agreement and Secured Term
Loan Agreement, each dated as of March 9, 1988, shall be terminated.
5.4 TERMINATION. The parties acknowledge that there are no assurances that
the transactions contemplated by this Agreement will be consummated. If the
conditions set forth in Article II are not satisfied by June 30, 1996, this
Agreement shall terminate and be of no further force and effect unless extended
in writing by the parties hereto. Without limiting the generality of the
foregoing, the parties acknowledge that the consummation of the Transaction
will require, among other things, certain consents and approvals.
ARTICLE VI
MISCELLANEOUS
6.1 Governing Law. To the extent not preempted by federal law, this
Agreement shall be governed by and construed in accordance with the laws of the
State of Illinois without regard to its conflict of law doctrines.
6.2 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement and the
Exhibits attached hereto, together with the engagement letter between the
parties hereto dated February 5, 1996, set forth all of the agreements between
the parties hereto with
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<PAGE> 12
respect to the subject matter hereof, and supersede all prior or
contemporaneous agreements and understandings. This Agreement is not intended
to confer upon any person other than the parties hereto any rights or remedies
hereunder.
6.3 NOTICES. All notices and other communications given or made
pursuant to this Agreement shall be in writing and shall be deemed to have
been duly given or made (i) the second business day after the date of mailing,
if delivered by registered or certified mail, postage prepaid, (ii) upon
delivery, if sent by hand delivery, (iii) upon delivery, if sent by prepaid
courier or facsimile, with a record of receipt, or (iv) the next day after the
date of dispatch, if sent by cable or telegram to the parties at the following
addresses:
(i) if to Trust, to:
Norman P. Goldberg
U. S. Trust Company of California, N.A.
1300 Eye Street, N.W.
Washington, D.C. 20005
Telecopy: 202-316-7515
with a required copy to:
Gregory K. Brown, Esq.
Oppenheimer, Wolff & Donnelly
180 North Stetson Avenue
45th Floor
Chicago, IL 60601
Telecopy: 312-616-5800
(ii) if to Company, to:
John R. Desjardins
Marks Bros. Jewelers
155 N. Wacker Drive
Chicago, IL 60606
Telecopy: 312-782-8299
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<PAGE> 13
with a required copy to:
Charles R. Smith, Esq.
Kirkpatrick & Lockhart LLP
1500 Oliver Building
Pittsburgh, PA 15222
Telecopy: 412-355-6501
Any party hereto may change the address to which notice to it, or copies
thereof, shall be addressed, by giving notice thereof to the other parties
hereto in conformity with the foregoing.
6.4 SEVERABILITY. If any term or other provision of this Agreement is held
by a court of competent jurisdiction to be invalid, illegal or incapable of
being enforced under any rule of law in any particular respect or under any
particular circumstances, such term or provision shall nevertheless remain in
full force and effect in all other respects and under all other circumstances,
and all other terms, conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in an acceptable
manner to the end that the transactions contemplated hereby are fulfilled to
the fullest extent possible.
6.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall be deemed to be one and the same instrument.
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<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date set forth above.
MARKS BROS. JEWELERS, INC.
By: John R. Desjardins
-----------------------------
Title: Executive Vice President
Finance and Administration
---------------------------
MARKS BROS. JEWELERS, INC.
EMPLOYEE STOCK OWNERSHIP TRUST
By: U.S. Trust Company of California, N.A.,
not in its individual or corporate
capacity, but solely in its capacity as
Trustee of the Marks Bros. Jewelers, Inc.
Employee Stock Ownership Plan
By: Norman P. Goldberg
--------------------------
Title: SVP
-----------------------
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<PAGE> 1
MARKS BROTHERS JEWELERS, INC. EXHIBIT 12.1
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year ended January 31, -----------------
--------------------------------------------- Proforma
1992 1993 1994 1995 1996 1996
---------- --------- -------- ------ ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Available earnings:
Earnings (loss) before income taxes (17,157) (3,557) (1,176) 571 2,048 9,154
Add: Interest expense 9,397 7,821 8,920 10,594 12,314 5,798
Add: Interest portion of rental expense 2,009 2,178 2,326 2,570 3,060 3,060
---------- --------- -------- ------- ------- -------
Available earnings (5,751) 6,442 10,070 13,735 17,422 18,012
========== ========= ======== ======= ======= =======
Fixed charges:
Interest expense 9,397 7,821 8,920 10,594 12,314 5,798
Interest portion of rental expense 2,009 2,178 2,326 2,570 3,060 3,060
---------- --------- -------- ------- ------- -------
Fixed charges 11,406 9,999 11,246 13,164 15,374 8,858
========== ========= ======== ======= ======= =======
Ratio of earnings to fixed charges (0.50) 0.64 0.90 1.04 1.13 2.03
========== ========= ======== ======= ======= =======
</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 Marks Bros. Jewelers, Inc. and of our report dated
February 27, 1996, except as to Note 14 which is as of May 7, 1996, on the
financial statement schedule of Marks Bros. Jewelers, Inc. We also consent to
the reference to our firm under the caption "Experts."
Chicago, Illinois
May 17, 1996
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