<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 31, 1996
REGISTRATION NO. 333-13903
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT
NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MARKS BROS. JEWELERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 5944 36-1433610
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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:
<TABLE>
<S> <C>
JOHN J. SABL GLENN W. REED
SIDLEY & AUSTIN GARDNER, CARTON & DOUGLAS
ONE FIRST NATIONAL PLAZA QUAKER TOWER
CHICAGO, ILLINOIS 60603 321 NORTH CLARK STREET
(312) 853-7567 CHICAGO, ILLINOIS 60610-4795
(312) 245-8446
</TABLE>
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS
OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
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Common Stock, $0.001
par value per
share(3)........... 2,650,750 shares $27.00 $71,570,250 $21,924(4)
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</TABLE>
(1) Includes an aggregate of 345,750 shares of Common Stock which the
Underwriters have the option to purchase from the Company and certain
Selling Stockholders to cover over-allotments, if any. See "Underwriting."
(2) Estimated at the time of the original filing of the Registration Statement
solely for the purpose of calculating the amount of the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933 based on the
closing price of the Common Stock on the Nasdaq National Market on October
8, 1996.
(3) Includes 2,650,750 associated preferred stock purchase rights ("Rights") to
purchase 1/100 of a share of Series A Junior Participating Preferred Stock,
par value $.001 per share. Rights initially are attached to and trade with
the Common Stock of the Registrant. The value attributable to such rights,
if any, is reflected in the market price for the Common Stock.
(4) Fees in this amount were previously paid at the time of the original filing
of the Registration Statement.
------------------------------
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> 2
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 prospectus 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 OCTOBER 31, 1996
2,305,000 SHARES
MARKS BROS. JEWELERS LOGO
COMMON STOCK
Of the 2,305,000 shares of Common Stock offered hereby, 1,100,000 shares
are being offered by Marks Bros. Jewelers, Inc. (the "Company") and 1,205,000
shares are being offered by certain stockholders (the "Selling Stockholders").
The Company will not receive any of the proceeds from the sale of shares of
Common Stock being offered hereby by the Selling Stockholders. See "Principal
and Selling Stockholders."
The Common Stock is quoted on the Nasdaq National Market under the symbol
"MBJI." The last sale price of the Common Stock as reported on the Nasdaq
National Market on October 8, 1996 was $27.00. See "Price Range of Common
Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK 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.
<TABLE>
<CAPTION>
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Proceeds to
Price to Proceeds to Selling
Public Company(2) Stockholders
Underwriting
Discounts and
Commissions(1)
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<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
Total(3).............. $ $ $ $
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</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting offering expenses payable by the Company, including certain
expenses of the Selling Stockholders, estimated at $700,000.
(3) The Company and certain of the Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to 345,750 additional shares of
Common Stock solely to cover over-allotments, if any. If the Underwriters
exercise this option in full, the Price to Public will total $ ,
the Underwriting Discounts and Commissions will total $ , the
Proceeds to Company will total $ , and the Proceeds to Selling
Stockholders will total $ . See "Principal and Selling
Stockholders" and "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein when, as and if delivered to and accepted by the Underwriters and subject
to their right to reject any orders in whole or in part. It is expected that
delivery of the certificates representing such shares will be made against
payment therefor at the office of Montgomery Securities on or about , 1996.
------------------------------
MONTGOMERY SECURITIES WILLIAM BLAIR & COMPANY
, 1996
<PAGE> 3
MARKS BROS. JEWELERS LOGO
WHITEHALL LOGO LUNDSTROM LOGO
[MAP OF STORE LOCATIONS]
<TABLE>
<S> <C>
----------------------- - = Stores as of 1995 Fiscal Year End
Whitehall Stores 123
Lundstrom Stores 35 * = Stores opened or scheduled to open
Marks Bros. Stores 5 during Fiscal 1996
</TABLE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND CERTAIN SELLING
GROUP MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 4
Photo of Lundstrom Jewelers Store
Photo of Whitehall Co. Store
<PAGE> 5
Photo of Whitehall Co. Store
Photo of Whitehall Co. Window display
<PAGE> 6
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. Unless otherwise indicated, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
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.
Certain statements in this Prospectus (including this Prospectus Summary)
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"). See
"Special Note Regarding Forward-Looking Statements."
THE COMPANY
Marks Bros. Jewelers, Inc. (the "Company") is a leading, national specialty
retailer of fine jewelry, operating 163 stores in 24 states. Founded in 1895,
the Company operates stores in regional and super-regional shopping malls under
the names Whitehall Co. Jewellers(R) (123 stores), Lundstrom Jewelers(R) (35
stores) and Marks Bros. Jewelers(TM) (5 stores). The Company offers at
competitive prices an in-depth selection of fine jewelry in the following key
categories: diamond, gold, precious and semi-precious jewelry. The Company's
target customers are middle to upper middle income women over 25 years old.
Central to the Company's growth in operating profits and its high store
productivity are its small but flexible store format, the absence of recourse
credit risk, its strong sales culture, and its operating efficiencies at both
the store and corporate levels.
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%. For the six months ended July 31, 1996, the Company's net sales increased
by 23.8% as compared to net sales in the first six months of fiscal 1995, and
operating margin improved from 7.0% to 8.5%.
The Company believes it has significant opportunities to increase sales and
profitability through an increased number of planned store openings, the
implementation of several new sales and merchandising programs designed to
produce comparable store sales growth, and continued adherence to its strict
operating standards regarding performance of sales personnel, store
profitability and cost control.
The key elements of the Company's multi-faceted operating strategy 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 790 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
competitors, which not only bear such credit risk, but also rely on finance
income in addition to merchandise sales.
3
<PAGE> 7
- Motivated, Sales-Oriented Store Personnel. The primary responsibility of
store sales personnel is selling to customers. Most non-sales activities are
largely centralized. Incentive 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.
RECENT DEVELOPMENTS
Strong Operating Performance. The Company's 23.8% increase in net sales for
the first six months of fiscal 1996 was driven by a comparable store sales
increase of 13.4% and the strong performance of recently opened stores.
Operating margin increased 150 basis points to 8.5% for the first six months of
fiscal 1996 from 7.0% over the prior year period, and pro forma net income per
share increased to $0.18 from $0.05. Store sales productivity continued to
increase, as average store sales grew to $972,000 per store ($1,224 per square
foot) for the 12 months ended July 31, 1996, from average store sales of
$936,000 ($1,187 per square foot) for fiscal 1995. For the first two months of
the third quarter of fiscal 1996, comparable store sales increased by 7.8% on
top of a 15.9% comparable store sales increase in the corresponding prior year
period.
Acceleration of Expansion Program. As of October 31, 1996, the Company has
opened 18 new stores and plans to open one additional store for a total of 19
new stores by the end of fiscal 1996, compared to the 18 originally planned. As
a result of this offering, the Company plans to accelerate its store expansion
program to 28 stores scheduled for fiscal 1997 (compared to the 23 originally
planned) and already has executed leases for 11 of these locations. The Company
intends to open a total of approximately 60 new stores in fiscal 1997 and 1998
combined.
Strengthening of Capital Structure. To facilitate its continuing expansion,
the Company intends to use proceeds from this offering to strengthen its capital
structure, retire $8.0 million of principal amount of its 15% subordinated notes
and pay down other outstanding borrowings.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company......................... 1,100,000 shares
Common Stock Offered by the Selling Stockholders............ 1,205,000 shares
Common Stock to be Outstanding Immediately After the
Offering.................................................. 9,707,250 shares(1)
Use of Proceeds............................................. To reduce indebtedness,
accelerate new store openings
and for working capital and
other general corporate
purposes.
Nasdaq National Market Symbol............................... MBJI
</TABLE>
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(1) Excludes 1,060,476 shares of Common Stock subject to outstanding stock
options at a weighted average exercise price of $10.37 per share, of which
318,760 are currently exercisable at a weighted average exercise price of
$0.93 per share. See "Management -- Stock Plans."
4
<PAGE> 8
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, SIX MONTHS ENDED JULY 31,
----------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $ 76,749 $ 88,141 $ 91,106 $106,683 $131,022 $52,074 $64,466
Gross profit...................... 31,143 36,035 36,595 42,460 53,300 20,115 25,840
Income from operations............ 5,362 8,064 8,255 11,712 15,413 3,657 5,455
Interest expense.................. 9,397 7,821 8,920 10,594 12,314 6,017 4,557
ESOP compensation expense......... -- 3,800 511 547 -- 295 --
Income (loss) from continuing
operations before income tax.... (17,157) (3,557) (1,176) 571 2,048 (2,655) 898
Net income (loss)(1)(2)(3)........ $(24,454) $ (3,557) $ (7,002) $ 571 $ 16,972 $(2,655) $11,712
SUPPLEMENTAL PRO FORMA STATEMENT OF
OPERATIONS DATA(4): (UNAUDITED)
Net sales......................... $131,022 $52,074 $64,466
Income from operations............ 15,413 3,657 5,455
Interest expense.................. 2,943 1,416 1,503
Net income........................ 7,205 1,345 2,371
Net income per share.............. $ 0.72 $ 0.13 $ 0.23
Weighted average number of
common shares and common share
equivalents outstanding(5)...... 10,008,222 10,014,617 10,170,053
SELECTED OPERATING DATA:
Stores open at end of period...... 111 113 122 131 146 143 155
Average net sales per store(6).... $699,000 $784,000 $791,000 $836,000 $936,000
Average net sales per gross square
foot(7)......................... $ 883 $ 1,008 $ 1,013 $ 1,068 $ 1,187
Average merchandise sale.......... $ 192 $ 210 $ 229 $ 245 $ 253 $ 262
Comparable store sales increase
(decrease)(8)................... 0.4% 12.5% (0.5)% 7.6% 11.0% 11.8% 13.4%
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1996
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ACTUAL AS ADJUSTED(9)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................................................... $15,030 $ 20,267
Total assets............................................................................ 75,300 75,384
Total debt.............................................................................. 43,532 16,753
Stockholders' equity.................................................................... 4,395 31,258
</TABLE>
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(1) 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.
(2) 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.
(3) Net income for the year ended January 31, 1996 reflects an income tax
benefit of $14.9 million, resulting from the reversal of the Company's
deferred tax 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" and Note 6 of Notes to
Financial Statements.
(4) Supplemental pro forma statement of operations data reflect (i) the
Company's initial public offering (the "IPO") and recapitalization in May
1996 (see "The Company"); (ii) the issuance of 1,100,000 shares of Common
Stock offered hereby at an assumed public offering price of $27.00 per share
(the "Offering") and the anticipated use of the
5
<PAGE> 9
estimated net proceeds therefrom; and (iii) the application of a tax
provision (assuming a statutory rate of 40%) to the pro forma net income
from continuing operations, as if each such transaction occurred on the
first day of the period presented.
(5) The pro forma weighted average number of common shares and common share
equivalents outstanding for the year ended January 31, 1996, and the six
months ended July 31, 1995 and July 31, 1996, respectively, consisted of (i)
9,707,267, 9,713,662 and 9,707,250 shares of Common Stock outstanding
(including 3,269,500 shares of Common Stock issued in the IPO and 1,100,000
shares of Common Stock offered hereby); (ii) 3,588, 3,588 and 3,213 common
share equivalents relating to Class B Common Stock; (iii) 297,367, 297,367
and 304,098 common share equivalents relating to the Company's 1995
incentive stock option plan and (iv) -0-, -0- and 222,654 common share
equivalents relating to the Company's 1996 incentive stock option plan.
(6) 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.
(7) 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.
(8) A store becomes comparable after it has been open for 12 full months.
(9) As adjusted to give effect to (i) the Offering; (ii) the receipt of $0.2
million in proceeds to the Company from the exercise of stock options in
connection with the Offering; and (iii) the anticipated use of proceeds from
the Offering (including a $0.96 million ($0.58 million net of tax)
prepayment premium in connection with the redemption of subordinated debt
and a non-cash extraordinary charge of $0.5 million ($0.3 million net of
tax) relating to the write-off of deferred financing costs). See "Use of
Proceeds."
6
<PAGE> 10
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing any of the shares of Common Stock offered hereby.
Certain statements in "Risk Factors" constitute "forward-looking statements"
within the meaning of the Litigation Reform Act. See "Special Note Regarding
Forward-Looking Statements."
EXPANSION PROGRAM
The growth of the Company's net sales and earnings will depend to a
significant degree on the Company's ability to expand its operations through the
opening of new stores in existing and new markets and to operate those stores
profitably. The results achieved by new stores may vary substantially. The
Company currently operates 163 stores in 24 states and plans to open a total of
19 new stores in fiscal 1996 (including 18 which have already been opened)
compared to 15 new stores in fiscal 1995. The Company is increasing its planned
store openings to 28 from 23 for fiscal 1997 and to a total of approximately 60
for fiscal 1997 and 1998 combined, contingent upon the completion of the
Offering. The cost of opening a new store on average is approximately $550,000,
including inventory, capital expenditures and pre-opening expenses. The Company
expects to fund the opening of new stores with cash flow from operating
activities and borrowings under its bank facility. Achieving the Company's
expansion goals will depend on a number of factors, including the Company's
ability to secure suitable locations on acceptable terms, open new stores in a
timely manner, hire and train additional store and supervisory personnel, and
integrate new stores into its operations on a profitable basis. Furthermore, the
Company will continually need to evaluate the adequacy of its store management
and systems to manage its planned expansion. The Company anticipates that there
will continue to be significant competition among specialty retailers for
desirable store sites and qualified personnel. There can be no assurance that
the Company will be able to open and operate new stores on a timely and
profitable basis. See "Business -- Operating Strategies" and "Business -- Growth
Strategies."
If the Company expands more rapidly than its current plans anticipate, or
if the Company fails to generate sufficient cash flow, it may require additional
capital (in addition to the proceeds of the Offering) in order to finance its
expansion. There can be no assurance as to the future availability of additional
financing or the terms thereof. Failure to obtain such financing on acceptable
terms could require the Company to alter its expansion plans or otherwise
adversely affect the Company. A change in the Company's expansion plans could
have a material adverse effect on the Company's results of operations or
financial condition.
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, the availability
and cost of credit from third party credit providers, the results of its
merchandising strategies, and the Company's ability to otherwise execute its
business strategy. The Company experienced an 11.0% comparable store sales
increase in fiscal 1995 and a 13.4% comparable store sales increase for the
first six months of fiscal 1996. The Company does not expect comparable store
sales to increase at such rates in the future, and there can be no assurance
that the Company will continue to achieve comparable store sales gains. The
Company's comparable store sales results could cause the price of the Common
Stock to fluctuate substantially. 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 lower net sales
in each of its first three fiscal quarters and expects this trend to continue
for the foreseeable future. The Company has from time to time experienced net
losses in one or more of its first three fiscal quarters. The
7
<PAGE> 11
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."
LEVERAGE
The Company will remain substantially leveraged following the Offering. The
Company's debt as of July 31, 1996 would have been approximately 35% of its
total debt and stockholders' equity, calculated on an as-adjusted basis after
giving effect to the Offering and the anticipated use of net proceeds generated
thereby. As of such date, the Company's stockholders' equity, calculated on such
an as-adjusted basis, would have been approximately $31.3 million. The Company's
ratio of earnings to fixed charges for fiscal 1995, on a pro forma basis to give
effect to the IPO and the related recapitalization and as so adjusted to give
effect to the Offering, was approximately 2.4x. See "The Company."
The degree to which the Company is leveraged could have important
consequences to the holders of the Common Stock, 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 bears
interest at fluctuating rates, and the Company's payments under its gold
consignment facility will vary, and changes in interest rates or rates charged
under its gold consignment facility 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" and "Summary of Debt Instruments." Furthermore, because the Company's
bank facility is secured by substantially all of the Company's assets, the
lender thereunder could look to the pledged assets to satisfy their claims.
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 and cost 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, particularly because the Company does
not engage in media advertising. 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 does not
maintain "key executive"
8
<PAGE> 12
life insurance on, or 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 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."
CONSUMER CREDIT
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.
("Bank One") 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. The Company and Bank One have determined to either eliminate or
substantially modify the Company's "First Time Buyers" program which was
introduced by the Company and Bank One late in fiscal 1995. During recent
periods there has been an increase in consumer credit delinquencies in the
retail industry generally, which has resulted in financial institutions
reexamining their lending practices and procedures. There can be no assurance
that the increased delinquencies being experienced by providers of consumer
credit generally will not cause providers of third party credit offered by the
Company to decrease the availability or increase the cost of such credit. See
"Business -- Credit."
SUPPLIERS; AVAILABILITY OF CONSIGNED MERCHANDISE
The Company does not manufacture its own merchandise but instead works
closely with a number of suppliers. For the twelve months ended July 31, 1996,
the Company's largest supplier accounted for approximately 19% of the Company's
total purchases, and its largest five suppliers accounted for approximately 39%
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, 1995 and the twelve months ended July 31,
1996 (based on the inventory levels at the end of each fiscal quarter) was
24.8%, 25.8%, 27.1% and 20.5%, 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."
9
<PAGE> 13
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 CSO has recently announced
price increases for a number of the sizes and quality grades of diamonds. The
availability of diamonds to the CSO and the Company's suppliers is to some
extent dependent on the political situation in diamond producing countries, such
as South Africa, Botswana, Zaire, republics of the former Soviet Union and
Australia, and on continuation of the prevailing supply and marketing
arrangements for raw diamonds. Until alternate sources could be developed, any
sustained interruption in the supply of diamonds or any oversupply from the
producing countries could adversely affect the Company and the retail jewelry
industry as a whole. The Company is in the process of increasing the amount of
inventory (especially higher priced items) carried in its stores. Higher priced
jewelry items tend to have a slower rate of turnover, thereby increasing the
risks to the Company associated with price fluctuations and changes in fashion
trends.
The Company has a gold consignment facility with a lending institution
pursuant to which the Company accepts as consignee, and is responsible to return
at some future date, a fixed number of ounces of gold. The periodic charges paid
by the Company are computed based on a percentage of the value of the gold
consigned. Therefore, an increase in the price of gold could substantially
increase the annual costs to the Company of the gold consignment and the
eventual cost to the Company upon the termination of this arrangement. See
"Summary of Debt Instruments -- Gold Consignment Facility."
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.
The Company's operations are also affected by federal and state laws
relating to marketing practices in the retail jewelry industry. In marketing to
its customers, the Company compares many of its prices to "reference prices."
The Company's literature indicates to customers that its reference price for an
item is either the manufacturer's suggested retail price or the Company's
determination of the non-discounted price at which comparable merchandise of
like grade or quality is advertised or offered for sale by competitive retailers
and is not the Company's current selling price or the price at which it formerly
sold such item. Although the Company believes that pricing comparisons are
common in the jewelry business and that the Company's practice is in compliance
with applicable laws relating to trade practices, there can be no assurance that
this practice would be upheld. See "Business -- Regulation."
AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS
At February 1, 1996, the Company had $18.4 million of net operating loss
carryforwards for federal income tax purposes. 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
10
<PAGE> 14
"Code"), limits the use of net operating losses and net operating loss
carryforwards with respect to periods 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 restrictions.
The Company believes that an ownership change did not occur with respect to
the Company as a result of the IPO. However, the Company's belief is based on
certain assumptions, including assumptions as to factual matters, as well as
interpretations of law which the Internal Revenue Service might challenge. 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.
The Company expects that the Offering will result in an ownership change.
As a result, the Company's ability to utilize net operating losses with respect
to periods after the Offering will be subject to an annual limitation on the
Company under Section 382 of the Code, which limitation is likely to cause the
Company to pay a limited amount of taxes earlier than would otherwise be the
case if all net operating losses could be used immediately in future years to
reduce federal income taxes without restriction.
See "Principal and Selling Stockholders -- Limitations on the Company's Use
of Net Operating Loss Carryforwards."
ANTI-TAKEOVER EFFECT OF CHARTER AND STATUTORY PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and Restated By-Laws and certain sections of the Delaware General Corporation
Law, including those which authorize the Company's Board of Directors to issue
shares of preferred stock and to establish the voting rights, preferences and
other terms thereof without further action by stockholders, may be deemed to
have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors (including takeovers which some stockholders
may deem to be in their best interests). These provisions could delay or
frustrate the removal of incumbent directors or the assumption of control by an
acquiror, even if such removal or assumption of control would be beneficial to
stockholders. These provisions also could discourage or make more difficult a
merger, tender offer or proxy contest, even if such events would be beneficial,
in the short term, to the interests of stockholders. Such provisions include,
among other things, a classified Board of Directors serving staggered three-year
terms, the elimination of stockholder voting by consent, a provision providing
that only the President or Board of Directors may call special meetings of
stockholders, the removal of Directors without cause only by the holders of at
least 75% of the shares entitled to vote, a provision permitting the Board of
Directors to take into account factors in addition to potential economic
benefits to stockholders, and certain advance notice requirements for
stockholder proposals and nominations for election to the Board of Directors.
The Company will be subject to Section 203 of the Delaware General Corporation
Law which, in general, imposes restrictions upon certain acquirors (including
their affiliates and associates) of 15% or more of the Company's Common Stock.
The Company has entered into severance agreements with its senior executives
which could increase the cost of any potential acquisition of the Company. See
"Management -- Severance Agreements."
In addition, the Board of Directors has adopted a stockholders rights plan
pursuant to which each share of Common Stock has associated with it one right
entitling the holder thereof, upon the occurrence of a triggering event, to
purchase shares of preferred stock of the Company or shares of the acquiror at a
discount from the prevailing market price. Triggering events are generally
events or transactions that relate to a potential acquisition, merger or
consolidation of the Company that has not been approved by the Board of
Directors. The stockholders rights plan may be deemed to have an anti-takeover
effect and may discourage or prevent takeover attempts not first approved by the
Board of Directors (including takeovers which certain stockholders may deem to
be in their best interests). See "Description of Capital Stock -- Delaware Law
and Certain Charter and By-Law Provisions" and "-- Rights."
11
<PAGE> 15
OWNERSHIP BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
After consummation of the Offering, the Company's four senior executive
officers (Messrs. H. Patinkin, Desjardins, M. Patinkin and Eisenheim) will
beneficially own approximately 13.1% of the shares of Common Stock and, together
with other officers, directors and certain other stockholders affiliated with
directors, will beneficially own approximately 23.3% of the shares of Common
Stock. By virtue of such holdings and if and to the extent such stockholders act
in concert, such stockholders will have substantial influence over 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 "Principal and Selling Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
There will be 9,707,250 shares of Common Stock outstanding upon the
consummation of the Offering. Of such shares, 3,737,500 shares sold in the IPO
are freely tradeable, and upon completion of the Offering, an additional
2,305,000 shares will be freely tradeable. Of the 3,664,750 remaining shares,
3,157,760 shares are held by executive officers, directors and certain
stockholders who, together with the Company, have agreed not to sell, contract
to sell, or otherwise dispose of, any shares of Common Stock without the consent
of Montgomery Securities for a period of 90 days after the date of this
Prospectus. Upon expiration of such agreements, such shares will be eligible for
sale in the public markets in accordance with Rule 144 ("Rule 144") promulgated
under the Securities Act of 1933, as amended (the "Securities Act"), including
458,501 shares (plus an additional 491,129 shares not subject to any lock-up
agreements) which may be sold in accordance with Rule 144(k) without regard to
Rule 144's volume or manner of sale limitations. In addition, upon consummation
of the Offering, there will be outstanding options to purchase a total of
1,060,476 shares of Common Stock (including 318,760 currently exercisable
options). Except as limited by the agreements described above and by Rule 144
volume limitations applicable to affiliates, shares issued upon the exercise of
stock options generally are available for sale in the open market. Future sales
of substantial amounts of Common Stock in the open market, or the availability
of such shares for sale following the Offering, could adversely affect the
prevailing market price of the Common Stock. See "Management," "Principal and
Selling Stockholders," "Description of Capital Stock," "Shares Eligible for
Future Sale" and "Underwriting."
VOLATILITY OF STOCK PRICE
The Common Stock is currently quoted on the Nasdaq National Market, which
has experienced and is likely to experience in the future significant price and
volume fluctuations which could adversely affect the market price of the Common
Stock without regard to the operating performance of the Company. In addition,
the Company believes that factors such as quarterly fluctuations in the
financial results of the Company, the Company's comparable store sales results,
announcements by other jewelry retailers, the overall economy and the condition
of the financial markets could cause the price of the Common Stock to fluctuate
substantially.
12
<PAGE> 16
THE COMPANY
The Company is a leading, national specialty retailer of fine jewelry
(based on number of stores), operating 163 stores in 24 states. Founded in 1895,
the Company operates stores in regional and super-regional shopping malls under
the names Whitehall Co. Jewellers(R) (123 stores), Lundstrom Jewelers(R) (35
stores) and Marks Bros. Jewelers(TM) (5 stores). The Company offers at
competitive prices an in-depth selection of fine jewelry in the following key
categories: diamond, gold, precious and semi-precious jewelry. The Company's
target customers are middle to upper middle income women over 25 years old.
Central to the Company's growth in operating profits and its high store
productivity are its small but flexible store format, the absence of recourse
credit risk, its strong sales culture, and its operating efficiencies at both
the store and corporate levels.
In May 1996, the Company completed an initial public offering (the "IPO")
of 3,269,500 shares of its Common Stock, which generated aggregate proceeds of
$40.4 million. Concurrently with the consummation of the IPO, the Company
completed a restructuring of its outstanding indebtedness consisting of (i) a
new $44 million five-year secured credit facility (the "Bank Facility"),
consisting of a $29 million senior secured revolving line of credit (the
"Revolver") and a $15 million senior secured term loan (the "Term Loan"); (ii) a
notes offering (the "Notes Offering") of $12.0 million aggregate principal
amount of Senior Subordinated Notes Due 2004 (the "Series C Notes") and $8.0
million aggregate principal amount of Senior Subordinated Notes due 2004 (the
"Series D Notes," and together with the Series C Notes, the "Subordinated
Notes"), and (iii) a bank gold consignment facility (the "Gold Consignment
Facility") in an amount up to $16 million.
The Company used the net proceeds of the IPO, together with the funds
generated by the Notes Offering, the Bank Facility and the Gold Consignment
Facility, to retire all of the Company's then outstanding bank indebtedness and
subordinated debt (thereby allowing the Company to realize the benefits of a
debt discount of approximately $18.3 million) and for working capital and other
general corporate purposes. Simultaneously with the completion of the IPO, the
Company completed a restructuring of its employee stock ownership plan (the
"ESOP"). The Notes Offering, the establishment of the Bank Facility and the Gold
Consignment Facility and the repayment and redemption of outstanding debt,
together with the restructuring of the Company's ESOP, as herein described, is
referred to as the "Recapitalization." See "Certain Transactions -- ESOP
Restructuring" and "Summary of Debt Instruments."
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.
13
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,100,000 shares of
Common Stock offered by the Company, assuming a public offering price of $27.00
per share and after deducting estimated underwriting discounts and commissions
and offering expenses, are estimated to be approximately $27.5 million ($31.7
million if the Underwriters' over-allotment option is exercised in full). The
Company intends to use such proceeds to reduce the Company's indebtedness, to
accelerate the pace of new store openings and for working capital and other
general corporate purposes. The Company will not receive any proceeds from the
sale of Common Stock offered by the Selling Stockholders.
Approximately $8,960,000 of the net proceeds from the Offering will be used
to redeem at a premium all $8.0 million in principal amount of the Company's
Series D Notes. The Series D Notes would otherwise mature in October 2004 and
bear interest at a rate of 15.0% per annum plus, for subsequent periods
commencing May 1, 1998, 1% per annum (increasing in 1% increments per each
subsequent year commencing May 1, 1999). In addition, the Company intends to use
the remaining net proceeds from the Offering to reduce borrowings under its Bank
Facility ($24.1 million outstanding as of October 10, 1996), which bear interest
at fluctuating rates (an average of 8.0% as of October 9, 1996). The Company
expects to borrow under its Bank Facility as needed to fund its store expansion
program, working capital needs and for general corporate purposes, possibly
including a purchase of a portion of its outstanding 12.15% Series C
Subordinated Notes due 2004. Pending such uses, a portion of the proceeds of the
Offering will be invested in short term, interest-bearing investments.
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.
In addition, the indenture governing the Subordinated Notes contains substantial
restrictions on the Company's ability to pay dividends. See "Summary of Debt
Instruments."
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"MBJI." The Common Stock was initially offered to the public on May 2, 1996 at
$14.00 per share. The following table sets forth for the periods indicated the
high and low reported sales prices of per share for the Common Stock as reported
by the Nasdaq National Market. There is no established trading market for the
Company's Class B Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1996
- ------------------------------------------------------------------------------
Second Quarter (commencing May 2)............................................. $24 3/4 $20
Third Quarter (through October 8)............................................. 28 1/4 20
</TABLE>
On October 8, 1996, the number of stockholders of record of Common Stock
was approximately 50 and the number of stockholders of record of the Class B
Common Stock was approximately 100. The Company estimates that the number of
beneficial owners of its Common Stock is significantly greater than the number
of record owners of its Common Stock. On October 8, 1996, the last reported sale
price of the Common Stock as reported by the Nasdaq National Market was $27.00
per share.
14
<PAGE> 18
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company at July 31, 1996 and as adjusted to give effect to the issuance and
sale of 1,100,000 shares of Common Stock offered hereby by the Company at an
assumed public offering price of $27.00 per share, before estimated underwriting
discounts and commissions and offering expenses, and the application of the
estimated net proceeds therefrom. See "Use of Proceeds." This table should be
read in conjunction with the financial statements, including the notes thereto,
of the Company appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JULY 31, 1996
-----------------------
AS
ACTUAL ADJUSTED(1)
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of long-term debt(2):
Bank Facility........................................................ $ 10,032 $ 4,753
Outstanding checks, net.............................................. 4,207 4,207
-------- -------
Total short-term debt............................................. $ 14,239 $ 8,960
======== =======
Long-term debt(2):
Term Loan............................................................ $ 13,500 $ --
Subordinated Notes................................................... 20,000 12,000
-------- -------
Total long-term debt.............................................. 33,500 12,000
Stockholders' equity:
Preferred stock...................................................... -- --
Common stock and additional paid-in capital.......................... 33,716 61,455
Accumulated deficit.................................................. (29,321) (30,197)
-------- -------
Total stockholders' equity........................................ 4,395 31,258
-------- -------
Total capitalization............................................ $ 37,895 $ 43,258
======== =======
</TABLE>
- -------------------------
(1) As adjusted to give effect to (i) the Offering; (ii) the receipt of $0.2
million in proceeds to the Company from the exercise of stock options in
connection with the Offering; and (iii) the anticipated use of proceeds from
the Offering (including a $0.96 million ($0.58 million net of tax)
prepayment premium in connection with the redemption of subordinated debt
and a non-cash extraordinary charge of $0.5 million ($0.3 million net of
tax) relating to the write-off of deferred financing costs). See "Use of
Proceeds."
(2) See "Summary of Debt Instruments" for a description of the Company's
long-term and short-term debt.
15
<PAGE> 19
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. The balance sheet and statement of
operations data as of, and for the six months ended, July 31, 1995 and 1996 have
been derived from and should be read in conjunction with the unaudited financial
statements of the Company. In the opinion of the Company, such unaudited
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. The interim financial
statements reflect all adjustments (consisting only of normal recurring
accruals) which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. The selected
financial and operating data for the six months ended July 31, 1996 are not
necessarily indicative of the results to be expected for the fiscal year ending
January 31, 1997. Supplemental pro forma financial data for the year ended
January 31, 1996 and for the six months ended July 31, 1996 and July 31, 1995
are unaudited. 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 and unaudited financial
statements and the related notes appearing elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JULY 31,
------------------------------------------------------ -----------------------
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 76,749 $ 88,141 $ 91,106 $106,683 $131,022 $52,074 $64,466
Cost of sales............................ 45,606 52,106 54,511 64,223 77,722 31,959 38,626
-------- ------- ------- -------- ---------- ---------- ----------
Gross profit........................... 31,143 36,035 36,595 42,460 53,300 20,115 25,840
Selling, general and administrative
expenses............................... 25,781 27,971 28,340 30,748 37,887 16,458 20,385
-------- ------- ------- -------- ---------- ---------- ----------
Income from operations................. 5,362 8,064 8,255 11,712 15,413 3,657 5,455
Interest expense......................... 9,397 7,821 8,920 10,594 12,314 6,017 4,557
Stock award expense...................... -- -- -- -- 461 -- --
ESOP compensation expense................ -- 3,800 511 547 590 295 --
Provision for store closings(1).......... 491 -- -- -- -- -- --
Refinancing costs(2)..................... 12,631 -- -- -- -- -- --
-------- ------- ------- -------- ---------- ---------- ----------
Income (loss) from continuing
operations before income taxes....... (17,157) (3,557) (1,176) 571 2,048 (2,655) 898
Income tax benefit (provision)(3)........ -- -- -- -- 14,924 -- (350)
-------- ------- ------- -------- ---------- ---------- ----------
Income (loss) from continuing
operations........................... (17,157) (3,557) (1,176) 571 16,972 (2,655) 548
Gain (loss) on disposal of discontinued
operations(4).......................... (7,297) -- 2,700 -- -- -- --
-------- ------- ------- -------- ---------- ---------- ----------
Net income (loss) before cumulative
effect of accounting change for ESOP
and extraordinary gain............... (24,454) (3,557) 1,524 571 16,972 (2,655) 548
Cumulative effect of accounting change
for ESOP(5)............................ -- -- (8,526) -- -- -- --
Extraordinary gain on extinguishment of
debt, net of taxes..................... -- -- -- -- -- -- 11,164
-------- ------- ------- -------- ---------- ---------- ----------
Net income (loss)...................... $(24,454) $ (3,557) $ (7,002) $ 571 $ 16,972 $(2,655) $11,712
======== ======= ======= ======== ========== ========== ==========
SUPPLEMENTAL PRO FORMA STATEMENT OF
OPERATIONS DATA(6): (UNAUDITED)
Net sales................................ $131,022 $52,074 $64,466
Income from operations................... 15,413 3,657 5,455
Interest expense......................... 2,943 1,416 1,503
Net income............................... 7,205 1,345 2,371
Net income per share..................... $ 0.72 $ 0.13 $ 0.23
Weighted average number of common shares
and common share equivalents
outstanding(7)......................... 10,008,222 10,014,617 10,170,053
</TABLE>
16
<PAGE> 20
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JULY 31,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Stores open at end of period................... 111 113 122 131 146 143 155
Average net sales per store(8)................. $699,000 $784,000 $791,000 $836,000 $936,000
Average net sales per gross square foot(9)..... $ 883 $ 1,008 $ 1,013 $ 1,068 $ 1,187
Average merchandise sale....................... $ 192 $ 210 $ 229 $ 245 $ 253 $ 262
Comparable store sales increase
(decrease)(10)............................... 0.4% 12.5% (0.5)% 7.6% 11.0% 11.8% 13.4%
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital................................ $ 29,731 $ 15,123 $ 20,079 $ 20,460 $ 21,512 $ 20,217 $ 15,030
Total assets................................... 59,376 59,174 51,677 61,512 87,403 70,468 75,300
Total debt..................................... 97,932 112,247 105,953 110,806 107,891 118,191 43,532
Stockholders' equity (deficit)................. (69,877) (69,634) (67,659) (66,578) (47,858) (68,944) 4,395
</TABLE>
- ------------------------------
(1) 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.
(2) 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.
(3) Income tax benefit in the year ended January 31, 1996 resulted from the
reversal of the Company's deferred tax valuation allowance and
corresponding recognition of a deferred tax asset. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Background" and Note 6 of Notes to Financial Statements.
(4) 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.
(5) 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.
(6) Supplemental pro forma statement of operations data reflect (i) the IPO and
the Recapitalization; (ii) the Offering and the anticipated use of the
estimated net proceeds therefrom; and (iii) the application of a tax
provision (assuming a statutory rate of 40%) to the pro forma net income
from continuing operations, as if each transaction occurred on the first
day of the period presented.
(7) The pro forma weighted average number of common shares and common share
equivalents outstanding for the year ended January 31, 1996, and six months
ended July 31, 1995 and July 31, 1996, respectively, consisted of (i)
9,707,267, 9,713,662 and 9,707,250 shares of Common Stock outstanding
(including 3,269,500 shares of Common Stock issued in the IPO and 1,100,000
shares of Common Stock offered hereby); (ii) 3,588, 3,588 and 3,213 common
share equivalents relating to Class B Common Stock; (iii) 297,367, 297,367
and 304,098 common share equivalents relating to the Company's 1995
incentive stock option plan; and (iv) -0-, -0- and 222,654 common share
equivalents relating to the Company's 1996 incentive stock option plan.
(8) 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.
(9) 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.
(10) A store becomes comparable after it has been open for 12 full months.
17
<PAGE> 21
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. Certain statements in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" constitute "forward-looking
statements" within the meaning of the Litigation Reform Act. See "Special Note
Regarding Forward-Looking Statements."
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 163 stores in 24 states. 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.
To strengthen its capital structure and provide greater financial
flexibility for new store openings, in May 1996, the Company completed the IPO
and the Recapitalization which substantially reduced its indebtedness and
ongoing interest expense. The net proceeds from the Offering are expected to
further strengthen the Company's capital structure, reduce indebtedness and
accelerate the pace of new store openings. The Recapitalization resulted in a
one-time extraordinary gain on early extinguishment of debt in the amount of
$18.3 million ($11.2 million net of tax) in the second quarter of fiscal 1996.
In connection with the reduction of indebtedness from the application of the
proceeds of the Offering, the Company expects to incur an extraordinary charge
of approximately $1.5 million (approximately $0.9 million net of tax) in the
fourth quarter of fiscal 1996.
The Company anticipates opening a total of 19 stores in fiscal 1996
(including the 18 stores opened through the date of this Prospectus) and,
contingent upon the completion of the Offering, 28 stores in fiscal 1997 and a
total of approximately 60 stores in fiscal 1997 and 1998 combined. 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 is
increasing its inventory in connection with its merchandising programs and, in
particular, in connection with its expanded offerings of higher priced
merchandise in a number of its stores. 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 an 11.0%
comparable store sales increase in fiscal 1995 and a 13.4% comparable store
sales increase in the first six months of fiscal 1996. 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 the third quarter of fiscal 1996 (i.e., August
and September) net sales increased $3.0 million, or 15.9%, to $22.0 million from
$19.0 million in the first two months of the third quarter of fiscal 1995.
Comparable store sales increased by 7.8% ($1.4 million) in the first two months
of the third quarter of fiscal 1996. This 7.8% comparable store sales increase
was achieved on top of a 15.9% increase in the first two months of the third
quarter of fiscal 1995.
18
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
information derived from the statements of operations of the Company expressed
as a percentage of net sales for such periods.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JANUARY 31, ENDED JULY 31,
------------------------- --------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (including buying and occupancy
expenses)............................................ 59.8 60.2 59.3 61.4 59.9
----- ----- ----- ----- -----
Gross profit......................................... 40.2 39.8 40.7 38.6 40.1
Selling, general and administrative expenses........... 31.1 28.8 28.9 31.6 31.6
----- ----- ----- ----- -----
Income from operations............................... 9.1 11.0 11.8 7.0 8.5
Interest expense....................................... 9.8 9.9 9.4 11.6 7.1
Stock award expense.................................... -- -- 0.4 -- --
ESOP compensation expense.............................. 0.6 0.6 0.4 0.5 --
----- ----- ----- ----- -----
Income (loss) from continuing operations before
income taxes...................................... (1.3) 0.5 1.6 (5.1) 1.4
Income tax benefit (expense)........................... -- -- 11.4 -- (0.5)
----- ----- ----- ----- -----
Income (loss) from continuing operations............. (1.3) 0.5 13.0 (5.1) 0.9
Gain on disposal of discontinued operations............ 3.0 -- -- -- --
----- ----- ----- ----- -----
Income (loss) before cumulative effect of change in
accounting for ESOP............................... 1.7 0.5 13.0 (5.1) 0.9
Cumulative effect of change in accounting for ESOP..... (9.4) -- -- -- --
----- ----- ----- ----- -----
Net income (loss) before extraordinary gain.......... (7.7)% 0.5% 13.0% (5.1)% 0.9%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JULY 31, 1996 COMPARED TO SIX MONTHS ENDED JULY 31, 1995
Net sales for the six months ended July 31, 1996 increased by $12.4
million, or 23.8%, to $64.5 million. Comparable store sales increased $6.8
million, or 13.4%, in the same period. Sales from new stores contributed $5.5
million to the overall sales increase. The average number of units sold on a
comparable store basis increased by approximately 7.6% in the six months ended
July 31, 1996, while the average price per merchandise sale increased to $262 in
the fiscal 1996 period from $253 in the fiscal 1995 period. Comparable store
sales increased in part due to increased use of non-recourse credit, the
implementation of certain return/exchange policies, ongoing improvements in the
quality of the Company's sales force, and increased inventory levels, as well as
a solid retail environment. The Company opened ten new stores and closed one in
the six months ended July 31, 1996, increasing the number of stores operated to
155 as of July 31, 1996 compared to 143 as of July 31, 1995.
Gross profit increased $5.7 million to $25.8 million in the six months
ended July 31, 1996. The gross profit percentage increased to 40.1% in the six
months ended July 31, 1996 from 38.6% in the six months ended July 31, 1995, due
to the spreading of certain buying and occupancy costs over the increased sales
base.
Selling, general and administrative expenses increased by $3.9 million, or
23.9%, to $20.4 million in the six months ended July 31, 1996 from $16.5 million
in the corresponding period of the prior year. New stores accounted for $1.7
million of this increase. As a percentage of net sales, selling, general and
administrative expenses remained consistent at 31.6% in the six months ended
July 31, 1996 and 1995. The dollar increase primarily relates to higher payroll
expenses of $2.4 million and higher credit expenses of $0.9 million. Comparable
store payroll costs increased 9.9% in the six months ended July 31, 1996, as
compared to the same period in 1995, primarily due to a continuing effort to
upgrade the quality of the sales force and an increase in incentive compensation
paid to store based personnel. Private label non-recourse credit sales as a
percentage of net sales increased to 44.6% in the six months ended July 31, 1996
from 36.4% in the six months ended July 31, 1995. These non-recourse credit
sales carry higher discount rates than bankcard sales, which resulted in higher
credit expense.
19
<PAGE> 23
Interest expense decreased $1.5 million or 24.3% to $4.6 million in the six
months ended July 31, 1996 from $6.0 million in the six months ended July 31,
1995. This decrease in interest expense was attributable to lower average
outstanding debt balances resulting from the Recapitalization and lower average
interest rates on bank borrowings.
No ESOP compensation expense has been recorded in fiscal 1996. The
compensation expense recorded in the six months ended July 31, 1995 was $0.3
million.
Income tax expense of $0.4 million was recorded in the six months ended
July 31, 1996 reflecting an expected effective annual tax rate of 39%. No income
tax benefit was recorded in the six months ended July 31, 1995, as utilization
of the Company's net operating loss was not reasonably assured at that time.
In connection with the Recapitalization, the Company recorded a gain on the
early extinguishment of debt in the amount of $11.2 million, net of taxes, which
was reflected as an extraordinary item. This gain reflects debt discounts on
senior accreting loans of $0.6 million, zero coupon notes of $4.0 million and
subordinated debt of $13.7 million.
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 base.
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. 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 1995 from 11.0% in fiscal 1994.
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
20
<PAGE> 24
on the Company's senior accreting note and subordinated indebtedness, which
indebtedness was subsequently retired in fiscal 1996 in connection with the
Recapitalization.
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. As a result of the Recapitalization, the Company does
not expect to record any 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 $18.4 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 realized $7.1 million of the deferred tax asset in May 1996,
in connection with the recognition of the gain relating to the debt forgiveness
as part of the Recapitalization.
Giving pro forma effect to the IPO and realization of a portion of the
deferred tax asset in the amount of $7.1 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 made hereby) 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 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 "Principal and Selling Stockholders --
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
21
<PAGE> 25
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 base.
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 1994 from 9.1% in fiscal 1993.
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 1994
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 lower net sales in each of its first three
fiscal quarters and expects this trend to continue. The Company has experienced
net losses from time to time in one or more of its first three fiscal quarters.
The following table sets forth summary unaudited quarterly financial
information of the Company for each quarter in fiscal 1994 and fiscal 1995 and
the first two quarters of fiscal 1996. In the opinion of management, this
quarterly information has been prepared on a basis consistent with the Company's
audited financial statements appearing elsewhere in this Prospectus and reflects
adjustments, 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
22
<PAGE> 26
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>
1996 QUARTERS ENDED
1994 QUARTERS ENDED 1995 QUARTERS ENDED
----------------------------------------- ----------------------------------------- --------------------
APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31,
1994 1994 1994 1995 1995 1995 1995 1996 1996 1996
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....... $ 19,091 $ 22,578 $ 22,125 $ 42,889 $ 23,676 $ 28,398 $ 27,688 $ 51,260 $ 29,560 $ 34,906
Gross profit.... 6,968 8,494 8,326 18,672 8,880 11,235 10,724 22,461 11,626 14,214
Income from
operations.... 370 1,424 1,079 8,839 854 2,803 1,800 9,956 1,608 3,847
</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 cash flows from operating activities decreased from a
positive cash flow of $2.0 million in the first six months of fiscal 1995 to a
cash flow shortfall of $0.4 million in the first six months of fiscal 1996.
Higher income from operations together with increases in accounts payable were
more than offset by increases in merchandise inventories (before the effects of
the Gold Consignment Facility) and deferred financing costs. Cash generated from
financing activities included proceeds from the IPO of $40.4 million, $15.0
million from proceeds of the Term Loan, $15.3 million from proceeds from the
Gold Consignment Facility less a $3.8 million dollar decrease in the net amount
of outstanding checks. The Company utilized cash in the first six months of 1996
primarily to repay outstanding bank borrowings of $7.8 million on revolving
loans, $26.6 million on the term loans, $50.5 million on senior accreting loans
and $2.0 million on zero coupon notes and to repay subordinated debt of $10.6
million in addition to funding capital expenditures of $3.3 million, primarily
related to the opening of ten new stores in the first six months of fiscal 1996.
The Company's cash flows from operating activities increased from $4.7
million in fiscal 1994 to $9.6 million in fiscal 1995, 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 1995 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,
1995, the Company had consigned inventories from vendors in the amount of $18.0
million.
The Company's cash flows from operating activities increased from a cash
flow shortfall 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, 1994, the
Company had consigned inventories from vendors in the amount of $16.6 million.
At February 1, 1996, the Company had net operating loss tax carryforwards
in the amount of $18.4 million, which will reduce cash payments for income taxes
in future periods but which have already been
23
<PAGE> 27
recognized for financial reporting purposes. The timing of the use of these
carryforwards is expected to be deferred under Section 382 of the Code. See
"Principal and Selling Stockholders -- Limitations on the Company's Use of Net
Operating Loss Carryforwards."
The Company has a $43.75 million Bank Facility, consisting of a $29.0
million Revolver and a $14.75 million Term Loan. Borrowings outstanding under
the Revolver and Term Loan bear interest at fluctuating rates determined by
reference to a bank base rate or LIBOR, plus in each case an applicable margin.
The Revolver is a five-year revolving line of credit, with borrowings thereunder
limited to a borrowing base determined based on levels of inventory and accounts
receivable. At September 30, 1996, the borrowing base under the Revolver was
$28.3 million, and borrowings outstanding under the Revolver were $9.7 million.
The Term Loan has a final maturity in May 2001, with quarterly amortization of
principal which commenced in July 1996 as described under "Summary of Debt
Instruments -- Bank Facility." Upon consummation of the Offering, the Term Loan
will be repaid and the Bank Facility will be converted into a $43.75 million
reducing revolver, with the borrowings thereunder limited to the borrowing base
and with the Commitment Amount reducing over five years to $29 million. See
"Summary of Debt Instruments -- Bank Facility."
See "Summary of Debt Instruments" for a description of the Company's Gold
Consignment Facility and Series C and Series D Senior Subordinated Notes. The
Company intends to utilize a portion of the proceeds from the Offering to retire
$8.0 million in principal amount of the Series D Notes at their applicable
redemption price of $8.96 million plus accrued interest, and the Company may in
the future use available borrowings under the Bank Facility to repurchase a
portion of the Series C Notes from time to time.
The Company's cash requirements consist principally of funding increases in
inventory at existing stores, capital expenditures and working capital
(primarily inventory) associated with the Company's new stores and amortizing
its debt. The Company's primary sources of liquidity have been cash flow from
operations and bank borrowings.
During fiscal 1996, the Company plans to open 19 stores, 18 of which had
been opened as of the date of this Prospectus. New stores on average require
inventory of approximately $300,000 and capital expenditures of approximately
$230,000. The Company is in the process of increasing the amount of inventory
(especially higher priced items) carried in its stores. Pre-opening expenses for
new stores average approximately $20,000. The Company has budgeted capital
expenditures in fiscal 1996 of $5.6 million for new store openings and other
assets being placed in service during fiscal 1996. The Company anticipates
capital expenditures of approximately $8.0 million for new store openings and
other assets being placed in service during fiscal 1997, a portion of which
expenditures will be made late in fiscal 1996.
The Company's inventory levels and working capital requirements have
historically been highest in advance of the Christmas season. The Company has
funded these seasonal working capital needs through borrowings under the
Company's revolver and increases in trade payables and accrued expenses.
Management expects that cash flows from operating activities and funds
available under its Bank Facility, together with the funds from the Offering,
should be sufficient to support the Company's accelerated new store expansion
program and to meet debt service requirements and seasonal working capital needs
for the foreseeable future.
INFLATION
The Company believes that inflation generally has not had a material effect
on the results of its operations.
24
<PAGE> 28
BUSINESS
THE COMPANY
General. Marks Bros. Jewelers, Inc. (the "Company") is a leading, national
specialty retailer of fine jewelry (based on number of stores), operating 163
stores in 24 states. Founded in 1895, the Company operates stores in regional
and super-regional shopping malls under the names Whitehall Co. Jewellers(R)
(123 stores), Lundstrom Jewelers(R) (35 stores) and Marks Bros. Jewelers(TM) (5
stores). The Company offers at competitive prices an in-depth selection of fine
jewelry in the following key categories: diamond, gold, precious and
semi-precious jewelry. The Company's target customers are middle to upper middle
income women over 25 years old. Central to the Company's growth in operating
profits and its high store productivity are its small but flexible store format,
the absence of recourse credit risk, its strong sales culture and its operating
efficiencies at both the store and corporate levels.
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%.
For the six months ended July 31, 1996, the Company's net sales increased by
23.8% as compared to net sales in the first six months of fiscal 1995, and
operating margin improved from 7.0% to 8.5%.
The Company believes it has significant opportunities to increase sales and
profitability through an increased number of planned store openings, 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.
Retailing Concepts. The Company's stores currently operate under the names
Whitehall Co. Jewellers(R) (123 stores), Lundstrom Jewelers(R) (35 stores) and
Marks Bros. Jewelers(TM) (5 stores). Each store concept is designed around an
open, brightly-lit and inviting layout which encourages browsing by mall
shoppers. The Company's multiple name format allows the Company to open
additional stores in malls where it already has profitable locations. Whitehall
Co. Jewellers is the Company's primary trademark and is positioned to be
somewhat more upscale than the average mall-based jewelry store. Lundstrom
Jewelers operates in 35 malls. The Company operates two stores in 29 malls and
three stores in one mall. 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
having opened in May 1996 in a mall in which the Company already operates a
Whitehall and a Lundstrom store.
INDUSTRY
Total retail sales by jewelry stores in the United States in 1995 were
approximately $19.4 billion, and such sales grew between 1990 and 1995 at an
annual rate of approximately 5.0%, according to the U.S. Department of Commerce.
The jewelry market is generally divided into three segments: fine jewelry,
costume jewelry, and guild jewelry. The broad "fine" jewelry market segment
represents a majority of the jewelry market in terms of revenue, and it includes
jewelry made from precious metals and gemstones, as well as finer watches. Fine
jewelry is sold at a range of price points from middle to upper end, with the
upper end consisting of luxury items such as unique design jewelry items and
expensive time pieces. Except for a few designer label offerings, fine jewelry
is generally not marketed under brand names. Costume jewelry consists of jewelry
made of non-precious stones and rhinestones, as well as inexpensive watches. The
"guild" market represents a small percentage of the total market.
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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.
The Company believes that the retail jewelry industry is consolidating due
to 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 790 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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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%. For the six months
ended July 31, 1996, the Company's central overhead represented 5.5% of net
sales as compared to 6.1% of net sales for the first six months of fiscal
1995.
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:
Further Acceleration of New Store Openings. The Offering is expected to
enable the Company to accelerate its new store expansion program from 23 to 28
new stores in fiscal 1997. The Company anticipates opening a total of
approximately 60 new stores in fiscal 1997 and 1998 combined. The Company plans
to open a total of 19 new stores in fiscal 1996 (including the 18 stores opened
as of the date of this Prospectus). The following table shows the Company's
store expansion during the periods presented reflecting both store openings and
closings for the respective periods:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, YEAR ENDING
------------------------------------ JANUARY 31, 1997
NUMBER OF STORES: 1992 1993 1994 1995 1996 (EXPECTED)(1)
------------------------------------------ ---- ---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C> <C>
Open at beginning of period............... 109 111 113 122 131 146
Opened during period...................... 8 4 11 11 15 19
Closed during period...................... (6) (2) (2) (2) -- (2)
--- --- --- --- --- ---
Open at end of period..................... 111 113 122 131 146 163
=== === === === === ===
Net increase............................ 2 2 9 9 15 17
</TABLE>
- ------------------------------
(1) As of the date of the Prospectus, 18 stores have been opened during fiscal
1996.
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, with a fourth store planned to open in fiscal 1997, and five
stores in the St. Louis area, with a sixth store planned to open in fiscal 1996.
The Company plans to enter the San Diego market in fiscal 1997 with three
stores.
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, the
Company operates two stores in 29 malls and three stores in one mall.
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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 has closed one
store, and plans to close an additional store, in fiscal 1996. The Company is
currently considering closing a limited number of such stores in fiscal 1997 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%, 11.0% and 13.4% in fiscal 1994 and 1995 and in the
first six months of fiscal 1996, respectively. The Company seeks to achieve
comparable store sales increases by (i) continuing to increase merchandise
offerings in selected categories (especially higher priced items), (ii)
continuing to implement its return/exchange policy, (iii) continuing to expand
the use of its non-recourse credit programs, (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 40% of
net sales during the twelve months ended July 31, 1996. 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 and from $253 in the
first six months of fiscal 1995 to $262 in the first six months of fiscal 1996.
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). During the first six months of fiscal 1996, the
Company placed a significantly expanded selection of higher priced merchandise
in over 30 stores on a test basis. Based on the initial success of this program,
the Company plans to expand this program to a number of additional stores.
The following table sets forth the Company's percentage of total
merchandise sales by category for the following periods:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 12 MONTHS
----------------------------------------- ENDED
1992 1993 1994 1995 1996 JULY 31, 1996
----- ----- ----- ----- ----- -------------
<S> <C> <C> <C> <C> <C> <C>
Diamonds.............................. 50.4% 51.4% 54.0% 56.8% 57.6% 57.5%
Gold.................................. 23.9 25.5 26.6 25.0 25.2 25.3
Precious/Semi-Precious................ 19.6 16.8 15.0 15.1 14.6 14.6
Watches............................... 3.2 3.0 2.7 2.4 2.1 2.2
Other................................. 2.9 3.3 1.7 0.7 0.5 0.4
----- ----- ----- ----- ----- -----
Total............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
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All stores carry the Company's core items. The Company also customizes the
merchandising of its stores based upon each store's sales volume, individual
market preferences and historical selling patterns. The Company continually
tests new items in its stores and monitors their sales performance to identify
additional sales opportunities.
Along with its broad product assortment, the Company also provides jewelry
repair services to its customers (sales from which represented approximately
four percent of fiscal 1995 net sales). Actual repair work is performed by
jewelers under independent contract. Approximately 80 of the Company's stores
have jewelers located in the store to provide on-site repair services to the
customer. To enhance customer service, the Company plans to continue to expand
the number of stores with on-site jewelry repair.
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 enable 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. Such
discount expense for the six months ended July 31, 1996 represented 3.2% of
credit sales for that period, compared to 2.5% for the first six months of 1995.
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
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<PAGE> 33
purchases. In addition, the Company utilizes a check authorization company which
guarantees payments on transactions involving personal checks.
In late fiscal 1995 and fiscal 1996 the Company has experimented with a
"First Time Buyers" program through a non-recourse arrangement with Bank One.
Under this program, Bank One grants credit to young customers with little or no
credit history, for which the Company pays Bank One a significantly higher fee
than it pays under its standard program. Based on the costs and results of the
program, the Company and Bank One have determined either to eliminate or
substantially modify the "First Time Buyers" program.
The Company has devoted considerable effort and sales training to credit,
and it anticipates that its non-recourse credit programs will continue to be a
focus of its efforts.
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 23 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 has focused 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 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%. Central
overhead expenses as a percentage of net sales decreased from 6.1% during the
first six months of fiscal 1995 to 5.5% during the comparable period in fiscal
1996.
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.
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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.
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. The vast majority
of the Company's sales in fiscal 1996 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 the twelve months ended July 31, 1996, the Company's largest
and five largest suppliers accounted for approximately 19% and 39%,
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
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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.
For the twelve months ended July 31, 1996, the Company's average net
monthly investment in inventory (i.e., the total cost of inventory owned and
paid for) was 66% of the total cost of the Company's on-hand merchandise. The
amount of consignment merchandise has increased in recent years. For example,
the average amount of consignment merchandise per store has increased from
$93,000 on January 31, 1994 to $109,000 on January 31, 1996 and increased from
$80,000 on July 31, 1994 to $90,000 on July 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.
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.
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,
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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
down-load it on an as-needed basis from the Company's central computer system.
The information available via laptop includes, among other items, store sales,
gross profit, personnel costs, and sales associates' productivity information.
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.
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 163 stores in 24 states. All of these stores are
leased and 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(@) and Lundstrom Jewelers(@) 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.
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<PAGE> 37
EMPLOYEES
As of July 31, 1996, the Company had a total of 1,046 employees, including
953 store level employees and 93 corporate level merchandising, marketing and
administrative employees. The Company usually hires a limited number of
temporary employees during each Christmas selling season. None of the Company's
employees are represented by a union. The Company believes that its relations
with its employees are good.
REGULATION
The Company's operations are affected by numerous federal and state laws
that impose disclosure and other requirements upon the origination, servicing
and enforcement of credit accounts, and limitations on the maximum amount of
finance charges that may be charged by a credit provider. Although credit to the
Company's customers is provided by third parties without recourse to the Company
based upon a customer's failure to pay, any restrictive change in the regulation
of credit, including the imposition of, or changes in, interest rate ceilings,
could adversely affect the cost or availability of credit to the Company's
customers and, consequently, the Company's results of operations or financial
condition.
The Company's operations are also affected by federal and state laws
relating to marketing practices in the retail jewelry industry. In marketing to
its customers, the Company compares many of its prices to "reference prices."
The Company's literature indicates to customers that its reference price for an
item is either the manufacturer's suggested retail price or the Company's
determination of the non-discounted price at which comparable merchandise of
like grade or quality is advertised or offered for sale by competitive retailers
and is not the Company's current selling price or the price at which it formerly
sold such item. Although the Company believes that pricing comparisons are
common in the jewelry business and that the Company's practice is in compliance
with applicable laws relating to trade practices, there can be no assurance that
this position would be upheld.
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.
34
<PAGE> 38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Company's
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Hugh M. Patinkin(1)(2).................... 46 Chairman, President and Chief Executive
Officer and Director
John R. Desjardins(1)..................... 46 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)...................... 45 Executive Vice President, Merchandising
Rodney L. Goldstein....................... 44 Director
Samuel B. Guren........................... 49 Director
Norman J. Patinkin(2)..................... 70 Director
Jack A. Smith............................. 61 Director
</TABLE>
- ------------------------------
(1) Executive officer.
(2) Messrs. Hugh and Matthew Patinkin are brothers. Norman J. Patinkin is a
first cousin, once removed, of Messrs. Hugh and Matthew Patinkin.
Mr. Hugh M. Patinkin has served as President and Chief Executive Officer of
the Company since 1989 and was elected its Chairman in February 1996. He has
served as a director from 1979 to 1988 and from 1989 to the present. He joined
the Company as its Assistant Secretary in 1979. Prior thereto he practiced law
with the firm of Sidley & Austin. For information concerning Mr. Patinkin's
services to Double P Corp., see "Certain Transactions -- Other."
Mr. John R. Desjardins joined the Company in 1979 and has served as
Executive Vice President, Finance and Administration, Treasurer and Secretary
and as a director of the Company since 1989. Previously, he worked as a
certified public accountant with Deloitte & Touche L.L.P.
Mr. Matthew M. Patinkin joined the Company in 1979 and has served as
Executive Vice President, Store Operations and as a director of the Company
since 1989.
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. 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
35
<PAGE> 39
for corporations, S&S Marketing Corp. (since 1979), which operates motor clubs
for corporations, and Continental Associates, Inc. (since 1979), which operates
travel clubs for corporations.
Mr. Jack A. Smith has served as director of the Company since July 1996.
Mr. Smith is Chairman of the Board and Chief Executive Officer of The Sports
Authority, Inc., a national sporting goods chain, which he founded in 1987.
Prior to founding The Sports Authority, Mr. Smith served as Chief Operating
Officer of Herman's Sporting Goods and held various executive management
positions with major national retailers, including Sears & Roebuck, Montgomery
Ward and Jefferson Stores. Mr. Smith serves on the Board of Directors of Darden
Restaurants, Inc.
BOARD OF DIRECTORS
The business of the Company is managed under the direction of the Company's
Board of Directors. The Board of Directors is presently composed of seven
directors. The directors are divided into three classes. Messrs. H. Patinkin,
Guren and N. Patinkin comprise Class I, which class will stand for election at
the annual meeting of stockholders to be held in 1997. Messrs. Desjardins and
Smith comprise Class II, which class will stand for election at the annual
meeting of stockholders to be held in 1998. Messrs. M. Patinkin and Goldstein
comprise Class III, which class will stand for election at the annual meeting of
stockholders to be held in 1999.
The Company's Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee recommends the firm to be appointed
as independent accountants to audit financial statements and to perform services
related to the audit, reviews the scope and results of the audit with the
independent accountants, reviews with management and the independent accountants
the Company's year-end operating results and considers the adequacy of the
internal accounting procedures. The Audit Committee consists of Messrs.
Goldstein, Guren and N. Patinkin. The Compensation Committee, which also
consists of Messrs. Goldstein, Guren and N. 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.
COMPENSATION OF DIRECTORS
Non-employee directors receive compensation of $6,250 per fiscal quarter
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 has adopted the 1996 Long-Term Incentive Plan. See "Management
- -- Stock Plans." Pursuant to this plan, each non-employee director (other than
Messrs. Goldstein and Guren) is granted a nonqualified option to purchase 10,000
shares of Common Stock (a "Directors Option") which vests one-third each on the
first, second and third anniversaries of grant. 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. Messrs. N. Patinkin and Smith were granted
Directors Options on May 7, 1996 (the date of the closing of the IPO) and July
12, 1996, respectively, at exercise prices of $14.00 and $23.50, respectively,
per share.
36
<PAGE> 40
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 AWARDS
-------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
FISCAL --------------------- STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS(1) OPTIONS
- ---------------------------------------- ------ -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Hugh M. Patinkin
President and Chief Executive
Officer............................... 1995 $255,000 $191,250 $ 223,576 228,337
John R. Desjardins
Executive Vice President, Finance
and Administration, Treasurer and
Secretary............................. 1995 234,000 175,500 128,001 154,603
Matthew M. Patinkin
Executive Vice President,
Store Operations...................... 1995 200,000 150,000 102,401 124,634
Lynn D. Eisenheim
Executive Vice President,
Merchandising......................... 1995 160,000 120,000 -- 69,040
</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.
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.
(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.
37
<PAGE> 41
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF
OPTIONS AT UNEXERCISED
JANUARY 31, 1996 IN-THE-MONEY
---------------------- OPTIONS AT
UNEXERCISABLE(1) JANUARY 31, 1996(2)
---------------------- -------------------
<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 IPO price of $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 realized upon
consummation of the IPO and 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.
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 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 grant. 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
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<PAGE> 42
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 are fully exercisable. In connection with the
Offering, the four executive officers will exercise options for 235,000 shares
(249,250 shares if the Underwriters' over-allotment option is exercised in
full). Options for 103,846 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 Offering) 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 Code, or nonqualified stock
options. The 1996 Plan also provides for the grant of stock appreciation rights
("SARs"), bonus stock awards which are vested upon grant, stock awards which may
be subject to a restriction period and specified performance measures, and
performance shares. Performance shares are rights, contingent upon the
attainment of performance measures within a specified performance period, to
receive one share of Common Stock, which may be restricted, or the fair market
value of such performance share in cash. A total of 774,631 shares of Common
Stock have been reserved for issuance under the 1996 Plan, subject to adjustment
in the event of a stock split, stock dividend or other changes in capital
structure. No grants may be made under the 1996 Plan after ten years after its
effective date. The 1996 Plan also provides for the automatic grants of stock
options to non-employee directors described above under the heading "--
Compensation of Directors." The total number of options that may be granted
under the 1996 Plan together with the total number of 1995 Options will
represent 15% of the Common Stock of the Company outstanding immediately after
the consummation of the Offering (assuming the exercise of all such options).
Therefore, the amounts of options may vary depending upon whether the
Underwriters' over-allotment option is exercised.
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 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
39
<PAGE> 43
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 completion of 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 IPO price), will become exercisable in cumulative
annual installments of 25% of the shares subject to option beginning on the
first anniversary of the date of grant, and will expire ten years after the
commencement date of the IPO (i.e. May 7, 2006). The options granted to Mr. H.
Patinkin and Mr. M. Patinkin are non-qualified stock options. Of the options
granted to Mr. Desjardins, 28,550 are incentive stock options, and 141,216 are
nonqualified stock options. Substantially all of the options granted to Mr.
Eisenheim are incentive stock options. A grant was made under the 1996 Plan,
effective upon the commencement of the IPO, of nonqualified options to purchase
10,000 shares of Common Stock with the same exercise price to Mr. N. Patinkin, a
non-employee director. A grant was made on July 12, 1996 under the 1996 Plan of
nonqualified options to purchase 10,000 shares of Common Stock to Mr. Smith at
an exercise price of $23.50 per share. See "Management -- Compensation of
Directors." As of October 10, 1996, additional grants of incentive stock options
covering a total of 32,915 shares of Common Stock may be made to other employees
or directors.
The Company has registered under the Securities Act all shares of Common
Stock issued or issuable pursuant to the 1995 Options and the 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, 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
40
<PAGE> 44
would constitute an "excess parachute payment" under Section 280G(b)(1) of the
Code, 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 IPO, 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.
CERTAIN TRANSACTIONS
REGISTRATION RIGHTS
Pursuant to the Second Amended and Restated Registration Agreement (the
"Registration Agreement") effective as of May 7, 1996, the Company granted to
Frontenac Venture V Limited Partnership, Frontenac Diversified III Limited
Partnership, Continental Illinois Venture Corporation, and William Blair Venture
Partners III Limited Partnership, and 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. Pursuant to the
Registration Agreement, shares offered hereby by the Selling Stockholders and
shares that may be sold by the Selling Stockholders upon the exercise of the
Underwriters' over-allotment option are being included in the registration
statement of which this Prospectus is a part. 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, pursuant to the Registration Agreement
effective as of May 7, 1996 between the Company and the ESOP Trust (the "ESOP
Registration Agreement"), the ESOP has the right to demand one registration with
respect to the shares of Common Stock it holds. After this Offering, holders of
3,638,890 shares of Common Stock not sold in the IPO or the Offering (and an
additional 175,874 shares of Common Stock subject to currently exercisable
options) will have registration rights under one of the Registration Agreements
described above.
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
children of Mr. Norman Patinkin no longer have any ownership interest in MBM Co.
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. ("Double P")
and Clark Foods Corp., which own and operate primarily mall-based snack food
stores, and 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 and Clark Foods Corp. 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. Following
the IPO, the Company's policy has required that the terms of any such leases
must be approved by a majority of the Company's outside directors.
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<PAGE> 45
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."
Concurrently with the consummation of the IPO and the Recapitalization in
May 1996, (i) the ESOP transferred to the Company 8,206 shares of Class B Common
Stock in exchange for the elimination of the ESOP Debt totalling 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 216,263 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 were
allocated to each individual participant's accounts, (v) the Company obligations
to make contributions to the ESOP were eliminated, and (vi) the Company's
obligation to purchase shares of Common Stock distributed by the ESOP to
participants was eliminated for so long as the shares of Common Stock remain
actively traded on a national quotation service or a national stock exchange.
After giving effect to the restructuring of the ESOP, 12,053 shares and 3,246
shares of Common Stock were allocated to the ESOP accounts of John R. Desjardins
and Lynn D. Eisenheim, respectively, who are the only directors or executive
officers who participate in the ESOP.
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<PAGE> 46
SUMMARY OF DEBT INSTRUMENTS
As part of the Recapitalization in May 1996, the Company completed a
restructuring of its outstanding indebtedness to consist of (i) the Subordinated
Notes, (ii) the Bank Facility and (iii) the Gold Consignment Facility. The
Company used the net proceeds of the IPO, together with the funds generated by
the Notes Offering, the Bank Facility and the Gold Consignment Facility, to
repay in full all of the Company's bank indebtedness and subordinated debt
currently outstanding and for working capital and other general corporate
purposes. In addition, simultaneously with the completion of the Offering, the
Company completed a restructuring of its ESOP, as more fully described under
"Certain Transactions -- ESOP Restructuring." The following summaries of the
material terms of the Subordinated Notes, the Bank Facility and the Gold
Consignment Facility do not purport to be complete and are subject to all of the
provisions of the respective governing agreements relating thereto, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
BANK FACILITY
The Company's $43.75 million secured credit facility (the "Bank Facility")
consists of a $29 million revolving senior secured line of credit (including a
$5 million letter of credit subfacility) (the "Revolver") and a $14.75 million
senior secured term loan (the "Term Loan") which is payable in quarterly
installments over five years. The 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 Revolver, in whole or in part, at any time, and re-
borrow monies up to the Commitment Amount. Available borrowings under the
Revolver are subject to a borrowing base determined based on levels of inventory
and accounts receivable (which borrowing base was $28.3 million as of September
30, 1996). The Company may also repay the entire outstanding balance and
terminate the agreement governing the Bank Facility (the "Bank Agreement") at
any time. At September 30, 1996, $9.7 million was outstanding under the
Revolver.
Upon consummation of the Offering, the Term Loan will be repaid and the
Bank Facility will be converted into a $43.75 million reducing revolver, with
the borrowings thereunder limited to the borrowing base and with the Commitment
Amount reducing over five years to $29.0 million.
At the Company's option, borrowings under the Bank Facility 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, borrowings under the Bank Facility will bear
interest, at the Company's option, at the Base Rate or the LIBOR Rate plus, in
each case, an applicable margin that will fluctuate depending on the Company's
leverage ratio. Interest is calculated on the average outstanding principal
balance and is 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 Bank Facility is 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 and contains customary
events of default provisions.
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
sell up to $16 million of fine gold to one or more financial institutions, which
will, in turn, consign the gold to the Company or to borrow revolving loans
limited to an amount based upon the value of gold owned by the Company. The Gold
Consignment Facility is secured
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<PAGE> 47
by the gold owned by the Company and the gold consigned and is subject to
financial, affirmative and negative covenants and default provisions that are
substantially similar to those 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 pays 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) the LIBOR Rate 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 is payable monthly in arrears and the consignment fee with respect to
Fixed Rate Amounts is payable on the last day of each interest period applicable
thereto. During the second quarter, the Company sold 39,000 troy ounces of gold
for approximately $15.3 million pursuant to the Gold Consignment Facility, which
gold had a Fair Market Value of $14.8 million as of September 30, 1996. As of
October 10, 1996, the weighted average consignment fee rate being paid by the
Company was 4.0%.
SUBORDINATED NOTES
As part of the Recapitalization, the Company issued (a) $12.0 million
aggregate principal amount of Senior Subordinated Notes Due 2004 (the "Series C
Notes") and (b) $8.0 million aggregate principal amount of Senior Subordinated
Notes Due 2004 (the "Series D Notes"). The Series C Notes and the Series D Notes
(collectively, the "Subordinated Notes") are unsecured general obligations of
the Company and are subordinated to all existing and future senior indebtedness
of the Company, including all amounts to be outstanding under the Bank Facility.
The Series C Notes bear interest at 12.15% per annum and mature in October
2004. Quarterly installments of principal on the Series C Notes in the amount of
$855,000 are mandatorily prepayable, commencing July 2001 through operation of a
mandatory sinking fund. The Company may prepay the Series C Notes at any time on
or after July 2001, at declining redemption prices, together with interest
accrued thereon to the date set for redemption.
The Series D Notes bear interest at the rate of (a) 15% per annum, payable
in cash, plus (b) for subsequent periods commencing May 1, 1998, 1% per annum
(increasing in 1% increments per each subsequent year commencing May 1, 1999)
("Additional Interest"), which Additional Interest is payable, at the option of
the Company, in cash or by delivery of additional Series B Notes. The Series B
Notes mature in October 2004. Quarterly installments of principal of the Series
B Notes in the amount of 1/14th of the outstanding principal balance of the
Series B Notes on July 31, 2001 are mandatorily prepayable, commencing July
2001, through operation of a mandatory sinking fund. The Company may prepay the
Series D Notes at declining redemption prices (currently 112%, or $8,960,000),
together with accrued and unpaid interest to the date of redemption.
The indenture governing the terms of the Subordinated Notes (the
"Indenture") contains a number of financial, affirmative and negative covenants.
The Indenture includes affirmative covenants relating to, among other things,
the delivery of certain financial information and maintenance of properties and
insurance. The Indenture contains certain negative covenants, including, among
other things, limitations on indebtedness, restricted payments (including the
payment of dividends), liens, sales and leases of property, mergers, investments
and transactions with affiliates. The Indenture also includes financial
covenants requiring the Company to maintain (a) minimum fixed charge coverage
ratios (varying over time); (b) minimum levels (varying over time) of
consolidated tangible net worth; and (c) maximum ratios (varying over time) of
funded debt to earnings before interest, taxes, depreciation and amortization.
The Company intends to use a portion of the proceeds of the Offering to
prepay in full the Series D Notes in fiscal 1996. In addition, the Company may
use a portion of such proceeds to purchase a portion of the Series C Notes.
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<PAGE> 48
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of the date of this Prospectus and as adjusted to
reflect the sale of shares of Common Stock by the Company and by the Selling
Stockholders being offered hereby, by (i) each person (or group of affiliated
persons) who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each Selling Stockholder, (iii) each
director of the Company, (iv) each of the executive officers named in the
Summary Compensation Table and (v) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE AFTER THE
OFFERING(1)(2) SHARES OFFERING(1)(2)
----------------------- BEING ----------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------------------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Frontenac Venture V Limited
Partnership(3)
135 S. LaSalle Street
Chicago, IL 60603..................... 712,247 8.3% -- 712,247 7.3%
Frontenac Diversified III
Limited Partnership(4)
135 S. LaSalle Street
Chicago, IL 60603..................... 325,425 3.8 325,425 -- --
Continental Illinois Venture Corporation
231 S. LaSalle Street
Chicago, IL 60697..................... 611,335 7.1 152,834 458,501 4.7
William Blair Venture Partners III
Limited Partnership(5)
222 West Adams
Chicago, IL 60606..................... 464,437 5.4 232,219 232,218 2.4
Hugh M. Patinkin*(6).................... 714,586 7.4 70,000 644,586 6.6
Matthew M. Patinkin*(7)................. 450,848 4.4 70,000 380,848 3.9
John R. Desjardins*(8).................. 332,723 3.0 75,000 257,723 2.6
Lynn D. Eisenheim*(9)................... 72,286 ** 20,000 52,286 **
Rodney L. Goldstein+(3)(4).............. 1,037,672 12.1 325,425 712,247 7.3
Samuel B. Guren+(5)..................... 464,437 5.4 232,219 232,218 2.4
Jack A. Smith........................... -- -- -- -- --
Norman J. Patinkin(10).................. 69,726 ** -- 69,726 **
Avy H. Stein............................ 26,365 ** 26,365 -- --
John R. Willis.......................... 21,421 ** 21,421 -- --
U.S. Trust Company of California, N.A.,
as trustee for the ESOP Trust,
1300 Eye Street, N.W., Suite 280 East
Washington, D.C. 20005(11)............ 828,025 9.6 211,736 616,289 6.4
All executive officers and directors as
a group (8 persons)................... 3,105,827 35.2 935,094 2,170,733 21.9
</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, 135 S. LaSalle Street Suite 2610, Chicago, IL
60603.
** Less than 1%.
(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. The Company and certain Selling
Stockholders have granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
aggregate of 345,750 shares of Common Stock, solely to cover
over-allotments, if any, as follows: the Company, 165,000 shares;
Continental Illinois Venture Corporation, 22,925 shares; William Blair
Venture Partners III Limited Partnership, 34,833 shares; John R.
Desjardins, 11,250 shares; Lynn D. Eisenheim, 3,000 shares; and U.S. Trust
Fiduciary Services, as trustee for the ESOP, 108,742 shares.
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<PAGE> 49
(2) Without giving effect to the Underwriters' over-allotment option. Where
indicated in the footnotes to this table, includes Common Stock issuable
pursuant to stock options exercisable within 60 days of the Offering.
(3) 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.
(4) Frontenac Company is the general partner, and the Teachers' Retirement
System of the State of Illinois is the sole 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.
(5) 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, Mr. Guren 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.
(6) Includes 155,537 shares of Common Stock issuable pursuant to presently
exercisable stock options, of which options for 70,000 shares will be
exercised in connection with the Offering. Includes 206,035 shares
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 23,376 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 11,120
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 36,451 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.
(7) Includes 92,734 shares of Common Stock issuable pursuant to presently
exercisable stock options, of which options for 70,000 shares will be
exercised in connection with the Offering. 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 16,646 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 8,854
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 36,451 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.
(8) Includes 142,603 shares of Common Stock issuable pursuant to presently
exercisable stock options, of which options for 75,000 shares (86,250
shares if the Underwriters' over-allotment option is exercised in full)
will be exercised in connection with the Offering. Includes 22,282 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 12,053 shares), as to
which he has voting power.
(9) Includes 59,040 shares of Common Stock issuable pursuant to presently
exercisable stock options, of which options for 20,000 shares (23,000
shares if the Underwriters' over-allotment option is exercised in full)
will be exercised in connection with the Offering. Shares beneficially
owned by Mr. Eisenheim include shares allocated to his account in the ESOP
(3,246 shares), as to which he has voting power.
(10) Norman J. Patinkin's three children own an aggregate of 69,726 shares, and,
accordingly, Norman J. Patinkin may be attributed beneficial ownership of
those shares. Mr. Patinkin disclaims beneficial ownership of all such
69,726 shares.
(11) The participants in the ESOP have voting power with respect to the shares
held by the ESOP.
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<PAGE> 50
LIMITATIONS ON THE COMPANY'S USE OF NET OPERATING LOSS CARRYFORWARDS
At February 1, 1996, the Company had $18.4 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.
Under the foregoing rules, if changes in the direct and indirect ownership
of the stock of the Company result in an ownership change of the Company at the
time of such transactions, the utilization of the NOLs in taxable years ending
after such ownership change will be subject to an annual limitation determined
under Section 382 of the Code. Such annual limitation is based on the value of
the stock of the Company at the time of the ownership change, determined under
special rules. Although there can be no assurances as to any position taken by
the Internal Revenue Service in the future, the Company believes that
immediately following the IPO, the percentage point increase of Five-Percent
Stockholders was approximately 47% and therefore that the IPO did not result in
an ownership change of the Company. 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.
The Company expects that the Offering will result in an ownership change of
the Company under Section 382 of the Code. As a result, the Company's use of the
NOLs in taxable years ending after the Offering is expected to be subject to an
annual limitation (the "Section 382 Limitation") determined by multiplying the
applicable long-term tax-exempt rate (5.80% as of October 1996) by the value of
the stock of the Company immediately before the Offering, determined under
special rules. Although the matter is not free from doubt, the Company expects
that it will be required to compute such value by reference to the market
capitalization of the Company immediately before the Offering, reduced by the
proceeds of the IPO, which, after such reduction, would be approximately $185
million based on an price per share of $27.00 for the Common Stock. To the
extent the Section 382 Limitation exceeds the Company's taxable income in any
year, such excess can be carried forward to increase the NOLs that can be
utilized in future years, subject to the normal expiration date of the NOLs. The
NOLs begin expiring in 2006.
Special rules govern the application of the Section 382 Limitation to the
Company's taxable year ending January 31, 1997, the taxable year that includes
the date of the ownership change. First, the Section 382 Limitation does not
apply to taxable income earned by the Company before the ownership change. The
NOLs can be used to offset such income without restriction. Second, the
remainder of the taxable income for such year is subject to a limitation
determined by multiplying the Section 382 Limitation by a fraction, the
numerator of which is the number of days in such year after the date of the
ownership change and the denominator of which is the total number of days in
such year. For these purposes, the taxable income allocable to periods before
and after the ownership change is generally determined by allocating the
Company's total taxable income for the taxable year ending January 31, 1997
ratably to each day in such year.
Because the Offering is expected to result in an ownership change, the
Company expects that its ability to use the NOLs to offset future income will be
somewhat restricted as described above and the Company will likely have to pay a
limited amount of taxes earlier than would be the case if the NOLs were
available to reduce federal income taxes without restriction.
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<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 2,000,000 shares of
Preferred Stock, par value $.001 per share, issuable in series (none of which is
outstanding), 30,000,000 shares of Common Stock, par value $.001 per share (of
which 8,372,250 shares are outstanding), and 26,026 shares of Class B Common
Stock, par value $1.00 per share (of which 90.715 shares are outstanding).
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of holders of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are, and
the shares offered by the Company in this Offering will be, when issued and paid
for, fully paid and nonassessable.
Holders of Class B Common Stock are entitled to vote together with the
holders of Common Stock, but with each share of Class B Common Stock having
approximately 35.4 votes. Class B Common Stock carries (i) a $130 per annum per
share cumulative dividend preference over all other classes of Common Stock
(accruing through March 4, 1995) and (ii) a liquidation preference over all
other classes of Common Stock for accumulated and unpaid dividends. Class B
Common Stock participates in dividends and liquidation payments to be made with
respect to the Common Stock on the basis that one share of Class B Common Stock
is equivalent to approximately 35.4 shares of Common Stock.
The Company's Restated Certificate of Incorporation (the "Charter")
provides that the Board of Directors is authorized, subject to certain
limitations prescribed by law, without further stockholder approval, to issue
from time to time up to an aggregate of 1,000,000 shares of Preferred Stock in
one or more series and to fix or alter the designations, preferences, rights and
any qualifications, limitations or restrictions of the shares of each such
series thereof, including the dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. The Company has no present plans
to issue any shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the Board of Directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder which is not shared pro rata with the other stockholders
of the Company. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within the past
three years did own, 15% or more of the corporation's voting stock.
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<PAGE> 52
The Charter provides for the division of the Board of Directors into three
classes as nearly equal in size as possible with staggered three-year terms. See
"Management -- Board of Directors." Any director may be removed only with cause
and then only by the vote of a majority of the shares entitled to vote for the
election of directors.
The Charter empowers the Board of Directors, when considering a tender
offer or merger or acquisition proposal, to take into account factors in
addition to potential economic benefits to stockholders. Such factors may
include (i) the comparison of the proposed consideration to be received by
stockholders in relation to the then current market price of the Company's
capital stock, the estimated current value of the Company in a freely negotiated
transaction and the estimated future value of the Company as an independent
entity, (ii) the impact of such a transaction on the employees, suppliers and
customers of the Company and its effect on the communities in which the Company
operates and (iii) the ability of the Company to fulfill its objectives under
applicable statutes and regulations.
The Charter provides that any action required or permitted to be taken by
the stockholders of the Company may be taken only at a duly called annual or
special meeting of the stockholders and that special meetings may be called only
by the President or a majority of the Board of Directors of the Company. These
provisions could have the effect of delaying until the next annual stockholders
meeting, stockholder actions which are favored by the holders of the outstanding
voting securities of the Company. These provisions may also discourage another
person or entity from making a tender offer for the Company's Common Stock,
because such person or entity, even if it acquired all or a majority of the
outstanding voting securities of the Company, would be able to take action as a
stockholder (such as electing new directors or approving a merger) only at a
duly called stockholders meeting, and not by written consent.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or by-laws, unless a corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage. The
Charter requires the affirmative vote of the holders of at least 75% of the
outstanding voting stock of the Company to amend or repeal any of the foregoing
Charter provisions, and to reduce the number of authorized shares of Common
Stock and Preferred Stock. A 75% vote is required to amend or repeal the
Company's Restated By-Laws (the "By-Laws"). The By-Laws may also be amended or
repealed by a majority vote of the Board of Directors. Such stockholder vote
would be in addition to any separate class vote that might in the future be
required pursuant to the terms of any Preferred Stock that might be outstanding
at the time any such amendments are submitted to stockholders.
The By-Laws provide that for nominations for the Board of Directors or for
other business to be properly brought by a stockholder before an annual meeting
of stockholders, the stockholder must first have given timely notice thereof in
writing to the Secretary of the Company. To be timely, a stockholder's notice
generally must be delivered not later than 90 days in advance of the anniversary
date of the release of the Company's proxy statement to stockholders in
connection with the prior year's annual meeting of stockholders. The notice must
contain, among other things, certain information about the stockholder
delivering the notice and, as applicable, background information about each
nominee or a description of the proposed business to be brought before the
meeting. The Company's By-Laws also provide that special meetings of
stockholders may be called only by the President or a majority of the Board of
Directors. Business transacted at a special meeting is limited to the purposes
for which the meeting is called.
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or discouraging a third party from attempting to
acquire, control of the Company.
The Charter contains certain provisions permitted under the DGCL relating
to the liability of directors. These provisions eliminate a director's liability
for monetary damages for a breach of fiduciary duty, except in certain
circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. The Charter and By-Laws also contain
provisions indemnifying the directors and officers of the Company to the fullest
extent permitted by the DGCL. The Company believes that these provisions will
assist the Company in attracting and retaining qualified individuals to serve as
directors.
49
<PAGE> 53
RIGHTS
Under the Company's stockholders rights plan, each share of Common Stock
has associated with it one preferred share purchase right (a "Right"). The terms
of the Rights are set forth in a Rights Agreement between the Company and The
First National Bank of Boston. Under certain circumstances described below, each
right entitles the holders thereof to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock for a price of $52.00 per one
one-hundredth of a share. The Rights are not presently exercisable and are
transferable only with the related shares of Common Stock. The Rights will not
become exercisable or be evidenced by separate certificates or traded separately
from the Common Stock prior to the occurrence of certain triggering events
described below. In such an event, separate Rights certificates would be issued
and distributed representing one right for each share of Common Stock. There is
no present market for the Rights separate from the Common Stock and the Company
cannot predict whether a trading market would develop with respect to the Rights
if the Rights ever become exercisable.
The Rights would become exercisable at the specified exercise price upon
the earliest to occur of (i) 10 Business Days after the first public
announcement that any person or group (other than an Exempt Person) has acquired
(an "Acquiring Person") Beneficial Ownership of 15% or more of the Company's
outstanding shares of Common Stock and (ii) 10 Business Days (unless delayed by
the Board of Directors) after any person or group (other than an Exempt Person)
has commenced, or announced the intention to commence, a tender or exchange
offer which would, upon its consummation, result in such person or group being
the Beneficial Owner of 15% or more of the Company's outstanding shares of
Common Stock (each a "Triggering Event"). Rights may not be exercised following
the occurrence of an event described below under the caption "Flip-In" prior to
the expiration of the Company's right to redeem the Rights. Rights certificates
will be distributed when the Rights become exercisable. An "Exempt Person"
includes the Company, Mr. Hugh M. Patinkin, Mr. John R. Desjardins and Mr.
Matthew M. Patinkin and certain related persons.
Flip-In. After the Rights become exercisable (unless the Triggering Event
is the commencement or the announcement of a tender or exchange offer as
described in (ii) in the immediately preceding paragraph), the holders of the
Rights (other than an Acquiring Person and certain transferees therefrom) would
be entitled to purchase shares of Common Stock of the Company at a 50% discount.
After the occurrence of a Flip-In event, the Rights of an Acquiring Person and
such transferees become void.
Flip-Over. In the event that, on or after the date on which an Acquiring
Person has become such: (i) the Company merges into or consolidates with an
Interested Stockholder or, unless all holders of the outstanding shares of
Common Stock of the Company are treated the same, any other person (with limited
designated exceptions), (ii) an Interested Stockholder or, unless all holders of
the outstanding shares of Common Stock of the Company are treated the same, any
other person (with limited designated exceptions) merges into the Company or
(iii) the Company sells or transfers 50% or more of its consolidated assets or
earning power to an Interested Stockholder or, unless all holders of the
outstanding shares of Common Stock of the Company are treated the same, any
other person (with limited designated exceptions), the holders of the Rights
(other than Rights which have become void) would be entitled to purchase common
shares of the acquiror (or a person affiliated therewith) at a 50% discount. In
general, an Interested Stockholder is an Acquiring Person and certain persons
affiliated, associated or acting on behalf of or in concert therewith.
Redemption of Rights. The Rights may be redeemed, as a whole, at a
redemption price of $.01 per Right, subject to adjustment, at the direction of
the Board of Directors, at any time prior to the earliest of (i) 10 Business
Days after the first public announcement that any person (other than the Company
and certain related entities) has become an Acquiring Person, (ii) the
occurrence of any transaction described under the caption "Flip-Over" and (iii)
the date of final expiration of the Rights, which is ten years after the date of
the Offering. Under certain circumstances set forth in the proposed Rights
Agreement, the decision to redeem the Rights requires the concurrence of at
least a majority of the disinterested directors, after the occurrence of an
event described under the caption "Flip-In" and prior to the occurrence of a
transaction described under the caption "Flip-Over," to redeem the Rights in
whole, but not in part, at the Redemption Price, but only (i) if the person who
is the Acquiring Person shall have reduced its Beneficial Ownership of the then
outstanding shares Common Stock of the Company to less than 10% or (ii) in
connection with the
50
<PAGE> 54
transaction described under the caption "Flip-Over" which does not involve an
Interested Stockholder and in which all holders of the Common Stock of the
Company are treated the same.
Exchange of Shares for Rights. At any time after any person or group shall
have become an Acquiring Person and before any person (other than an Exempt
Person), together with its affiliates and associates, shall have become the
Beneficial Owner of 50% or more of the outstanding shares of the Common Stock of
the Company, the Board of Directors may direct the exchange of shares of Common
Stock (or Preferred Shares) for all or any part of the Rights (other than Rights
which have become void) at the exchange rate of one share of Common Stock (or
one one-hundredth of a Preferred Share) per Right, subject to adjustment.
TERMS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
The Series A Junior Participating Preferred Stock (the "Preferred Shares")
which would be issuable upon exercise of the Rights (should the rights become
exercisable) would not be redeemable. Each Preferred Share would entitle the
holder thereof to receive a preferential quarterly dividend equal to 100 times
the aggregate per share amount of all cash dividends, plus 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends and other
distributions (other than in shares of Common Stock), declared on the Common
Stock during such quarter, adjusted to give effect to any dividend on the Common
Stock payable in shares of Common Stock or any subdivision, combination or
reclassification of the Common Stock (a "Dilution Event"). Each Preferred Share
would entitle the holder thereof to 100 votes on all matters submitted to a vote
of the stockholders of the Company, voting together as a single class with the
holders of the Common Stock and the holders of any other class of capital stock
having general voting rights, adjusted to give effect to any Dilution Event. In
the event of liquidation of the Company, the holder of each Preferred Share
would be entitled to receive a preferential liquidation payment equal to 100
times the aggregate per share amount to be distributed to the holders of the
Common Stock, adjusted to give effect to any Dilution Event, plus an amount
equal to accrued and unpaid dividends and distributions on such Preferred Share,
whether or not declared, to the date of such payment. In the event of any
merger, consolidation or other transaction in which the outstanding shares of
Common Stock of the Company are exchanged for or converted into other capital
stock, securities, cash and/or other property, each Preferred Share would be
similarly exchanged or converted into 100 times the per share amount applicable
to the Common Stock, adjusted to give effect to any Dilution Event.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston.
51
<PAGE> 55
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 9,707,250 shares of
Common Stock outstanding. Of these shares, the 3,737,500 shares sold in the IPO
are freely tradeable and the 2,305,000 shares sold in this Offering will be
freely tradeable without restriction or further registration under the
Securities Act, except that any shares purchased by "affiliates" of the Company,
as that term is defined in Rule 144 ("Rule 144") under the Securities Act
("Affiliates"), generally may be sold only in compliance with the limitations of
Rule 144 described below.
SALE OF RESTRICTED SHARES
The remaining 3,664,750 shares of Common Stock are deemed "Restricted
Shares" under Rule 144 because they were originally issued and sold by the
Company in private transactions in reliance upon exemptions from the Securities
Act. These remaining Restricted Shares are eligible for resale and may be resold
in the public market only in compliance with the registration requirements of
the Securities Act or pursuant to a valid exemption therefrom. Approximately
949,630 of the Restricted Shares may be sold in accordance with Rule 144(k)
without regard to Rule 144's volume or manner of sale restrictions.
Approximately 458,501 of such shares (and an additional 214,914 shares of Common
Stock subject to currently exercisable options) are subject to Lock-up
Agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least two years is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (97,072 shares
immediately after the Offering) or (ii) the average weekly trading volume in the
Common Stock in the over-the-counter market during the four calendar weeks
preceding the date on which notice of such sale is filed. In addition, under
Rule 144(k), a person who is not an Affiliate and has not been an Affiliate for
at least three months prior to the sale and who has beneficially owned
Restricted Shares for at least three years may resell such shares without
compliance with the foregoing requirements. In meeting the two and three-year
holding periods described above, a holder of Restricted Shares can include the
holding periods of a prior owner who was not an Affiliate. The holding period
will include the period during which the person held convertible securities of
the Company or stock of the Company.
LOCK-UP AGREEMENTS
Holders of 3,157,760 of the Restricted Shares (and substantially all shares
of Common Stock subject to currently exercisable options), including all
executive officers, directors and certain stockholders of the Company who will
hold shares of Common Stock after the Offering, have agreed, pursuant to Lock-up
Agreements, that they will not, without the prior written consent of Montgomery
Securities, offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock beneficially owned by them for a period of 90 days after the date
of this Prospectus, except pursuant to bona fide gifts to persons who agree in
writing to be bound by the provisions of the Lock-up Agreements.
STOCK OPTIONS
Upon the expiration of the 90-day period described above, certain shares
issued or issuable upon the exercise of options granted prior to the date of
this Prospectus also may be issuable for sale in the public market pursuant to
Rule 701 under the Securities Act. In general, Rule 701 permits resales of
shares issued pursuant to certain compensatory benefit plans and contracts
commencing at the end of the 90-day period referred to under "Sale of Restricted
Shares," in reliance upon certain provisions of Rule 144. If all of the
requirements of Rule 701 are satisfied, and upon completion of the 90-day
period, an additional 318,760 shares of Common Stock issuable upon the exercise
of currently outstanding options which are vested or will vest within 60 days
will be eligible for sale.
The Company has registered under the Securities Act all shares of Common
Stock issued or issuable pursuant to the 1995 Options and the 1996 Plan.
Accordingly, as the 1995 Options and awards under the
52
<PAGE> 56
1996 Plan vest, shares issued pursuant thereto will be freely tradeable, except
such shares as may be acquired by an "affiliate" of the Company or as may be
held by persons subject to the Lock-up Agreements described above.
The Company intends to file a registration statement under the Securities
Act to register all shares of Common Stock issuable pursuant to the Company's
1996 Long-Term Incentive Plan. See "Management -- Stock Plans." Subject to the
completion of the 90-day period described above, shares of Common Stock issued
after the effective date of such registration statement upon the exercise of
awards issued under such plan generally will be eligible for sale in the public
market.
REGISTRATION RIGHTS
Pursuant to the Registration Agreement, the Company has granted certain
stockholders the right to require the Company to register their stock under the
Securities Act. See "Certain Transactions."
53
<PAGE> 57
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms
and conditions in the Underwriting Agreement, to purchase from the Company and
the Selling Stockholders the number of shares of Common Stock indicated below
opposite their respective names at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all the shares of Common Stock, if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
-------------------------------------------------------------- ---------
<S> <C>
Montgomery Securities.........................................
William Blair & Company, L.L.C. ..............................
---------
Total.................................................... 2,305,000
=========
</TABLE>
The Underwriters have advised the Company and the Selling Stockholders that
the Underwriters propose initially to offer the Common Stock to the public on
the terms set forth on the cover page of this Prospectus. The Underwriters may
allow selected dealers a concession of not more than $ per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the public offering, the
public offering price and other selling terms may be changed by the
Underwriters. The Common Stock is offered subject to receipt and acceptance by
the Underwriters, and to certain other conditions, including the right to reject
orders in whole or in part.
The Company and certain of the Selling Stockholders have granted an option
to the Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of an aggregate of 345,750 additional
shares of Common Stock to cover over-allotments, if any, at the same price per
share as the shares initially to be purchased by the Underwriters. See
"Principal and Selling Stockholders." To the extent that the Underwriters
exercise this option, the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with the Offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Company and its executive officers and directors and the Selling
Stockholders and certain other stockholders have agreed that, for a period of 90
days after the date of this Prospectus, they will not offer, sell or dispose of
any shares of Common Stock without the prior written consent of Montgomery
Securities.
Samuel B. Guren, a director of the Company, is a general partner of the
general partner of William Blair Venture Partners III Limited Partnership,
another general partner of which is William Blair & Company, L.L.C.
The Underwriters and certain selling group members, or their respective
affiliates, that currently act as market makers for the Common Stock may engage
in "passive market making" in the Common Stock on the Nasdaq National Market in
accordance with Rule 10b-6A under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"). Rule 10b-6A permits, upon the satisfaction of
certain conditions, underwriters and selling group members participating in a
distribution that are also Nasdaq market makers in the security being
distributed to engage in limited market making transactions during the period
when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity.
Rule 10b-6A prohibits underwriters and selling group members engaged in passive
market making generally from entering a bid or effecting a purchase at a price
that exceeds the highest bid for those securities displayed on Nasdaq by a
market maker that is not participating in the distribution. Under Rule 10b-6A,
each underwriter or selling group member engaged in passive market making is
subject to a daily net purchase limitation equal to 30% of such entity's average
daily trading volume during the two full consecutive calendar months immediately
preceding the date of the filing of
54
<PAGE> 58
the registration statement under the Securities Act pertaining to the security
to be distributed. Passive market making may stabilize the market price of the
Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Prospectus, constitute "forward looking
statements" within the meaning of the Reform Act. Such forward looking
statements involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. Such factors include,
among others, those described under "Risk Factors" and the following: (i) the
extent and results of the Company's store expansion program, (ii) the
seasonality of the Company's business, (iii) the Company's leverage, (iv)
economic conditions, the retail sales environment and the Company's ability to
execute its business strategy and the related effects on comparable store sales
and other results, (v) the extent to which the Company is able to retain and
attract key personnel, (vi) competition, (vii) the availability and cost of
consumer credit, (viii) relationships with suppliers, (ix) fluctuations in gem
and gold prices, and (x) regulation.
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby will be
passed upon for the Company and the Selling Stockholders by Sidley & Austin,
Chicago, Illinois. Certain legal matters in connection with this Offering will
be passed upon for the Underwriters by Gardner, Carton & Douglas, 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.
55
<PAGE> 59
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Avenue, N.W., Washington, D.C. 20549 or at
its Regional Offices located at Room 1400, 500 West Madison Street, Chicago,
Illinois 60661 and Seven World Trade Center, New York, New York 10048, and
copies of such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Additionally, copies of reports, proxy statements and other information
filed with the Commission electronically by the Company may be inspected by
accessing the Commission's Internet site at http://www.sec.gov. The Company's
Common Stock is listed for quotation on the Nasdaq National Market, and such
reports, proxy statements and other information can also be inspected at the
office of Nasdaq Operation, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules filed therewith. For
further information with respect to the Company and the Common Stock offered
hereby, reference is hereby made to such Registration Statement and to the
financial statements, and exhibits filed therewith. Except as provided below,
statements contained in this Prospectus regarding the contents of any contract
or other documents referred to are not necessarily complete and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. This Prospectus contains a description of all
provisions of the documents filed as exhibits to the Registration Statement that
are material to investors.
56
<PAGE> 60
MARKS BROS. JEWELERS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Balance Sheets of the Company as of January 31, 1995 and 1996 and as of July 31, 1995
(unaudited) and 1996 (unaudited).................................................... F-3
Statements of Operations of the Company for the years ended January 31, 1994, 1995 and
1996 and for the six months ended July 31, 1995 (unaudited) and 1996 (unaudited).... F-4
Statements of Stockholders' Equity (Deficit) of the Company for the years ended
January 31, 1994, 1995 and 1996 and for the six months ended July 31, 1996
(unaudited)......................................................................... F-5
Statements of Cash Flows of the Company for the years ended January 31, 1994, 1995 and
1996 and for the six months ended July 31, 1995 (unaudited) and 1996 (unaudited).... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 61
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 August 22, 1996
F-2
<PAGE> 62
MARKS BROS. JEWELERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, 1995 JANUARY 31, 1996 JULY 31, 1995 JULY 31, 1996
---------------- ---------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable, net............... $ 1,494 $ 1,169 $ 2,063 $ 1,672
Layaway receivables, net............... 1,406 1,576 1,158 1,454
Merchandise inventories................ 46,054 55,401 52,959 46,542
Other current assets................... 690 714 570 366
Deferred income taxes, net............. -- 817 -- 817
Deferred financing costs............... -- -- -- 427
-------- -------- --------- ---------
Total current assets............... 49,644 59,677 56,750 51,278
Property and equipment, net.............. 11,868 12,852 13,718 14,657
Deferred income taxes, net............... -- 14,874 -- 7,387
Deferred financing costs................. -- -- -- 1,978
-------- -------- --------- ---------
Total assets....................... $ 61,512 $ 87,403 $ 70,468 $ 75,300
======== ======== ========= =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C> <C>
Current liabilities:
Outstanding checks, net................ $ 2,511 $ 7,991 $ 389 $ 4,207
Revolver loan.......................... 6,805 2,119 10,205 8,782
Current portion of term loan........... 6,400 7,938 6,400 1,250
Current portion of senior accreting
notes................................ -- 1,908 -- --
Accounts payable....................... 6,006 9,037 12,490 13,535
Accrued payroll........................ 1,988 2,324 1,535 1,630
Other accrued expenses................. 5,474 6,848 5,514 6,844
-------- -------- --------- ---------
Total current liabilities.......... 29,184 38,165 36,533 36,248
Term loan, net of current portion........ 26,600 18,662 26,600 13,500
Senior accreting notes, net of current
portion................................ 44,733 47,819 47,176 --
Zero coupon notes........................ 5,413 5,847 5,626 --
Subordinated Debt........................ 20,855 23,598 22,184 20,000
Other long-term liabilities.............. 1,305 1,170 1,293 1,157
-------- -------- --------- ---------
Total liabilities.................. 128,090 135,261 139,412 70,905
-------- -------- --------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock , $.001 par value;
8,855,210 shares authorized;
2,053,629 shares, 2,559,793 shares,
2,559,793 shares, and 8,372,250
shares issued and outstanding,
respectively......................... -- -- -- 8
Class B common stock $1.00 par value;
29,567 shares authorized; 26,229,
26,026 shares, 26,206 shares, and 91
shares issued and outstanding,
respectively......................... 30 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................................ -- -- -- --
Class D common stock $.001 par value;
60,000 shares authorized; no shares
issued and outstanding; convertible 1
for 1 into common stock.............. -- -- -- --
Additional paid-in capital............. 11,855 8,766 9,815 33,708
Accumulated deficit.................... (31,645) (14,673) (34,300) (29,321)
Treasury stock, (1,400,123, 1,400,326,
1,400,086, and 0 shares at cost,
respectively)........................ (20,270) (20,333) (20,276) --
Deferred ESOP compensation............. (26,548) (21,648) (24,213) --
-------- -------- --------- ---------
Total stockholders' equity
(deficit),
net............................. (66,578) (47,858) (68,944) 4,395
-------- -------- --------- ---------
Total liabilities and stockholders'
equity (deficit)................ $ 61,512 $ 87,403 $ 70,468 $ 75,300
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 63
MARKS BROS. JEWELERS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, SIX MONTHS ENDED
------------------------------ JULY 31,
1994 1995 1996 -------------------------
------- -------- --------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales................................... $91,106 $106,683 $ 131,022 $ 52,074 $ 64,466
Cost of sales (including buying and
occupancy expenses)....................... 54,511 64,223 77,722 31,959 38,626
------- -------- --------- --------- ---------
Gross profit........................... 36,595 42,460 53,300 20,115 25,840
Selling, general and administrative
expenses.................................. 28,340 30,748 37,887 16,458 20,385
------- -------- --------- --------- ---------
Income from operations................. 8,255 11,712 15,413 3,657 5,455
Interest expense, including deferred
interest of $5,467, $6,685, $8,171, $3,985
and $2,250, respectively.................. 8,920 10,594 12,314 6,017 4,557
Stock award expense......................... -- -- 461 -- --
ESOP compensation expense................... 511 547 590 295 --
------- -------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes....... (1,176) 571 2,048 (2,655) 898
Income tax benefit (provision).............. -- -- 14,924 (350)
------- -------- --------- --------- ---------
Income (loss) from continuing
operations........................... (1,176) 571 16,972 (2,655) 548
Gain on disposal of discontinued
operations................................ 2,700 -- -- -- --
------- -------- --------- --------- ---------
Income before cumulative effect of
change in accounting for ESOP and
extraordinary gain................... 1,524 571 16,972 (2,655) 548
Cumulative effect of change in accounting
for ESOP.................................. (8,526) -- -- -- --
Extraordinary gain on extinguishment of
debt, net of taxes........................ -- -- -- -- 11,164
------- -------- --------- --------- ---------
Net income (loss)...................... $(7,002) $ 571 $ 16,972 $ (2,655) $ 11,712
======= ======== ========= ========= =========
Primary EPS:
Income (loss) per share before
extraordinary gain..................... $ 3.02 $ (0.58) $ 0.08
Income per share on extraordinary gain.... $ -- $ -- $ 1.53
Income (loss) per share after
extraordinary.......................... $ 3.02 $ (0.58) $ 1.61
Fully diluted EPS:
Income (loss) per share before
extraordinary gain..................... $ 3.02 $ (0.58) $ 0.07
Income per share on extraordinary gain.... $ -- $ -- $ 1.53
Income (loss) per share after
extraordinary gain..................... $ 3.02 $ (0.58) $ 1.60
Primary weighted average shares
outstanding............................ 5,614,437 4,554,459 7,286,960
========= ========= =========
Fully diluted weighted average shares
outstanding............................ 5,614,437 4,554,959 7,321,329
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 64
MARKS BROS. JEWELERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS
B ADDITIONAL DEFERRED
COMMON PAID-IN ACCUMULATED TREASURY ESOP COMMON
STOCK CAPITAL DEFICIT STOCK COMPENSATION STOCK
------ ---------- ----------- -------- ------------ ------
(IN THOUSANDS)
<S> <C> <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) --
---- ------- -------- -------- -------- ----
Net income for the six months
(unaudited)..................... 11,712
To record the effect of the
initial public offering
(unaudited)..................... (30) 24,942 (26,360) 20,333 21,648 8
---- ------- -------- -------- -------- ----
Balance at July 31, 1996
(unaudited)..................... $ 0 $33,708 $(29,321) $ -- $ -- $ 8
==== ======= ======== ======== ======== ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 65
MARKS BROS. JEWELERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
JANUARY 31, JULY 31,
----------------------------------- --------------------------
1994 1995 1996 1995 1996
--------- --------- --------- ----------- -----------
(IN THOUSANDS)(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ (7002) $ 571 $ 16,972 $ (2,655) $ 11,712
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) -- -- -- --
Gain on extinguishment of debt, net of taxes.......... -- -- -- -- (11,164)
Depreciation and amortization......................... 2,879 2,815 2,948 1,434 1,529
Stock award expense non-cash portion.................. -- -- 454 -- --
ESOP compensation expense............................. 511 547 590 295 --
Income tax benefit.................................... -- -- (14,924) -- --
Interest on zero coupon notes......................... 372 402 434 213 121
Interest on senior accreting notes.................... 2,985 3,860 4,994 2,443 1,339
Interest on subordinated debt......................... 2,110 2,423 2,743 1,329 790
Loss on disposition of assets......................... -- -- -- -- (1)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net..... (405) 509 325 (569) (503)
Decrease (increase) in layaway receivables, net..... 1,438 (112) (170) 248 122
(Increase) in merchandise inventories, net of gold
consignment....................................... (9,337) (9,460) (9,347) (6,905) (6,436)
(Increase) decrease in other assets................. (279) 239 (24) 120 348
(Increase) in deferred financing costs.............. -- -- -- -- (2,405)
Decrease in deferred taxes, net..................... -- -- -- -- 349
(Decrease) increase in accounts payable............. (529) 2,903 3,031 6,484 4,498
(Decrease) increase in accrued liabilities.......... (3,226) (26) 1,575 (425) (711)
--------- -------- --------- --------- ---------
Net cash (used in) provided by operating
activities...................................... (4,657) 4,671 9,601 2,012 (412)
--------- -------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures.................................... (3,466) (3,974) (3,932) (3,284) (3,333)
Proceeds from assets sold............................... -- 30 -- -- --
Proceeds from disposal of discontinued operations....... 2,910 -- -- -- --
--------- -------- --------- --------- ---------
Net cash used in investing activities............. (556) (3,944) (3,932) (3,284) (3,333)
--------- -------- --------- --------- ---------
Cash flows from financing activities:
Borrowing on old revolver loan.......................... 99,766 99,159 127,109 58,545 38,078
Repayment of old revolver loan.......................... (108,127) (98,993) (131,795) (55,145) (40,197)
Borrowing on new revolver loan.......................... -- -- -- -- 39,865
Repayment of new revolver loan.......................... -- -- -- -- (31,083)
Repayment of term loan.................................. (4,500) (2,500) (6,400) -- (250)
Repayment of old term loan.............................. -- -- -- -- (26,600)
Repayment of senior accreting notes..................... -- -- -- -- (50,502)
Repayment of zero coupon note........................... -- -- -- -- (2,000)
Repayment of subordinated debt.......................... -- -- -- -- (10,618)
Proceeds from term loan................................. -- -- -- -- 15,000
Proceeds from subordinated debt......................... 600 -- -- -- 20,000
Proceeds from gold consignment.......................... -- -- -- -- 15,295
Proceeds from stock issuance, net....................... -- -- -- -- 40,416
Proceeds from exercise of stock options................. -- -- -- -- 123
Proceeds from exercise of warrants...................... -- -- -- -- 2
Repurchase of ESOP shares............................... (60) (37) (63) (6) --
(Decrease) increase in outstanding checks, net.......... 867 1,644 5,480 (2,122) (3,784)
--------- -------- --------- --------- ---------
Net cash (used in) provided by financing
activities...................................... (11,454) (727) (5,669) 1,272 3,745
--------- -------- --------- --------- ---------
Net decrease in cash and cash equivalents................. (16,667) -- -- -- --
Cash and cash equivalents at beginning of period.......... 16,667 -- -- -- --
--------- -------- --------- --------- ---------
Cash and cash equivalents at end of period................ $ -- $ -- $ -- $ -- $ --
========= ======== ========= ========= =========
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> 66
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
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 155 stores, as of July
31, 1996, located in 24 states operating in regional or super-regional shopping
malls.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis for Presentation
The accompanying unaudited Balance Sheets as of July 31, 1996 and 1995 and
the Statements of Operations and Cash Flows for the six months ended July 31,
1996 and 1995 have been prepared in accordance with generally accepted
accounting principles for interim financial information. The interim financial
statements reflect all adjustments (consisting only of normal recurring
accruals) which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. The Company operates
on a fiscal year which ends on January 31. References in the following notes to
years and quarters are references to fiscal years and fiscal quarters.
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
F-7
<PAGE> 67
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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 of shares allocated
prior to February 1, 1993 in excess of expense recognized under the Company's
historical method.
F-8
<PAGE> 68
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
F-9
<PAGE> 69
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
3. FINANCING ARRANGEMENTS (CONTINUED)
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.
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
F-10
<PAGE> 70
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
3. FINANCING ARRANGEMENTS (CONTINUED)
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 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.
F-11
<PAGE> 71
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
3. FINANCING ARRANGEMENTS (CONTINUED)
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 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.
F-12
<PAGE> 72
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
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
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.
F-13
<PAGE> 73
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
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-14
<PAGE> 74
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
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-15
<PAGE> 75
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
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
Merchandise inventory consists of:
<TABLE>
<CAPTION>
JULY 31,
1996
JANUARY 31, JANUARY 31, -----------
1995 1996
----------- ----------- (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials....................................... $ 2,572 $ 2,944 $ 2,401
Finished goods inventory............................ 43,482 52,457 44,141
------- ------- -------
$46,054 $55,401 $46,542
======= ======= =======
</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 or
July 31, 1996. Included within finished goods inventory are allowances for
inventory shrink, scrap, and miscellaneous costs of $1,564,000, $1,263,000 and
$1,225,000 as of January 31, 1995 and 1996 and July 31, 1996 (unaudited),
respectively. As of January 31, 1995 and 1996 and July 31, 1996 (unaudited),
consignment inventories held by the Company that are not included in its balance
sheets are $14,219,000, $15,940,000 and $28,713,000, (including $15,295,000
under the Gold Facility), respectively.
F-16
<PAGE> 76
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
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.
F-17
<PAGE> 77
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
10. DISCONTINUED OPERATIONS AND RELATED PARTY TRANSACTIONS (CONTINUED)
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 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
F-18
<PAGE> 78
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
12. STOCK PLANS (CONTINUED)
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.
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 (UNAUDITED)
On May 7, 1996, the Company completed an initial public offering (the
"IPO"). The Company issued 3,269,500 shares of common stock and received net
proceeds of $40.4 million after deducting underwriting discounts and offering
costs. Contemporaneously with the IPO, the outstanding warrants for 177,887
shares of common stock were exercised.
F-19
<PAGE> 79
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
14. SUBSEQUENT EVENTS (CONTINUED)
Simultaneously with the completion of the IPO, the Company completed a
recapitalization (the "Recapitalization"). The Recapitalization consisted of:
(i) a $44.0 million secured credit facility, consisting of a $29.0
million revolving line of credit and a $15.0 million term loan;
(ii) $20.0 million of senior subordinated notes due 2004; and
(iii) the sale of $15.0 million of gold in its inventory to a financial
institution and consignment of such gold to the Company under the
terms of a gold consignment agreement. The facility has an
availability of up to $16.0 million. On July 8, 1996 the Company
sold, and received on consignment, an additional 774 troy ounces
of gold for approximately $300,000.
Approximately $87.0 million of the funds available from the
Recapitalization were used by the Company to repay all outstanding bank
borrowings under the Company's then existing bank agreement, 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 been due on May 31, 1997;
(iii) approximately $51.1 million of senior accreting notes, which bore
interest at a floating rate (with an annual weighted average
interest rate of approximately 11.0% during fiscal 1995), and of
which $2.0 million would have otherwise matured on September 15,
1996, and the balance would have otherwise been due on May 31,
1997; and
(iv) approximately $6 million of zero coupon notes due May 31, 1997,
which would have begun accruing interest on June 1, 1996 at a
floating rate per annum (based on the lender's base rate or
certificate of deposit rate plus 1.8%).
In addition, the Company used approximately $10.6 million of the funds
available from the Recapitalization to repurchase the Company's then outstanding
subordinated notes at a discount. As of May 7, 1996, one of these subordinated
notes had a principal amount outstanding of $23.5 million and bore interest at a
rate per annum of 12.5% and the other subordinated note had a principal amount
outstanding of $0.9 million and bore interest at a rate per annum of 13.75%.
The bank borrowing and subordinated note repayments utilized a debt
discount due to the early repayment of the debt of approximately $18.3 million,
net of $7.1 million of taxes, resulting in a net of tax gain on extinguishment
of debt of $11.2 million.
The $18.3 million of debt discount consisted of the following:
(i) $0.6 million on the senior accreting notes.
(ii) $4.0 million on the zero coupon note.
(iii) $13.7 million on the subordinated notes.
F-20
<PAGE> 80
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
14. SUBSEQUENT EVENTS (CONTINUED)
Simultaneously with the completion of the IPO and the Recapitalization, the
Company restructured its Employee Stock Ownership Plan ("ESOP"). The Company
canceled the remaining unamortized portion of the ESOP debt owed to the Company.
In settlement of the debt, the trustee transferred to the Company 8,206 shares
of Class B common stock held in suspense by the ESOP. The Company transferred to
the ESOP 216,263 shares of common stock in exchange for the ESOP's cancellation
of the accumulated dividend preference and other preferences associated with the
Class B common stock. The ESOP also exchanged the 17,719 of allocated Class B
shares for 627,624 shares of common stock of the Company. Approximately 91
shares of Class B common stock, currently held by former employees, remain
outstanding. All Class B shares transferred to the Company and the shares held
in treasury were canceled. The restructuring resulted in an elimination of the
deferred ESOP compensation equity account, and eliminated the future annual
allocation of shares and the related compensation expense in the Company's
income statement in periods subsequent to January 31, 1996. The Company expects
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 35.4-for-1
common stock split effected in connection with the IPO.
The Company has also:
(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.
In connection with the Recapitalization and the IPO, the Company incurred
various financing costs and transaction costs, which have been recorded as
deferred financing costs. As of July 31, 1996, the deferred financing costs
totaling $2,405,000, of which $427,000 are classified as current, will be
amortized over the term of the loan agreements as interest expense.
In conjunction with the IPO and Recapitalization, the Company completed a
restructuring of its outstanding indebtedness. Effective May 3, 1996 the Company
entered into a Revolving Credit, Term Loan and Gold Consignment agreement with a
group of banks totaling $60,000,000 which expires April 30, 2001.
Under this agreement, the banks have a security interest in all of the
assets of the Company. The Credit Agreement contains certain restrictions on
capital expenditures, payment of dividends and assumption of additional debt and
requires the Company to maintain specified minimum levels of certain financial
measures, including fixed charge ratio and certain balance sheet measures.
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") or
nonqualified stock options. The 1996 Plan also provides for the grant of stock
appreciation rights ("SARs"), bonus stock awards which are vested upon grant,
stock awards which may be subject to a restriction period and specified
performance measures, and performance shares. Performance shares are rights,
contingent upon the attainment of performance measures within a specified
performance period, to receive one share of Common Stock, which may be
restricted, or the fair market value of such performance share in cash. A total
of 774,631 shares of Common Stock have been reserved for issuance under the 1996
Plan. Grants may be made under the 1996 Plan during the ten years after its
effective date.
F-21
<PAGE> 81
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
14. SUBSEQUENT EVENTS (CONTINUED)
As of July 31, 1996, the Company has granted options for 727,216 shares
under the 1996 Plan. These options generally become exercisable in cumulative
annual installments of 25% of the shares subject to option beginning on the
first anniversary of the date of the option grant. The stock options granted and
exercise price under the 1996 Plan are as follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
- ------- --------------
<S> <C>
702,216 $14.00
15,000 $21.00
10,000 $23.50
727,216
</TABLE>
The weighted average exercise price of outstanding options under the 1996
Plan is $14.28.
Revolver Loan
The Dollar Facility Revolving Credit is available up to a maximum of
$29,000,000 and is limited by a borrowing base computed based on the value of
the Company's inventory and accounts receivable. A commitment fee of .5% per
annum on the unused portion of the commitment is payable monthly.
Interest rates for these borrowings under this agreement are, at the
Company's option, Eurodollar rates plus 2.5% or the banks' prime rate. Interest
is payable monthly for prime borrowings and upon maturity for Eurodollar
borrowing. The interest expense for the quarter ended July 31, 1996 was $123,000
reflecting a weighted average interest rate of 8.2%.
Term Loan
Outstanding term loan borrowings as of July 31, 1996 were $14,750,000 of
which $1,250,000 were due within one year. Principal payments are due quarterly.
Interest rates for these borrowings under this agreement are, at the Company's
option, Eurodollar rates plus 2.5% or the banks' prime rate. Interest is payable
monthly for prime borrowings and upon maturity for Eurodollar borrowings. The
interest expense for the period ended July 31, 1996 was $286,000 reflecting a
weighted average interest rate of 8.1%.
Scheduled maturities under the term loan borrowings are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
-----------
<S> <C>
1996........................................................... $ 500,000
1997........................................................... 1,750,000
1998........................................................... 2,750,000
1999........................................................... 3,750,000
2000........................................................... 4,750,000
Thereafter..................................................... 1,250,000
-----------
$14,750,000
===========
</TABLE>
Subordinated Notes
In conjunction with the completion of the IPO and Recapitalization, the
Company issued Senior Subordinated Notes totaling $20,000,000 due in 2004.
Series A Notes totaling $12,000,000 bear interest at 12.15% per annum payable in
cash, with interest payments due quarterly. Series B Notes totaling $8,000,000
F-22
<PAGE> 82
MARKS BROS. JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED AND AS OF JULY 31, 1996 AND JULY
31, 1995)
14. SUBSEQUENT EVENTS (CONTINUED)
bear interest at 15% per annum increasing 1% per annum beginning May 1, 1998,
payable in cash, with interest payment due quarterly. Interest expense was
$613,000 for the quarter ended July 31, 1996.
As of July 31, 1996, January 31, 1996 and July 31, 1995, respectively, the
current portion and noncurrent portion of long term debt consisted of the
following:
<TABLE>
<CAPTION>
JULY 31, 1996 JANUARY 31, 1996 JULY 31, 1995
------------- ---------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt
Term loan, old...................................... $-- $ 7,938 $ 6,400
Senior accreting notes.............................. 1,908 --
Term debt........................................... 1,250 -- --
------- ------- --------
Total............................................ $ 1,250 $ 9,846 $ 6,400
======= ======= ========
Long-term debt, net of current portion
Term loan, old...................................... $-- $ 18,662 $ 26,600
Senior accreting notes.............................. -- 47,819 47,176
Zero coupon notes................................... -- 5,847 5,626
Term loan........................................... 13,500 -- --
Subordinated debt, old.............................. -- 23,598 22,184
Subordinated debt................................... 20,000 -- --
------- ------- --------
Total............................................ $33,500 $ 95,926 $ 101,586
======= ======= ========
</TABLE>
Gold Consignment
During the second quarter of 1996, the Company sold a total of 39,000 troy
ounces of gold for approximately $15,300,000 under a gold consignment facility,
which provides for the sale of a maximum 39,000 troy ounces or $16,000,000.
Under the agreement, the Company agreed to pay consignment fees generally of 250
basis points over the rate set by the bank based on the London Interbank Bullion
Rates payable monthly. A commitment fee of .5% per annum on the unused portion
of the gold consignment facility is payable monthly. The consignment fees total
$136,000 for the quarter ended July 31, 1996 at a weighted average rate of 3.8%.
F-23
<PAGE> 83
(4 PHOTOS)
<TABLE>
<S> <C>
1st Photo Jewelry 2nd Photo Whitehall Store
with customer viewing Jewelry
3rd Photo Rings 4th Photo
Necklaces & Rings
</TABLE>
<PAGE> 84
------------------------------------------------------
------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company, the Selling
Stockholders or the Underwriters. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, to any person in any jurisdiction
in which such offer to sell or solicitation is not authorized, or in which the
person making such offer or solicitation is not qualified to do so, or to any
person to whom it is unlawful to make such offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 13
Use of Proceeds....................... 14
Dividend Policy....................... 14
Price Range of Common Stock........... 14
Capitalization........................ 15
Selected Historical Financial and
Operating Data...................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 25
Management............................ 35
Certain Transactions.................. 41
Summary of Debt Instruments........... 43
Principal and Selling Stockholders.... 45
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 52
Underwriting.......................... 54
Special Note Regarding Forward-Looking
Statements.......................... 55
Legal Matters......................... 55
Experts............................... 55
Additional Information................ 56
Index to Financial Statements......... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
2,305,000 SHARES
MARKS BROS. JEWELERS LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
WILLIAM BLAIR & COMPANY
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 85
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses (other than underwriting discount and expenses) payable by the
Company in connection with the sale of the Common Stock offered hereby
(including the Common Stock which may be issued pursuant to an over-allotment
option) are set forth below. All such amounts (other than the SEC registration
fee, NASD filing fee and Nasdaq National Market fee) are estimated.
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
SEC registration fee...................................................... $ 21,924
NASD filing fee........................................................... 7,735
Nasdaq National Market fee................................................ 17,500
Printing and engraving expenses........................................... 100,000
Legal fees and expenses................................................... 150,000
Accounting fees and expenses.............................................. 125,000
Blue Sky fees and expenses (including legal fees and expenses)............ 5,000
Transfer agent and registrar fees and expenses............................ 5,000
Insurance................................................................. 225,000
Miscellaneous............................................................. 42,841
-------
Total................................................................ $700,000
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and the Company's Charter and By-Laws
provide for indemnification of the Company's directors and officers for
liabilities and expenses that they may incur in such capacities. In general,
directors and officers are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the Company, and with respect to any criminal action or proceeding,
actions that the indemnitee had no reasonable cause to believe were unlawful.
Reference is made to the Company's Charter and By-Laws filed as Exhibits 3.1 and
3.2 hereto, respectively.
The Underwriting Agreement 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 of 1933, as amended (the "Securities Act"). Reference is made
to the form of Underwriting Agreement filed as Exhibit 1.1 hereto.
The Company has purchased directors and officers liability insurance, which
would provide coverage against certain liabilities, including liabilities under
the Securities Act.
Rodney L. Goldstein and Samuel B. Guren are each covered by agreements with
Frontenac Venture V Limited Partnership 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.
In connection with the restructuring of the Company's ESOP, shares of
Common Stock of the Company were exchanged for outstanding shares of Class B
Common Stock. See "Certain Transactions -- 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. Prior to the IPO,
the four executive officers of the Company exercised options to acquire shares
of Common Stock from the Company for $96,920 in cash.
II-1
<PAGE> 86
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.
As part of the Recapitalization, on May 7, 1996 the Company sold (1)
$8,000,000 aggregate principal amount of its Series A Senior Subordinated Notes
Due 2004 and (2) $12,000,000 aggregate principal amount of its Series B Senior
Subordinated Notes Due 2004 to "accredited investors," as such term is defined
under Regulation D of the Securities Act, and to "qualified institutional
buyers," as such term is defined under Rule 144A of the Securities Act. Such
sales were made pursuant to the exemption under Section 4(2) of the Securities
Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS:
See Exhibit Index.
(b) FINANCIAL STATEMENT SCHEDULES:
Report of Independent 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 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.
The undersigned registrant hereby undertakes (1) that for purposes of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of a registration statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was declared
effective; and (2) that for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Chicago, Illinois on
October 30, 1996.
MARKS BROS. JEWELERS, INC.
By: /s/ JOHN R. DESJARDINS
--------------------------------
John R. Desjardins
Executive Vice President,
Finance and Administration
POWER OF ATTORNEY AND SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this amendment
to registration statement has been signed on October 30, 1996 by the following
persons in the capacities indicated.
SIGNATURE TITLE(S)
- -------------------------------------- ------------------------------
<TABLE>
<CAPTION>
<S> <C>
* Chairman, President and Chief Executive
- --------------------------------------------- Officer (principal executive officer) and
Hugh M. Patinkin Director
/s/ JOHN R. DESJARDINS Executive Vice President, Finance and
- --------------------------------------------- Administration, and Treasurer (principal
John R. Desjardins financial and accounting officer) and
Director
* Director
- ---------------------------------------------
Matthew M. Patinkin
Director
- ---------------------------------------------
Rodney L. Goldstein
* Director
- ---------------------------------------------
Samuel B. Guren
* Director
- ---------------------------------------------
Norman J. Patinkin
* Director
- ---------------------------------------------
Jack A. Smith
</TABLE>
*By: /S/ JOHN R. DESJARDINS
---------------------------------
John R. Desjardins
as Attorney-in-Fact
II-3
<PAGE> 88
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Marks Bros. Jewelers, Inc.
In connection with our audits of the balance sheets of Marks Bros.
Jewelers, Inc. as of January 31, 1995 and 1996, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the twelve months
ended January 31, 1994, 1995 and 1996, which financial statements are included
in the Registration, we have also audited the financial statement schedule as of
and for the twelve months ended January 31, 1994, 1995 and 1996.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 27, 1996, except as to Note 14
which is as of August 22, 1996
S-1
<PAGE> 89
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> 90
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- --------------------------------------------------------------------- --------
<S> <C> <C> <C>
1.1 -- Form of Underwriting Agreement
3.1 -- Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement on
Form S-1 (Commission File No. 333-1794) (the "May Registration
Statement"))
3.2 -- Restated By-Laws of the Company (incorporated by reference to Exhibit
3.2 of the May Registration Statement)
4.1 -- Stockholders Rights Plan (incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-1 (Commission File No.
333-0403) (the "August Registration Statement"))
4.2 -- Certificate of Designations of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 4.2 of the May
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
(the "Indenture") (incorporated by reference to Exhibit 4.3 of the
August Registration Statement)
4.4 -- Form of Series C Notes (included in Exhibit 4.3 to this Registration
Statement)
4.5 -- Form of Series D Notes (included in Exhibit 4.3 to this Registration
Statement)
4.6 -- First Supplemental Indenture to the Indenture dated September ,
1996 (incorporated by reference to Exhibit 4.4 of the August
Registration Statement)
5.1 -- Opinion of Sidley & Austin
10.1 -- Second Amended and Restated Registration Agreement (incorporated by
reference to Exhibit 10.1 of the August 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 May
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 May 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 May Registration Statement)
10.5 -- Company's 1995 Executive Incentive Stock Option Plan (incorporated by
reference to Exhibit 10.5 of the May 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
May Registration Statement)
10.7 -- 1996 Long-Term Incentive Plan (incorporated by reference to Exhibit
10.7 of the August Registration Statement)
</TABLE>
<PAGE> 91
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- --------------------------------------------------------------------- --------
<C> <C> <S> <C>
Statement)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 May 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, as amended by the First Amendment
thereto, the Second Amendment thereto and the Third Amendment thereto
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 (incorporated by
reference to Exhibit 10.11 of the August Registration Statement)
10.12 -- ESOP Restructuring Agreement, dated as of March 29, 1996, between the
Company and the Marks Bros. Jewelers, Inc. Employee Stock Ownership
Trust (incorporated by reference to Exhibit 10.12 of the August
Registration Statement)
*11.1 -- Statement re: Computation of Net Income Per Share
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 the
Registration Statement)
</TABLE>
- -------------------------
* Previously filed.
<PAGE> 1
Exhibit 1.1
DRAFT OF OCTOBER 30, 1996
MARKS BROS. JEWELERS, INC.
2,305,000 Shares*
Common Stock
UNDERWRITING AGREEMENT
October __, 1996
MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
WILLIAM BLAIR & COMPANY, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Dear Sirs:
SECTION 1. Introductory. Marks Bros. Jewelers, Inc., a Delaware
corporation (the "Company), (the "Company"), proposes to issue and sell
1,100,000 shares of its authorized but unissued Common Stock (the "Common
Stock") and certain stockholders of the Company named in Schedule B annexed
hereto (the "Selling Stockholders") propose to sell an aggregate of 1,205,000
shares of the Company's issued and outstanding Common Stock to you (the
"Underwriters"). Said aggregate of 2,305,000 shares are herein called the
"Firm Common Shares." In addition, the Company and certain of the Selling
Stockholders propose to grant to the Underwriters an option to purchase up to
345,750 additional shares of Common Stock (the "Optional Common Shares"), as
provided in Section 5 hereof. The Firm Common Shares and, to the extent such
option is exercised, the Optional Common Shares are hereinafter collectively
referred to as the "Common Shares."
You have advised the Company and the Selling Stockholders that the
Underwriters propose to make a public offering of their respective portions of
the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is
advisable.
The Company and each of the Selling Stockholders hereby confirm their
respective agreements with respect to the purchase of the Common Shares by the
Underwriters as follows:
- ------------------------
*Plus an option to acquire from the Company and certain of the Selling
Stockholders up to 345,750 additional shares to cover overallotments.
-1-
<PAGE> 2
SECTION 2. Representations and Warranties of the Company. The Company
represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-13903) with
respect to the Common Shares has been prepared by the Company in
conformity in all material respects with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder, and has been filed with the
Commission. The Company has prepared and has filed or proposes to file
prior to the effective date of such registration statement an amendment
or amendments to such registration statement, which amendment or
amendments have been or will be similarly prepared. There have been
delivered to you two signed copies of such registration statement and
amendments, together with two copies of each exhibit filed therewith.
Conformed copies of such registration statement and amendments (but
without exhibits) and of the related preliminary prospectus have been
delivered to you in such reasonable quantities as you have requested for
each of the Underwriters. The Company will next file with the Commission
one of the following: (i) prior to effectiveness of such registration
statement, a further amendment thereto, including the form of final
prospectus, (ii) a final prospectus in accordance with Rules 430A and
424(b) of the Rules and Regulations or (iii) a term sheet (the "Term
Sheet") as described in and in accordance with Rules 434 and 424(b) of
the Rules and Regulations. As filed, the final prospectus, if one is
used, or the Term Sheet and Preliminary Prospectus, if a final prospectus
is not used, shall include all Rule 430A Information and, except to the
extent that you shall agree in writing to a modification, shall be in all
substantive respects in the form furnished to you prior to the date and
time that this Agreement was executed and delivered by the parties
hereto, or, to the extent not completed at such date and time, shall
contain only such specific additional information and other changes
(beyond that contained in the latest Preliminary Prospectus) as the
Company shall have previously advised you in writing would be included or
made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement
becomes effective and, in the event any post-effective amendment thereto
becomes effective prior to the First Closing Date (as hereinafter
defined), shall also mean such registration statement as so amended;
provided, however, that such term shall also include (i) all Rule 430A
Information deemed to be included in such registration statement at the
time such registration statement becomes effective as provided by Rule
430A of the Rules and Regulations and (ii) any registration statement
filed pursuant to 462(b) of the Rules and Regulations relating to the
Common Shares. The term "Preliminary Prospectus" shall mean any
preliminary prospectus referred to in the preceding paragraph and any
preliminary prospectus included in the Registration Statement at the time
it becomes effective that omits Rule 430A Information. The term
"Prospectus" as used in this Agreement shall mean either (i) the
prospectus relating to the Common Shares in the form in which it is first
filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations or, (ii) if a Term Sheet is not used and no filing pursuant
to Rule 424(b) of the Rules and Regulations is required, shall mean the
form of final prospectus included in the Registration Statement at the
time such registration statement becomes effective or (iii) if a Term
Sheet is used, the Term Sheet in the form in which it is first filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations,
together with the Preliminary Prospectus included in the Registration
Statement at the time it becomes effective. The term "Rule 430A
Information" means information with respect to the Common Shares and the
offering thereof permitted to be
-2-
<PAGE> 3
omitted from the Registration Statement when it becomes effective
pursuant to Rule 430A of the Rules and Regulations.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus
has conformed in all material respects to the requirements of the Act and
the Rules and Regulations and, as of its date, has not included any
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and at the time
the Registration Statement becomes effective, and at all times subsequent
thereto up to and including each Closing Date hereinafter mentioned, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, will contain all material statements and information
required to be included therein by the Act and the Rules and Regulations
and will in all material respects conform to the requirements of the Act
and the Rules and Regulations, and neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will include any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; provided, however, no representation or warranty
contained in this subsection 2(b) shall be applicable to information
contained in or omitted from any Preliminary Prospectus, the Registration
Statement, the Prospectus or any such amendment or supplement in reliance
upon and in conformity with written information furnished to the Company
by or on behalf of either Underwriter or any Selling Stockholder,
specifically for use in the preparation thereof.
(c) The Company does not have any direct or indirect equity or other
ownership interest in any other corporation, partnership, joint venture
or other business organization.
(d) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of Delaware, with
corporate power and authority to own and lease its properties and conduct
its business as described in the Prospectus; the Company is in possession
of and operating in compliance with all authorizations, licenses,
permits, consents, certificates and orders material to the conduct of its
business, all of which are valid and in full force and effect, except for
such failure to possess or noncompliance which would not have a material
adverse effect on the Company; the Company is duly qualified to do
business and in good standing as a foreign corporation in each
jurisdiction in which the ownership or leasing of properties or the
conduct of its business requires such qualification, except for
jurisdictions in which the failure to so qualify would not have a
material adverse effect upon the Company; and no proceeding has been
instituted in any such jurisdiction, revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or
qualification.
(e) The Company has an authorized and outstanding capital stock as
set forth under the heading "Capitalization" in the Prospectus; the
issued and outstanding shares of Common Stock have been duly authorized
and validly issued, are fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and conform to the description
thereof contained in the Prospectus. Except as disclosed in or
contemplated by the Prospectus and the financial statements of the
Company, and the related notes thereto, included in the Prospectus,
Company does not have outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations. The description
of
-3-
<PAGE> 4
the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly present in
all material respects the information required to be shown with respect
to such plans, arrangements, options and rights.
(f) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set
forth in this Agreement, will be duly authorized, validly issued, fully
paid and nonassessable, and will conform to the description thereof
contained in the Prospectus. No preemptive rights or other rights to
subscribe for or purchase exist with respect to the issuance and sale of
the Common Shares by the Company pursuant to this Agreement. No
stockholder of the Company has any right which has not been waived to
require the Company to register the sale of any shares owned by such
stockholder under the Act in the public offering contemplated by this
Agreement. No further approval or authority of the stockholders or the
Board of Directors of the Company will be required for the transfer and
sale of the Common Shares to be sold by the Selling Stockholders or the
issuance and sale of the Common Shares to be sold by the Company as
contemplated herein.
(g) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the
Company and constitutes a valid and binding obligation of the Company in
accordance with its terms, except as enforceability may be limited by
general equitable principles, bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally and
except that no representation or warranty is made relating to indemnity
or contribution. The making and performance of this Agreement by the
Company and the consummation of the transactions herein contemplated will
not violate any provisions of the certificate of incorporation or bylaws,
or other organizational documents, of the Company, and will not conflict
with, result in the breach or violation of, or constitute, either by
itself or upon notice or the passage of time or both, a default under any
agreement, mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument to which the Company is a party or by which
the Company or its properties may be bound or affected, any statute or
any authorization, judgment, decree, order, rule or regulation of any
court or any regulatory body, administrative agency or other governmental
body applicable to the Company or any of its properties, except in each
case for such violations, conflicts or defaults which would not have a
material adverse effect on the Company. No consent, approval,
authorization or other order of any court, regulatory body,
administrative agency or other governmental body is required for the
execution and delivery of this Agreement or the consummation of the
transactions contemplated by this Agreement, except for compliance with
the Act, the Blue Sky laws applicable to the public offering of the
Common Shares by the several Underwriters and the clearance of such
offering with the National Association of Securities Dealers, Inc. (the
"NASD"), except for such consent the failure to have would have not have
a material adverse effect on the Company.
(h) Coopers & Lybrand, L.L.P., who have expressed their opinion with
respect to the financial statements and schedules filed with the
Commission as a part of the Registration Statement and included in the
Prospectus and in the Registration Statement, are independent accountants
as required by the Act and the Rules and Regulations.
(i) The financial statements and schedule of the Company, and the
related notes thereto, included in the Registration Statement and the
Prospectus present fairly the financial
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position of the Company as of the respective dates of such financial
statements and schedule, and the results of operations and changes in
financial position of the Company for the respective periods covered
thereby. Such statements, schedule and related notes have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis as certified by the independent accountants named in
subsection 2(h), except as disclosed in such financial statements, and
except that the financial statements for interim periods are not
certified and have been prepared in accordance with generally accepted
accounting principles for interim financial information. No other
financial statements or schedules are required to be included in the
Registration Statement. The selected financial data set forth in the
Prospectus under the captions "Capitalization" and "Selected Financial
Data" fairly present the information set forth therein on the basis
stated in the Registration Statement. The pro forma information included
in the Prospectus present fairly the information shown therein, have been
properly compiled on the pro forma basis described therein, and, in the
opinion of the Company, the assumptions used in the preparation thereof
are reasonable and the adjustments used therein are appropriate under the
circumstances based on such assumptions.
(j) Except as disclosed in the Prospectus, and except as to defaults
which individually or in the aggregate would not have a material adverse
effect on the Company, the Company is not in violation or default of any
provision of its certificate of incorporation or bylaws, or other
organizational documents, and is not in breach of or default with respect
to any provision of any agreement, judgment, decree, order, mortgage,
deed of trust, lease, franchise, license, indenture, permit or other
instrument to which it is a party or by which it or any of its properties
are bound; and there does not exist any state of facts which constitutes
an event of default on the part of the Company as defined in such
documents or which, with notice or lapse of time or both, would
constitute such an event of default.
(k) There are no material contracts or other documents required to
be described in the Registration Statement or to be filed as exhibits to
the Registration Statement by the Act or by the Rules and Regulations
which have not been described or filed as required.
(l) There are no legal or governmental actions, suits or proceedings
pending or, to the best of the Company's knowledge, threatened to which
the Company is or may be a party or of which property owned or leased by
the Company is or may be the subject, or related to environmental or
discrimination matters, which actions, suits or proceedings might,
individually or in the aggregate, prevent or materially and adversely
affect the transactions contemplated by this Agreement or result in a
material adverse change in the condition (financial or otherwise),
properties, business, results of operations or prospects of the Company;
and no labor disturbance by the employees of the Company exists or is
imminent which might be expected to materially and adversely affect such
condition, properties, business, results of operations or prospects. The
Company is not a party or subject to the provisions of any injunction,
judgment, decree or order of any court, regulatory body, administrative
agency or other governmental body which materially and adversely affects
the Company.
(m) The Company has good and marketable title to all the properties
and assets reflected as owned in the financial statements hereinabove
described (or elsewhere in the Prospectus), subject to no lien, mortgage,
pledge, charge or encumbrance of any kind except (i) those, if any,
reflected in such financial statements (or elsewhere in the Prospectus),
or (ii) those which are not material in amount and do not materially and
adversely affect the use made and proposed to be made of such property by
the Company. The Company holds its leased
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<PAGE> 6
properties under valid and binding leases, with such exceptions as are
not materially significant in relation to the business of the Company.
Except as disclosed in the Prospectus, the Company owns or leases all
such properties as are necessary to its operations as now conducted or as
proposed to be conducted, in each case in all material respects.
(n) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company has not
incurred any material liabilities or obligations, indirect, direct or
contingent, or entered into any material verbal or written agreement or
other transaction which is not in the ordinary course of business; (ii)
the Company has not sustained any material loss or interference with its
business or properties from fire, flood, windstorm, accident or other
calamity, whether or not covered by insurance; (iii) the Company has not
paid or declared any dividends or other distributions with respect to its
capital stock, and the Company is not in default in the payment of
principal or interest on any outstanding debt obligations; (iv) there has
not been any change in the capital stock (other than upon the sale of the
Common Shares hereunder and upon the exercise of options and warrants
described in the Registration Statement) or indebtedness material to the
Company (other than in the ordinary course of business); and (v) there
has not been any material adverse change in the condition (financial or
otherwise), business, properties, results of operations or prospects of
the Company and its subsidiaries.
(o) Except as disclosed in or specifically contemplated by the
Prospectus, the Company has sufficient trademarks, trade names, patent
rights, mask works, copyrights, licenses, approvals and governmental
authorizations to conduct its business as now conducted; the expiration
of any trademarks, trade names, patent rights, mask works, copyrights,
licenses, approvals or governmental authorizations would not have a
material adverse effect on the condition (financial or otherwise),
business, results of operations or prospects of the Company; and the
Company has no knowledge of any material infringement by it or its
subsidiaries of trademark, trade name rights, patent rights, mask works,
copyrights, licenses, trade secret or other similar rights of others, and
there is no claim being made against the Company regarding trademark,
trade name, patent, mask work, copyright, license, trade secret or other
infringement which could have a material adverse effect on the condition
(financial or otherwise), business, results of operations or prospects
of the Company.
(p) The Company has not been advised, and has no reason to believe,
that it is not conducting business in compliance with all applicable
laws, rules and regulations of the jurisdictions in which it is
conducting business, including, without limitation, all applicable local,
state and federal environmental laws and regulations, except where
failure to be so in compliance would not materially adversely affect the
condition (financial or otherwise), business, results of operations or
prospects of the Company.
(q) The Company has filed all necessary federal, state and foreign
income and franchise tax returns and have paid all taxes shown as due
thereon, and the Company has no knowledge of any tax deficiency which has
been or might be asserted or threatened against the Company, except in
each case for any failure to file, failure to pay or tax deficiency which
would not materially and adversely affect the business, operations or
properties of the Company.
(r) The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
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<PAGE> 7
(s) The Company has not distributed and will not distribute prior to
the First Closing Date any offering material in connection with the
offering and sale of the Common Shares other than the Prospectus, the
Registration Statement and the other materials permitted by the Act.
(t) The Company maintains insurance of the types and in the amounts
customarily maintained by similarly situated companies, including, but
not limited to, insurance covering real and personal property owned or
leased by the Company against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected
to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Common Shares.
SECTION 3. Representations, Warranties and Covenants of the Selling
Stockholders.
(a) Each of the Selling Stockholders severally represents and
warrants to, and agrees with, the several Underwriters that:
(i) Such Selling Stockholder has, and on the First Closing
Date and the Second Closing Date hereinafter mentioned will have,
good and marketable title to the Common Shares proposed to be sold
by such Selling Stockholder hereunder on such Closing Date (except
that the Common Shares to be sold by Hugh M. Patinkin, Matthew M.
Patinkin, John R. Desjardins and Lynn D. Eisenheim (the "Employee
Selling Stockholders") are to be issued pursuant to currently
outstanding and exercisable options immediately prior to the First
Closing Date or Second Closing Date, as the case may be, so that
such Selling Stockholder, if an Employee Selling Stockholder, does
not have good and marketable title to the Common Shares on the date
hereof but will have such good and marketable title to the Common
Shares to be sold by him on the Closing Date on which such Common
Shares are to be delivered) and full right, power and authority to
enter into this Agreement and to sell, assign, transfer and deliver
such Common Shares hereunder, free and clear of all voting trust
arrangements, liens, encumbrances, equities, security interests,
restrictions and claims whatsoever; and upon delivery of and
payment for such Common Shares hereunder, the Underwriters will
acquire good and marketable title thereto, free and clear of all
liens, encumbrances, equities, claims, restrictions, security
interests, voting trusts or other defects of title whatsoever.
(ii) Such Selling Stockholder has executed and delivered a
Power of Attorney and caused to be executed and delivered on his
behalf a Custody Agreement (hereinafter collectively referred to as
the "Stockholders Agreement") and in connection herewith such
Selling Stockholder further represents, warrants and agrees that
such Selling Stockholder has deposited in custody, under the
Stockholders Agreement, with the agent named therein (the "Agent")
as custodian, certificates in negotiable form for the Common Shares
to be sold hereunder by such Selling Stockholder, for the purpose
of further delivery pursuant to this Agreement. Such Selling
Stockholder agrees that the Common Shares to be sold by such
Selling Stockholder on deposit with the Agent are
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<PAGE> 8
subject to the interests of the Company and the Underwriters, that
the arrangements made for such custody are to that extent
irrevocable, and that the obligations of such Selling Stockholder
hereunder shall not be terminated, except as provided in this
Agreement or in the Stockholders Agreement, by any act of such
Selling Stockholder, by operation of law, by the death or
incapacity of such Selling Stockholder or by the occurrence of any
other event. If such Selling Stockholder should die or become
incapacitated, or if any other event should occur, before the
delivery of the Common Shares hereunder, the documents evidencing
Common Shares then on deposit with the Agent shall be delivered by
the Agent in accordance with the terms and conditions of this
Agreement as if such death, incapacity or other event had not
occurred, regardless of whether or not the Agent shall have
received notice thereof. This Agreement and the Stockholders
Agreement have been duly executed and delivered by or on behalf of
such Selling Stockholder and the form of such Stockholders
Agreement has been delivered to you.
(iii) The performance of this Agreement and the Stockholders
Agreement and the consummation of the transactions contemplated
hereby and by the Stockholders Agreement will not result in a
breach or violation by such Selling Stockholder of any of the terms
or provisions of, or constitute a default by such Selling
Stockholder under, any indenture, mortgage, deed of trust, trust
(constructive or other), loan agreement, lease, franchise, license
or other agreement or instrument to which such Selling Stockholder
is a party or by which such Selling Stockholder or any of its
properties is bound, any statute, or any judgment, decree, order,
rule or regulation of any court or governmental agency or body
applicable to such Selling Stockholder or any of its properties.
(iv) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or
result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Common Shares.
(v) Each Preliminary Prospectus and the Prospectus, insofar as
it has related to such Selling Stockholder has conformed in all
material respects to the requirements of the Act and the Rules and
Regulations and has not included any untrue statement of a material
fact or omitted to state a material fact necessary to make the
statements therein not misleading in light of the circumstances
under which they were made; and neither the Registration Statement
nor the Prospectus, nor any amendment or supplement thereto, as it
relates to such Selling Stockholder, will include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading.
(b) Each of the Selling Stockholders agrees with the Company and the
Underwriters not to offer to sell, sell or contract to sell or otherwise
dispose of any shares of Common Stock or securities convertible into or
exchangeable for any shares of Common Stock, for a period of 90 days
after the first date that any of the Common Shares are released by you
for sale to the public, without the prior written consent of Montgomery
Securities, which consent may be withheld at the sole discretion of
Montgomery Securities, provided, that this subsection (b) shall not
restrict (i) any bona gift by any Selling Stockholder that is a natural
person or any distribution by any other Selling Stockholder to any
equityholder of such Selling Stockholder in each case so long as the
donee or transferee agrees to comply with this subsection (b) for any
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<PAGE> 9
remaining portion of such 90-day period or (ii) any distribution by U.S.
Trust Company of Californis, N.A., as Trustee for the Marks Bros.
Jewelers, Inc. Employee Stock Ownership Trust, to participants in such
plan pursuant to the terms of such plan.
SECTION 4. Representations and Warranties of the Underwriters. The
Underwriters represent and warrant to the Company and to the Selling
Stockholders that the information set forth (i) on the cover page of the
Prospectus with respect to price, underwriting discounts and commissions and
terms of offering and (ii) under "Underwriting" in the Prospectus was furnished
to the Company by and on behalf of the Underwriters for use in connection with
the preparation of the Registration Statement and the Prospectus and is correct
in all material respects.
SECTION 5. Purchase, Sale and Delivery of Common Shares. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, (i) the Company agrees to issue and
sell to the Underwriters 1,100,000 of the Firm Common Shares, and (ii) the
Selling Stockholders agree, severally and not jointly, to sell to the
Underwriters in the respective amounts set forth in Schedule B hereto, an
aggregate of 1,205,000 of the Firm Common Shares. The Underwriters agree,
severally and not jointly, to purchase from the Company and the Selling
Stockholders, respectively, the number of Firm Common Shares described below.
The purchase price per share to be paid by the Underwriters to the Company and
to the Selling Stockholders, respectively, shall be equal to the initial price
to the public per share less an amount per share equal to the per share
underwriting discount. The initial price to the public, which shall be a fixed
price, and the underwriting discount will be determined by separate agreement
among the Company, the Selling Stockholders and the Underwriters in
substantially the form set forth as Schedule C hereto.
The obligation of each Underwriter to the Company shall be to purchase
from the Company that number of full shares which (as nearly as practicable, as
determined by you) bears to 1,100,000 the same proportion as the number of
shares set forth opposite the name of such Underwriter in Schedule A hereto
bears to the total number of Firm Common Shares. The obligation of each
Underwriter to the Selling Stockholders shall be to purchase from the Selling
Stockholders that number of full shares which (as nearly as practicable, as
determined by you) bears to 1,205,000 the same proportion as the number of
shares set forth opposite the name of such Underwriter in Schedule A hereto
bears to the total number of Firm Common Shares.
Delivery of certificates for the Firm Common Shares to be purchased by the
Underwriters and payment therefor shall be made at the offices of Sidley &
Austin, counsel for the Company, One First National Plaza, Chicago, IL 60603
(or such other place as may be agreed upon by the Company and the Underwriters)
at such time and date, not later than the third (or, if the Firm Common Shares
are priced, as contemplated by Rule 15c6-1(c) under the Securities Exchange Act
of 1934, after 4:30 P.M. Washington D.C. time, the fourth) full business day
following the first date that any of the Common Shares are released by you for
sale to the public, as you shall designate by at least 48 hours prior notice to
the Company (or at such other time and date, not later than one week after such
third or fourth, as the case may be, full business day as may be agreed upon by
the Company and the Underwriters) (the "First Closing Date"); provided,
however, that if the Prospectus is at any time prior to the First Closing Date
recirculated to the public, the First Closing Date shall occur upon the later
of the third or fourth, as the case may be, full business day following the
first date that any of the Common Shares are released by you for sale to the
public or the date that is 48 hours after the date that the Prospectus has been
so recirculated.
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<PAGE> 10
Delivery of certificates for the Firm Common Shares shall be made by or
on behalf of the Company and the Selling Stockholders to you, for the
respective accounts of the Underwriters with respect to the Firm Common Shares
to be sold by the Company and by the Selling Stockholders against payment by
you, for the accounts of the several Underwriters, of the purchase price
therefor by a wire transfer of immediately available funds to an account
designated by the Company and by the Agent in proportion to the number of Firm
Common Shares to be sold by the Company and the Selling Stockholders,
respectively. The certificates for the Firm Common Shares shall be registered
in such names and denominations as you shall have requested at least two full
business days prior to the First Closing Date, and shall be made available for
checking and packaging on the business day preceding the First Closing Date at
a location in New York, New York, as may be designated by you. Time shall be
of the essence, and delivery at the time and place specified in this Agreement
is a further condition to the obligations of the Underwriters.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company and certain of the Selling Stockholders identified in
Schedule B hereby grant an option to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 345,750 Optional Common Shares
at the purchase price per share to be paid for the Firm Common Shares, for use
solely in covering any over-allotments made by you for the account of the
Underwriters in the sale and distribution of the Firm Common Shares. The
option granted hereunder may be exercised at any time (but not more than once)
within 30 days after the first date that any of the Common Shares are released
by you for sale to the public, upon notice by you to the Company and each such
Selling Stockholder setting forth the aggregate number of Optional Common
Shares as to which the Underwriters are exercising the option, the names and
denominations in which the certificates for such shares are to be registered
and the time and place at which such certificates will be delivered. Such time
of delivery (which may not be earlier than the First Closing Date), being
herein referred to as the "Second Closing Date," shall be determined by you,
but if at any time other than the First Closing Date shall not be earlier than
three nor later than five full business days after delivery of such notice of
exercise. The number of Optional Common Shares to be purchased by each
Underwriter shall be determined by multiplying the aggregate number of Optional
Common Shares to be sold by the Company and such Selling Stockholders pursuant
to such notice of exercise by a fraction, the numerator of which is the number
of Firm Common Shares to be purchased by such Underwriter as set forth opposite
its name in Schedule A and the denominator of which is 2,305,000 (subject to
such adjustments to eliminate any fractional share purchases as you in your
discretion may make). Certificates for the Optional Common Shares will be made
available for checking and packaging on the business day preceding the Second
Closing Date at a location in New York, New York, as may be designated by you.
The manner of payment for and delivery of the Optional Common Shares shall be
the same as for the Firm Common Shares purchased from the Company and such
Selling Stockholders as specified in the two preceding paragraphs. At any time
before lapse of the option, you may cancel such option by giving written notice
of such cancellation to the Company and such Selling Stockholders. If the
option is cancelled or expires unexercised in whole or in part, the Company
will deregister under the Act the number of Option Shares as to which the
option has not been exercised.
You have advised the Company and the Selling Stockholders that each
Underwriter has authorized you to accept delivery of its Common Shares, to make
payment and to receipt therefor.
Subject to the terms and conditions hereof, the Underwriters propose to
make a public offering of their respective portions of the Common Shares as
soon after the effective date of the Registration Statement as in the judgment
of the Underwriters is advisable and at the public offering price set forth on
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<PAGE> 11
the cover page of and on the terms set forth in the final prospectus, if one is
used, or on the first page of the Term Sheet, if one is used.
SECTION 6. Covenants of the Company. The Company covenants and agrees
that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and
date that this Agreement is executed and delivered by the parties hereto,
to become effective. If the Registration Statement has become or becomes
effective pursuant to Rule 430A of the Rules and Regulations, or the
filing of the Prospectus is otherwise required under Rule 424(b) of the
Rules and Regulations, the Company will file the Prospectus, properly
completed, pursuant to the applicable paragraph of Rule 424(b) of the
Rules and Regulations within the time period prescribed and will provide
evidence satisfactory to you of such timely filing. The Company will
promptly advise you in writing (i) of the receipt of any comments of the
Commission, (ii) of any request of the Commission for amendment of or
supplement to the Registration Statement (either before or after it
becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall have
become effective, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of
the institution of any proceedings for that purpose. If the Commission
shall enter any such stop order at any time, the Company will use its
best efforts to obtain the lifting of such order at the earliest possible
moment. The Company will not file any amendment or supplement to the
Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus of which you have not been
furnished with a copy a reasonable time prior to such filing or to which
you reasonably object or which is not in compliance with the Act and the
Rules and Regulations.
(b) If at any time within the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the
Common Shares is required to be delivered under the Act any event occurs,
as a result of which the Prospectus, including any amendments or
supplements, would include an untrue statement of a material fact, or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or if it is
necessary at any time to amend the Prospectus, including any amendments
or supplements, to comply with the Act or the Rules and Regulations, the
Company will promptly advise you thereof and will promptly prepare and
file with the Commission, at its own expense, an amendment or supplement
which will correct such statement or omission or an amendment or
supplement which will effect such compliance and will use its best
efforts to cause the same to become effective as soon as possible; and,
in case any Underwriter is required to deliver a prospectus after such
nine-month period, the Company upon request, but at the expense of such
Underwriter, will promptly prepare such amendment or amendments to the
Registration Statement and such Prospectus or Prospectuses as may be
necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act.
(c) As soon as practicable, but not later than 45 days after the end
of the first quarter ending after one year following the "effective date
of the Registration Statement" (as defined in Rule 158(c) of the Rules
and Regulations), the Company will make generally available to its
security holders an earnings statement (which need not be audited)
covering a period of 12 consecutive months beginning after the effective
date of the Registration Statement which will satisfy the provisions of
the last paragraph of Section 11(a) of the Act.
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<PAGE> 12
(d) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the
Company, at its expense, but only for the nine-month period referred to
in Section 10(a)(3) of the Act, will furnish to you and the Selling
Stockholders or mail to your order copies of the Registration Statement,
the Prospectus, the Preliminary Prospectus and all amendments and
supplements to any such documents in each case as soon as available and
in such quantities as you and the Selling Stockholders may request, for
the purposes contemplated by the Act.
(e) The Company shall cooperate with you and your counsel in order
to qualify or register the Common Shares for sale under (or obtain
exemptions from the application of) the Blue Sky laws of such
jurisdictions as you designate, will comply with such laws and will
continue such qualifications, registrations and exemptions in effect so
long as reasonably required for the distribution of the Common Shares.
The Company shall not be required to qualify as a foreign corporation or
to file a general consent to service of process in any such jurisdiction
where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise you promptly
of the suspension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale or trading in
any jurisdiction or any initiation or threat of any proceeding for any
such purpose, and in the event of the issuance of any order suspending
such qualification, registration or exemption, the Company, with your
cooperation, will use its best efforts to obtain the withdrawal thereof.
(f) During the period of five years hereafter, the Company will
furnish to the Underwriters: (i) as soon as practicable after the end of
each fiscal year, copies of the Annual Report of the Company containing
the balance sheet of the Company as of the close of such fiscal year and
statements of income, stockholders' equity and cash flows for the year
then ended and the opinion thereon of the Company's independent public
accountants; (ii) as soon as practicable after the filing thereof, copies
of each proxy statement, Annual Report on Form 10-K, Quarterly Report on
Form 10-Q, Report on Form 8-K or other report filed by the Company with
the Commission, the NASD or any securities exchange; and (iii) as soon as
available, copies of any report or communication of the Company mailed
generally to holders of its Common Stock.
(g) During the period of 90 days after the first date that any of
the Common Shares are released by you for sale to the public, without the
prior written consent of Montgomery Securities (which consent may be
withheld at the sole discretion of Montgomery Securities), the Company
will not other than pursuant to outstanding stock options and warrants
disclosed in the Prospectus issue, offer, sell, grant options to purchase
(except options granted pursuant to the Company's employee stock option
plan that are not exercisable during such 90 day period) or otherwise
dispose of any of the Company's equity securities or any other securities
convertible into or exchangeable with its Common Stock or other equity
security.
(h) The Company will apply the net proceeds of the sale of the
Common Shares sold by it substantially in accordance with its statements
under the caption "Use of Proceeds" in the Prospectus.
You, on behalf of the Underwriters, may, in your sole discretion, waive in
writing the performance by the Company of any one or more of the foregoing
covenants or extend the time for their performance.
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<PAGE> 13
SECTION 7. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective or
is terminated, the Company agrees to pay all costs, fees and expenses incurred
in connection with the performance of its obligations hereunder and in
connection with the transactions contemplated hereby (except as provided in the
following sentence), including without limiting the generality of the
foregoing, (i) all expenses incident to the issuance and delivery of the Common
Shares (including all printing and engraving costs), (ii) all fees and expenses
of the registrar and transfer agent of the Common Stock, (iii) all necessary
issue, transfer and other stamp taxes in connection with the issuance and sale
of the Common Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel and the Company's independent accountants, (v) all costs and
expenses incurred in connection with the preparation, printing, filing,
shipping and distribution of the Registration Statement, each Preliminary
Prospectus and the Prospectus (including all exhibits and financial statements)
and all amendments and supplements provided for herein, this Agreement, the
Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters'
Questionnaire, the Underwriters' Power of Attorney and the Blue Sky memorandum,
(vi) all filing fees, attorneys' fees and expenses reasonably incurred by the
Company or the Underwriters not exceeding $5,000 in connection with qualifying
or registering (or obtaining exemptions from the qualification or registration
of) all or any part of the Common Shares for offer and sale under the Blue Sky
laws, (vii) the filing fee of the National Association of Securities Dealers,
Inc., (viii) any fees and expenses of counsel for the Selling Stockholders
generally, (ix) any fees and expenses of the Agent and (x) all other fees,
costs and expenses referred to in Item 13 of the Registration Statement.
Except as provided in this Section 7, Section 9 and Section 11 hereof, the
Underwriters shall pay all of their own expenses, including the fees and
disbursements of their counsel (excluding those relating to qualification,
registration or exemption under the Blue Sky laws and the Blue Sky memorandum
referred to above) and the travel and other expenses for the "road show"
presentations.
The Selling Stockholders will pay (directly or by reimbursement) all fees
and expenses incident to the performance of their obligations under this
Agreement which are not otherwise specifically provided for herein, including
but not limited to all expenses and taxes incident to the sale and delivery of
the Common Shares to be sold by such Selling Stockholders to the Underwriters
hereunder.
This Section 7 shall not affect any agreements relating to the payment of
expenses between the Company and the Selling Stockholders.
SECTION 8. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm Common
Shares on the First Closing Date and the Optional Common Shares on the Second
Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein set
forth as of the date hereof and as of the First Closing Date or the Second
Closing Date, as the case may be, to the accuracy of the statements of Company
officers and the Selling Stockholders made pursuant to the provisions hereof,
to the performance by the Company and the Selling Stockholders of its or their
respective obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M. (or, in the case of a registration statement filed
pursuant to Rule 462(b) of the Rules and Regulations relating to the
Common Shares, not later than 10 P.M.), Washington, D.C. Time, on the
date of this Agreement, or at such later time as shall have been
consented to by you; if the filing of the Prospectus, or any supplement
thereto, is required pursuant to Rule 424(b) of the Rules and
Regulations, the Prospectus shall have been filed in the manner and
within the time period required by Rule 424(b) of the Rules and
Regulations; and prior to such Closing Date, no
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<PAGE> 14
stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have
been instituted or shall be pending or, to the knowledge of the Company,
the Selling Stockholders or you, shall be contemplated by the Commission;
and any request of the Commission for inclusion of additional
information in the Registration Statement, or otherwise, shall have been
complied with to your satisfaction.
(b) You shall be satisfied that since the respective dates as of
which information is given in the Registration Statement and Prospectus,
(i) there shall not have been any change in the capital stock other than
pursuant to the exercise of outstanding options and warrants disclosed in
the Prospectus of the Company or any material increase in the
indebtedness (other than in the ordinary course of business) of the
Company, (ii) except as set forth or contemplated by the Registration
Statement or the Prospectus, no material verbal or written agreement or
other transaction shall have been entered into by the Company, which is
not in the ordinary course of business, (iii) no loss or damage (whether
or not insured) to the property of the Company shall have been sustained
which materially and adversely affects the condition (financial or
otherwise), business, results of operations or prospects of the Company,
(iv) no legal or governmental action, suit or proceeding affecting the
Company which is material to the Company or which affects or might
adversely affect the transactions contemplated by this Agreement shall
have been instituted or threatened, and (v) there shall not have been any
material change in the condition (financial or otherwise), business,
management, results of operations or prospects of the Company which makes
it impractical or inadvisable in the judgment of the Underwriters to
proceed with the public offering or purchase the Common Shares as
contemplated hereby.
(c) There shall have been furnished to you on each Closing Date, in
form and substance satisfactory to you, except as otherwise expressly
provided below:
(i) An opinion of Sidley & Austin, counsel for the Company and
the Selling Stockholders, addressed to the Underwriters and dated
the First Closing Date, or the Second Closing Date, as the case may
be, to the effect that:
(1) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of Delaware, is duly qualified to do business as a
foreign corporation and is in good standing in all other
jurisdictions where the ownership or leasing of properties or
the conduct of its business requires such qualification,
except for jurisdictions in which the failure to so qualify
would not have a material adverse effect on the Company, and
has the corporate power and authority to own its properties
and conduct its business as described in the Registration
Statement;
(2) The authorized capital stock of the Company conforms
as to legal matters in all material respects to the
description thereof in the Prospectus; all necessary
corporate proceedings have been taken in order to authorize
validly such authorized Common Stock; all outstanding shares
of Common Stock (including the Firm Common Shares and any
Optional Common Shares) have been duly and validly issued,
are fully paid and nonassessable;
(3) The certificates evidencing the Common Shares to be
delivered hereunder are in due and proper form under Delaware
law, and when duly countersigned by the Company's transfer
agent and registrar, and delivered to
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<PAGE> 15
you or upon your order against payment of the agreed
consideration therefor in accordance with the provisions
of this Agreement, the Common Shares represented thereby
will be duly authorized and validly issued, fully paid and
nonassessable, will not have been issued in violation of or
subject to any preemptive rights and will conform as to legal
matters in all material respects to the description thereof
contained in the Prospectus;
(4) (a) The Registration Statement has become
effective under the Act, and, to the best of such
counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or
preventing the use of the Prospectus has been issued
and no proceedings for that purpose have been
instituted or are pending or contemplated by the
Commission; any required filing of the Prospectus and
any supplement thereto pursuant to Rule 424(b) of the
Rules and Regulations has been made in the manner and
within the time period required by such Rule 424(b);
(b) The Registration Statement, the Prospectus and
each amendment or supplement thereto (except for the
financial statements and schedule and other statistical
or financial data included therein as to which such
counsel need express no opinion) comply as to form in
all material respects with the requirements of the Act
and the Rules and Regulations;
(c) To such counsel's knowledge, there are no
franchises, leases, contracts, agreements or documents
of a character required to be disclosed in the
Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not
disclosed or filed, as required; and
(d) To such counsel's knowledge, there are no
legal or governmental actions, suits or proceedings
pending or threatened against the Company which are
required to be described in the Prospectus which are
not described as required.
(5) This Agreement has been duly and validly authorized
by all necessary corporate action by the Company, has been
duly and validly executed and delivered by and on behalf of
the Company, and is a valid and binding agreement of the
Company in accordance with its terms, except as
enforceability may be limited by general equitable
principles, bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights
generally and except as to those provisions relating to
indemnity or contribution as to which no opinion need be
expressed; and no approval, authorization, order, consent,
registration, filing, qualification, license or permit of or
with any court, regulatory, administrative or other
governmental body is required for the execution and delivery
of this Agreement by the Company or the consummation of the
transactions contemplated by this Agreement, except such as
have been obtained and are in full force and effect under the
Act and such as may be required under applicable Blue Sky
laws in connection with the purchase and
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<PAGE> 16
distribution of the Common Shares by the Underwriters and
the clearance of such offering with the NASD;
(6) The execution and performance of this Agreement and
the consummation of the transactions herein contemplated will
not (i) conflict with, result in the breach of, or
constitute, either by itself or upon notice or the passage of
time or both, a default under, any agreement, mortgage, deed
of trust, lease, franchise, license, indenture, permit or
other instrument known to such counsel to which the Company
is a party or by which the Company or any of its or their
property may be bound or affected, or (ii) violate any of the
provisions of the certificate of incorporation or bylaws, or
other organizational documents, of the Company or (iii) so
far as is known to such counsel, violate any statute,
judgment, decree, order, rule or regulation of any court or
governmental body having jurisdiction over the Company or any
of its property, except in the case of clauses (i) and (iii)
for any such conflict, breach, default or violation which
could not reasonably be expected to have a material adverse
effect on the Company;
(7) To such counsel's knowledge, this Agreement has been
duly authorized, executed and delivered by or on behalf of
each of the Selling Stockholders; and the performance of this
Agreement and the consummation of the transactions herein
contemplated by the Selling Stockholders will not result in a
breach of, or constitute a default under, any indenture,
mortgage, deed of trust, trust (constructive or other), loan
agreement, lease, franchise, license or other agreement or
instrument to which any of the Selling Stockholders is a
party or by which any of the Selling Stockholders or any of
their properties may be bound, or violate any statute,
judgment, decree, order, rule or regulation known to such
counsel of any court or governmental body having jurisdiction
over any of the Selling Stockholders or any of their
properties; and to such counsel's knowledge, no approval,
authorization, order or consent of any court, regulatory
body, administrative agency or other governmental body is
required for the execution and delivery of this Agreement or
the Stockholders Agreement or the consummation by the Selling
Stockholders of the transactions contemplated by this
Agreement, except such as have been obtained and are in full
force and effect under the Act and such as may be required
under the rules of the NASD and applicable Blue Sky laws;
(8) To such counsel's knowledge, the Selling
Stockholders that are not natural persons have corporate,
partnership or trust (as the case may be) power and authority
to enter into this Agreement and the Stockholders Agreement
and to sell, transfer and deliver the Common Shares to be
sold on such Closing Date by such Selling Stockholders
hereunder upon registration of the number of Common Shares
being sold by all the Selling Stockholders on the date hereof
to the Underwriters in the names of the Underwriters in the
stock records of the Company, such Underwriters will,
assuming that such Underwriters are purchasing such shares in
good faith and without notice of any adverse claim within the
meaning of the Uniform Commercial Code as currently in effect
in the State of Illinois, have acquired all rights of such
Selling Stockholder in such shares free and clear of any such
adverse claims; and
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<PAGE> 17
(9) To such counsel's knowledge, this Agreement is the
valid and binding agreement of each of the Selling
Stockholders in accordance with its terms except as
enforceability may be limited by general equitable
principles, bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights
generally and except with respect to those provisions
relating to indemnities or contributions for liabilities,
as to which no opinion need be expressed.
In rendering such opinion, such counsel may rely (i), as to the matters
set forth in paragraphs (7), (8) and (9), on opinions of other counsel
retained by the Selling Stockholders, (ii) as to matters of local law, on
opinions of local counsel, and (iii) as to matters of fact, on
certificates of the Selling Stockholders and of officers of the Company
and of governmental officials, in which case their opinion is to state
that they are so doing and copies of said opinions or certificates are to
be attached to the opinion unless opinions or certificates (or, in the
case of certificates, the information therein) have been furnished to the
Underwriters in other form. Such counsel shall also include a statement
to the effect that nothing has come to such counsel's attention that
would lead such counsel to believe that either at the effective date of
the Registration Statement or at the applicable Closing Date the
Registration Statement or the Prospectus, or any such amendment or
supplement (except for the financial statement and schedule and other
statistical or financial data as to which such counsel need express no
belief), contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading;
(ii) Such opinion or opinions of Gardner, Carton & Douglas,
counsel for the Underwriters dated the First Closing Date or the
Second Closing Date, as the case may be, with respect to the
incorporation of the Company, the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement, the
validity of the Common Shares, the Registration Statement and the
Prospectus and other related matters as you may reasonably require,
and the Company and the Selling Stockholders shall have furnished
to such counsel such documents and shall have exhibited to them
such papers and records as they may reasonably request for the
purpose of enabling them to pass upon such matters. In connection
with such opinions, such counsel may rely on representations or
certificates of officers of the Company and governmental officials.
(iii) A certificate of the Company executed on its behalf by
the Chairman of the Board or President and the chief financial or
accounting officer of the Company, dated the First Closing Date or
the Second Closing Date, as the case may be, to the effect that:
(1) The representations and warranties of the Company
set forth in Section 2 of this Agreement are true and correct
as of the date of this Agreement and as of the First Closing
Date or the Second Closing Date, as the case may be, and the
Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied
on or prior to such Closing Date; and
(2) The Commission has not issued any order preventing
or suspending the use of the Prospectus or any Preliminary
Prospectus filed as a
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<PAGE> 18
part of the Registration Statement or any amendment thereto;
no stop order suspending the effectiveness of the
Registration Statement has been issued; and to the best of
the knowledge of the respective signers, no proceedings for
that purpose have been instituted or are pending or
contemplated under the Act.
(iv) On the First Closing Date or the Second Closing Date, as
the case may be, a certificate, dated such Closing Date and
addressed to you, signed by or on behalf of each of the Selling
Stockholders to the effect that the representations and warranties
of such Selling Stockholder in this Agreement are true and correct,
as if made at and as of the First Closing Date or the Second
Closing Date, as the case may be, and such Selling Stockholder has
complied with all the agreements and satisfied all the conditions
on his part to be performed or satisfied prior to the First Closing
Date or the Second Closing Date, as the case may be.
(v) On the date before this Agreement is executed and also on
the First Closing Date and the Second Closing Date a letter
addressed to the Underwriters, from Coopers & Lybrand, L.L.P.,
independent accountants, the first one to be dated the day before
the date of this Agreement, the second one to be dated the First
Closing Date and the third one (in the event of a Second Closing)
to be dated the Second Closing Date, in form and substance
satisfactory to you.
(vi) On or before the First Closing Date, letters from each
other holder of the Company's Common Stock identified in Schedule D
hereof, substantially in the form of Schedule E.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
to you and to Gardner, Carton & Douglas, counsel for the Underwriters. The
Company shall furnish you with such manually signed or conformed copies of such
opinions, certificates, letters and documents as you reasonably request. Any
certificate signed by any officer of the Company and delivered to the
Underwriters or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the
statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you to the
Company and the Selling Stockholders without liability on the part of any
Underwriter or the Company or the Selling Stockholders except for the expenses
to be paid or reimbursed by the Company and by the Selling Stockholders
pursuant to Sections 7 and 9 hereof and except to the extent provided in
Section 11 hereof.
SECTION 9. Reimbursement of Underwriters' Expenses. Notwithstanding any
other provisions hereof, if this Agreement shall be terminated by you pursuant
to Section 8, or if the sale to the Underwriters of the Common Shares at the
First Closing is not consummated because of any refusal, inability or failure
on the part of the Company or the Selling Stockholders to perform any agreement
herein or to comply with any provision hereof, the Company agrees to reimburse
you and the other Underwriters upon demand for all out-of-pocket expenses that
shall have been reasonably incurred by you and them in connection with the
proposed purchase and the sale of the Common Shares, including but not limited
to fees and disbursements of counsel, printing expenses, travel expenses,
postage, telegraph charges and telephone charges relating directly to the
offering contemplated by the Prospectus.
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<PAGE> 19
Any such termination shall be without liability of any party to any other party
except that the provisions of this Section, Section 7 and Section 11 shall at
all times be effective and shall apply.
SECTION 10. Effectiveness of Registration Statement. You and the Company
and the Selling Stockholders will use your and its and their best efforts to
cause the Registration Statement to become effective, to prevent the issuance
of any stop order suspending the effectiveness of the Registration Statement
and, if such stop order be issued, to obtain as soon as possible the lifting
thereof.
SECTION 11. Indemnification. (a) The Company agrees to indemnify and hold
harmless, and Hugh M. Patinkin, Matthew M. Patinkin, John R. Desjardins, Lynn D.
Eisenheim, and William Blair Venture Partners III Limited Partnership (each, an
"Identified Selling Stockholder" and, collectively, the "Identified Selling
Stockholders") jointly and severally agree (subject in all cases to the overall
limitation on liability set forth in the second paragraph of this subsection
(a)) to indemnify and hold harmless, each Underwriter and each person, if any,
who controls any Underwriter within the meaning of the Act against any losses,
claims, damages, liabilities or expenses, joint or several, to which such
Underwriter or such controlling person may become subject, under the Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or other
federal or state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected with
the written consent of the Company or such Identified Selling Stockholder),
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof as contemplated below) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state in any of them a material fact required to be
stated therein or necessary to make the statements in any of them not
misleading; and will reimburse each Underwriter and each such controlling person
for any legal and other expenses as such expenses are reasonably incurred by
such Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that neither the Company nor
the Identified Selling Stockholders will be liable in any such case to the
extent that any such loss, claim, damage, liability or expense arises out of or
is based upon (i) an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, any Preliminary Prospectus,
the Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with the information furnished to the Company pursuant to Section 4
hereof or (ii) any statement or omission contained or made in any preliminary
prospectus and corrected in the Prospectus if (x) such loss, claim, damage,
liability or expense suffered or incurred by any Underwriter (or any such
controlling person) resulted from any claim, action, investigation, inquiry or
other proceeding brought by any person who purchased Common Shares which are the
subject thereof from such Underwriter and (y) such Underwriter failed to deliver
or provide a copy of the Prospectus, as then amended or supplemented, to such
person at or prior to the confirmation of the sale of such Common Shares in any
case where such delivery is required. In addition to its other obligations under
this Section 11(a), the Company and the Identified Selling Stockholders agree
that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, as described in
this Section 11(a), it or he will reimburse each Underwriter on a quarterly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's or such Identified Selling
Stockholders' obligation to reimburse each Underwriter for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, each Underwriter shall
promptly return it to the Company or the Identified Selling Stockholder, as the
case may be.
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<PAGE> 20
This indemnity agreement will be in addition to any liability which the Company
or an Identified Selling Stockholder may otherwise have.
Without limiting the full extent of (i) the Company's agreement to
indemnify each Underwriter (and controlling persons thereof, if any) as herein
provided, (ii) the liability of the Company with respect to the breach by the
Company of any representation, warranty or covenant contained in this Agreement
(or in any certificate of the Company delivered pursuant hereto) and (iii) the
liability of any Identified Selling Stockholder with respect to the breach by
such Identified Selling Stockholder of any representation, warranty or covenant
contained in Section 3 of this Agreement (or in any certificate of such
Identified Selling Stockholder delivered pursuant hereto relating thereto),
notwithstanding anything contained in this Agreement to the contrary, each
Identified Selling Stockholder shall be liable under (A) the indemnification
agreements contained in the first paragraph of this Section 11(a) or (B) the
contribution provisions contained in Section 11(e) of this Agreement, only for
an amount not exceeding, in the aggregate, the net proceeds received by such
Identified Selling Stockholder from the sale of Common Shares hereunder. The
Company and the Identified Selling Stockholders may agree or have agreed, as
among themselves and without limiting the rights of the Underwriters and
controlling persons under this Agreement, as to the respective amounts of such
liability for which each of them shall be responsible.
Notwithstanding anything to the contrary under this Section 11(a), each
Underwriter and each person, if any, who controls any Underwriter agrees not to
assert its rights to indemnity against any Identified Selling Stockholder for
losses, claims, damages or liabilities (or actions in respect thereof) arising
out of or based upon any such untrue statement or alleged untrue statement
unless and until (i) such Underwriter or controlling person has requested
indemnification and reimbursement from the Company for such losses, claims,
damages or liabilities (including any legal or other expenses reasonably
incurred) and (ii) the Company does not within 30 days of such request (x)
agree to so indemnify such Underwriter or controlling person and (y) reimburse
in full such Underwriter or controlling person for any such losses, damages or
liabilities (including legal and other expenses) incurred. If, after having
made such demand on the Company for indemnification and reimbursement as herein
provided, any Underwriter and any person, if any, who controls any Underwriter
asserts its rights to indemnity against any Identified Selling Stockholder for
losses, claims, damages or liabilities (or actions in respect thereof) arising
out of or based upon any such untrue statement or alleged untrue statement,
then in such event such Underwriter and each person, if any, who controls such
Underwriter shall first request indemnification and reimbursement from all (and
not less than all) Identified Selling Stockholders for such losses, claims,
damages or liabilities (including legal and other expenses), with such request
for indemnification and reimbursement to be made to each Identified Selling
Stockholder in such proportion as the number of Firm Common Shares to be sold
hereunder by such Identified Selling Stockholder bears to the total number of
Firm Common Shares to be sold by all Identified Selling Stockholders.
(b) Each of the Selling Stockholders not constituting Identified Selling
Stockholders (the "Other Selling Stockholders") severally and not jointly
agrees to indemnify and hold harmless each Underwriter and each person, if any,
who controls any Underwriter within the meaning of the Act against any losses,
claims, damages, liabilities or expenses, joint or several, to which such
Underwriter or such controlling person may become subject, under the Act, the
Exchange Act, or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Other Selling
Stockholders), insofar as such losses, claims, damages, liabilities or expenses
(or actions in respect thereof as contemplated below) arise
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<PAGE> 21
out of or are based upon any untrue statement or alleged untrue statement of
any material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state in
any of them a material fact required to be stated therein or necessary to make
the statements in any of them not misleading (in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by such Other Selling Stockholder
specifically for use therein); and will reimburse each Underwriter and each
such controlling person for any legal and other expenses as such expenses are
reasonably incurred by such Underwriter or such controlling person in
connection with investigating, defending, settling, compromising or paying any
such loss, claim, damage, liability, expense or action; provided, however, that
the Other Selling Stockholders will not be liable in any such case to the
extent that any such loss, claim, damage, liability or expense arises out of or
is based upon (i) an untrue statement or alleged untrue statement or omission
or alleged omission made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with the information furnished to the Company pursuant
to Section 4 hereof or (ii) any statement or omission contained or made in any
preliminary prospectus and corrected in the Prospectus if (x) such loss, claim,
damage, liability or expense suffered or incurred by any Underwriter (or any
such controlling person) resulted from any claim, action, investigation,
inquiry or other proceeding brought by any person who purchased Common Shares
which are the subject thereof from such Underwriter and (y) such Underwriter
failed to deliver or provide a copy of the Prospectus, as then amended or
supplemented, to such person at or prior to the confirmation of the sale of
such Common Shares in any case where such delivery is required. In addition to
their other obligations under this Section 11(b), the Other Selling
Stockholders agree that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission, as
described in this Section 11(b), it will reimburse each Underwriter on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Other
Selling Stockholders' obligation to reimburse each Underwriter for such
expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any
such interim reimbursement payment is so held to have been improper, each
Underwriter shall promptly return it to the Other Selling Stockholders. This
indemnity agreement will be in addition to any liability which the Other
Selling Stockholders may otherwise have.
Without limiting the full extent of (i) the Company's agreement to
indemnify each Underwriter (and controlling persons thereof, if any) as herein
provided, (ii) the liability of the Company with respect to the breach by the
Company of any representation, warranty or covenant contained in this Agreement
(or in any certificate of the Company delivered pursuant hereto) and (iii) the
liability of any Other Selling Stockholder with respect to the breach by such
Other Selling Stockholder of any representation, warranty or covenant contained
in Section 3 of this Agreement (or in any certificate of such Outsider Selling
Stockholder delivered pursuant hereto relating thereto), notwithstanding
anything contained in this Agreement to the contrary, each Other Selling
Stockholder shall be liable under (A) the indemnification agreements contained
in the first paragraph of this Section 11(b) or (B) the contribution provisions
contained in Section 11(e) of this Agreement, only for an amount not exceeding,
in the aggregate, the net proceeds received by such Other Selling Stockholder
from the sale of Common Shares hereunder. The Company and the Other Selling
Stockholders may agree, as among themselves and without limiting the rights of
the Underwriters and controlling persons under this Agreement, as to the
respective amounts of such liability for which each of them shall be
responsible.
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<PAGE> 22
Notwithstanding anything to the contrary under this Section 11(b), each
Underwriter and each person, if any, who controls any Underwriter agrees not to
assert its rights to indemnity against any Other Selling Stockholder for
losses, claims, damages or liabilities (or actions in respect thereof) arising
out of or based upon any such untrue statement or alleged untrue statement or
for breach of representations and warranties set forth in Section 3 hereof,
unless and until (i) such Underwriter or controlling person has requested
indemnification and reimbursement from the Company for such losses, claims,
damages or liabilities (including any legal or other expenses reasonably
incurred) and (ii) the Company does not within 30 days of such request (x)
agree to so indemnify such Underwriter or controlling person and (y) reimburse
in full such Underwriter or controlling person for any such losses, damages or
liabilities (including legal and other expenses) incurred.
(c) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the
Registration Statement , the Selling Stockholders and each person, if any, who
controls the Company or any Selling Stockholder within the meaning of the Act,
against any losses, claims, damages, liabilities or expenses to which the
Company, or any such director, officer, Selling Stockholder or controlling
person may become subject, under the Act, the Exchange Act, or other federal or
state statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any Preliminary Prospectus,
the Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with the information furnished to the Company pursuant to Section 4
hereof; and will reimburse the Company, or any such director, officer, Selling
Stockholder or controlling person for any legal and other expense reasonably
incurred by the Company, or any such director, officer, Selling Stockholder or
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action. In addition to its other obligations under this Section 11(c), each
Underwriter severally agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in this Section 11(c) which relates to information furnished to the
Company pursuant to Section 4 hereof, it will reimburse the Company (and, to
the extent applicable, each officer, director, controlling person or Selling
Stockholder) on a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company (and, to the extent
applicable, each officer, director, controlling person or Selling Stockholder)
for such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. To the extent that
any such interim reimbursement payment is so held to have been improper, the
Company (and, to the extent applicable, each officer, director, controlling
person or Selling Stockholder) shall promptly return it to the Underwriters.
This indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made
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<PAGE> 23
against an indemnifying party under this Section, notify the indemnifying
party in writing of the commencement thereof; but the omission so
to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party, except to the extent it is prejudiced as
a proximate result of such failure. In case any such action is brought against
any indemnified party and such indemnified party seeks or intends to seek
indemnity from an indemnifying party, the indemnifying party will be entitled
to participate in, and, to the extent that it may wish, jointly with all other
indemnifying parties similarly notified, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided, however,
if the defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be a conflict between the positions of the indemnifying party
and the indemnified party in conducting the defense of any such action or that
there may be legal defenses available to it and/or other indemnified parties
which are different from or additional to those available to the indemnifying
party, the indemnified party or parties shall have the right to select separate
counsel to assume such legal defenses and to otherwise participate in the
defense of such action on behalf of such indemnified party or parties. Upon
receipt of notice from the indemnifying party to such indemnified party of its
election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed such counsel in
connection with the assumption of legal defenses in accordance with the proviso
to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel, approved by the Underwriters in the case of paragraph (a) or
paragraph (b), representing the indemnified parties who are parties to such
action) or (ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of the action, in
each of which cases the fees and expenses of counsel shall be at the expense of
the indemnifying party.
(e) If the indemnification provided for in this Section 11 is required by
its terms but is for any reason held to be unavailable to or otherwise
insufficient to hold harmless an indemnified party under paragraphs (a), (b),
(c) or (d) in respect of any losses, claims, damages, liabilities or expenses
referred to herein, then each applicable indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of any losses,
claims, damages, liabilities or expenses referred to herein (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company, the Selling Stockholders and the Underwriters from the offering of the
Common Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company, the Selling Stockholders and the Underwriters in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The respective relative benefits received by the
Company, the Selling Stockholders and the Underwriters shall be deemed to be in
the same proportion, in the case of the Company and the Selling Stockholders as
the total price paid to the Company and to the Selling Stockholders,
respectively, for the Common Shares sold by them to the Underwriters (net of
underwriting commissions but before deducting expenses) bears to the total
price to the public set forth on the cover of the Prospectus, and in the case
of the Underwriters as the underwriting commissions received by them bears to
the total price to the public set forth on the cover of the Prospectus. The
relative fault of the Company, the Selling Stockholders and the Underwriters
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company, the
Selling Stockholders or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of
the losses, claims, damages, liabilities and expenses referred to above shall
be deemed to include, subject to the limitations set forth in subparagraph (d)
of this Section 11, any legal or other fees or expenses reasonably incurred by
such party in connection with investigating or defending any action or claim.
The provisions set forth in subparagraph (d) of this Section 11 with respect to
notice of commencement of any action shall apply if a claim for contribution is
to be made under this subparagraph (e); provided, however, that no additional
notice shall be required with respect to any action for which notice has been
given under subparagraph (d) for purposes of indemnification. The Company, the
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<PAGE> 24
Selling Stockholders and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 11 were determined solely by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. Notwithstanding the provisions of this Section 11, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price paid by the public in connection with the Common
Shares underwritten by it and distributed to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by reason
of such actual or alleged untrue statement or omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 11 are several in proportion to their respective
underwriting commitments and not joint.
SECTION 12. Default of Underwriters. It shall be a condition to this
Agreement and the obligation of the Company and the Selling Stockholders to
sell and deliver the Common Shares hereunder, and of each Underwriter to
purchase the Common Shares in the manner as described herein, that, except as
hereinafter in this paragraph provided, each of the Underwriters shall purchase
and pay for all the Common Shares agreed to be purchased by such Underwriter
hereunder upon tender to the Underwriters of all such shares in accordance with
the terms hereof. If any Underwriter or Underwriters default in their
obligations to purchase Common Shares hereunder on either the First or Second
Closing Date and the aggregate number of Common Shares which such defaulting
Underwriter or Underwriters agreed but failed to purchase on such Closing Date
does not exceed 10% of the total number of Common Shares which the Underwriters
are obligated to purchase on such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Common Shares which such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of Common Shares with respect
to which such default occurs is more than the above percentage and arrangements
satisfactory to the Underwriters and the Company for the purchase of such
Common Shares by other persons are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company or the Selling Stockholders except
for the expenses to be paid by the Company and the Selling Stockholders
pursuant to Section 7 hereof and except to the extent provided in Section 11
hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties,
the non defaulting Underwriter or the Company shall have the right to postpone
the First or Second Closing Date, as the case may be, for not more than five
business days in order that the necessary changes in the Registration
Statement, Prospectus and any other documents, as well as any other
arrangements, may be effected. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability
for its default.
-24-
<PAGE> 25
SECTION 13. Effective Date. This Agreement shall become effective
immediately as to Sections 7, 9, 11, 14 and 16 and, as to all other provisions,
(i) if at the time of execution of this Agreement the Registration Statement
has not become effective, at 2:00 P.M., California time, on the
first full business day following the effectiveness of the Registration
Statement, or (ii) if at the time of execution of this Agreement the
Registration Statement has been declared effective, at 2:00 P.M., California
time, on the first full business day following the date of execution of this
Agreement; but this Agreement shall nevertheless become effective at such
earlier time after the Registration Statement becomes effective as you may
determine on and by notice to the Company or by release of any of the Common
Shares for sale to the public. For the purposes of this Section 13, the Common
Shares shall be deemed to have been so released upon the release for
publication of any newspaper advertisement relating to the Common Shares or
upon the release by you of telegrams (i) advising Underwriters that the Common
Shares are released for public offering, or (ii) offering the Common Shares for
sale to securities dealers, whichever may occur first.
SECTION 14. Termination. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
and the Selling Stockholders or by you by notice to the Company and the
Selling Stockholders at any time prior to the time this Agreement shall
become effective as to all its provisions, and any such termination shall
be without liability on the part of the Company or the Selling
Stockholders to any Underwriter (except for the expenses to be paid or
reimbursed by the Company and the Selling Stockholders pursuant to
Sections 7 and 9 hereof and except to the extent provided in Section 11
hereof) or of any Underwriter to the Company or the Selling Stockholders
(except to the extent provided in Section 11 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if additional material
governmental restrictions, not in force and effect on the date hereof,
shall have been imposed upon trading in securities generally or minimum
or maximum prices shall have been generally established on the New York
Stock Exchange or on the American Stock Exchange or in the over the
counter market by the NASD, or trading in securities generally shall have
been suspended on either such Exchange or in the over the counter market
by the NASD, or a general banking moratorium shall have been established
by federal, New York or California authorities, (ii) if an outbreak of
major hostilities or other national or international calamity or any
substantial change in political, financial or economic conditions shall
have occurred or shall have accelerated or escalated to such an extent,
as, in the judgment of the Underwriters, to affect adversely the
marketability of the Common Shares, or (iii) if there shall be any
action, suit or proceeding pending or threatened, or there shall have
been any development or prospective development involving particularly
the business or properties or securities of the Company or any of its
subsidiaries or the transactions contemplated by this Agreement, which,
in the reasonable judgment of the Underwriters, may materially and
adversely affect the Company's business or earnings and makes it
impracticable or inadvisable to offer or sell the Common Shares. Any
termination pursuant to this subsection (b) shall without liability on
the part of any Underwriter to the Company or the Selling Stockholders or
on the part of the Company or the Selling Stockholders to any Underwriter
(except for expenses to be paid or reimbursed by the Company and the
Selling Stockholders pursuant to Section 7 and, if otherwise applicable,
Section 9 hereof and except to the extent provided in Section 11 hereof.
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<PAGE> 26
SECTION 15. Failure of the Selling Stockholders to Sell and Deliver.
If one or more of the Selling Stockholders shall fail to sell and deliver to
the Underwriters the Common Shares to be sold and delivered by such Selling
Stockholders at the First Closing Date under the terms of this Agreement, then
the Underwriters may at their option, by written notice from you to the Company
and the Selling Stockholders, either (i) terminate this Agreement without any
liability on the part of any Underwriter or, except as provided in Sections 7,
9 and 11 hereof, the Company or the Selling Stockholders, or (ii) purchase the
shares which the Company and other Selling Stockholders have agreed to sell and
deliver in accordance with the terms hereof. In the event of a failure by one
or more of the Selling Stockholders to sell and deliver as referred to in this
Section, either you or the Company shall have the right to postpone the Closing
Date for a period not exceeding seven business days in order that the necessary
changes in the Registration Statement, Prospectus and any other documents, as
well as any other arrangements, may be effected.
SECTION 16. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Stockholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or the Selling Stockholders, or any
of its or their partners, officers or directors or any controlling person, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
SECTION 17. Notices. All communications hereunder shall be in writing
and, if sent to the Underwriters shall be mailed, delivered or telegraphed and
confirmed c/o Montgomery Securities at 600 Montgomery Street, San Francisco,
California 94111, Attention: Ms. Debra Somberg, with a copy to Gardner, Carton
& Douglas, 321 North Clark Street, Chicago, Illinois 60610, Attention: Glenn
W. Reed, Esq.; and if sent to the Company or the Selling Stockholders shall be
mailed, delivered or telegraphed and confirmed to the Company at 155 North
Wacker Drive, Chicago, Illinois 60606, with a copy to Sidley & Austin, One
First National Plaza, Chicago, Illinois 60603, Attention: John J. Sabl, Esq.
The Company, the Selling Stockholders or you may change the address for receipt
of communications hereunder by giving notice to the others.
SECTION 18. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 12 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 11, and in each case their
respective successors, personal representatives and assigns, and no other
person will have any right or obligation hereunder. No such assignment shall
relieve any party of its obligations hereunder. The term "successors" shall
not include any purchaser of the Common Shares as such from any of the
Underwriters merely by reason of such purchase.
SECTION 19. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary
to make it valid and enforceable.
SECTION 20. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of Illinois.
SECTION 21. General. This Agreement constitutes the entire agreement
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements,
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<PAGE> 27
understandings and negotiations with respect to the subject matter
hereof. This Agreement may be executed in several counterparts, each one of
which shall be an original, and all of which shall constitute one and the same
document. In this Agreement, the masculine, feminine and neuter genders and
the singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be
amended or modified, and the observance of any term of this Agreement may be
waived, only by a writing signed by the Company, the Selling Stockholders and
you.
Any person executing and delivering this Agreement as Attorney-in-fact for
the Selling Stockholders represents by so doing that he has been duly appointed
as Attorney-in-fact by such Selling Stockholder pursuant to a validly existing
and binding Power of Attorney which authorizes such Attorney-in-fact to take
such action. Any action taken under this Agreement by any of the
Attorneys-in-fact will be binding on all the Selling Stockholders.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed copies hereof, whereupon it will
become a binding agreement among the Company, the Selling Stockholders and the
several Underwriters including you, all in accordance with its terms.
Very truly yours,
MARKS BROS. JEWELERS, INC.
BY:
--------------------------------------------
PRESIDENT
FRONTENAC DIVERSIFIED III LIMITED PARTNERSHIP
CONTINENTAL ILLINOIS VENTURE CORPORATION
WILLIAM BLAIR VENTURE PARTNERS III
LIMITED PARTNERSHIP
HUGH M. PATINKIN
MATTHEW M. PATINKIN
JOHN R. DESJARDINS
LYNN D. EISENHEIM
AVY H. STEIN
JOHN R. WILLIS
U.S. TRUST COMPANY OF CALIFORNIA, N.A. AS TRUSTEE
FOR THE MARKS BROS. JEWELERS, INC. EMPLOYEE
STOCK OWNERSHIP TRUST
BY:
--------------------------------------------
(ATTORNEY-IN-FACT)
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in San Francisco, California as of
the date first above written.
MONTGOMERY SECURITIES
-27-
<PAGE> 28
BY:
-------------------------------
AUTHORIZED SIGNATORY
WILLIAM BLAIR & COMPANY, L.L.C.
BY:
--------------------------------
PRINCIPAL
-28-
<PAGE> 29
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF FIRM
COMMON SHARES
NAME OF UNDERWRITER TO BE PURCHASED
- ------------------- ---------------
<S> <C>
Montgomery Securities ....................................... 1,152,500
William Blair & Company, L.L.C. ............................. 1,152,500
---------
TOTAL .................................................... 2,305,000
=========
</TABLE>
-29-
<PAGE> 30
SCHEDULE B
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF FIRM OPTIONAL
COMMON SHARES COMMON SHARES
TO BE SOLD TO BE SOLD
-------------- -------------
<S> <C> <C>
Company ........................................ 1,100,000 165,000
Frontenac Diversified III Limited Partnership .. 325,425 0
Continental Illinois Venture Corporation ....... 152,834 22,925
William Blair Venture Partners III Limited
Partnership .................................... 232,219 34,833
Hugh M. Patinkin ............................... 70,000 0
Matthew M. Patinkin ............................ 70,000 0
John R. Desjardins ............................. 75,000 11,250
Lynn D. Eisenheim .............................. 20,000 3,000
Avy H. Stein ................................... 26,365 0
John R. Willis ................................. 21,421 0
U.S. Trust Company of California, N.A. as
trustee for ESOP ........................... 211,736 108,742
-------------- -------------
TOTAL ................. 2,305,000 345,750
============== =============
</TABLE>
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<PAGE> 31
SCHEDULE C
October __, 1996
PRICE DETERMINATION AGREEMENT
Referring to Section 5 of the Underwriting Agreement dated October __,
1996 among the Company, the Selling Stockholders and the Underwriters as
therein defined with respect to the purchase and sale of the Common Shares, we
hereby confirm our agreement that the initial public offering price of the
Common Shares shall be $_____ per share; that the underwriting discount shall
be $_____ per share; and that the purchase price to be paid by the several
Underwriters for the Common Shares to be purchased from the Company and the
Selling Stockholders shall be $_____ per share.
This Agreement may be executed in various counterparts which together
shall constitute one and the same Agreement.
MONTGOMERY SECURITIES
BY:
-----------------------------------
AUTHORIZED SIGNATORY
WILLIAM BLAIR & COMPANY, L.L.C.
BY:
-----------------------------------
PRINCIPAL
MARKS BROS. JEWELERS, INC.
BY:
------------------------------------
FRONTENAC DIVERSIFIED III LIMITED PARTNERSHIP
CONTINENTAL ILLINOIS VENTURE CORPORATION
WILLIAM BLAIR VENTURE PARTNERS III
LIMITED PARTNERSHIP
HUGH M. PATINKIN
MATTHEW M. PATINKIN
JOHN R. DESJARDINS
LYNN D. EISENHEIM
AVY H. STEIN
JOHN R. WILLIS
U.S. TRUST COMPANY OF CALIFORNIA, N.A., AS TRUSTEE
FOR THE MARKS BROS. JEWELERS, INC. EMPLOYEE
STOCK OWNERSHIP TRUST
BY:
--------------------------------------
(ATTORNEY-IN-FACT)
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<PAGE> 32
SCHEDULE D
STOCKHOLDERS TO BE SUBJECT TO 90-DAY LOCK-UP AGREEMENTS
Jack A. Smith
Norman J. Patinkin
Rodney L. Goldstein
Samuel B. Guren
Frontenac Venture V Limited Partnership
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<PAGE> 33
SCHEDULE E
LOCK UP AGREEMENT
Montgomery Securities
William Blair & Company, L.L.C.
c/o Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
RE: Marks Bros. Jewelers, Inc. (the "Company")
------------------------------------------
Ladies and Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry
out a public offering of Common Stock (the "Offering") for which you will act
as the Underwriters. The undersigned recognizes that the Offering will be of
benefit to the undersigned and will benefit the Company by, among other things,
raising additional capital for its operations. The undersigned acknowledges
that you and the other underwriters are relying on the representations and
agreements of the undersigned contained in this letter in carrying out the
Offering and in entering into underwriting arrangements with the Company with
respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Montgomery
Securities (which may be withheld in its sole discretion), directly or
indirectly, sell, offer or contract to sell or otherwise dispose of any shares
of Common Stock or securities exchangeable or convertible into shares of Common
Stock currently or hereafter owned either of record or beneficially (as defined
in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the
undersigned, for a period commencing on the date hereof and continuing to a
date 90 days after the first date any of the Common Stock to be sold in the
Offering is released by you for sale to the public, provided, that this
agreement shall not restrict any bona fide gift by the undersigned or any
distribution by the undersigned to any equityholder of the undersigned in each
case so long as the donee or transferee agrees to comply with this agreement
for any remaining portion of such 90-day period.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
Dated: October ___, 1996
- ------------------------------------------
Printed Name of Holder
By:
---------------------------------------
Signature
- ------------------------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
-33-
<PAGE> 1
EXHIBIT 5.1
October 31, 1996
Marks Bros. Jewelers, Inc.
155 North Wacker Drive
Suite 500
Chicago, Illinois 60606
Re: Registration of 2,650,750 shares of Common Stock,
$.001 par value, and associated Preferred Stock
Purchase Rights
Ladies and Gentlemen:
We refer to the Registration Statement (Registration No. 333-13903) on
Form S-1 filed on October 10, 1996 by Marks Bros. Jewelers, Inc., a Delaware
corporation (the "Company"), with the Securities and Exchange Commission ("SEC")
under the Securities Act of 1933, as amended (the "Securities Act"), and
Amendment No. 1 thereto being filed with the SEC on October 31, 1996 (such
registration statement, as so amended, being hereinafter referred to as the
"Registration Statement") relating to the registration of 2,650,750 shares of
Common Stock, $.001 par value (the "Shares"), of the Company, together with
2,650,750 Preferred Stock Purchase Rights (the "Rights") associated therewith.
The terms of the Rights are set forth in the Rights Agreement dated as of May
1, 1996 (the "Rights Agreement") between the Company and The First National
Bank of Boston, as Rights Agent.
The Shares include 1,265,000 shares (the "Company Shares") to be sold by
the Company, including 165,000 Company Shares, some or all of which may be
sold pursuant to an over-allotment option (the "Overallotment Option"). The
Shares also include 1,385,750 shares (the "Selling Stockholder Shares") to be
sold by certain selling stockholders, including 367,117 Selling Stockholder
Shares, some or all of which may be sold by certain selling stockholders named
in the Registration Statement pursuant to the Overallotment Option. The Selling
Stockholder Shares include shares that are currently issued and outstanding
(the "Outstanding Selling Stockholder Shares") and shares (the "Option Shares")
that are to be issued upon the exercise of outstanding options (the "Options")
as described in the Registration Statement.
<PAGE> 2
Marks Bros. Jewelers, Inc.
October 31, 1996
Page 2
We are familiar with the proceedings to date with respect to the proposed
offering and sale of the Shares, together with the associated Rights, and have
examined such records, documents and questions of law, and satisfied ourselves
as to such matters of fact, as we have considered relevant and necessary as a
basis for this opinion.
Based on the foregoing, we are of the opinion that:
1. The Company is duly incorporated and validly existing under the laws
of the State of Delaware.
2. The Company Shares will be legally issued, fully paid and
non-assessable when (i) the Registration Statement, as finally amended, shall
have become effective under the Securities Act; (ii) the Company's Board of
Directors or a duly authorized committee thereof shall have duly adopted final
resolutions authorizing the issuance and sale of the Company Shares as
contemplated by the Registration Statement; and (iii) certificates representing
the Company Shares shall have been duly executed, countersigned and registered
and duly delivered to the purchasers thereof against payment of the agreed
consideration therefor (not less than the par value thereof).
3. The Outstanding Selling Stockholder Shares have been legally issued
and are fully paid and non-assessable.
4. The Option Shares will be legally issued, fully paid and non-
assessable when certificates representing the Option Shares shall have been
duly executed, countersigned and registered and duly delivered to the holders
of the Options upon proper exercise thereof, including payment of the exercise
price specified therein.
5. The Rights associated with the Company Shares will be legally issued
when (i) the Registration Statement, as finally amended, shall have become
effective under the Securities Act; (ii) such Rights shall have been duly
issued in accordance with the terms of the Rights Agreement; and (iii) the
Company Shares shall have been duly issued and paid for as set forth in
paragraph 2.
6. The Rights associated with the Outstanding Selling Stockholder Shares
have been legally issued in accordance with the terms of the Rights Agreement.
<PAGE> 3
Marks Bros. Jewelers, Inc.
October 31, 1996
Page 3
7. The Rights associated with the Option Shares will be legally issued
when (i) such Rights shall have been duly issued in accordance with the terms
of the Rights Agreement and (ii) the Option Shares shall have been duly issued
and paid for as set forth in paragraph 4.
We do not find it necessary for the purpose of this opinion to cover, and
accordingly we express no opinion as to, the application of the securities or
blue sky laws of the various states to the sale of the Shares.
This opinion is limited to the General Corporation Law of the State of
Delaware and the Securities Act.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to all references to our Firm included in or made a
part of the Registration Statement.
Very truly yours,
Sidley & Austin
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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
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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
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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
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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
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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.
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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.
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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.
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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
-8-
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
-9-
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
-10-
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
-11-
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
-13-
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
-17-
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
-18-
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
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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).
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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.
<PAGE> 30
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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
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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
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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
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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
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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.
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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
<PAGE> 105
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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
<PAGE> 106
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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
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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.
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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.
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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
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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.
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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> 118
FIRST AMENDMENT TO REVOLVING CREDIT, TERM LOAN
AND GOLD CONSIGNMENT AGREEMENT
AND
SECURITY AGREEMENT
FIRST AMENDMENT dated as of June 12, 1996 (this "Amendment"), by and among
(a) MARKS BROS. JEWELERS, INC. (the "Borrower"), a Delaware corporation having
its principal place of business at 155 North Wacker Drive, Suite 500, Chicago,
Illinois 60606; (b) the lending institutions (the "Banks") set forth on the
signature pages hereto; (c) THE FIRST NATIONAL BANK OF BOSTON, a national
banking association and RHODE ISLAND HOSPITAL TRUST NATIONAL BANK as agents for
themselves and the Banks (the "Agents"), amending certain provisions of (i) the
Revolving Credit, Term Loan and Gold Consignment Agreement dated as of May 3,
1996 (the "Credit Agreement"), by and among the Borrower, the Banks and the
Agents and (ii) the Security Agreement dated as of May 3, 1996, between the
Borrower and the Collateral Agent. Terms not otherwise defined herein which
are defined in the Credit Agreement shall have the respective meanings herein
assigned to such terms in the Credit Agreement.
WHEREAS, the Borrower has requested that the Agents and the Banks agree to
amend the terms of the Credit Agreement in several respects all as hereinafter
more fully set forth; and
WHEREAS, the Agents and the Banks are willing to amend the terms of the
Credit Agreement in such respects upon the terms and subject to the conditions
contained herein;
NOW, THEREFORE, in consideration of the mutual agreements contained in the
Credit Agreement, and herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
Section 1. AMENDMENT OF SECTION 1 OF THE CREDIT AGREEMENT. Section 1 of
the Credit Agreement is hereby amended as follows:
(a) by deleting the definition of "Majority Banks" in its entirety and
replacing it with the following new definition:
"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; provided, however,
until the portion of the outstanding amount of the Term Loan and
the Commitment of FNBB together with the Gold Commitment of RIHT
are in the aggregate less than fifty-one percent (51%) of the Total
Commitment, Majority Banks must include at least one Bank other
than FNBB and RIHT; provided, further, that if the Commitments or
the Gold Commitments shall have been terminated, then the Majority
Banks
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shall be the Banks whose aggregate portions of the Outstanding
Facility Amounts together constitute at least fifty-one percent
(51%) of the Outstanding Facility Amounts."
(b) by deleting the definition of "Consignment Base Rate" in its entirety
and replacing it with the following new definition:
"Consignment Base Rate. On any date of determination, a rate
equal to the average of the difference, over the previous sixty
(60) Business Days, between (a) the Eurodollar Rate for three month
Interest Periods and (b) the London gold forward rate as displayed
on Reuter's gold loan screen, or if Reuter's gold loan screen is
not available, as set by RIHT, for three month Interest Periods."
Section 2. AMENDMENT OF SECTION 8.9(b) OF THE CREDIT AGREEMENT. Section
8.9(b) of the Credit Agreement is hereby amended to read in its entirety as
follows:
"(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 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 solely
for purposes of so determining the pro rata portion of each Gold Bank's
claim in respect of Consigned Precious Metal following an Event of
Default described in Sections 16.1(g) or (h), the amount of the
Obligations owed to the Gold Banks shall be an amount equal to the
Effective Date Value, as such term is defined in the Confirmation of Swap
Agreement); and provided, further, that the Agents may in their
discretion make proper allowance to take into account any Obligations not
then due and payable;"
Section 3. AMENDMENT OF SECTION 12.5.2 OF THE CREDIT AGREEMENT. Section
12.5.2 of the Credit Agreement is hereby amended by inserting, at the end
thereof, the following new subpart (e):
"and (e) sales of retail installment sale accounts so long as such sales
(i) are without recourse to the Borrower, (ii) are for cash in an amount
equal to not less than 80% of the amount of such accounts, (iii) are done
within one month of the creation of such accounts, and (iv) are otherwise
consistent with past practices of the Borrower."
Section 4. AMENDMENT OF SECTION 18.5 OF THE CREDIT AGREEMENT. Section
18.5 of the Credit Agreement is hereby amended by inserting the following new
Section 18.5.4 immediately following Section 18.5.3 thereof:
<PAGE> 120
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"18.5.4 PAYMENTS UNDER CONFIRMATION OF SWAP AGREEMENT. Each of the
Gold Banks agrees to pay to the Gold Agent an amount equal to its Gold
Commitment Percentage of any amounts owed by the Gold Agent to the
Borrower pursuant to the terms of the Confirmation of Swap Agreement, and
each of the Gold Banks agrees that the Gold Agent may deduct any such
amounts from amounts which the Gold Agent receives from the Borrower on
account of any Obligations owed to such Gold Bank or, to the extent that
the Gold Agent has offset such amounts against the Obligations, by offset
to the Obligations owed to such Gold Bank."
Section 5. AMENDMENT OF SECTION 29 OF THE CREDIT AGREEMENT. Section 29
of the Credit Agreement is hereby amended by deleting the second sentence
thereof in its entirety and replacing it with the following new sentence:
"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; (c)
the amount of the Agents' fees and Section 18 may not be amended without
the written consent of each of the Agents; (d) Section 8.9 may not be
amended without the written consent of all of the Banks, (e) all or
substantially all of the Collateral may not be released without the
consent of all of the Banks and (f) there can be no reduction in the
amount or extension of the maturity date of any of the Obligations (other
than as a result of any permitted prepayments made hereunder, it being
understood that any waiver of the application of any voluntary prepayment
of, or the method of application of any voluntary prepayment to the
amortization of, the Term Loan shall not constitute any such extension)
without the consent of Banks (other than Delinquent Banks) whose
aggregate portions of the outstanding amount of the Term Loan and whose
aggregate Commitments or, as the case may be, Gold Commitments together
constitute at least sixty-six and two thirds percent (66-2/3%) of the
Total Commitment."
Section 6. LIMITED CONSENT UNDER SECTION 22.1(b) OF THE CREDIT AGREEMENT.
Notwithstanding the provisions of Section 22.1(b) of the Credit Agreement,
each of the parties hereto consents to the assignment, by FNBB in favor of
LaSalle National Bank, of a portion of FNBB's interest in respect of the Dollar
Facility (including a $5,000,000 interest in respect of the Term Loan
<PAGE> 121
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and a $9,700,000 interest in respect of the Total Revolver Commitment) equal to
33.3333% of the Term Loan and 33.4483% of the Total Revolver Commitment. Such
consent by the parties hereto shall be limited to such assignment by FNBB in
favor of LaSalle National Bank and shall not apply to, or constitute a consent
to, the terms of any other assignment not in accordance with the provisions of
the Credit Agreement.
Section 7. AMENDMENT OF SECTION 17 OF THE SECURITY AGREEMENT. Section 17
of the Security Agreement is hereby amended by deleting the second sentence
thereof in its entirety and replacing it with the following new sentence:
"After deducting all of said expenses, the residue of any proceeds of
collection or sale of the Obligations or Collateral shall, to the extent
actually received in cash, be applied to in such order or preference as
is provided in the Credit Agreement, proper allowance and provision being
made for any Obligations not then due."
Section 8. CONDITIONS TO EFFECTIVENESS. This Amendment shall not become
effective until the Dollar Administrative Agent receives a counterpart of this
Amendment executed by each of the Borrower, the Agents and the Banks.
Section 9. REPRESENTATIONS AND WARRANTIES; NO DEFAULT; AUTHORIZATION.
The Borrower hereby represents and warrants to the Banks and the Agents as
follows:
(a) Each of the representations and warranties made by it in the Credit
Agreement was true as of the date as of which it was made and is true as
and at the date of this Amendment (except to the extent of changes
resulting from transactions contemplated or permitted by the Credit
Agreement and the other Loan Documents and changes occurring in the
ordinary course of business that in the aggregate are not materially
adverse, and to the extent that such representations and warranties
relate expressly to an earlier date), and, after the execution of this
Amendment, no Default or Event of Default has occurred and is continuing
as of the date of this Amendment; and
(b) This Amendment has been duly authorized, executed and delivered by of
the Borrower and is in full force and effect, and the agreements and
obligations of the Borrower contained herein and in the Credit Agreement
respectively constitute the legal, valid and binding obligations of the
Borrower, enforceable against the Borrower in accordance with their
respective terms, except as enforceability is limited by bankruptcy,
insolvency, reorganization, moratorium or other laws relating to or
affecting generally the enforcement of creditors' rights and except to
the extent that availability of the remedy of specific performance or
injunctive relief is subject to the discretion of the court before which
any proceeding therefor may be brought.
<PAGE> 122
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Section 10. RATIFICATION, ETC. Except as expressly amended hereby, the
Credit Agreement and all documents, instruments and agreements related thereto
are hereby ratified and confirmed in all respects. All references in the
Credit Agreement or any related agreement or instrument to the Credit Agreement
shall hereafter refer to the Credit Agreement as amended hereby.
Section 11. NO IMPLIED WAIVER. Except as expressly provided herein,
nothing contained herein shall constitute a waiver of, impair or otherwise
affect any Obligations, or any right of any of the Agents or the Banks
consequent thereon.
Section 12. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but which together
shall constitute one and the same instrument.
Section 13. GOVERNING LAW. THIS AMENDMENT SHALL FOR ALL PURPOSES BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICTS OF LAW).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 123
-6-
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment as
a sealed instrument as of the date first above written.
MARKS BROS. JEWELERS, INC.
By:_________________________
Name:
Title:
THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By:_________________________
Name: Elizabeth A. Ratto
Title: Vice President
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK, individually and
as Agent
By:________________________
Name: Denis D. Hamboyan
Title: Senior Vice President
<PAGE> 124
SECOND AMENDMENT TO REVOLVING CREDIT, TERM LOAN
AND GOLD CONSIGNMENT AGREEMENT
SECOND AMENDMENT TO REVOLVING CREDIT, TERM LOAN AND GOLD CONSIGNMENT
AGREEMENT dated as of July 17, 1996 (this "Amendment"), by and among (a) MARKS
BROS. JEWELERS, INC. (the "Borrower"), a Delaware corporation having its
principal place of business at 155 North Wacker Drive, Suite 500, Chicago,
Illinois 60606; (b) the lending institutions (the "Banks") set forth on the
signature pages hereto; and (c) THE FIRST NATIONAL BANK OF BOSTON, a national
banking association and RHODE ISLAND HOSPITAL TRUST NATIONAL BANK as agents for
themselves and the other Banks (in such capacity, the "Agents"), amending
certain provisions of the Revolving Credit, Term Loan and Gold Consignment
Agreement dated as of May 3, 1996 (as amended and in effect prior to the date
hereof, the "Credit Agreement"), by and among the Borrower, the Banks and the
Agents. Terms not otherwise defined herein which are defined in the Credit
Agreement shall have the respective meanings herein assigned to such terms in
the Credit Agreement.
WHEREAS, the Borrower has requested that the Agents and the Banks agree to
amend the terms of the Credit Agreement in several respects all as hereinafter
more fully set forth; and
WHEREAS, the Agents and the Banks are willing to amend the terms of the
Credit Agreement in such respects upon the terms and subject to the conditions
contained herein;
NOW, THEREFORE, in consideration of the mutual agreements contained in the
Credit Agreement, and herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
Section 1. AMENDMENT OF Section 8 OF THE CREDIT AGREEMENT. Section 8 of
the Credit Agreement is hereby amended as follows:
(a) by amending the last sentence of Section 8.3(a) thereof to read in
its entirety as follows:
"Each Loan Request for a Base Rate Loan shall be in a minimum
aggregate amount of $250,000.00 or an integral multiple thereof,
and each Loan Request for a Eurodollar Rate Loan shall be in a
minimum aggregate amount of $250,000.00 or an integral multiple of
$50,000.00 in excess thereof."
(b) by amending the third sentence of Section 8.4.1 thereof to read in
its entirety as follows:
<PAGE> 125
-2-
"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 $50,000.00 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 $250,000.00
or a whole multiple of $50,000.00 in excess thereof."
(c) by amending the first sentence of Section 8.4.3 thereof to read in
its entirety as follows:
"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 $250,000.00 or a whole multiple of $50,000.00 in excess
thereof."
Section 2. CONDITIONS TO EFFECTIVENESS. This Amendment shall not become
effective until the Dollar Administrative Agent receives a counterpart of this
Amendment executed by each of the Borrower, the Agents and the Banks.
Section 3. REPRESENTATIONS AND WARRANTIES; NO DEFAULT; AUTHORIZATION.
The Borrower hereby represents and warrants to the Banks and the Agents as
follows:
(a) Each of the representations and warranties made by it in the Credit
Agreement was true as of the date as of which it was made and is true as
and at the date of this Amendment (except to the extent of changes
resulting from transactions contemplated or permitted by the Credit
Agreement and the other Loan Documents and changes occurring in the
ordinary course of business that in the aggregate are not materially
adverse, and to the extent that such representations and warranties
relate expressly to an earlier date), and, after the execution of this
Amendment, no Default or Event of Default has occurred and is continuing
as of the date of this Amendment; and
(b) This Amendment has been duly authorized, executed and delivered by
the Borrower and is in full force and effect, and the agreements and
obligations of the Borrower contained herein and in the Credit Agreement
respectively constitute the legal, valid and binding obligations of the
Borrower, enforceable against the Borrower in accordance with their
respective terms, except as enforceability is limited by bankruptcy,
insolvency, reorganization, moratorium or other laws relating to or
affecting generally the enforcement of creditors' rights and except to
the extent that availability of the remedy of specific performance or
injunctive relief is subject to the discretion of the court before which
any proceeding therefor may be brought.
<PAGE> 126
-3-
Section 4. RATIFICATION, ETC. Except as expressly amended hereby, the
Credit Agreement and all documents, instruments and agreements related thereto
are hereby ratified and confirmed in all respects. All references in the
Credit Agreement or any related agreement or instrument to the Credit Agreement
shall hereafter refer to the Credit Agreement as amended hereby.
Section 5. NO IMPLIED WAIVER. Except as expressly provided herein,
nothing contained herein shall constitute a waiver of, impair or otherwise
affect any Obligations, or any right of any of the Agents or the Banks
consequent thereon.
Section 6. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but which together
shall constitute one and the same instrument.
Section 7. GOVERNING LAW. THIS AMENDMENT SHALL FOR ALL PURPOSES BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICTS OF LAW).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 127
-4-
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment as
a sealed instrument as of the date first above written.
MARKS BROS. JEWELERS, INC.
By:_________________________
Name:
Title:
THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By:_________________________
Name: Elizabeth A. Ratto
Title: Vice President
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK, individually and
as Agent
By:________________________
Name: Denis D. Hamboyan
Title: Senior Vice President
LASALLE NATIONAL BANK
By:________________________
Name:
Title:
ABN AMRO BANK, N.V.
By:________________________
Name:
Title:
<PAGE> 128
THIRD AMENDMENT TO REVOLVING CREDIT, TERM LOAN
AND GOLD CONSIGNMENT AGREEMENT
THIRD AMENDMENT TO REVOLVING CREDIT, TERM LOAN AND GOLD CONSIGNMENT
AGREEMENT dated as of October 9, 1996 (this "Amendment"), by and among (a)
MARKS BROS. JEWELERS, INC. (the "Borrower"), a Delaware corporation having its
principal place of business at 155 North Wacker Drive, Suite 500, Chicago,
Illinois 60606; (b) the lending institutions (the "Banks") set forth on the
signature pages hereto; and (c) THE FIRST NATIONAL BANK OF BOSTON, a national
banking association and RHODE ISLAND HOSPITAL TRUST NATIONAL BANK as agents for
themselves and the other Banks (in such capacity, the "Agents"), amending
certain provisions of the Revolving Credit, Term Loan and Gold Consignment
Agreement dated as of May 3, 1996 (as amended and in effect prior to the date
hereof, the "Credit Agreement"), by and among the Borrower, the Banks and the
Agents. Terms not otherwise defined herein which are defined in the Credit
Agreement shall have the respective meanings herein assigned to such terms in
the Credit Agreement.
WHEREAS, the Borrower has requested that the Agents and the Banks agree
to amend the terms of the Credit Agreement in several respects all as
hereinafter more fully set forth; and
WHEREAS, the Agents and the Banks are willing to amend the terms of the
Credit Agreement in such respects upon the terms and subject to the conditions
contained herein;
NOW, THEREFORE, in consideration of the mutual agreements contained in
the Credit Agreement, and herein, and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto hereby agree as follows:
Section 1. AMENDMENT OF SECTION 1.1. OF THE CREDIT AGREEMENT. Subject
to the satisfaction of the conditions set forth in section 14 of this
Amendment, Section 1.1. of the Credit Agreement is hereby amended as follows:
(a) by amending the definitions of "Applicable Agent",
"Applicable Banks", "Base Rate Loans", Commitment", "Dollar Facility
Loans", "Eurodollar Rate Loans", "Loans", "Majority Banks", "Notes",
"Total Commitment" and "Type" to read in their respective entireties as
follows:
<PAGE> 129
-2-
"Applicable Agent. With respect to the Dollar Facility, the
Revolving Credit Loans, the Letters of Credit, or the Dollar Banks, the
Dollar Agent; with respect to the Gold Facility, the Purchases and
Consignments, the Gold Loans or the Gold Banks, the Gold Agent."
"Applicable Banks. With respect to the Dollar Facility, the
Revolving Credit Loans, the Letters of Credit, or the Dollar Agent, the
Dollar Banks; with respect to the Gold Facility, the Purchases and
Consignments, the Gold Loans or the Gold Agent, the Gold Banks."
"Base Rate Loans. Revolving Credit Loans and Gold Loans
bearing interest calculated by reference to the Base Rate."
"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, minus the amount of such Dollar Bank's
Commitment Percentage of any optional or mandatory reductions in the
Total Revolver Commitment pursuant to Section 2.3 hereof, as the same
may be otherwise reduced from time to time; or if such commitment is
terminated pursuant to the provisions hereof, zero."
"Dollar Facility Loans. The Revolving Credit Loans."
"Eurodollar Rate Loans. Revolving Credit Loans and Gold Loans
bearing interest calculated by reference to the Eurodollar Rate."
"Loans. The Revolving Credit Loans and the Gold Loans."
"Majority Banks. As of any date, the Banks (other than
Delinquent Banks) whose aggregate Commitments or, as the case
may be, Gold Commitments together constitute at least fifty-one percent
(51%) of the Total Commitment; provided, however, that if the
Commitments or the Gold Commitments shall have been terminated, then
the Majority Banks shall be the Banks whose aggregate portions of the
Outstanding Facility Amounts together constitute at least fifty-one
(51%) of the Outstanding Facility Amounts; provided, further, that
until the Commitment (or, as applicable, the portion of the Outstanding
Facility Amounts) of FNBB together with the Gold Commitment (or, as
applicable, the portion of the Outstanding Facility Amounts) of RIHT
are in the aggregate less than fifty-one percent (51%) of the Total
Commitment (or, as applicable, the Outstanding Facility Amounts),
<PAGE> 130
-3-
Majority Banks must include at least one Bank other than FNBB
and RIHT."
"Notes. The Gold Notes and the Revolving Credit Notes."
"Total Commitment. The sum of the Total
Revolver Commitment and the Total Gold Commitment."
"Type. As to any Revolving Credit Loan or Gold Loan,
its nature as a Base Rate Loan or a Eurodollar Rate Loan."
(b) by deleting the definitions of "Consolidated Excess
Cash Flow", "Consolidated Working Capital", "Excess Cash Flow
Prepayment", "Term Loan", "Term Notes" and "Term Note Record" in their
entireties (any and all references to such terms appearing elsewhere in
the Credit Agreement or in any other Loan Document also being hereby
deleted).
Section 2. AMENDEMENT OF SECTION 2.3 OF THE CREDIT AGREEMENT. Subject
to the satisfaction of the conditions set forth in Section 14 of this
Amendment, Section 2.3 of the Credit Agreement is hereby amended to read in its
entirety as follows:
"2.3 REDUCTION OF TOTAL REVOLVER COMMITMENT.
2.3.1 OPTIONAL REDUCTIONS. 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 repsective 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 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.
2.3.2 MANDATORY REDUCTIONS. The Total Revolver Commitment
shall also be reduced on a semi-annual basis in accordance with the
provisions of this paragraph. Upon each such semi-annual reduction in
the Total Revolver Commitment, the Commitments of the Dollar Banks
shall be reduced pro rata in accordance with their respective Commitment
Percentages of the amount of such reduction. Upon the effective date
of
<PAGE> 131
-4-
each such reduction, the Borrower shall pay to the Dollar Agent
for the respective accounts of the Dollar Banks (a) the amount, if any,
by which the outstanding amount of Revolving Credit Loans exceeds the
reduced amount of the Total Revolver Commitment, together with all
accrued and unpaid interest on such excess, and (b) the full amount of
any commitment fee then accrued on the amount of the reduction. No
such mandatory reduction of the Total Revolver Commitment may be
reinstated. The Total Revolver Commitment shall be reduced in nine
consecutive semi-annual reductions occurring on each alternate fiscal
quarter ending date set forth in the table below and in each amount set
forth in the table below opposite such date in such table, with the
remainder of the Total Revolver Commitment being terminated (and all
outstanding Revolving Credit Loans being repaid) on the Maturity Date
in accordance with Section 2.8 hereof; provided, however, that the
amount of the reduction in the Total Revolver Commitment to be made on
January 31, 1997 as set forth in the table below shall be reduced by
the amount of any payments, if any, made on Term Loan on October 31,
1996 pursuant to the provisions of Section 3.3 hereof as in effect
prior to the effectiveness of the Third Amendment to this Credit
Agreement.
<TABLE>
<CAPTION>
AMOUNT OF
DATE: REDUCTION:
----- ----------
<S> <C>
January 31, 1997 $ 500,000.00
July 31, 1997 and January 31, 1998 $ 1,000,000.00
July 31, 1998 and January 31, 1999 $ 1,500,000.00
July 31, 1999 and January 31, 2000 $ 2,000,000.00
July 31, 2000 and January 31, 2001 $ 2,500,000.00"
</TABLE>
Section 3. AMENDMENT OF SECTION 2.6 OF THE CREDIT AGREEMENT. Subject
to the satisfaction of the conditions set forth in section 14 of this
Amendment, Section 2.6 of the Credit Agreement is hereby amended by deleting
the phrase "and the Term Loan" appearing at the end thereof.
Section 4. AMENDMENT OF SECTION 3 OF THE CREDIT AGREEMENT. Subject to
the satisfaction of the conditions set forth in section 14 of this Amendment,
Section 3 of the Credit Agreement is hereby amended by deleting the text of
such section in its entirety and replacing it with the words "Intentionally
Omitted." All references to such Section 3 of the Credit Agreement or any
subsection or subclause thereof appearing elsewhere in the Credit Agreement or
in any of the other Loan Documents shall also be deleted.
<PAGE> 132
-5-
Section 5. AMENDMENT OF SECTION 6.4 OF THE CREDIT AGREEMENT. Subject
to the satisfaction of the conditions set forth in section 14 of this
Amendement, Section 6.4 of the Credit Agreement is hereby amended by deleting
the phrase "and the Term Loan" appearing at the end thereof.
Section 6. AMENDMENT OF SECTION 8.7 OF THE CREDIT AGREEMENT. Subject
to the satisfaction of the conditions set forth in section 14 of this
Amendment, Section 8.7 of the Credit Agreement is hereby amended by deleting the
phrase "the Term Loan" appearing therein.
Section 7. AMENDMENT OF SECTION 8.13 OF THE CREDIT AGREEMENT. Subject
to the satisfaction of the conditions set forth in section 14 of this
Amendment, Section 8.13 of the Credit Agreement is hereby amended by deleting
the phrase "the Term Note Records," appearing therein.
Section 8. AMENDMENT OF SECTION 8.19(a) OF THE CREDIT AGREEMENT.
Subject to the satisfaction of the conditions set forth in section 14 of this
Amendment, Section 8.19(a) of the Credit Agreement is hereby amended by
deleting the phrase "notice (in the case of all or any portion of the Term Loan
pursuant to Section 3.5)," appearing therein.
Section 9. AMENDMENT OF SECTION 12.8 OF THE CREDIT AGREEMENT. Subject
to the satisfaction of the conditions set forth in section 14 of this
Amendment, Section 12.8 of the Credit Agreement is hereby amended to read in
its entirety as follows:
"12.8 INDENTURES. The Borrower will not amend,
supplement or otherwise modify the terms of the Indentures or any of
the Senior Subordinated Notes or prepay, redeem, cause the defeasance
of or repurchase any of the Senior Subordinated Notes; provided,
however, (a) the Borrower may amend or modify the Senior Subordinated
Notes or refinance, refund or replace the Senior Subordinated Notes
with new notes (any such amended, modified or new notes resulting from
any such amendment, modification, refinancing, refunding or replacement
being herein referred to as the "New Notes") so long as (i) such New
Notes are on substantially identical terms as the Senior Subordinated
Notes (including without limitation, terms relating to subordination
and covenants), provided that such New Notes may have a longer
maturity, lower interest rates, less restrictive covenants, slower
sinking fund payments and lower prepayment premiums and (ii) the Agents
shall have reviewed such New Notes prior to their issuance, (b) the
Borrower may redeem those Senior Subordinated Notes constituting the
15.00% Series D Senior Subordinated Notes due 2004 at a redemption
price not to exceed $8,960,000 plus the amount of interest accrued
thereon, and (c) the Borrower may repurchase a portion of those Senior
Subordinated Notes constituting the 12.15% Series C Senior Subordinated
Notes due 2004 at a repurchase price (including any prepayment premiums
payable thereon) not to exceed an amount, up to $5,000,000, equal to
the aggregate amount of net cash proceeds, if any, to the Borrower in
excess of $20,000,000 (exclusive of any amounts
<PAGE> 133
-6-
received by any stockholders of the Borrower) in connection
with its planned public offering of its common stock to be consummated
on or prior to December 31, 1996. The Borrower wil not pay any
interest in cash on the Senior Subordinated Notes in excess of fifteen
percent (15%) per annum in the aggregate with any interest in excess of
fifteen percent (15%) per annum to be payable only in Senior
Subordinated Notes."
Section 10. AMENDMENT OF SECTION 13.2 OF THE CREDIT AGREEMENT.
Subject to the satisfaction of the conditions set forth in section 14 of this
Amendment, Section 13.2 of the Credit Agreement is hereby amended by replacing
the chart appearing therein with the following new chart:
<TABLE>
<CAPTION>
"Fiscal Year Amount
----------- ------
<S> <C>
2/1/96 - 1/31/97 $ 8,500,000
2/1/97 - 1/31/98 $10,500,000
2/1/98 - 1/31/99 $13,500,000
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"
</TABLE>
Section 11. AMENDMENT OF SECTION 15 OF THE CREDIT AGREEMENT. Subject
to the satisfaction of the conditions set forth in section 14 of this Amendment,
Section 15 of the Credit Agreement is hereby amended by deleting the phrase
"and the Term Loan" appearing in the first paragraph thereof.
Section 12. AMENDMENT OF SECTION 29 OF THE CREDIT AGREEMENT. Subject
to the satisfaction of the conditions set forth in section 14 of this
Amendment, Section 29 of the Credit Agreement is hereby amended by deleting
clause (f) of the second sentence thereof in its entirety and replacing it with
the following new clause (f):
"(f) there can be no reduction in the amount or extension of
the maturity date of any of the Obligations (other than as a result of
any permitted prepayments made hereunder) without the consent of Banks
(other than Delinquent Banks) whose aggregate Commitments or, as the
case may be, Gold Commitments together constitute at least sixty-six
and two thirds percent (66-2/3%) of the Total Commitment."
Section 13. CONCERNING EXHIBITS AND SCHEDULES TO THE CREDIT AGREEMENT.
Subject to the satisfaction of the conditions set forth in section 14 of this
Amendment, the Exhibits and Schedules to the Credit Agreement are hereby
amended as follows:
(a) EXHIBIT F to the Credit Agreement is hereby deleted in its
entirety; and
<PAGE> 134
-7-
(b) Schedule 1 to the Credit Agreement is hereby deleted in
its entirety and replaced with Schedule 1 hereto.
Section 14. CONDITIONS TO EFFECTIVENESS. The effectiveness of this
Amendment shall be subject to the delivery by (or on behalf of) the Borrower of
the following, in form and substance satisfactory to the Agents and the Banks:
(a) this Amendment signed by each of the Borrower, the Banks
and the Agents;
(b) new Revolving Credit Note for each of the Dollar Banks, each
signed by the Borrower, each substantially in the form of Exhibit
E to the Credit Agreement, and each in the maximum amount of each
such Dollar Bank's Commitment as set forth on Schedule 1 hereto;
(c) a certificate of the Secretary or Assistant Secretary of the
Borrower certifying as to (a) the Certificate of Incorporation or
other incorporation documents of the Borrower as in effect on such
date of certification, (b) the by-laws of the Borrower as in
effect on such date, (c) the corporate resolutions of the Borrower
approving this Amendment and the other documents and instruments
required to be delivered hereunder by the Borrower, and (d) the
names, titles, incumbency, and true specimen signatures of the
officers of the Borrower authorized to sign this Amendment and the
other documents and instruments required to be delivered hereunder
by the Borrower;
(d) a certificate, as of a recent date, from the Secretary of State
of Delaware as to the legal existence and corporate good standing
of the Borrower;
(e) a favorable opinion of counsel to the Borrower in form and
substance satisfactory to the Agents and the Banks;
(f) evidence, satisfactory to the Agents and the Banks in all
respects, that on or prior to December 31, 1996, the Borrower
shall have consummated the public offering of its common stock, and
such public offering shall have yielded net cash proceeds to the
Borrower (exclusive of any amounts received by any stockholders of
the Borrower) in an aggregate amount not less than $20,000,000;
(g) the Borrower shall have paid to the Dollar Agent, for the
respective accounts of the Dollar Banks, the aggregate outstanding
principal amount of the Term Loan, together with all accrued and
unpaid interest thereon through the date of repayment;
<PAGE> 135
-8-
(h) the Borrower shall have paid to the Agents, for the
respective accounts of the Banks, an amendment fee in the amount of
$50,000; and
(i) any other document or instrument the Agents and the Banks
may reasonably request.
Section 15. REPRESENTATIONS AND WARRANTIES: NO DEFAULT:
AUTHORIZATION. The Borrower hereby represents and warrants to the Banks and
the Agents as follows:
(a) Each of the representations and warranties made by it in
the Credit Agreement was true as of the date as of which it was made
and is true as and at the date of this Amendment (except to the extent
of changes resulting from transactions contemplated or permitted by the
Credit Agreement and the other Loan Documents and changes occurring in
the ordinary course of business that in the aggregate are not
materially adverse, and to the extent that such representations and
warranties relate expressly to an earlier date), and, after the
execution of this Amendment, no Default or Event of Default has
occurred and is continuing as of the date of this Amendment; and
(b) This Amendment has been duly authorized, executed and
delivered by the Borrower and is in full force and effect, and the
agreements and obligations of the Borrower contained herein and in the
Credit Agreement respectively constitute the legal, valid and binding
obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms, except as enforceability is
limited by bankruptcy, insolvency, reorganization, moratorium or other
laws relating to or affecting generally the enforcement of creditors'
rights and except to the extent that availability of the remedy of
specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding therefor may be brought.
Section 16. RATIFICATION, ETC. Except as expressly amended hereby,
the Credit Agreement and all documents, instruments and agreements related
thereto are hereby ratified and confirmed in all respects. All references in
the Credit Agreement or any related agreement or instrument to the Credit
Agreement shall hereafter refer to the Credit Agreement as amended hereby.
Section 17. NO IMPLIED WAIVER. Except as expressly provided herein,
nothing contained herein shall constitute a waiver of, impair or otherwise
affect any Obligations, or any right of any of the Agents or the Banks
consequent thereon.
Section 18. COUNTERPARTS. This Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but which together
shall constitute one and the same instrument.
<PAGE> 136
-9-
Section 19. GOVERNING LAW. THIS AMENDMENT SHALL FOR ALL PURPOSES BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICTS OF LAW).
[Remainder of Page Intentionally Left Blank]
<PAGE> 137
-10-
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment
as a sealed instrument as of the date first above written.
MARKS BROS. JEWELERS, INC.
By:
-------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By:
------------------------
Name: Ellen Heath
Title: Director
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK, individually and as
Agent
By:
------------------------
Name: Denis D. Hamboyan
Title: Senior Vice President
LASALLE NATIONAL BANK
By:
------------------------
Name:
Title:
ABN AMRO BANK, N.V.
By: /s/ Jeffrey Sarfay
------------------------
Name: Jeffrey Sarfay
Title: Vice President
<PAGE> 138
-10-
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment
as a sealed instrument as of the date first above written.
MARKS BROS. JEWELERS, INC.
By:
-------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By:
------------------------
Name: Ellen Heath
Title: Director
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK, individually and as
Agent
By:
------------------------
Name: Denis D. Hamboyan
Title: Senior Vice President
LASALLE NATIONAL BANK
By: /s/ Samir D. Desai
------------------------
Name: Samir D. Desai
Title: Assistant Vice President
ABN AMRO BANK, N.V.
By:
------------------------
Name:
Title:
<PAGE> 139
-10-
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment
as a sealed instrument as of the date first above written.
MARKS BROS. JEWELERS, INC.
By:
-------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By:
------------------------
Name: Ellen Heath
Title: Director
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK, individually and as
Agent
By: /s/ Denis D. Hamboyan
------------------------
Name: Denis D. Hamboyan
Title: Senior Vice President
LASALLE NATIONAL BANK
By:
------------------------
Name:
Title:
ABN AMRO BANK, N.V.
By:
------------------------
Name:
Title:
<PAGE> 140
-10-
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment
as a sealed instrument as of the date first above written.
MARKS BROS. JEWELERS, INC.
By: ______________________________
Name:
Title:
THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By: /s/ Ellen Heath
--------------------------------
Name: Ellen Heath
Title: Director
RHODE ISLAND HOSPITAL, TRUST
NATIONAL BANK, individually and
as Agent
By:________________________________
Name: Denis D. Hamboyan
Title: Senior Vice President
LASALLE NATIONAL BANK
By:________________________________
Name:
Title:
ABN AMRO BANK, N.V.
By:________________________________
Name:
Title:
<PAGE> 141
-10-
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment
as a sealed instrument as of the date first above written.
MARKS BROS. JEWELERS, INC.
By: /s/ John Desjardins
-------------------------------
Name: John Desjardins
Title: Executive Vice President
THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By:
--------------------------------
Name: Ellen Heath
Title: Director
RHODE ISLAND HOSPITAL, TRUST
NATIONAL BANK, individually and
as Agent
By:________________________________
Name: Denis D. Hamboyan
Title: Senior Vice President
LASALLE NATIONAL BANK
By:________________________________
Name:
Title:
ABN AMRO BANK, N.V.
By:________________________________
Name:
Title:
<PAGE> 142
SCHEDULE 1
PART 1 - DOLLAR BANKS - COMMITMENTS AND COMMITMENT PERCENTAGES
<TABLE>
<CAPTION> COMMITMENT
DOLLAR BANKS COMMITMENT PERCENTAGE
<S> <C> <C>
THE FIRST NATIONAL BANK OF BOSTON
Domestic Lending Office:
100 Federal Street
Boston, MA 02110
Telefax Number: (617) 434-2309 $29,116,368.75 66.5517%
Attention: Ellen Heath, Director
Eurodollar Lending Office:
100 Federal Street
Boston, MA 02110
Telefax Number: (617) 434-2309
Attention: Ellen Heath, Director
</TABLE>
<PAGE> 143
-2-
<TABLE>
<S> <C> <C>
LASALLE NATIONAL BANK
Domestic Leading Office
120 South LaSalle Street
Chicago, IL 60603
Telefax Number: (312) 904-6225 $14,633,631.25 33.4483%
Attention: Samir Desai, Assistant Vice President
Eurodollar Lending Office:
120 South LaSalle Street
Chicago, IL 60603
Telefax Number: (312) 904-6225
Attention: Samir Desai, Assistant Vice President
Eurodollar Lending Office:
</TABLE>
<PAGE> 144
-3-
SCHEDULE 1
PART 2 - GOLD BANKS - GOLD COMMITMENTS AND GOLD COMMITMENT PERCENTAGES
<TABLE>
<CAPTION> GOLD COMMITMENT
GOLD BANKS GOLD COMMITMENT PERCENTAGE
<S> <C> <C>
RHODE ISLAND HOSPITAL TRUST NATIONAL BANK
Domestic Lending Office:
One Hospital Trust Plaza, R-W09-01
Providence, Rhode Island 02903
Telefax Number: (401) 278-7329 $10,700,000 66.875%
Attention: Denis D. Hamboyan, Senior Vice President
Eurodollar Lending Office:
One Hospital Trust Plaza, R-W09-01
Providence, Rhode Island 02903
Telefax Number: (401) 278-7329
Attention: Denis D. Hamboyan, Senior Vice President
</TABLE>
<PAGE> 145
-4-
<TABLE>
<S> <C> <C>
ABN AMRO BANK, N.V.
Domestic Leading Office
335 Madison Avenue
New York, NY 10017
Telefax Number: (212) 644-6905 $5,300,000 33.125%
Attention: Jeffrey Sarfaty, Vice President
Eurodollar Lending Office:
335 Madison Avenue
New York, NY 10017
Telefax Number: (212) 644-6905
Attention: Jeffrey Sarfaty, Vice President
</TABLE>
<PAGE> 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 August
22, 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 August 22, 1996, on the
financial statement schedule of Marks Bros. Jewelers, Inc. We also consent to
the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
October 31, 1996
