-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HcJiJItcgF45p0wF3tWvSuyA2mTn0fyvV5aWKmHSqMIsXjppQ05Es07kP+b4yUc6 SPAYmTmjy7gHy1zJpgmIeQ== 0000950134-99-008234.txt : 19990914 0000950134-99-008234.hdr.sgml : 19990914 ACCESSION NUMBER: 0000950134-99-008234 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990529 FILED AS OF DATE: 19990913 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAMUELS JEWELERS INC CENTRAL INDEX KEY: 0000790360 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-JEWELRY STORES [5944] IRS NUMBER: 953746316 STATE OF INCORPORATION: DE FISCAL YEAR END: 0530 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-15017 FILM NUMBER: 99710732 BUSINESS ADDRESS: STREET 1: 2914 MONTOPOLIS STREET 2: SUITE 200 CITY: AUSTIN STATE: TX ZIP: 78741 BUSINESS PHONE: 512-369-1400 MAIL ADDRESS: STREET 1: 2914 MONTOPOLIS DRIVE STREET 2: SUITE 200 CITY: AUSTIN STATE: TX ZIP: 78741 FORMER COMPANY: FORMER CONFORMED NAME: BARRYS JEWELERS INC /CA/ DATE OF NAME CHANGE: 19920703 10-K405 1 FORM 10-K FOR FISCAL YEAR END MAY 29, 1999 1 DOCUMENTS INCORPORATED BY REFERENCE ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 29, 1999 COMMISSION FILE NUMBER 0-15017 _______________ SAMUELS JEWELERS, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-3746316 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 2914 MONTOPOLIS DRIVE, SUITE 200 78741 AUSTIN, TEXAS (Zip Code) (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (512) 369-1400 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: TITLE OF EACH CLASS ------------------- COMMON STOCK WARRANTS Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes. [X] No. [ ] Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of August 31, 1999, the aggregate market value of the voting stock, held by nonaffiliates of the issuer, was $20,879,925 based upon an average price of $4.125 multiplied by 5,061,800 shares of common stock outstanding on such date held by nonaffiliates. As of August 31, 1999, the issuer had a total of 5,061,800 shares of common stock outstanding. APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution under a plan confirmed by a court. Yes. [X] No. [ ] DOCUMENTS INCORPORATED BY REFERENCE Part III. Samuels Jewelers, Inc. Proxy Statement relating to its 1999 Annual Meeting of Shareholders, to be filed with the SEC within 120 days of May 29, 1999. ================================================================================ 2 PART I ITEM 1. BUSINESS THE COMPANY Samuels Jewelers, Inc. ("Samuels" or the "Company"), was created in August 1998 for the purpose of acquiring the assets of Barry's Jewelers, Inc. ("Barry's" or "Predecessor") as part of Barry's Plan of Reorganization (the "Plan"), which was confirmed by the U. S. Bankruptcy Court on September 16, 1998, and consummated on October 2, 1998 (the "Reorganization"). Samuels is incorporated in Delaware and was initially funded by $15 million of new equity provided by the former bondholders of Barry's, who also consented to the conversion of $50 million of Barry's bonds they held into equity of Samuels Jewelers, Inc. Barry's Background Barry's previously had filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code on February 26, 1992, for the purpose of implementing a pre-negotiated plan of reorganization (the "Old Plan"). The Court confirmed the Old Plan and Barry's consummated the reorganization under that plan in June of 1992. When Barry's emerged under the Old Plan, it had approximately $103 million in debt and approximately $16 million in equity. Ultimately, Barry's sales and operating results failed to meet expectations, which thereby exacerbated Barry's leverage situation. Then in June 1996, Barry's announced that it had overstated Fiscal 1995 earnings by $1.5 million or 44.1% and that it had incurred a loss of approximately $2 million in Fiscal 1996. These developments caused defaults on Barry's two revolving credit facilities, one of which was accelerated and the other renegotiated. Shortly thereafter, a newly reconstituted board of directors began a search for a new management team. During the spring of 1997, a new management team was selected with an established background in the retail jewelry industry. This background included experience with national retail jewelers in merchandising, marketing, operations and training, systems installations and management, financial management and reporting, as well as restructuring expertise. After its appointment, the new management team identified additional problems with Barry's financial and operational situation, including the following situations: (a) Barry's was significantly over-leveraged; (b) Barry's had a substantial number of stores that consistently operated at a net loss and needed to be closed; (c) Barry's information systems were not year 2000 compliant, not integrated, not adequately supported by the vendors and generally were ineffective; (d) Barry's had no continuity in management (it had, for example, four Chief Executive Officers in the two years prior to the appointment of the new management team); (e) Barry's had higher than normal inventory shrinkage due to inadequate systems and poor inventory management and controls; (f) Barry's operated with a below-industry-average inventory both in quality and quantity, which limited not only the depth and breadth of selection in its stores but also the value perception to customers; (g) Barry's had poor accounts receivable management policies, and poor credit granting standards and had failed to implement proper incentives to collect past due accounts; (h) Barry's cost of collection of its accounts receivable was far in excess of acceptable business practice levels; and (i) Barry's headquarters space was too large for its needs and the lease for such space was significantly above market. The new management team embarked on the development and implementation of a business plan designed to address these issues and to restore Barry's to profitability. Originally, Barry's hoped to implement its new business plan without having to commence bankruptcy proceedings, but after discussions with various constituencies it was determined that Barry's would have to commence chapter 11 reorganization proceedings in order to provide it with the time, flexibility and stability needed to formulate and fully implement the new business plan and otherwise to reorganize its financial and operations affairs. With the cooperation of these constituencies, the new management team successfully instituted its new merchandising and marketing strategy in time for the 1997 Christmas selling season. Concurrently, the new management team began developing the infrastructure necessary to allow the company to grow and go forward profitably. In the spring of 1998, management presented a plan that readily received approval from the various constituencies. This plan included approvals for using resources to obtain all new information technology that would be necessary to efficiently operate the business and for the aggressive, but successful, effort of 2 3 relocating the home office from southern California to central Texas. These substantial efforts were commenced throughout and substantially concluded in 1998. Emergence from Chapter 11 Reorganization Barry's filed the Plan with the bankruptcy court on April 30, 1998 and the bankruptcy court confirmed the Plan, with certain modifications, on September 16, 1998. The Reorganization described under the Plan was consummated on October 2, 1998. The plan provided for the following: o payment in full of certain administrative claims, tax claims, bank secured claims and other allowed secured claims; o distribution of 2.5 million shares of the Company's common stock to Barry's bondholders in exchange for their allowed claims; o distribution of 2.25 million shares of the Company's common stock in exchange for $15 million in a new equity cash infusion; o distribution of 250,000 restricted shares of the Company's common stock to certain members of the new management team; o payment of allowed claims of general unsecured creditors at a rate of $0.15 for each dollar of their allowed claims; o issuance of 263,158 warrants to purchase the Company's common stock to stockholders in exchange for their shares of Barry's common stock; and o merger of Barry's into Samuels Jewelers, Inc. In addition, Foothill Capital Corporation agreed to provide the Company with a new fully secured line of credit of up to $50,000,000. On October 2, 1998, the Company drew down approximately $32 million from this line of credit. These borrowings along with the $15 million new cash equity infusion were used to pay off Barry's previous line of credit balance with Bank Boston. Samuels Jewelers The new company's name, "Samuels Jewelers," comes from a chain of stores operated by the Predecessor in the San Francisco Bay area. The chain was founded in 1891 and it has a rich tradition of outstanding customer service and of providing an excellent selection of fine jewelry. The Company operates a chain of specialty retail jewelry stores generally located in regional shopping malls. Our stores offer fine jewelry items in a wide range of styles and prices, with a principal emphasis on diamond and gemstone jewelry. As of August 13, 1999, the Company operated 123 retail jewelry stores, principally in California, Texas, Colorado, Utah, Arizona, Idaho, Montana, Indiana and North Carolina. As measured by the number of retail locations, the Company is one of the larger specialty retailers of fine jewelry in the country. The Company's corporate office is located at 2914 Montopolis Drive, Suite 200, Austin, Texas 78741, and its telephone number is (512) 369-1400. The Company's new stock is traded on the Nasdaq OTC Bulletin Board under the symbol "SMJW". Today, Samuels is a new company with new shareholders and a new board of directors that is managed by a new management team, all the way down to and, in many cases, including store manager level. The Company targets more affluent and less credit dependent customers through a sophisticated marketing program that focuses on offering quality merchandise at a fair price. The Company has relocated its headquarters from southern California to central Texas, placing the Company in more cost-effective facilities in a more geographically strategic location for carrying on its operations, with new staff dedicated to providing customer service. Samuels manages the business, including merchandising and distribution functions, through new cost-effective operating systems that use current technology that is fully year 2000 compliant. The Company has consolidated the number of trade names under which it operates from over 14 to 6 and it plans to be operating all stores under the Samuels name within the next two to three years. The Company has introduced a new store prototype that is customer friendly, inviting and attracts the target customer, as well as the various mall developers. Subsequent to year end, the Company outsourced the credit function to an independent credit expert in Alliance Data Services ("ADS") and has embarked upon an aggressive plan of expansion with the infrastructure capable of generating significant economies of size. As of August 31, 1999 the Company had opened 5 new stores and had binding commitments to open 3 4 approximately 17 stores in Fiscal 2000 and the Company is in various stages of negotiating for several more stores. See "Notes to Financial Statements - Note 11 Subsequent Events Sale of Credit Portfolio to Alliance Data Systems and Acquisition of Silverman's and New Store Commitments". The only remnants of Barry's are 106 locations of the over 200 leasehold interests that Barry's occupied a few years ago. Most of the leases for these locations have been renegotiated and many of the stores have been renamed and remodeled. The rest will be renamed and remodeled in the coming few years. The financial statements contained within this report are for Samuels Jewelers, Inc. after October 2, 1998. Nevertheless, the Company is providing the information with regard to Barry's as of and prior to that time under its obligation, as set forth in the Securities and Exchange Act regulations, to describe the general development of the business and to report selected financial data for the Company, including its predecessor-in-interest. Thus, as used herein, the Company, refers to Samuels for period after October 2, 1998 and to Barry's for periods through October 2, 1998. Upon emergence from Chapter 11 proceedings and with regard to the second quarter of Fiscal 1999 and fiscal periods thereafter, the Company adopted the fresh start reporting requirements of AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." In accordance with the fresh start reporting requirements, the reorganization value of the Company has been allocated to the Company's assets in conformity with the procedures specified by the Accounting Principles Board ("APB") Opinion 16, Business Combinations. In addition the accumulated deficit of the Company was eliminated and its capital structure was revalued in accordance with the Reorganization. The Company has recorded the effects of the Reorganization and Fresh-Start Reporting as of October 2, 1998. The adjustment to eliminate the Company's accumulated deficit totaled $77.6 million of which $11.6 million was forgiveness of debt and the remaining $66.0 million was for Fresh-Start adjustments. The results of operations and cash flows for the four months ended October 2, 1998 include operations prior to the Company's emergence from Chapter 11 proceedings and the effects of Fresh-Start Reporting. The results of operations and cash flows for the eight months ended May 29, 1999 include operations subsequent to the Company's emergence from Chapter 11 proceedings and reflect the effects of Fresh-Start Reporting. As a result, the net income for the eight months ended May 29, 1999 is not comparable with prior periods and the net income for the fiscal year ended May 29, 1999 is divided into Successor Company (the "Successor Company") and Predecessor Company (the "Predecessor Company") periods and it is also not comparable with net income from prior fiscal year periods. In addition, the balance sheet as of May 29, 1999 is not comparable to prior periods for the reasons discussed above. The reorganized value of the Company's common equity of $47.1 million was determined by the Company, with the assistance of financial advisors, by reliance on the Discounted Cash Flow method using the weighted average cost of capital. The reorganized value of the Company has been allocated to specific assets categories pursuant to Fresh-Start Reporting. The Company's Reorganization Value in Excess of Amounts Allocated to Identifiable Assets reflects the difference in the Company's stock valuation and the Company's net assets. The Company is amortizing the Reorganization Value in Excess of Amounts Allocated to Identifiable Assets over ten years. The Company changed its fiscal year end during 1998 from May 31 to the Saturday closest to May 31. The Company's fiscal years ended May 29, 1999 ("Fiscal 1999") and May 30, 1998 ("Fiscal 1998") may be referred to herein as such. STRATEGY The Company's operating strategy is to provide exceptional values on fine jewelry to its retail jewelry consumer. This is accomplished by partnering with vendors to develop new products and expand assortments based on customer demand and perceived value and then by communicating this value message through targeted marketing programs. To enhance sales, the Company makes credit financing available to qualified customers through a private label credit card program and through various secondary credit sources. The Company's sales capabilities are supported by a trained and knowledgeable sales staff, an automated, centralized credit and collection system and a centralized distribution system to replenish merchandise. MERCHANDISE STRATEGY AND MIX Strong vendor partnering has enabled management to leverage a large portion of the Company's inventory through consignment arrangements, resulting in dominant assortments of quality jewelry. A talented team of merchandise buyers with expertise in jewelry manufacturing has been assembled to allow the Company to not only buy a product, but also to also focus on developing product 4 5 solutions that meet specific competitive opportunities created by consumer demand. As a result, the Company's stores offer exceptional selection and excellent values that enhance its ability to offer a better value to the customer and, thereby, capture a larger market share. The Company has repositioned its merchandise assortments to appeal to the mainstream jewelry consumer. Improved price points, updated styling and an expanded selection in high volume product categories such as bridal, diamond fashion and gold have been the primary focus of the new merchandising strategy. INVENTORY PURCHASING Buyers based in the Company's corporate offices purchase most of the stores' merchandise. Each store's inventory is replenished weekly or more often during peak selling seasons. Management believes that centralized merchandise purchasing provides the Company with quality controls and price advantages. Three vendors collectively have accounted for 31%, 27%, and 25% of merchandise purchases by the Company during Fiscal 1999, 1998 and 1997, respectively. Management believes that the Company's relationship with these three vendors, as well as its other vendors, is good. These vendors, and all vendors key to the Company's new merchandising strategy, have agreed to consignment agreements with Samuels. SUPPLY AND PRICE FLUCTUATIONS The world supply and price of diamonds are influenced considerably by the Central Selling Organization ("CSO"), which is the marketing arm of DeBeers Consolidated Mines, Ltd. ("DeBeers"), a South African company. Through the CSO, over the past several years, DeBeers has supplied approximately 80% of the world demand for rough diamonds, selling to gem cutters and polishers at controlled prices. The continued availability of diamonds to the Company's suppliers is dependent, to a material degree, upon the political and economic situation in South Africa. While several other countries, including Australia, the Commonwealth of Independent States, Zaire, Angola, Tanzania and Sierra Leone are suppliers of diamonds, the Company cannot predict with any certainty the effect on the overall supply or price of diamonds in the event of an interruption of supplies from South Africa, the CSO or DeBeers. The Company is subject to other supply risks, including fluctuations in the price of precious gems and metals. The Company presently does not engage in any hedging activity with respect to possible fluctuations in the price of these items. If such fluctuations should be unusually large or rapid and result in prolonged higher or lower prices, there is no assurance that the necessary retail price adjustments will be made quickly enough to prevent the Company from being adversely affected. TRADE NAMES As of August 31, 1999, the Company operated 122 stores under the following trade names: "Samuels", "Schubach", "Hatfield", "Harts", "Mission", "Silverman's" and "Samuels Diamonds". See "Notes to Financial Statements - Note 11 Subsequent Events Acquisition of Silverman's and New Store Commitments." The Company intends to change the names under which all of its stores operate to "Samuels Jewelers" or "Samuels Diamonds" over the next two to three years. STORE PERFORMANCE The following table sets forth selected data with respect to the Company's operations for the last five fiscal years:
1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ Number of stores at beginning of year ............ 117 130 161 162 144 Acquired during the year ...................... 5 -- -- -- 15 Opened during the year ........................ 2 -- 17 7 8 Closed during the year(1) ..................... (8) (13) (48) (8) (5) ------ ------ ------ ------ ------ Total at year end ..................... 116 117 130 161 162 ====== ====== ====== ====== ====== Percentage increase (decrease) in sales of ....... 2.0% 9.2% (10.0)% 2.2% 11.0% Comparable stores(2) Average sales per comparable store (in Thousands)(2) ................................. $ 968 $ 951 $ 709 $ 905 $ 871
5 6 - ---------- (1) The 48 stores closed during Fiscal 1997 are composed of 33 stores closed on or about May 11, 1997, as part of the Company's Chapter 11 Petition filing; 11 stores closed in connection with the restructuring, announced in January 1997, and 4 other stores closed during the year. (2) Comparable stores are stores that were open for all of the current and preceding year. CREDIT PROGRAM The Company's credit policy is intended to complement its overall sales strategy. The principal objective is the extension of credit to those customers who will produce the most reasonable rate of return. The Company also offers credit insurance to its customers. This insurance program, underwritten by a major insurance company, generally provides coverage for life, disability, unemployment and loss of property. Charges, net of down payments, under the Company's credit program accounted for approximately 49.5% of Fiscal 1999 sales and 54.3% of Fiscal 1998 sales. The decline in credit sales mix is attributable to management's policy of tightening credit-granting standards offset by a merchandising and marketing strategy designed to attract a more affluent customer. Payment periods for the credit sales generally range from 24 to 36 months. Customers may also purchase jewelry for cash and by using major national credit cards. On July 20, 1999, the Company entered agreements with ADS to sell its existing credit card accounts and to provide a third party credit card program for the benefit of the Company's customers. The transactions set out in the agreements were effected on August 30, 1999. See "Notes to Financial Statements - - Note 11 Subsequent Events Sale of Credit Portfolio to Alliance Data Systems". The Company does not expect a significant change in the credit policies offered to its customers under the agreement with ADS. SEASONALITY Sales during the Christmas season, which includes the period from the day following Thanksgiving Day to December 31, generally account for approximately 25% of the Company's annual net sales and all or nearly all of its annual earnings. The success of the Company is heavily dependent each year on its Christmas selling season, which in turn depends on many factors beyond the Company's control, including the general business environment and competition in the industry. The Company had net sales of $30.2 million during the Christmas 1998 selling season. The Company also relies heavily on sales during other annual holidays and special events. Although the Company's success on an annual basis does not depend as heavily on the sales during these times as it does during the Christmas season, unusually slow sales activity during these times will have an impact on any projections for the Company's annual net sales. COMPETITION The retail jewelry industry is highly competitive. It is estimated that there are approximately 35,000 retail jewelry stores in the United States, most of which are independently operated and not part of a major chain. Numerous companies, including publicly and privately held independent stores and small chains, department stores, catalog showrooms, direct mail suppliers, and TV shopping networks, provide competition on a national and regional basis. The malls and shopping centers where many of the Company's stores are located typically contain several other national chain or independent jewelry stores, as well as one or more jewelry departments located in the "anchor" department stores. Certain of the Company's competitors are substantially larger than the Company and have greater financial resources. Management believes that the primary elements of competition in the retail jewelry business are quality of personnel, level of customer service, value of merchandise offered, store location and design and credit terms. Management believes that the Company's predecessor was unable to compete successfully in prior years because of its failed merchandising programs, poor credit underwriting practices, cash flow constraints, excessive collection costs, poor inventory controls, executive turnover, restrictive financing arrangements, ineffective investment in technology and the resultant excessive administrative costs. In addition, the Company believes that, as the jewelry retailing industry consolidates, the ability to compete effectively may become increasingly dependent on volume purchasing capability, regional market focus, superior management information systems, and the ability to provide customer service through trained and knowledgeable sales staffs. Additionally, the competitive environment is often affected by factors beyond a particular retailer's control, such as shifts in consumer preferences, economic conditions, population and traffic patterns. 6 7 YEAR 2000 COMPLIANCE Many existing computer systems and applications, and other control devices, use only two digits to identify a year in the date field without considering the impact of the upcoming change in the century. As a result, such systems and applications could fail or create erroneous results unless corrected so that they can process data related to the year 2000 and beyond. The Company relies on its computer system, applications and devices in operating and monitoring all major aspects of its business, including financial systems (such as general ledger, accounts payable and payroll modules), customer services, infrastructure, embedded computer chips, networks, telecommunications equipment and end products. The Company has obtained a new integrated management information system that includes a system processor and operating system, applications software, point of sale hardware and additional microcomputers. The year 2000 issue was addressed during the planning process, and all new system technology is believed to be year 2000 compliant. Through May 1999, the Company had spent approximately $3.5 million, with $1.2 million of this amount for new hardware and $2.3 million for new software on all projects to insure the Company meets all requirements to be year 2000 compliant. All of the internal operating systems the Company currently uses are believed to be year 2000 compliant. The Company also relies, directly and indirectly, on external systems of business enterprises such as suppliers, creditors and financial organizations, and of government entities, for accurate exchange of data. The Company has received assurances from most of the parties with which it interacts that their systems are currently year 2000 compliant or will be year 2000 compliant by December 31, 1999. We have no assurances that their representations are correct, and although the year 2000 issue may not materially affect the Company's internal systems, it possibly could be affected through disruptions in the operations of the parties with which it interacts. Therefore, despite the Company's efforts to address the year 2000 impact on its internal systems and business operations, there can be no assurance that such impact will not result in a material disruption of its business or have a material adverse effect on its business, financial condition, or results of operations. EMPLOYEES At May 29, 1999, the Company had approximately 1,200 full-time and part-time employees. Unions represented approximately 26 employees, or 2.2% of the Company's employees, at such date. On December 31, 1998, the Company modified and extended its existing union contract covering these employees, which expires on January 31, 2000. The Company believes it provides working conditions and wages that compare favorably with those offered by other retailers in the industry and that its employee relations are good. The Company has not experienced material labor unrest, disruption of operations or strikes. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The statements included in this annual report regarding future financial performance and results of operations and other statements that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements to the effect that the Company or its management "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," or "projects" a particular result or course of events, or that such result or course of events "may" or "should" occur, and similar expressions, are also intended to identify forward-looking statements. Such statements are subject to numerous risks, uncertainties and assumptions, including but not limited to, the risk of losses and cash flow constraints despite the Company's efforts to improve operations. Should these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary materially from those indicated. ITEM 2. PROPERTIES The Company leases all of its retail stores. The stores range in size from approximately 428 square feet to 3,690 square feet. The leases generally have an initial term of five to fifteen years and are scheduled to expire at various dates through 2010. Currently, leases at 7 stores have expired and these stores are being occupied on a month-to-month basis. Some of the leases contain renewal options for periods ranging from five to ten years on substantially the same terms and conditions as the initial lease. Under most of the store leases, the Company is required to pay taxes, insurance, and its pro rata share of common area and maintenance expenses. The leases also usually require the Company to pay the greater of a specified minimum rent or a contingent rent based on a percentage of sales as set forth in the respective lease. 7 8 During April 1999, the Company entered into separate purchase agreements for the purchase of the leasehold interests, and properties related thereto, of five stores from Hart's Diamond Jewelers. The five stores are located in Colorado. The Company leases its headquarters in Austin, Texas. The lease for its headquarters contains the following substantive terms: (a) approximately 24,000 square feet, with rent of $0.47 per square foot per month on a triple net basis; and (b) a term of five years, with an option to renew for one additional five year term at the average monthly net rental rate charged for comparable premises. The Company also leases space in Irwindale, California, for its credit center. Consistent with the company's outsourcing of its credit operations to ADS, the Company has notified the landlord that it will terminate the lease on the Irwindale facility in October 1999 in accordance with an early termination provision of that lease. As of August 31, 1999, the Company was operating 123 retail stores in the following states:
NUMBER OF STATE STORES - ------------------------------ ------------ California ................... 31 Texas ........................ 31 Colorado ..................... 10 Utah ......................... 8 Arizona ...................... 5 Idaho ........................ 5 Montana ...................... 5 Indiana ...................... 4 North Carolina ............... 4 Others ....................... 20 ------------ TOTAL ........................ 123 ============
The Company owns substantially all of the equipment used in its retail stores and corporate headquarters. ITEM 3. LEGAL PROCEEDINGS The Company is involved from time to time in legal proceedings of a character normally incident to its business. The Company believes that its potential liability in any such pending or threatened proceedings, either individually or in the aggregate, will not have a material effect on the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company during the quarter ended May 29, 1999. 8 9 EXECUTIVE OFFICERS The following individuals currently serve as the Company's executive officers. Officers are elected by the board of directors each to serve until their successor is elected and qualified, or until their earlier resignation or removal from office or death. Executive Officers
Name Age Position ---- --- -------- Randy N. McCullough 47 President, Chief Executive Officer and Director E. Peter Healey 46 Executive Vice President, Chief Financial Officer, Secretary, Treasurer and Director Bill R. Edgel 33 Senior Vice President - Merchandising and Marketing Chad Haggar 35 Senior Vice President - Operations Paul W. Hart 41 Senior Vice President - Management Information Systems Robert J. Herman 38 Vice President, Controller and Assistant Secretary
Set forth below is biographical information for each executive officer. Randy N. McCullough, 47, has been a Director of the Company since September 22, 1998. Mr. McCullough has been the Company's President and Chief Executive Officer since its inception on August 20, 1998 and previously served in that capacity for the Predecessor Company since March 31, 1998. Mr. McCullough served as the Predecessor Company's Executive Vice President and Chief Operating Officer from January to March 1998. Mr. McCullough joined the Predecessor Company in April 1997 and was its Senior Vice President-Merchandise from April 1997 to March 1998. Prior to joining the Predecessor Company, Mr. McCullough served as President of Silverman's Factory Jewelers from 1991 to March 1997. Prior to that time, Mr. McCullough was a senior manager with a leading national retail jewelry chain for over 18 years. E. Peter Healey, 46, has been a Director of the Company since September 22, 1998. Mr. Healey has served as the Company's Executive Vice President, Chief Financial Officer, Secretary and Treasurer since its inception on August 20, 1998 and previously served in that capacity for the Predecessor Company since February 1997. From 1994 to 1996, Mr. Healey was the Vice President, Chief Financial Officer, Secretary and Treasurer of MS Financial, Inc. From 1985 to 1993, Mr. Healey was with Zale Corporation, serving as Vice President and Treasurer from 1987 to 1993. Bill R. Edgel, 33, has been the Company's Senior Vice President - Merchandising and Marketing since October 2, 1998 and previously served the Predecessor Company as Vice President of Marketing since February 1997. Prior to joining the Predecessor Company, Mr. Edgel served as Director of Credit Marketing of Macy's West, a division of Federated Department Stores, from 1996 to 1997. From 1995 to 1996, Mr. Edgel served as Director of Marketing for Merksamer Jewelers, Inc. from 1993 to 1995. Chad C. Haggar, 35, has been the Company's Senior Vice President - Operations since October 2, 1998 and previously served as Vice President - Operations for the Predecessor Company since February 1997. Prior to joining the Predecessor Company, Mr. Haggar served as Director of Stores of Fred Meyer, Inc. from 1996 to 1997. From 1987 to 1996, Mr. Haggar served as Regional Manager of Merksamer Jewelers, Inc. Prior to 1987 Mr. Haggar served in various management positions, with leading jewelry chains, for over six years. Paul W. Hart, 41, has been the Company's Senior Vice President - Management Information Systems since October 2, 1998 and previously served in that capacity for the Predecessor Company since August 1997. Prior to joining the Predecessor Company, Mr. Hart served as Vice President - Management Information Systems of MS Financial, Inc. From 1974 to 1995, Mr. Hart was employed by Zale Corporation, serving as Director of Credit Systems from 1994 to 1995, and as its Manager of Business Systems Planning and Support from 1988 to 1994. Robert J. Herman, 38, has been the Company's Vice President, Controller and Assistant Secretary since October 2, 1998 and previously served in that capacity for the Predecessor Company since February 2, 1998. Prior to joining Barry's, Mr. Herman served as the Controller for Datamark, Inc. from 1997 to February 1998. From 1994 to 1997, Mr. Herman served as the Controller for Silverman's Factory Jewelers. From 1987 to 1994, Mr. Herman was employed by Sunbelt Nursery Group, Inc., serving as its Controller from 1991 to 1994. 9 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's common stock, par value $.001 per share ("Common Stock"), began trading after the effective date of the Reorganization under the symbol "SMJW". Less than one year of trading history of the Common Stock is available. A graphical comparison of its predecessor's Common Stock against the market and the predecessor's industry prior to the effective date is available in Barry's 1998 Form 10-K/A. The Company's warrants are traded under the symbol "SMJWW". The following table sets forth the high and low, per share closing prices of the Company's new Common Stock since October 2, 1998.
High Low ---------- ---------- Second quarter .......... $ 5.000 $ 3.875 Third quarter ........... $ 6.500 $ 4.375 Fourth quarter .......... $ 4.750 $ 3.500
HOLDERS Management believes that as of May 29, 1999 there are approximately 650 beneficial owners of its Common Stock. DIVIDENDS Under the Company's current working capital facility, with certain lenders party thereto and Foothill Capital Corporation as agent and a lender, the Company is prohibited from paying dividends. See "Notes to Financial Statements - - Note 6 Notes Payable." The Company did not pay any dividends during Fiscal 1999 and intends to retain its earnings to provide funds for reinvestment in the Company's business, and therefore, does not anticipate declaring or paying cash dividends in the foreseeable future. Payment of dividends is subject to the then existing business conditions and the business results, cash requirements and financial condition of the Company, and will be at the discretion of the Company's Board of Directors. 10 11 ITEM 6. SELECTED FINANCIAL DATA The following tables set forth selected financial data of the Company and the Predecessor Company, as of and for each of the four fiscal years ended May 1998 and for the four months ended October 2, 1998 and the eight months ended May 29, 1999. The data should be read in conjunction with the financial statements, related notes and other financial information included herein. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Successor Predecessor Eight Months Four Months Ended Ended Predecessor For the Fiscal Years Ended May May 29, October 2, -------------------------------------------------------- 1999 1998 1998 1997 1996 1995 ------------ ----------- ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Net Sales ............................ $ 81,043 $ 27,494 $ 113,873 $ 130,446 $ 140,145 $ 136,055 Finance and credit insurance fees .... 6,517 3,397 11,316 13,900 16,008 15,681 ----------- ----------- ----------- ----------- ----------- ----------- 87,560 30,831 125,189 144,346 156,153 151,736 ----------- ----------- ----------- ----------- ----------- ----------- Operating (loss) income(1) ........... 128 (2,672) (4,009) (29,741) 8,651 11,670 ----------- ----------- ----------- ----------- ----------- ----------- Interest expense, net ................ 2,202 2,367 7,025 12,745 11,146 9,764 Reorganization items(2) .............. 400 (61,605) 11,134 2,322 -- -- Provision for income taxes ........... -- -- -- 284 288 -- ----------- ----------- ----------- ----------- ----------- ----------- (Loss) income before extraordinary item .............................. (2,474) 56,566 (22,168) (45,092) (2,783) 1,906 Extraordinary item(3) ................ -- 11,545 -- (876) -- -- ----------- ----------- ----------- ----------- ----------- ----------- Net (loss) income .................... $ (2,474) $ 68,111 $ (22,168) $ (45,968) $ (2,783) $ 1,906 =========== =========== =========== =========== =========== =========== Basic and Diluted Per Share Data:(4) (Loss) income before extraordinary item .............................. $ (0.49) $ 11.31 $ (5.50) $ (11.25) $ (0.70) $ 0.48 =========== =========== =========== =========== =========== =========== Extraordinary item(3) ................ $ -- $ 2.31 $ -- $ (0.22) $ -- $ -- =========== =========== =========== =========== =========== =========== Net (loss) income .................... $ (0.49) $ 13.62 $ (5.50) $ (11.47) $ (0.70) $ 0.48 =========== =========== =========== =========== =========== =========== Weighted average number of common shares outstanding ................. 5,002 5,002 4,029 4,007 3,978 3,969 =========== =========== =========== =========== =========== ===========
SUCCESSOR PREDECESSOR 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ BALANCE SHEET DATA: Current assets .......... $ 80,445 $ 95,939 $ 105,390 $ 127,075 $ 127,208 Working capital ......... 9,091 77,155 99,482 117,819 109,873 Total assets ............ 115,209 110,732 123,483 145,875 144,959 Total debt(5) ........... 45,893 126,812 130,271 103,579 92,368
- ---------- (1) Operating (loss) income for the fiscal year ended May 31, 1997, includes $1,336 of restructuring expenses primarily related to severance and costs associated with 11 stores closed during the fiscal year. Operating (loss) income for the fiscal year ended May 31, 1997, includes $3,947 for impairment loss, and $3,033 for inventory valuation. (2) Reorganization costs for the eight months ended May 29, 1999, include a Fresh-start reporting income adjustment of $66,042. Other amounts consist primarily of professional fees and other costs directly related to the Company's Reorganization. See "Notes to Financial Statements - Note 10 Reorganization Costs." (3) The year ended May 31, 1997 includes an extraordinary loss of $876 or $0.22 per share, incurred in connection with the early extinguishment of the Company's Securitization Facility. The four months ended October 2, 1998 included an extraordinary gain of $11,545 or $2.31 per share incurred in connection with the forgiveness of debt as a part of the Company's Reorganization. (4) Net income (loss) per share and weighted average number of common shares outstanding for the Predecessor Company are not comparable to the Successor Company due to the Reorganization and implementation of Fresh Start Reporting. (5) As of May 30, 1998 and May 31, 1997, total debt includes liabilities subject to compromise under reorganization proceedings. 11 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS With respect to Management's Discussion and Analysis of Financial Conditional and Results of Operations, see "Item 1 Cautionary Notice Regarding Forward Looking Statements." The Twelve Month Period Ended May 29, 1999 ("Fiscal 1999")(combining both the predecessor and successor companies) Compared With Fiscal Year Ended May 31, 1998 ("Fiscal 1998") STORE ACTIVITY The following table sets forth selected data with respect to the Company's operations for the last two fiscal years:
1999 1998 ------- ------- Number of stores at beginning of year .......... 117 130 Acquired during the year ..................... 5 -- Opened during the year ....................... 2 -- Closed during the year ....................... (8) (13) ------- ------- Total at year end .................... 116 117 ======= ======= Percentage increase (decrease) in sales of ..... 2.0% 9.2% Comparable stores Average sales per comparable store (in Thousands) ................................... $ 968 $ 951
Of the eight stores closed during Fiscal 1999, five were closed during the second quarter, prior to the Christmas selling season, two immediately thereafter and the final store during the third quarter. The Company also opened two new stores during the second quarter. The five stores acquired by the Company all began operation during the last two months of the fiscal year. Of the thirteen store closed during Fiscal 1998, two were closed during the first quarter, prior to the Christmas selling season, three late in the third quarter and eight in the fourth quarter. The activity reflected above resulted in 5,932 and 6,576 equivalent store weeks for Fiscal 1999 and 1998, respectively. RESULTS OF OPERATIONS Net sales for Fiscal 1999, were $108.5 million as compared to $113.9 million for the previous year. This decrease of $5.4 million, or 4.7%, resulted primarily from a 9.8% decrease in equivalent store weeks from Fiscal 1998 to Fiscal 1999 offset by a 5.7% increase in equivalent store week average volume. Sales at comparable stores, those open for all of the current and proceeding year, increased by 2.0% from $103.5 million to $105.5 million. This increase of 2.0% in average comparable store volumes was a result of a continuation of the upgrading of merchandise offered and marketing efforts to appeal to a better customer and drive sales during traditionally slow periods, partially offset by the temporary negative impact of the company's remodeling and name change program during the second and third quarters. Throughout the fiscal year the Company has continued to upgrade the quality of its merchandise as well as offering an expanded assortment of higher ticket price merchandise. The Company has also continued to refine its marketing efforts, targeting a more mature, financially sound customer, with more discretionary spending ability. The Company also held special promotional events to drive additional sales during the traditionally slower periods of the year. During the current year comparable store sales were negatively impacted in the second quarter as the Company began a major remodeling and name change campaign that resulted in the temporary closure or relocation of approximately 18 stores. These remodels and name changes were completed early in the third quarter and these 18 stores showed average sales increases during the third quarter which more than offset the impact in the second quarter. The increase was offset somewhat by reduced credit sales (representing 49.5% of sales in the current year as compared to 54.3% in the prior year) which resulted from continued changes in credit underwriting criteria and marketing efforts designed to lessen the Company's reliance on credit sales, reduce charge offs and build a portfolio consisting of more creditworthy customers. Finance and credit insurance fees decreased from $11.3 million in Fiscal 1998 to $9.9 million in Fiscal 1999. This decrease of $1.4 million, or 12.4%, was primarily due to the decrease in average outstanding customer receivables resulting from the closing of almost 70 stores over the last 3 years, changes in credit underwriting criteria, and lower reliance on credit to generate sales, somewhat offset by an increase in average account balance as a result of marketing efforts to appeal to a more affluent customer who buys higher priced merchandise. 12 13 Cost of goods sold, buying and occupancy expenses were 65.7% of sales in Fiscal 1999 compared to 66.4% of sales in Fiscal 1998. Excluding amortization of the Company's reorganization value in excess of amounts allocated to identifiable assets of $1.2 million cost of goods sold, buying and occupancy expenses this year was 64.6% of sales. The reduction in cost of goods sold, buying and occupancy expenses resulted primarily from improved merchandise margins and savings in occupancy expense due to the closing of relatively high rent stores and the relocation and downsizing of the Company's headquarters. Selling, general and administrative expenses were $44.2 million, a decrease of $2.8 million, or 6.0% from the prior year. Selling, general and administrative expenses decreased as a percentage of net sales to 40.7% in Fiscal 1999 from 41.3% in Fiscal 1998. This improvement resulted from sales efficiencies as well as some improvements in the efficiency of the structure of the company but was offset somewhat by some fixed expenses being spread over a smaller sales base. The provision for doubtful accounts was $5.5 million for Fiscal 1999. This was a decrease of $1.1 million, or 16.7% from $6.6 million for Fiscal 1998. The provision was approximately 10.2% and 10.6%, of net credit sales for Fiscal 1999 and Fiscal 1998, respectively. The decrease in the provision was primarily due to closed stores, which had generated less creditworthy customer receivables, as well as the reduction in the percentage of credit sales to total sales from the continuing effects of changes in credit underwriting and marketing efforts to reduce reliance on credit to effect sales by targeting a more creditworthy customer. Net interest expense was $4.6 million for Fiscal 1999, a decrease of $2.4 million, or 34.3% from $7.0 million for Fiscal 1998. The decrease was due partially to interest associated with the Company's Senior Secured Notes, which was accrued during Fiscal 1998 but was not accrued during Fiscal 1999 (in accordance with SOP 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code") because such interest was not allowed under the Company's Plan of Reorganization. Upon completion of the Reorganization the amounts outstanding under the respective revolving lines of credit were reduced by an average of over $10 million. The Company also entered into a new financing agreement on October 2, 1998, which resulted in reduced amounts outstanding as well as a lower rate of interest on amounts outstanding after October 2, 1998. Reorganization costs consist primarily of professional fees directly related to the Chapter 11 filing and the grant of stock to management as part of the Reorganization, offset by interest earned on accumulated cash during the pendency of the Chapter 11 filing. TAX LOSS CARRYFORWARDS During 1999, the Company's net operating losses were reduced by approximately $49 million as a result of debt discharge income. Pursuant to IRC 382 (1)(5), the Company's NOL's were further reduced by $27 million. At May 29, 1999, the Company had a net operating loss carryforward for federal income tax purposes of $36 million. The remaining carryforward is not subject to any annual limitation on its use. In the event of more than a 50% change in ownership of the Company prior to October 2, 2000, the annual limitation on the use of the losses will be zero. These losses begin to expire in 2012. In addition, the Company has AMT credit carryforwards of $109. These credits do not expire. The Company maintains a valuation allowance against the net deferred tax assets, which in Management's opinion reflects the net deferred tax asset that is more likely than not to be realized. Fiscal Year Ended May 30, 1998 ("Fiscal 1998") Compared With Fiscal Year Ended May 31, 1997 ("Fiscal 1997") Net sales for Fiscal 1998 were $113.9 million, a decrease of $16.5 million, or 12.7%, from net sales of $130.4 million for Fiscal 1997. This decrease resulted primarily from the closure of 13 stores in Fiscal 1998 and 33 stores in May 1997 offset by an increase in comparable store sales (those open in both the current and preceding year). Comparable store sales increased by $8.6 million, or 9.2% from Fiscal 1997 to Fiscal 1998. This increase resulted from improved merchandise offerings and improved marketing but was offset by the reduction of credit sales caused by changes in credit granting standards. Finance and credit insurance fees decreased from $13.9 million in Fiscal 1997 to $11.3 million in Fiscal 1998. This decrease of $2.6 million, or 18.7%, was primarily due to the decrease in average outstanding customer receivables resulting from store closures, changes in credit underwriting criteria, and lower reliance on credit to generate sales. Cost of goods sold, buying and occupancy expenses were 66.4% of sales in Fiscal 1998 compared to 71.3% of sales in Fiscal 1997. The increase in gross margin resulted from the sale of fresher merchandise purchased during Fiscal 1998 under the new merchandising strategy, (which allowed for a reduction in competitive discounting) and a reduction in the inventory shrink percentage. In connection with the change in merchandising strategy developed by the Company's new management team, an inventory valuation reserve of $3.0 13 14 million was established as of May 31, 1997. The inventory valuation reserve was $2.2 million at May 30, 1998. The reduction of the inventory valuation reserve is the result of sales of merchandise below cost to reposition the Company's merchandise selection. Selling, general and administrative expenses were $47.0 million, a decrease of $10.0 million, or 17.5% from the prior year, primarily due to decreases in advertising expenses, professional services, shipping expenses, credit department expenses, payroll expense and other store related expenses. Selling, general and administrative expenses decreased as a percentage of net sales to 41.3% in Fiscal 1998 from 43.7% in Fiscal 1997. The decrease as a percentage of net sales is attributable primarily to the decrease in marketing expense and efficiencies in the Company's credit department. The provision for doubtful accounts was $6.6 million, a decrease of $12.2 million from the prior year. The provision for doubtful accounts was approximately 5.8% and 14.4% of net sales for Fiscal 1998 and 1997, respectively. The decrease is primarily due to improvement in the performance of the Company's credit portfolio and changes in credit underwriting criteria. Additionally, in May 1997, the Company closed 33 stores. These store closures required an increase in the provision for doubtful accounts for Fiscal 1997. Interest expense was $7.0 million, a decrease of $5.7 million from the prior year. As indicated in the Plan, the Senior Secured Notes will be exchanged for common stock in the new reorganized company. Accordingly, and in accordance with SOP 90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" interest expense of $6.0 million on these notes was not recorded because management believes that it is unlikely that such interest will be paid and because the accrued interest on the Senior Secured Notes will not become an allowed claim. The Company recorded $11.1 million of reorganization costs in Fiscal 1998. The reorganization costs primarily include professional fees, losses on the disposal of property and equipment related to 13 store closures and the closure of the Company's former headquarters in Monrovia, California, adjustments to pre-petition unsecured liabilities, provision for lease rejection claims and employee costs related to the Chapter 11 filing. The above expenses are offset by interest earned on accumulated cash resulting from the Chapter 11 filing. FINANCIAL CONDITION CREDIT PROGRAM The Company offers its merchandise sales on credit terms to qualified customers. The Company's credit policies establish monthly payments such that the payment of the credit balance will occur, generally, over a period ranging from 24 to 36 months. The Company's customer receivables are revolving charge accounts. The Company currently collects (and has historically collected) approximately 10% of its customer receivable balances each month. Sales under the Company's credit program accounted for approximately 49.5% of Fiscal 1999 sales, net of down payments compared to 54.3% for Fiscal 1998. As of May 29, 1999 and May 30, 1998, the aggregate customer receivables balances were $50.2 million and $55.2 million, respectively. Aggregate credit collections during the fiscal year ended May 29, 1999 were $62.3 million. See "Note 11 Subsequent Events - Sale of Credit Portfolio to Alliance Data Systems." INVENTORY At May 29, 1999, owned inventory was approximately $32.7 million, an increase of approximately $5.7 million (net of a Fresh-start reporting adjustment of $5.1 million) from May 30, 1998. This increase is a result of the Company implementing a new merchandise assortment plan, designed to target a more mature, financially sound customer, with more discretionary spending ability. The Company has recently implemented programs to liquidate additional aged merchandise that it feels no longer fits its assortment. LIQUIDITY AND CAPITAL RESOURCES GENERAL Upon emergence from Chapter 11 bankruptcy proceedings the DIP Financing Agreement with Bank Boston was paid off, see "Financing Transactions." In addition, settlement of claims was commenced and new common stock and warrants were issued, see "Item 1. Business - The Company." The Company's operations require working capital to fund the purchase of inventory, carry its accounts receivable, make lease payments, and the funding of normal operating expenses. The seasonality of the Company's business requires a significant build-up of inventory for the Christmas holiday selling period. These seasonal inventory needs generally must be funded during the late summer 14 15 and fall months because of the necessary lead-time to obtain additional inventory. Additionally, the heavy holiday selling period leads to a seasonal build-up of customer receivables that must be funded during the winter and spring months. See "Notes to Financial Statements - Note 11 Subsequent Events Sale of Credit Portfolio to Alliance Data Systems. The Company enters into consignment inventory agreements with its key vendors in the ordinary course of business. During Fiscal 1999, consignment inventory on hand ranged from $30 to $38 million. These amounts are excluded from the merchandise inventory balance in the financial statements. The Company reported cash flows used in operating activities of approximately $11.1 million for Fiscal 1999, as compared to cash flows provided by operating activities of $15.1 million for Fiscal 1998 and $8.3 million for Fiscal 1997. Cash used in operating activities for Fiscal 1999 resulted primarily from a $10.7 million increase in inventories (an increase of approximately $5.6 million net of a Fresh-Start Reporting adjustment of $5.1 million) (see "Inventory"), offset by an increase of $3.1 million in trade accounts payable. In addition, the Company requires working capital to fund capital expenditures. Capital expenditures for Fiscal 1999, 1998 and 1997, were $9.1 million, $3.0 million, and $7.2 million, respectively. Expenditures in Fiscal 1999 were made primarily in connection with computer equipment associated with the Company's new merchandise and financial systems, leasehold improvements associated with remodeling of nineteen stores, the build out of the Company's new headquarters, the opening of two new stores and the acquisition of five stores. The Company made net repayments of $12.0 million under its revolving credit facility including $11.4 million upon emergence from bankruptcy proceedings, and received $15.0 million for the issuance of new stock. FINANCING TRANSACTIONS To replace the DIP Financing agreement and to provide for longer term financing on October 2, 1998, the Company entered into a three year, $50.0 million financing agreement with Foothill Capital Corporation as a lender and as agent for a lender group (the "Lenders"). The lenders will make revolving advances to the Company in amounts determined based on percentages of eligible accounts receivable and inventory. The annual rate of interest will be, at the Company's option, (i) 2.25% per annum over the Eurodollar rate or (ii) 0.5% per annum over the bank's prime rate, provided, however, that in no event will the applicable interest rate on any advance be less than 7% per annum. Interest charges are payable monthly. Upon the occurrence and during the continuation of any event of default under the financing agreement, all obligations will bear interest at a per annum rate equal to three percentage points above the otherwise applicable interest rate. As collateral for any and all obligations to the lenders under the financing agreement, the Company granted a first priority perfected security interest in and to substantially all of its owned or thereafter acquired assets, both tangible and intangible. The financing agreement contains quarterly covenants which include its meeting a minimum level of tangible net worth and prohibits the payment of dividends. The Company entered into Amendment Number One to the Loan and Security Agreement with the Lenders on April 15, 1999. The amendments under this Amendment Number One adjusted some of the covenants required of the Company under this financing agreement. As of May 29, 1999, the Company had direct borrowings of $45.9 million outstanding with additional credit available of approximately $4.1 million. As of May 29, 1999, the Company was in compliance with all terms of the financing agreement. See "Notes to Financial Statements - Note 11 Subsequent Events Amendment of Financing Agreement with Foothill." INFLATION The impact of inflation on the cost of merchandise (including gems and metals), labor, occupancy and other operating costs can affect the Company's results. For example, most of the Company's leases require the Company to pay rent, taxes, maintenance, insurance, repairs and utility costs, all of which are subject to inflationary pressures. To the extent permitted by competition, in general the Company passes increased costs to the customer by increasing sales prices over time. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The Company is exposed to market risk in the form of interest rate risk. At May 29, 1999, the Company had $45.9 million outstanding under its revolving line of credit. This revolving line is priced with a variable rate based on LIBOR or a base rate, plus, in each case an applicable margin. See "Note 6 Notes Payable". An increase or decrease in interest rates would affect the interest costs 15 16 relating this revolving line of credit. The Company has no interest rate swaps or other hedging facilities relating to its revolving line of credit. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and Financial Statement Schedule of the Company and the report of independent auditors are listed at Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 16 17 PART III ITEMS 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, ETC. The information contained in the Company's definitive Proxy Statement relating to its 1999 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120 days of May 29, 1999, with respect to Directors of the Registrant (Item 10), Executive Compensation (Item 11), Security Ownership of Certain Beneficial Owners and Management (Item 12), and Certain Relationships and Related Transactions (Item 13), are incorporated herein by reference in response to such items of Form 10-K. The information required by Item 10 with respect to executive officers is included in Part 4 under the caption "Executive Officers." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements, Financial Statement Schedules and Exhibits 1. FINANCIAL STATEMENTS The following are included herein under Item 8: Financial Statements, Financial Statement Schedules and Exhibits Independent Auditors' Report -- Deloitte & Touche LLP Balance Sheets for the Successor Company as of May 29, 1999 and the Predecessor Company as of May 30, 1998 Statements of Operations for the Successor Company for the eight months ended May 29, 1999, and the Predecessor Company for the four month Period ended October 2, 1998 and the years ended May 30, 1998 and May 31, 1997 Statements of Stockholders' Equity (Deficiency) for the three years ended May 29, 1999 Statements of Cash Flows for the Successor Company for the eight months ended May 29, 1999 and the Predecessor Company for the four months ended October 2, 1998 and the years ended May 30, 1998 and May 31, 1997 Notes to Financial Statements 2. FINANCIAL STATEMENT SCHEDULES: II. Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is included in the Financial Statements or notes thereto. 17 18 3. EXHIBITS Exhibit No. Exhibit 2.1 Order Confirming Original Disclosure Statement and Plan of Reorganization, Dated April 30, 1998, Proposed by Barry's Jewelers, Inc., as modified, dated September 16, 1998 (with Plan attached).(1) 2.2 Certificate of Ownership and Merger of Barry's Jewelers, Inc. with and into Samuels Jewelers, Inc. dated October 2, 1998.(1) 3.1 Certificate of Incorporation of Samuels Jewelers, Inc.(1) 3.2 Bylaws of Samuels Jewelers, Inc.(1) 4.1 Warrant Agreement dated as of October 2, 1998 between the Company and Norwest Bank Minnesota, N.A., as Warrant Agent.(1) 4.2 Registration Rights Agreement dated as of October 2, 1998 among the Company, The Galileo Fund, L.P., B III Capital Partners, L.P., DDJ Overseas Corporation, Paine Webber High Income Fund, Managed High Yield Fund Inc., All-American Term Trust Inc. and Paine Webber Offshore Funds PLC, The High Income Fund.(1) 10.1(a) Loan and Security Agreement dated October 2, 1998, between the Company and Foothill Capital Corporation, as agent for certain lenders party thereto.(2) 10.1(b) Amendment Number One to Loan and Security Agreement entered into as of April 15, 1999, among the Company, Foothill Capital Corporation and the financial institutions listed on the signature pages thereto.(3) 10.1(c) Amendment Number Two to Loan and Security Agreement entered into as of August 30, 1999, among the Company, Foothill Capital Corporation and the financial institutions listed on the signature pages thereto, (3) 10.2 Employment Agreement, dated as of October 2, 1998 between the Company and Randy N. McCullough.(1) 10.3 Employment Agreement, dated as of October 2, 1998 between the Company and E. Peter Healey.(1) 10.4 Employment Agreement, dated as of October 2, 1998 between the Company and Chad C. Haggar.(1) 10.5 Employment Agreement, dated as of October 2, 1998 between the Company and Bill R. Edgel.(1) 10.6 Employment Agreement, dated as of October 2, 1998 between the Company and Paul Hart.(1) 10.7 Private Label Credit Card Agreement between World Financial Network National Bank and the Company dated as of July 27, 1999.(3) 10.8 Purchase and Sale Agreement between World Financial Network National Bank and the Company dated as of July 27, 1999.(3) 23.1 Consent of Independent Auditors.(3) 27.1 Financial Data Schedule.(3) 99.1 Press Release dated October 5, 1998.(1) - --------------- (1) Incorporated by reference to the Company's Current Report on Form 8-K filed October 6, 1998. (2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended August 29, 1998. (3) Filed herewith. 18 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Samuels Jewelers, Inc. September 13, 1999 By: /s/ RANDY N. MCCULLOUGH ------------------------------ Randy N. McCullough President and Chief Executive Officer September 13, 1999 By: /s/ E. PETER HEALEY ------------------------------ E. Peter Healey Executive Vice President and Chief Financial Officer (Principal Financial Officer) September 13, 1999 By: /s/ ROBERT J. HERMAN ------------------------------ Robert J. Herman Vice President and Controller (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ DAVID BARR Director September 13, 1999 - ---------------------------------- David Barr /s/ DAVID J. BREAZZANO Director September 13, 1999 - ---------------------------------- David J. Breazzano /s/ DAVID H. EISENBERG Director September 13, 1999 - ---------------------------------- David H. Eisenberg /s/ E. PETER HEALEY Director September 13, 1999 - ---------------------------------- E. Peter Healey /s/ WENDY LANDON Director September 13, 1999 - ---------------------------------- Wendy Landon /s/ RANDY N. MCCULLOUGH Director September 13, 1999 - ---------------------------------- Randy N. McCullough /s/ JERRY WINSTON Director September 13, 1999 - ---------------------------------- Jerry Winston
19 20 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Samuels Jewelers, Inc. Austin, Texas We have audited the accompanying balance sheets of Samuel's Jewelers, Inc. as of May 29, 1999 (Successor Company balance sheet) and May 30, 1998 (Predecessor Company balance sheet), and the related statements of operations, shareholders' equity (deficiency) and cash flows for the eight months ended May 29, 1999 (Successor Company operations), the four months ended October 2, 1998, and the years ended May 30, 1998 and May 31, 1997, (Predecessor Company operations). 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. As discussed in Note 1 to the financial statements, on September 16, 1998, the Bankruptcy Court entered an order confirming the plan of reorganization which became effective after the close of business on October 2, 1998. Accordingly, the accompanying financial statements have been prepared in conformity with AICPA Statement of Position 90-7, "Financial Reporting for Entities in Reorganization Under the Bankruptcy Code," for the Successor Company as a new entity with assets, liabilities, and a capital structure having carrying values not comparable with prior periods as described in Note 1. In our opinion, the Successor Company financial statements present fairly, in all material respects, the financial position of Samuel's Jewelers, Inc. as of May 29, 1999, and the results of its operations and its cash flows for the eight months ended May 29, 1999 in conformity with generally accepted accounting principles. Further, in our opinion, the Predecessor Company financial statements referred to above present fairly, in all material respects, the financial position of the Predecessor Company as of May 30, 1998, and the results of its operations and its cash flows for the four months ended October 2, 1998 and the years ended May 30, 1998 and May 31, 1997 in conformity with generally accepted accounting principles. Dallas, Texas September 10, 1999 20 21 SAMUELS JEWELERS, INC. BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS (Notes 1 and 6)
Successor Predecessor May 29, May 30, 1999 1998 ------------ ------------ Current assets: Cash and cash equivalents ................................................... $ 1,456 $ 19,301 Customer receivables, net of allowances for doubtful accounts of $5,120 (1999) and $7,099 (1998) ........................................ 45,098 48,076 Merchandise inventories (Notes 3 and 8) ..................................... 32,684 26,993 Prepaid expenses and other current assets ................................... 1,207 1,569 ------------ ------------ Total current assets ........................................................... 80,445 95,939 ------------ ------------ Property and equipment: (Note 2) Leasehold improvements, furniture and fixtures .............................. 15,396 17,824 Computers and equipment ..................................................... 4,334 5,724 ------------ ------------ 19,730 23,548 Less: accumulated depreciation and amortization ............................. 2,109 10,250 ------------ ------------ Net property and equipment .................................................. 17,621 13,298 Other assets ................................................................... 631 1,495 Reorganization value in excess of amounts allocated to identifiable assets, Net ......................................................................... 16,512 -- ------------ ------------ Total assets ................................................................... $ 115,209 $ 110,732 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) (Notes 1 and 6) Current liabilities: Notes payable (Note 6) ...................................................... $ 45,893 $ -- Accounts payable - trade .................................................... 12,157 9,086 Other accrued liabilities (Note 4) .......................................... 13,304 9,698 ------------ ------------ Total current liabilities ...................................................... 71,354 18,784 Liabilities subject to compromise under reorganization proceedings (Note 5) ..................................................................... -- 126,812 ------------ ------------ Commitments and contingencies (Note 8) Shareholders' equity (deficiency): (Notes 1 and 9) Common stock, no par value; authorized 8,000,000 shares; issued and outstanding, 4,029,372 shares at May 30, 1998 ............................ -- 33,247 Common stock, $.001 par value; authorized 20,000,000 shares; issued and outstanding, 5,001,800 shares at May 29, 1999 ....................... 5 -- Additional paid in capital .................................................. 48,346 -- Deferred compensation ....................................................... (1,251) -- Notes receivable ............................................................ (771) -- Accumulated deficit ......................................................... (2,474) (68,111) ------------ ------------ Total shareholders' equity (deficiency) ........................................ 43,855 (34,864) ------------ ------------ Total liabilities and shareholders' equity (deficiency) ........................ $ 115,209 $ 110,732 ============ ============
See Notes to Financial Statements. 21 22 SAMUELS JEWELERS, INC. STATEMENTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
Successor Predecessor Eight Months Four Months Predecessor Ended Ended For the Years Ended May 29, October 2, May 30, May 31, 1999 1998 1998 1997 ------------ ------------ ------------ ------------ Net sales .................................................... $ 81,043 $ 27,494 $ 113,873 $ 130,446 Finance and credit insurance fees ............................ 6,517 3,397 11,316 13,900 ------------ ------------ ------------ ------------ 87,560 30,891 125,189 144,346 ------------ ------------ ------------ ------------ Costs and expenses: Cost of goods sold, buying and occupancy .................. 52,198 19,091 75,567 93,002 Selling, general and administrative expenses .............. 31,217 12,980 47,045 57,036 Provision for doubtful accounts ........................... 4,017 1,492 6,586 18,766 Impairment loss (Note 2) .................................. -- -- -- 3,947 Restructuring expenses (Note 1) ........................... -- -- -- 1,336 ------------ ------------ ------------ ------------ 87,432 33,563 129,198 174,087 ------------ ------------ ------------ ------------ Operating (loss) income ...................................... 128 (2,672) (4,009) (29,741) Interest expense, net (excludes $5,989 of interest expense in Fiscal 1998 on Senior Secured Notes, Note 6) ........... 2,202 2,367 7,025 12,745 ------------ ------------ ------------ ------------ Loss before reorganization items, income taxes, and extraordinary item ........................................ (2,074) (5,039) (11,034) (42,486) Reorganization items Fresh-start adjustments (Note 1) .......................... -- (66,042) -- -- Reorganization costs (Note 10) ............................ 400 4,437 11,134 2,322 ------------ ------------ ------------ ------------ Earnings (loss) before income taxes and extraordinary item ...................................................... (2,474) 56,566 (22,168) (44,808) Income taxes (Note 7) ........................................ -- -- -- 284 ------------ ------------ ------------ ------------ Earnings (loss) before extraordinary item .................... (2,474) 56,566 (22,168) (45,092) Extraordinary item (Note 1) .................................. -- 11,545 -- (876) ------------ ------------ ------------ ------------ Net earnings (loss) .......................................... $ (2,474) $ 68,111 $ (22,168) $ (45,968) ============ ============ ============ ============ Basic and Diluted Per share data: Earnings (loss) before extraordinary item ................. $ (0.49) 11.31 $ (5.50) (11.25) Extraordinary item (Note 1) ............................... $ -- 2.31 $ -- (0.22) ------------ ------------ ------------ ------------ Net earnings (loss) ....................................... $ (0.49) $ 13.62 $ (5.50) $ (11.47) ============ ============ ============ ============ Weighted-average number of common shares outstanding ............................................. 5,002 5,002 4,029 4,007 ============ ============ ============ ============
See Notes to Financial Statements. 22 23 SAMUELS JEWELERS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) (DOLLARS AND SHARES IN THOUSANDS)
Predecessor Successor Common Stock Common Stock ------------------------ ----------------------- Shares Amount Shares Amount ---------- ---------- ---------- ---------- Balance at May 31, 1996 ....................................... 3,999 $ 33,196 Net loss for the year ......................................... Shares issued pursuant to employment contracts (Note 9) ....... 20 37 Shares issued pursuant to employee stock purchase Plan (Note 9) ...................................................... 10 14 Balance at May 31, 1997 ....................................... 4,029 33,247 Net loss for the year ......................................... Balance at May 30, 1998 ....................................... 4,029 33,247 Net income for the four months ended October 2, 1998 .......... Fresh-start reporting adjustment .............................. (4,029) (33,247) Exchange of senior secured notes for stock .................... 2,500 $ 2 Shares issued pursuant to plan of reorganization .............. 2,502 3 Deferred compensation (Note 9) ................................ Notes receivable (Note 9) ..................................... Net loss for the eight months ended May 29, 1999 .............. ---------- ---------- ---------- ---------- Balance at May 29, 1999 ....................................... -- $ -- 5,002 $ 5 ========== ========== ========== ========== Retained Additional Deferred Notes Earnings Paid in Capital Compensation Receivable (Deficit) Total --------------- ------------ ---------- ---------- ---------- Balance at May 31, 1996 .................................... $ 25 $ 33,221 Net loss for the year ...................................... (45,968) (45,968) Shares issued pursuant to employment contracts (Note 9) .... 37 Shares issued pursuant to employee stock purchase Plan (Note 9) ................................................... 14 --------------- ------------ ---------- ---------- ---------- Balance at May 31, 1997 .................................... (45,943) (12,696) Net loss for the year ...................................... (22,168) (22,168) --------------- ------------ ---------- ---------- ---------- Balance at May 30, 1998 .................................... (68,111) (34,864) Net income for the four months ended October 2, 1998 ....... 68,111 68,111 Fresh-start reporting adjustment ........................... (33,247) Exchange of senior secured notes for stock ................. $ 32,086 32,088 Shares issued pursuant to plan of reorganization ........... 16,260 16,263 Deferred compensation (Note 9) ............................. $ (1,251) $ (1,251) Notes receivable (Note 9) .................................. $ (771) (771) Net loss for the eight months ended May 29, 1999 ........... (2,474) (2,474) --------------- ------------ ---------- ---------- ---------- Balance at May 29, 1999 .................................... $ 48,346 $ (1,251) $ (771) $ (2,474) $ 43,855 =============== ============ ========== ========== ==========
See Notes to Financial Statements. 23 24 SAMUELS JEWELERS, INC. STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Successor Co. Predecessor Co. Eight Months Four Months Predecessor Co. Ended Ended For the Years Ended May 29, October 2, May 30, May 31, 1999 1998 1998 1997 --------------- --------------- ---------- ---------- Cash Flows from Operating Activities: Net loss ..................................................... $ (2,474) $ 68,111 $ (22,168) $ (45,968) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Fresh-start adjustments ................................... -- (66,042) Extraordinary item - gain on forgiveness of debt .......... -- (11,545) -- -- Depreciation and amortization ............................. 3,292 1,341 4,166 4,992 Impairment of long-lived assets ........................... -- -- -- 3,947 Extraordinary loss ........................................ -- -- -- 876 Compensation on issuance of common stock .................. -- -- -- 37 Provision for doubtful accounts ........................... 4,017 1,492 6,586 18,766 Inventory valuation allowance ............................. -- -- (815) 3,033 Loss on sale or abandonment of property and equipment ..... 315 -- 2,132 311 Deferred income taxes ..................................... -- -- -- 50 Management stock grant .................................... -- 417 -- -- Changes in assets and liabilities: Customer receivables ...................................... (5,183) 2,652 (110) (4,598) Merchandise inventories ................................... (6,155) (4,592) 9,700 10,152 Prepaid expenses and other current assets ................. (190) 552 573 (111) Other assets .............................................. (148) (21) (141) (2,385) Restructuring and reorganization costs .................... -- -- 3,090 2,752 Accounts payable-- trade .................................. (545) 3,616 8,865 6,728 Other accrued liabilities ................................. (1,936) 1,921 3,182 9,681 --------------- --------------- ---------- ---------- Net cash provided by (used in) operating activities ......................................... (9,007) (2,098) 15,060 8,263 --------------- --------------- ---------- ---------- Cash Flows from Investing Activities: Purchase of property and equipment ........................... (6,478) (2,641) (3,081) (7,158) Proceeds from sale of assets ................................. 100 -- -- 74 --------------- --------------- ---------- ---------- Net cash used in investing activities ................ (6,378) (2,641) (3,081) (7,084) --------------- --------------- ---------- ---------- Cash Flows from Financing Activities: Net borrowing (repayments) under revolving credit facility .................................................. (565) (11,397) -- 49,666 Issuance of common stock ..................................... 15,012 -- -- -- Notes receivable ............................................. (771) -- -- -- Net (repayments) borrowings under securitization facility .................................................. -- -- -- (45,119) Proceeds from employee stock purchase plan ................... -- -- -- 14 Principal payments on long-term debt ......................... -- -- -- (183) --------------- --------------- ---------- ---------- Net cash provided by financing activities ............ 13,676 (11,397) -- 4,378 --------------- --------------- ---------- ---------- Net increase in cash and cash equivalents ...................... (1,709) (16,136) 11,979 5,557 Cash and cash equivalents at beginning of year ................. 3,165 19,301 7,322 1,765 --------------- --------------- ---------- ---------- Cash and cash equivalents at end of year ....................... $ 1,456 $ 3,165 $ 19,301 $ 7,322 =============== =============== ========== ========== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest .................................................. $ 1,958 $ 2,060 $ 5,760 $ 8,364 Income taxes .............................................. $ -- $ -- $ -- $ 30 Noncash investing and financing activities: Merchandise inventory returned in exchange for pre-petition .. $ -- $ -- $ 5,496 $ -- liabilities (Notes 1 and 5) Exchange of Senior Notes for Common Stock (Note 1) .......... $ 32,088 $ -- $ -- $ -- Deferred compensation (Notes 1 and 9) ........................ $ (1,251) $ -- $ -- $ --
See Notes to Financial Statements. 24 25 SAMUELS JEWELERS, INC. NOTES TO FINANCIAL STATEMENTS FOR THE EIGHT MONTH PERIOD ENDED MAY 29, 1999, THE FOUR MONTH PERIOD ENDED OCTOBER 2, 1998, THE FISCAL YEAR ENDED MAY 30 1998, AND THE FISCAL YEAR ENDED MAY 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. REORGANIZATION AND BASIS OF PRESENTATION REORGANIZATION Samuels Samuels Jewelers, Inc. ("Samuels" or the "Company"), was created in August, 1998 for the purpose of acquiring the assets of Barry's Jewelers, Inc. ("Barry's") as part of Barry's Plan of Reorganization (the "Plan") which was confirmed by the U.S Bankruptcy Court on September 16, 1998, and consummated on October 2, 1998 (the "Reorganization"). Samuels is incorporated in Delaware and was initially funded by $15 million of new equity provided by the former bondholders of Barry's who also consented to the conversion of their $50 million of Barry's bonds into equity of Samuels Jewelers, Inc. On May 11, 1997, (the "Petition Date"), Barry's filed a voluntary petition for reorganization under Chapter 11 in the United States Bankruptcy Court for the Central District of California, Los Angeles Division (the "Bankruptcy Court"). After the Petition Date, Barry's continued in possession of its properties and, as Debtor-in-Possession, was authorized to operate and manage its businesses and enter into all transactions (including obtaining services, inventories, and supplies) that it could have entered into in the ordinary course of business without approval of the Bankruptcy Court. On September 16, 1998, the Bankruptcy court entered an order (the "Confirmation Order") confirming Barry's Original Disclosure Statement and Plan of Reorganization dated April 30, 1998, as Modified (as so modified and confirmed, the "Plan"). A copy of the Plan and the Confirmation Order are attached as Exhibits to Barry's Current Report on Form 8-K dated September 16, 1998. Please refer to such documents for more information. Upon emergence from Chapter 11 proceedings and with regard to the second quarter of Fiscal 1999 and fiscal periods thereafter, the Company adopted the fresh start reporting requirements of AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" during the second quarter of Fiscal 1999. In accordance with the fresh start reporting requirements, the reorganization value of the Company has been allocated to the Company's assets in conformity with the procedures specified by the Accounting Principles Board Opinion 16, Business Combinations. In addition the accumulated deficit of the Company was eliminated and its capital structure was revalued in accordance with the Plan. The Company has recorded the effects of the Plan and Fresh-Start Reporting as of October 2, 1998. The adjustment to eliminate the Company's accumulated deficit totaled $77.6 million of which $11.6 million was forgiveness of debt and the remaining $66.0 million was Fresh-Start adjustments. Under the plan, the Company issued 5,001,800 shares of the reorganized company stock. Of those shares 2,500,000 shares were issued to holders of Allowed Class 2 and Class 5 claims (secured and unsecured Claims of Bondholders), an additional 2,251,800 were sold to holders of Allowed Class 2 and Class 5 claims, and 250,000 shares were granted to executive officers of the reorganized company. Under the plan, the Company issued 263,158 Reorganized Company Warrants to the holders of Allowed Class 9 claims (claims of former holders of common stock of Barry's Jewelers, Inc.) which are exercisable at rates outlined in the Company's Plan of Reorganization. The plan also provided for the payment of certain administrative claims, including tax claims, bank secured claims, and other allowed claims. Holders of Class 6 general unsecured claims are receiving payment at a rate of $.15 for each dollar of their allowed claims. On October 2, 1998, as part of its plan of reorganization, Barry's was merged into Samuels. The financial statements contained within this report are for Samuels Jewelers, Inc. after October 2, 1999. Nevertheless, the Company is providing the information with regard to Barry's Jewelers, Inc. as of and prior to that time under its obligation, as set forth in the Securities and Exchange Act regulations. Thus, as used herein, the Company, refers to Samuels for period after October 2, 1998 and to Barry's for periods through October 2, 1998. 25 26 BASIS OF PRESENTATION The results of operations and cash flows for the four months ended October 2, 1998 and for the years ended May 30, 1998 and May 31, 1997, include operations prior to the Company's emergence from Chapter 11 proceedings (referred to as "Predecessor Company") and the effects of Fresh-Start Reporting. The results of operations and cash flows for the eight months ended May 29, 1999 include operations subsequent to the Company's emergence from Chapter 11 proceedings (referred to as "Successor Company")and reflect the effects of Fresh-Start Reporting. As a result, the net income for the eight months ended May 29, 1999 is not comparable with prior periods and the net income for the year-to-date period ended May 29, 1999 is divided into Successor Company and Predecessor Company and is also not comparable with prior periods. In addition, the balance sheet as of May 29, 1999 is not comparable to prior periods for the reasons discussed above. The reorganized value of the Company's common equity of $47.1 million was determined by the Company, with the assistance of financial advisors, by reliance on the Discounted Cash Flow method using the weighted average cost of capital. The reorganized value of the Company has been allocated to specific asset categories pursuant to Fresh-Start Reporting. Reorganization Value in Excess of Amounts Allocated to Identifiable Assets reflects the difference in the Company's stock valuation and the Company's net assets. The Company is amortizing the Reorganization Value in Excess of Amounts Allocated to Identifiable Assets over ten years. The adoption of the Fresh-start reporting requirements had the following effect on the Company's unaudited Condensed Balance Sheet dated October 2, 1999:
Pre- Debt Exchange Confirmation Discharge of Stock ------------ --------- -------- ASSETS Current assets: Cash and cash equivalents ...................................... $ 14,562 $ (11,397) $ -- Customer receivables, net ...................................... 43,932 -- -- Merchandise inventories ........................................ 31,585 -- -- Prepaid expenses and other current assets ...................... 1,017 -- -- ------------ --------- --------- Total current assets .............................................. 91,096 (11,397) -- Net property and equipment ........................................ 14,905 -- -- Other assets ...................................................... 1,209 (718) -- Reorganization value in excess of amounts allocated to identifiable assets, net .......................................... -- -- -- ------------ --------- --------- Total assets ...................................................... $ 107,210 $ (12,115) $ -- ============ ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable - trade ....................................... $ 12,702 $ -- $ -- Other accrued liabilities ...................................... 11,932 3,308 -- ------------ --------- --------- Total current liabilities ......................................... 24,634 3,308 -- Liabilities subject to compromise under reorganization proceedings ....................................................... 126,499 (73,426) (53,073) Long-term debt .................................................... -- 46,458 -- Shareholders' equity (deficiency): Common stock, no par value; authorized 8,000,000 shares; Issued and outstanding, 4,029,372 shares at May 30, 1998 .... 33,247 -- (33,247) Common stock, $.001 par value; authorized 20,000,000 Shares; issued and outstanding, 5,001,800 shares at May 29, 1999 .................................................... -- -- 2 Additional paid in capital ..................................... 417 -- 86,318 Accumulated deficit ............................................ (77,587) 11,545 -- ------------ --------- --------- Total shareholders' equity (deficiency) ........................... (43,923) 11,545 53,073 ------------ --------- --------- Total liabilities and shareholders' deficiency .................... $ 107,210 $ (12,115) $ -- ============ ========= ========= Additional Fresh-Start Capitalization Adjusted ----------- -------------- --------- Current assets: Cash and cash equivalents ...................................... $ -- $ -- $ 3,165 Customer receivables, net ...................................... -- -- 43,932 Merchandise inventories ........................................ (5,056) -- 26,529 Prepaid expenses and other current assets ...................... -- -- 1,017 --------- ------------ --------- Total current assets .............................................. (5,056) -- 74,643 Net property and equipment ........................................ (1,238) -- 13,667 Other assets ...................................................... -- -- 491 Reorganization value in excess of amounts allocated to identifiable assets, net .......................................... 17,687 -- 17,687 --------- ------------ --------- Total assets ...................................................... $ 11,393 $ -- $ 106,488 ========= ============ ========= Liabilities and Shareholders' Equity (Deficiency) Current liabilities: Accounts payable - trade ....................................... $ -- $ -- $ 12,702 Other accrued liabilities ...................................... -- -- 15,240 --------- ------------ --------- Total current liabilities ......................................... -- -- 27,942 Liabilities subject to compromise under reorganization proceedings ....................................................... -- -- -- Long-term debt .................................................... -- (15,012) 31,446 Shareholders' equity (deficiency): Common stock, no par value; authorized 8,000,000 shares; Issued and outstanding, 4,029,372 shares at May 30, 1998 .... -- -- -- Common stock, $.001 par value; authorized 20,000,000 Shares; issued and outstanding, 5,001,800 shares at May 29, 1999 .................................................... -- 3 5 Additional paid in capital ..................................... (54,649) 15,009 47,095 Accumulated deficit ............................................ 66,042 -- -- --------- ------------ --------- Total shareholders' equity (deficiency) ........................... 11,393 15,012 47,100 --------- ------------ --------- Total liabilities and shareholders' deficiency .................... $ 11,393 $ -- $ 106,488 ========= ============ =========
26 27 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year. The Company changed its fiscal year end during 1998 from May 31 to the Saturday closest to May 31. The Company's fiscal years ended May 29, 1999 ("Fiscal 1999"), May 30, 1998 ("Fiscal 1998") and May 31, 1997 ("Fiscal 1997"), may be referred to herein as such. Cash and Cash Equivalents. The Company considers all highly liquid investments with an original maturity at date of purchase of three months or less to be cash equivalents. Customer Receivables. The Company offers its merchandise on credit terms to qualified customers. The Company's policy is to attempt to obtain a cash down payment on all credit sales, with remaining monthly payments established such that the payment of the credit balance will occur, generally, over a period ranging from 24 to 36 months. In accordance with industry practice, customer receivables are included in current assets in the Company's balance sheet. The Company routinely assesses the collectibility of its customer receivables. See "Note 11 Subsequent Events - Sale of Credit Portfolio to Alliance Data Systems." Merchandise Inventories. Merchandise inventories, substantially all of which represent finished goods, are stated at the lower of cost or market. Cost is determined using the average cost method. Property and Equipment. Property and equipment in existence at October 2, 1998 were stated at fair values as of that date pursuant to fresh start reporting adopted in connection with the Reorganization. Additions since October 2, 1998 are stated at cost. Depreciation and amortization of leasehold improvements, furniture and fixtures, computers and equipment are computed by the straight-line method over the lesser of related lease terms or the estimated useful lives of such assets as set forth in the following table:
USEFUL LIVES IN YEARS ------------ Leasehold improvements ............ 10-15 Furniture and fixtures ............ 5-10 Computers and equipment ........... 5
Impairment of Long-lived Assets. Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of," requires an entity to review long-lived assets for impairment and recognize a loss if expected future cash flows are less than the carrying amount of the assets; such losses are measured as the difference between the carrying value and the estimated fair value of the assets. The estimated fair value is determined based on expected future cash flows. The Company adopted this standard in Fiscal 1997 and recognized an impairment loss of approximately $3.9 million. This impairment loss is comprised of leasehold improvements and fixtures at 37 closed stores, as well as computer equipment and software related to the Company's plan to replace its merchandise management and point-of-sale systems. Deferred Debt Issuance. Deferred debt issuance costs are reported on the Company's balance sheet as other assets and are being amortized on a straight-line basis over the terms of the related financing agreements. Revenue Recognition. The Company recognizes revenue upon delivery of merchandise to the customer and either the receipt of a cash payment or approval of a credit agreement. Reorganization Costs. Expenditures directly related to the Chapter 11 filing are classified as reorganization costs and are expensed as incurred. See "Note 10 Reorganization costs." Income Taxes. Income taxes are computed using the liability method. The provision for income taxes includes income taxes payable for the current period and the deferred income tax consequences of transactions that have been recognized in the Company's financial statements or income tax returns. The carrying value of deferred income tax assets is determined based on an evaluation of whether the realization of such assets is more likely than not. Temporary differences result primarily from accrued liabilities, valuation allowances, depreciation and amortization, and state franchise taxes. The valuation allowance is reviewed periodically to determine the amount of deferred tax asset considered realizable. (Loss) per Share. The Company computes earnings per share in accordance with SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires the Company to present basic and diluted earnings per share on the face of the income statement. Basic earnings per 27 28 share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the sum of the weighted average number of common shares outstanding for the period plus the assumed exercise of all dilutive securities. However, in the case of a loss per share, dilutive securities outstanding would be antidilutive and would, therefore, be excluded from the computation of diluted earnings per share. The weighted-average number of shares used to calculate basic earnings per share was 5,001,800 for Fiscal 1999. Diluted earnings per share were the same as basic earnings per share. Accounting for Stock-based Compensation. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" ("SFAS No. 123") requires compensation expense equal to the fair value of an option grant to be estimated using accepted option-pricing formulas when an option is granted. The compensation may either be charged to the statement of operations or set forth as pro forma information in the footnotes to the financial statements, depending on the method elected by the Company upon adoption of the standard. During Fiscal 1997, the Company adopted the disclosure requirements of SFAS No. 123 and elected to continue using the intrinsic value method prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," for stock option expense recognition and has disclosed the proforma effects of SFAS No. 123. See "Note 9 Shareholders' Equity (Deficiency)." Disclosure about Segments of an Enterprise and Related Information. Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS No. 131") became effective for years beginning after December 15, 1997. The Company is not engaged in multiple businesses or geographic segments requiring separate disclosure under SFAS No. 131. Use of 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 expense during the reporting period. Actual results could differ from those estimates. Fair Market Value of Financial Instruments. The carrying amounts of notes payable and trade accounts payable approximate fair value because of the short maturity of these financial instruments. Reclassifications. Certain previously reported amounts were reclassified to conform to current year presentations. 3. INVENTORY VALUATION In connection with the implementation of fresh-start reporting, the Company increased its inventory valuation reserve to $7,274 at October 2, 1998 in order to adjust the carrying value of its inventory to its net realizable value. The inventory valuation reserve was $5,336 at May 29, 1999 and $2,218 at May 30, 1998. The reduction in the inventory valuation reserve is the result of sales of aged merchandise below normal margin levels. 4. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following as of the fiscal years ended May:
Successor Predecessor 1999 1998 ---------- ---------- Accrued wages and benefits ........ $ 2,472 $ 3,450 Accrued bankruptcy claims ......... 2,071 -- Accrued professional fees ......... 1,922 1,766 Sales tax ......................... 694 686 Layaway and customer refunds ...... 414 489 Accrued interest .................. 254 790 Other accrued expenses ............ 5,477 2,517 ---------- ---------- $ 13,304 $ 9,698 ========== ==========
28 29 5. LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS Liabilities subject to compromise under reorganization proceedings consists of the following as of the fiscal years ended May:
Successor Predecessor 1999 1998 ---------- ----------- Secured liabilities: Borrowings outstanding under Revolving Credit Agreement (Note .. .. $ -- $ 57,855 6) Senior Secured Notes (includes interest payable of $3,073 Accrued through Petition Date) (Note 6) ......................... 53,073 Other notes payable and capital lease obligations .................. -- 88 ---------- ---------- -- 111,016 ---------- ---------- Unsecured liabilities: Trade accounts payable ............................................. 4,870 Other accrued expenses (includes restructuring and Reorganization expenses) ........................................ -- 10,926 ---------- ---------- -- 15,796 ---------- ---------- $ -- $ 126,812 ========== ==========
In accordance with the Plan, these liabilities subject to compromise were resolved on the Effective Date. 6. NOTES PAYABLE On October 2, 1998, the Company entered into a three year, $50.0 million financing agreement with Foothill Capital Corporation as a lender and as agent for a lender group (the "Lenders"). The lenders will make revolving advances to the Company in amounts determined based on percentages of eligible accounts receivable and inventory. The annual rate of interest will be, at the Company's option, (i) 2.25% per annum over the Eurodollar rate or (ii) 0.5% per annum over the bank's prime rate, provided, however, that in no event will the applicable interest rate on any advance be less than 7% per annum. Interest charges are payable monthly. Upon the occurrence and during the continuation of any event of default under the financing agreement, all obligations will bear interest at a per annum rate equal to three percentage points above the otherwise applicable interest rate. As collateral for any and all obligations to the lenders under the financing agreement, the Company granted a first priority perfected security interest in and to substantially all of its owned or thereafter acquired assets, both tangible and intangible. The financing agreement contains quarterly covenants which include its meeting a minimum level of tangible net worth and prohibits the payment of dividends. See "Note 11 Subsequent Events - Amendment to Financing Agreement with Foothill." At May 29, 1999 the Company had direct borrowings of $45.9 million outstanding under the revolving line of credit, all of which was classified as current, with an interest rate of 8.25% on $2.9 million, 7.25% on 18.0 million and 7.24% on $25.0 million. The weighted average interest rate for the eight months ended May 29, 1999 was 7.56%. At May 29, 1999 the Company had additional credit available of approximately $4.1 million. 7. INCOME TAXES During 1999, the Company's net operating losses were reduced by approximately $49 million as a result of debt discharge income. Pursuant to IRC 382 (1)(5), the Company's NOL's were further reduced by $27 million. At May 29, 1999, the Company had a net operating loss carryforward for federal income tax purposes of $36 million. The remaining carryforward is not subject to any annual limitation on its use. In the event of more than a 50% change in ownership of the Company prior to October 2, 2000, the annual limitation on the use of the losses will be zero. These losses begin to expire in 2012. In addition, the Company has AMT credit carryforwards of $109. These credits do not expire. The Company maintains a valuation allowance against the net deferred tax assets, which in Management's opinion reflects the net deferred tax asset that is more likely than not to be realized. 29 30 The provision for income taxes includes the following:
SUCCESSOR PREDECESSOR FOR THE EIGHT FOR THE FOUR PREDECESSOR MONTHS ENDED MONTHS ENDED FOR THE FISCAL YEARS MAY 29, OCTOBER 2, ENDED MAY 1999 1998 1998 1997 ------------- ------------ -------- -------- Current: Federal ........ $ -- $ -- $ -- $204 State .......... -- -- -- 30 ---- ---- ---- ---- -- -- -- 234 Deferred: Federal ........ -- -- -- 50 State .......... -- -- -- -- ---- ---- ---- ---- -- -- -- 50 ---- ---- ---- ---- $ -- $ -- $ -- $284 ==== ==== ==== ====
The Company's effective tax rate differs from the statutory federal income tax rate as follows:
SUCCESSOR PREDECESSOR FOR THE EIGHT FOR THE FOUR PREDECESSOR MONTHS ENDED MONTHS ENDED FOR THE FISCAL YEARS MAY 29, OCTOBER 2, ENDED MAY 1999 1998 1998 1997 ------------- ------------ -------- -------- Statutory rate ........ (35.0)% (35.0)% (35.0)% (35.0)% Surtax benefit ........ 1.0 1.0 1.0 1.0 Valuation allowance ... 34.0 34.0 34.0 35.4 Other ................. -- -- -- (0.8) ---- ---- ---- ---- 0.0% 0.0% 0.0% 0.6% ==== ==== ==== ====
Significant components of the Company's deferred income taxes are as follows:
SUCCESSOR PREDECESSOR MAY 29, MAY 30, 1999 1998 --------- ----------- Current tax assets: Reserve for bad debts .............. $ 2,233 $ 3,081 Inventory .......................... 705 584 Vacation accrual ................... 358 341 State Franchise taxes .............. 991 (1,018) Restructuring reserve .............. 3,053 3,617 Other .............................. (8) -- -------- -------- 7,332 6,605 ======== ======== Noncurrent tax assets: State franchise taxes .............. (818) (1,218) Property and equipment ............. (1,138) (1,237) Net operating loss carryforwards ... 2,558 40,368 Other .............................. 2,159 1,006 -------- -------- 2,761 38,919 -------- -------- Total deferred tax assets ............ 10,093 45,524 Valuation allowance .................. (9,982) (45,452) -------- -------- Net deferred tax assets .............. $ 111 $ 72 ======== ========
8. COMMITMENTS AND CONTINGENCIES The Company leases store and office facilities and certain equipment used in its regular operations under operating leases, which expire at various dates through 2010. The store leases provide for additional rentals based upon sales and for payment of taxes, insurance and certain other expenses. Rent expense charged to operations is as follows for the fiscal years ended May:
SUCCESSOR PREDECESSOR FOR THE EIGHT FOR THE FOUR PREDECESSOR MONTHS ENDED MONTHS ENDED FOR THE FISCAL YEARS MAY 29, OCTOBER 2, ENDED MAY 1999 1998 1998 1997 ------------- ------------ ------- ------- Minimum rentals ...... $ 5,078 $ 2,620 $ 9,373 $11,616 Contingent rentals ... 1,218 536 2,216 2,706 ------- ------- ------- ------- $ 6,296 $ 3,156 $11,589 $14,322 ======= ======= ======= =======
30 31 Included in the above table is rent expense paid to officers/shareholders related to certain stores and the office facility of $0, $683 and $649, respectively for the fiscal years ended May 1999, 1998 and 1997. Minimum rental commitments for all remaining noncancelable leases in effect as of May 29, 1999 are as follows for the fiscal years ended May: 2000............. $ 7,034 2001............. 6,391 2002............. 5,842 2003............. 5,516 2004............. 4,882 Thereafter....... 13,835 -------- $ 43,500 ========
The Company enters into consignment inventory agreements with its key vendors in the ordinary course of business. During Fiscal 1999, consignment inventory on hand ranged from $30 to $38 million. These amounts are excluded from the merchandise inventory balance on the accompanying balance sheet. Consignment inventory was approximately $30.1 million and $32.0 at May 29, 1999 and May 30, 1998, respectively. The Company is from time to time involved in routine litigation incidental to the conduct of its business. Based upon discussions with legal counsel, management believes that its litigation currently pending, other than its Chapter 11 proceedings previously discussed, will not have a material adverse effect on the Company's financial position or results of operations. 9. SHAREHOLDERS' EQUITY (DEFICIENCY) Stock Option Plans. In 1998 the Company adopted a stock option plan for certain of its officers and key employees. The number of shares of common stock that can be purchased pursuant to this plan cannot exceed 500,000 and must be granted prior to October 2, 2008. The exercise price for options granted under this plan may not be less than the fair market value of the Company's common stock at the date of grant. These options become exercisable over a four year period and vest at 25% per year. At May 29, 1999, the Company had 231,200 options outstanding with an exercise price of $6.67 per share. In 1998 the Company also adopted a stock option plan for its non-employee directors. The number of shares of common stock that can be purchased pursuant to this plan cannot exceed 250,000 and must be granted prior to September 30, 2008. The exercise price for options granted under this plan may not be less than the fair market value of the Company's common stock at the date of grant. These options become exercisable over a four year period and vest at 25% per year. At May 29, 1999, the Company had 25,000 options outstanding with an exercise price of $6.67 per share. Stock options for all plans are summarized as follows:
Weighted Average 1999 Exercise Price ------- ---------------- Options outstanding at the beginning of the year......... -- -- Granted......................... 256,200 $ 6.67 ------- ------- Options outstanding at the end of the year............... 256,200 $ 6.67 ======= =======
The estimated fair value of options granted was $3.15 per share during Fiscal 1999. The fair value of each stock option grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate 4.8%, no dividend yield, expected lives of 7.23 years and expected volatility of 35%. The Company applies the provisions of APB Opinion 25 and related interpretations in accounting for its employee benefit plans. Accordingly no compensation expense has been recognized for its stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for the awards under those plans consistent with the method prescribed by SFAS No. 123, The Company's proforma net loss would have been $3.0 million for the eight month period ended May 29, 1999. Proforma net loss per share would have been $(.60) for the eight month period ended May 29, 1999. 31 32 Warrants. At May 29, 1999 the Company had 263,158 warrants outstanding which were issued to shareholders of Barry's Jewelers, Inc as a part of the Company's Reorganization. The warrants are exercisable over a five year period with strike prices ranging from $19.69 to $24.00 per share. The Company has an option that, upon the occurrence of certain transactions, allows the Company to call the warrants at a price equal to the greater of $.20 or the net exercise value (i.e., the difference between the fully diluted market price of the common stock and the strike price of the warrant.) 401(k) Retirement Plan. Barry's Board of Directors adopted a qualified 401(k) retirement plan effective June 1, 1995. Substantially all full-time employees of the Company, age 21 and older, are eligible to participate in the Company's 401(k) plan beginning the first day of the month following the date of employment. Employees may elect to contribute 1% to 15% of their compensation, subject to certain IRS limitations. Effective June 1, 1999, the plan was amended, changing its name to Samuels 401(k) Plan, changing the plan record keeper, changing the eligibility period to the first day of the month following the date of employment, and changing the plan year to a calendar year. Employer matching contributions are determined annually by a Board of Directors resolution. The Board of Directors agreed to match contributions for calendar year 1999 at $.50 per dollar of contribution up to a 6% deferral rate. No employer matching contributions were granted prior to that time. Participants are partially vested in employer matching contributions after two years and fully vested after five years of employment with the Company. Employee Incentive Stock Grant. On October 2, 1998, the Company issued 250,000 restricted shares of common stock to certain key executives as part of their employment agreements provided for in the Plan of Reorganization. These grants vest 25% per year, commencing on the grant date and each of the first three anniversaries thereof. At May 29, 1999, 62,500 shares were fully vested. As a result of these grants, the company recognized deferred compensation expense in the amount of $0.4 million for Fiscal 1999. The deferred compensation expense is being amortized over the remaining three-year vesting period. Notes Receivable. As part of the employment agreements for certain key executives, the company issued notes in the amount of $936 (and agreed to issue more notes as shares vest) to help defray the tax expense of the above stock grants. These notes bear interest at the applicable federal short-term rate and are payable in quarterly installments over the three year vesting schedule. If however, the executive is employed on the quarterly due date, a bonus in the amount of the principal then due is then payable. The Company recognized deferred compensation expense in the full amount of the notes issued. The notes receivable will be charged to income as compensation expense over three-years. 10. REORGANIZATION COSTS Reorganization costs consisted of the following:
SUCCESSOR PREDECESSOR FOR THE EIGHT FOR THE FOUR PREDECESSOR MONTHS ENDED MONTHS ENDED FOR THE FISCAL YEARS MAY 29, OCTOBER 2, ENDED MAY 1999 1998 1998 1997 ------------- ------------ -------- -------- Professional fees .............................................. $ -- $ 3,196 $ 5,662 $ 462 Loss on disposal of property and equipment (related to store closures and the Company's former headquarters)............... -- 379 2,448 -- Adjustments to pre-petition unsecured liabilities .............. -- -- 1,440 -- Provision for lease rejection claims ........................... -- 81 1,127 1,860 Employee costs related to the Chapter 11 filing ................ 400 239 696 -- Other .......................................................... -- 926 586 -- Interest earned on accumulated cash resulting from Chapter 11 Filing .............................................. -- (384) (825) -- -------- -------- -------- -------- Total .......................................................... $ 400 $ 4,437 $ 11,134 $ 2,322 ======== ======== ======== ========
Cash paid (net of interest income) for reorganization costs during the eight months ended May 29,1999, the four months ended October 2, 1998, and the years ended May 1998 and 1997 amounted to $2.5 million, $2.3 million, $3.6 million and $1.2 million, respectively. Retainers paid to professionals are included in prepaid and other current assets in the accompanying 1997 balance sheet. 11. SUBSEQUENT EVENTS Sale of Credit Portfolio to Alliance Data Systems. On July 20, 1999, the Company entered agreements with Alliance Data Systems ("ADS") to sell its existing credit card accounts and to provide a third party credit card program for the benefit of the Company's customers. The transactions set out in the agreements were effected on August 30, 1999. The Company does not expect a significant change in its credit policies under the agreement with ADS. On closing the sale to ADS, the company sold its approximately $46.8 million, Accounts Receivable to World Financial Network National Bank ("WFN") at face value, less a hold back reserve of 32 33 approximately $9.4 million. The net proceeds of approximately $37.4 million were used to reduce the balances outstanding under the company's financing agreement with the Lenders. Amendment to financing agreement with Foothill. Concurrent with the sale of the credit facility with ADS, the financing agreement was amended to allow, among other things, for the sale to WFN and a reduction of the total commitment under the financing agreement with the Lenders from $50.0 million to $40.0 million. Acquisition of Silverman's and New Store Commitments. On July 20, 1999 Samuels entered into a purchase agreement with Silverman's to acquire lease rights and fixtures for seventeen Silverman's stores. The purchase price for these assets was 60,000 shares of the Company's Common Stock, the delivery of which is contingent upon the delivery of the assets to the Company. The company will not assume any of Silverman's liabilities and will be acquiring none of Silverman's other assets as part of the purchase agreement. Acquisition of the lease rights is subject to landlord approval, and where landlord approval cannot be received, the purchase price will be reduced based upon an agreed upon allocation. The 60,000 shares have been issued and are registered under the Company's shelf registration on Form S-1, declared effective by the SEC on June 9, 1999, but they are currently held in trust pursuant to an escrow agreement and are to be released to the seller upon the successful assignment of the lease rights to the Company. The actual number of leases assigned may not be determinable until as late as December 1, 1999. To the extent certain lease rights are not assigned, the shares allocated to those leases will be returned to the Company. As of August 31, 1999, five leases have been assumed that will require the issuance of 16,500 shares. Two lease assignments with a total of 4,600 shares allocated have already been abandoned. The other ten lease assignments are still under negotiation. The Silverman's acquisition represents the Company's departure from a mall only retail jewelry environment. Only one of the former Silverman's stores is located in a mall. The others are either located in power centers or are stand-alone stores. The Company plans to rename the non-mall stores Samuels Diamonds. The mall store will be renamed Samuels Jewelers. As of August 31, 1999, in addition to the Silverman's store acquisition, the company has opened two new stores and entered into leases for twelve additional new stores which will be opened prior to the 1999 Christmas retail selling season. Five of these stores will be in three new markets and the rest are in existing markets. Additionally, the company is in various stages of negotiations for several other leases on new locations. 33 34 SCHEDULE II SAMUELS JEWELERS, INC. VALUATION & QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGE TO BALANCE AT BEGINNING COSTS AND DEDUCTIONS/ END OF OF PERIOD EXPENSES OTHER PERIOD ---------- --------- ----------- ---------- YEAR END 1999: Allowance for doubtful accounts ..... $ 7,099 $ 5,509 $ (7,488) $ 5,120 Inventory valuation allowance (1) ... $ 2,218 $ 5,056 $ (1,938) $ 5,336 YEAR END 1998: Allowance for doubtful accounts ..... $ 10,300 $ 6,586 $ (9,787) $ 7,099 Inventory valuation allowance ....... $ 3,033 $ $ (815) $ 2,218 YEAR END 1997: Allowance for doubtful accounts ..... $ 10,930 $ 18,766 $(19,396) $ 10,300 Inventory valuation allowance ....... $ -- $ 3,033 $ -- $ 3,033 YEAR END 1996: Allowance for doubtful accounts ..... $ 11,662 $ 11,839 $(12,571) $ 10,930
(1) The inventory valuation allowance was adjusted by $5,056 as of October 2, 1998, as a part of the Company's adoption of the fresh-start reporting requirements of Statement of Position 90-7. See "Note 1 Reorganization and Basis of Presentation." 34 35 INDEX TO EXHIBITS
Exhibit No. Exhibit ----------- ------- 2.1 Order Confirming Original Disclosure Statement and Plan of Reorganization, Dated April 30, 1998, Proposed by Barry's Jewelers, Inc., as modified, dated September 16, 1998 (with Plan attached).(1) 2.2 Certificate of Ownership and Merger of Barry's Jewelers, Inc. with and into Samuels Jewelers, Inc. dated October 2, 1998.(1) 3.1 Certificate of Incorporation of Samuels Jewelers, Inc.(1) 3.2 Bylaws of Samuels Jewelers, Inc.(1) 4.1 Warrant Agreement dated as of October 2, 1998 between the Company and Norwest Bank Minnesota, N.A., as Warrant Agent.(1) 4.2 Registration Rights Agreement dated as of October 2, 1998 among the Company, The Galileo Fund, L.P., B III Capital Partners, L.P., DDJ Overseas Corporation, Paine Webber High Income Fund, Managed High Yield Fund Inc., All-American Term Trust Inc. and Paine Webber Offshore Funds PLC, The High Income Fund.(1) 10.1(a) Loan and Security Agreement dated October 2, 1998, between the Company and Foothill Capital Corporation, as agent for certain lenders party thereto.(2) 10.1(b) Amendment Number One to Loan and Security Agreement entered into as of April 15, 1999, among the Company, Foothill Capital Corporation and the financial institutions listed on the signature pages thereto.(3) 10.1(c) Amendment Number Two to Loan and Security Agreement entered into as of August 30, 1999, among the Company, Foothill Capital Corporation and the financial institutions listed on the signature pages thereto, (3) 10.2 Employment Agreement, dated as of October 2, 1998 between the Company and Randy N. McCullough.(1) 10.3 Employment Agreement, dated as of October 2, 1998 between the Company and E. Peter Healey.(1) 10.4 Employment Agreement, dated as of October 2, 1998 between the Company and Chad C. Haggar.(1) 10.5 Employment Agreement, dated as of October 2, 1998 between the Company and Bill R. Edgel.(1) 10.6 Employment Agreement, dated as of October 2, 1998 between the Company and Paul Hart.(1) 10.7 Private Label Credit Card Agreement between World Financial Network National Bank and the Company dated as of July 27, 1999.(3) 10.8 Purchase and Sale Agreement between World Financial Network National Bank and the Company dated as of July 27, 1999.(3) 23.1 Consent of Independent Auditors.(3) 27.1 Financial Data Schedule.(3) 99.1 Press Release dated October 5, 1998.(1)
- --------------- (1) Incorporated by reference to the Company's Current Report on Form 8-K filed October 6, 1998. (2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended August 29, 1998. (3) Filed herewith. EX-10.1(B) 2 AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.1(b) AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT This Amendment Number One to Loan and Security Agreement ("Amendment") is entered into as of April 15, 1999, among SAMUELS JEWELERS, INC., a Delaware corporation (the "Borrower"), on the one hand, and the financial institutions listed on the signature pages hereof (such financial institutions, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders"), and FOOTHILL CAPITAL CORPORATION, as Agent ("Agent"), on the other hand. RECITALS A. Borrower, Lenders and Agent have previously entered into that certain Loan and Security Agreement, dated as of October 2, 1998 (the "Agreement"). B. Borrower, Lenders and Agent desire to amend the Agreement as provided for an on the conditions herein. NOW, THEREFORE, Borrower, Lenders and Agent hereby amend certain provisions of the Agreement as follows: 1. DEFINITIONS. All initially capitalized terms used in this Amendment shall have the meanings given to them in the Agreement unless specifically defined herein. 2. AMENDMENTS 2.1 Section 1.1 of the Agreement is hereby amended by adding the following definition thereto: "Owned Inventory" means, as of any date of determination, Inventory that is owned by Borrower (other than all merchandise classified on the Borrower's books and records as "miscellaneous" including, but not limited to, customer trade-ins, breakouts and giftware), and specifically excluding any Inventory acquired by Borrower on consignment from vendors. 2.2 Section 2.1 (a) (y) of the Agreement is hereby amended and restated in its entirety to read as follows: (y) the lesser of (i) 70% (75% during a Seasonal Period) of the Cost of Eligible Inventory, less the amount, if any, of the Inventory Reserve, and reserves for gift certificates outstanding and for shrinkage, and (ii) 80% (85% during a Seasonal Period) of the GOB Value of Owned Inventory, 1 2 less the amount, if any, of the Inventory Reserve and reserves for gift certificates outstanding and for shrinkage, minus 2.3 Section 7.20 (b) of the Agreement is hereby amended and restated in its entirety to read as follows: (b) Tangible Net Worth. Tangible Net Worth of at least the following amounts as of the end of the corresponding fiscal quarters:
Fiscal Quarter Ending Minimum Tangible Net Worth --------------------- -------------------------- 05/29/99 $ 26,000,000 08/29/99 $ 24,000,000 11/27/99 $ 20,000,000
for each fiscal quarter ending thereafter, such minimum Tangible Net Worth shall be set at amounts acceptable to the Agent and the Lenders based upon a discount from the Borrower's projected Tangible Net Worth for such periods, all as set forth in detailed financial projections (including a balance sheet, income statement, statement of cash flows, and availability calculations) for Borrower's fiscal year ending June 3, 2000, which projections are to be delivered to Lenders on or before June 1, 999. Failure to deliver such projections by such date, in form and content (and reflecting financial performance) acceptable to the Lenders in their sole discretion, shall constitute an Event of Default. 2.4 Section 17.5(a) of the Agreement is hereby amended by deleting the words "within three days" contained therein and replacing them with the words "within seven Business Days". 3. REPRESENTATION AND WARRANTIES. Borrower hereby affirms to Lenders and Agent that all Borrower's representations and warranties set forth in the Agreement are true, complete and accurate in all respects as of the date hereof (except to the extent such representations and warranties relate solely to an earlier date). 4. DEFAULTS; WAIVER. Agent and the Lenders acknowledge and agree that any Event of Default occasioned by Borrower's noncompliance with the requirements of Section 7.20(b) (minimum Tangible Net Worth) as set forth in the Loan Agreement prior to the amendment provided in Section 2 hereof, is hereby waived. 2 3 5. Borrower hereby affirms to Lenders and Agent that, subject to the waiver provided in the preceding sentence, no Default or Event of Default exists as of the date hereof. 6. CONDITIONS PRECEDENT. The effectiveness of this Amendment is expressly conditioned upon the following: (a) Receipt by Agent of fully executed copies of this Amendment; and (b) Payment of a fee to Agent, for the pro rata account of Lenders, in the amount of $10,000. 7.COSTS AND EXPENSES. Borrower shall pay to Agent all of Agent's out-of-pocket costs, and expenses (including, without limitation, the reasonable fees and expenses of its counsel, which counsel may include any local counsel reasonably deemed necessary, search fees, filing and recording fees, documentation fees, appraisal fees, travel expenses, and other fees) arising in connection with the preparation, execution, and delivery of this Amendment and any related documents. 8. LIMITED EFFECT. In the event of a conflict between the terms and provisions of this Amendment and the terms and provisions of the Agreement, the terms and provisions of this Amendment shall govern. In all other respects, the Agreement, as amended, modified, and supplemented hereby, shall remain in full force and effect. 9. COUNTERPARTS: EFFECTIVENESS. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed and delivered shall be deemed to be an original. All such counterparts, taken together, shall constitute but one and the same Amendment. This Amendment shall become effective upon the execution of a counterpart of this Amendment by each of the parties hereto. 3 4 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above. SAMUELS JEWELERS, INC. a Delaware corporation By: /s/ ROBERT HERMAN ------------------------------ Title: /s/ Asst. Secretary --------------------------- FOOTHILL CAPITAL CORPORATION a California corporation, as Agent and as a Lender By: /s/ ROBERT CASTINE ------------------------------ Title: /s/ Vice President --------------------------- LASALLE BUSINESS CREDIT, INC. a Delaware corporation By: /s/ SCOTT BUSCH ------------------------------ Title: /s/ FVP --------------------------- SUNROCK CAPITAL CORP. a Delaware corporation By: /s/ ROBERT HERMAN ------------------------------ Title: /s/ Asst. Secretary --------------------------- 4 EX-10.1(C) 3 AMENDMENT NO. 2 TO LAON AND SECURITY AGREEMENT 1 EXHIBIT 10.1(c) AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT This Amendment Number Two to Loan and Security Agreement ("Amendment") is entered into as of August 30, 1999, among SAMUELS JEWELERS, INC., a Delaware corporation (the "Borrower"), on the one hand, and the financial institutions listed on the signature pages hereof (such financial institutions, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders"), and FOOTHILL CAPITAL CORPORATION, as Agent ("Agent"), on the other hand. RECITALS A. Borrower, Lenders and Agent have previously entered into that certain Loan and Security Agreement, dated as of October 2, 1998 and amended by that certain Amendment Number One, dated as of April 15, 1999 (the "Agreement"). B. Borrower, Lenders and Agent desire to further amend the Agreement as provided for and on the conditions herein. NOW, THEREFORE, Borrower, Lenders and Agent hereby amend certain provisions of the Agreement as follows: 1. DEFINITIONS. All initially capitalized terms used in this Amendment shall have the meanings given to them in the Agreement unless specifically defined herein. 2. AMENDMENTS. 2.1 Section 1.1 of the Agreement is hereby amended by deleting the following definitions therefrom: "Credit Sales Reserve," "Dilution Reserve," "Eligible Accounts," and "Reduction Option." 2.2 Section 1.1 of the Agreement is hereby amended by adding the following new definitions thereto: "Credit Card Issuer" means World Financial Network National Bank. "Credit Card Agreement" means that certain Private Label Credit Card Program Agreement, between Credit Card Issuer and Borrower. "Holdings" means Samuels Holdings, a California corporation, and a wholly owned subsidiary of Borrower. 1 2 "Permitted Accounts Sale Agreement" means that certain Purchase and Sale Agreement, dated as of July 27, 1999 between Borrower and Credit Card Issuer. "Permitted Accounts Sale Proceeds" means the monies due to Borrower as a result of the sale of the Private Label Accounts pursuant to the Permitted Accounts Sale Agreement. "Permitted Stock Repurchase Transactions" means any of one or more transactions in which Borrower repurchases its common stock in the open market, so long as (a) at such time no Event of Default has occurred and is continuing or would arise as a result of such repurchase, (b) such purchase is not from an Affiliate, (c) the purchase price for any such transaction does not exceed $7 per share, and (d) after each such repurchase is taken into account Borrower's Availability would be at least $5,000,000. "Private Label Accounts" means those certain Accounts existing as of August 30, 1999 and arising out of Borrower's sales of Inventory to customers pursuant to Borrower's existing private label credit card arrangements, together with those of Borrower's Books and any General Intangibles related to such Accounts all as more completely described on Schedule P-2. The Private Label Accounts are to be sold to Credit Card Issuer pursuant to the Permitted Accounts Sale Agreement "Samuels.com" means Samuels.com, Inc., a Delaware corporation, and a wholly owned subsidiary of Borrower. 2.3 Section 1.1 of the Agreement is hereby amended by amending each of the following existing definitions to read as hereinafter set forth: (a) "Maximum Amount" means $40,000,000. (b) "Permitted Accounts Sale" means Borrower's sale of its Private Label Accounts to the Credit Card Issuer from time to time on the terms set forth in the Permitted Accounts Sale Agreement. (c) "Seasonal Period" means, with respect to Advances against Inventory under Section 2.1 (a)(y). the period from and including October 1 in any year through and including December 15 in that year. 2.4 Section 2.1 (a) of the Agreement is hereby amended by deleting paragraph (x) therefrom in its entirety. 2.5 Section 2.1 (b) of the Agreement is hereby amended to read as follows: 2 3 (b) Anything to the contrary in Section 2.1(a) above notwithstanding, Agent may create reserves against the Borrowing Base or reduce its advance rates based upon Eligible Inventory without declaring an Event of Default if it determines that there has occurred a Material Adverse Change. 2.6 Section 2.1(n) of the Agreement is hereby amended and restated in its entirety to read: "[Intentionally Deleted]" 2.7 Section 5.2 of the Agreement is hereby amended and restated in its entirety to read: "[Intentionally Deleted]" 2.8 Section 7.3 of the Agreement is hereby amended by adding the following to the end thereof: ;provided, however, that Borrower shall be entitled to make the Permitted Accounts Sale to the Credit Card Issuer pursuant to the terms of the Permitted Accounts Sale Agreement. 2.9 Clause (viii) of Section 7.13 of the Agreement is hereby amended to read as follows: (viii) Borrower may hold not less than 100% of the equity interests in Holdings and Samuels.com and may hold the Tax Loan Notes. 2.10 a new clause (x) is hereby added to Section 7.13 of the Agreement as follows: (x) Borrower may acquire its own shares in one or more Permitted Stock Repurchase Transactions; provided, however, that the aggregate amount Borrower may spend for all such transactions may not exceed $1,000,000; 2.11 Section 7.14(c) of the Agreement is hereby deleted and replaced with the following: (c) advances or any loans to any Affiliate of Borrower permitted by clause (viii) of Section 7.13; 2.12 Section 7.20(a) of the Agreement is hereby amended and restated in its entirety to read: "[Intentionally Deleted]" 3 4 2.13 Section 7.20 (b) of the Agreement is hereby amended to read as follows: (b) Tangible Net Worth. A Tangible Net Worth of at least the following amounts as of the last day of the fiscal quarters of Borrower ending on or about the last day of the following months:
Month Minimum Tangible Net Worth ----- -------------------------- August 1999 $24,000,000 November 1999 $20,000,000 February 2000 $28,000,000 May 2000 $27,000,000 August 2000 $24,000.000 November 2000 $21,000,000 February 2001 $29,000,000 May 2001 $28,000,000 August 2001 $25,000,000
2.14 Section 7.22 of the Agreement is hereby amended and restated in its entirety to read: "[Intentionally Deleted]" 2.15 Schedule C-1 of the Agreement is hereby amended and restated in its entirety to read as set forth on Schedule C-1 to this Amendment to reflect the allocated Commitments of the Lenders as of the effective date of this Amendment; and a new Schedule P-2 is hereby added to the Agreement, to read as set forth on Schedule P-2 to this Amendment. 3. REPRESENTATIONS AND WARRANTIES. Borrower hereby affirms to Lenders and Agent that all of Borrower's representations and warranties set forth in the Agreement are true, complete and accurate in all respects as of the date hereof (except to the extent such representations and warranties relate solely to an earlier date). 4. DEFAULTS: WAIVER. Borrower hereby affirms to Lenders and Agent that. subject to the waiver provided in the preceding sentence, no Default or Event of Default exists as of the date hereof. 5. CONDITIONS PRECEDENT. The effectiveness of this Amendment is expressly conditioned upon the following: (a) Receipt by Agent of fully executed copies of this Amendment; (b) Receipt by Agent of fully executed copies of an Irrevocable Assignment by Borrower in form and substance acceptable to Agent, specifying payment of the 4 5 Permitted Accounts Sale Proceeds directly to the Agent's Account, and payment of any future monies owing by Credit Card Issuer directly to the Lockboxes; (c) Payment of a fee to Agent, for the pro rata account of Lenders, in the amount of $30,000. 6. COSTS AND EXPENSES. Borrower shall pay to Agent all of Agent's out-of-pocket costs and expenses (including, without limitation, the reasonable fees and expenses of its counsel, which counsel may include any local counsel reasonably deemed necessary, search fees, filing and recording fees, documentation fees, appraisal fees, travel expenses, and other fees) arising in connection with the preparation, execution, and delivery of this Amendment and any related documents 7. LIMITED EFFECT. In the event of a conflict between the terms and provisions of this Amendment and the terms and provisions of the Agreement, the terms and provisions of this Amendment shall govern. In all other respects, the Agreement, as amended, modified, and supplemented hereby, shall remain in full force and effect. 8. COUNTERPARTS EFFECTIVENESS. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed and delivered shall be deemed to be an original. All such counterparts, 5 6 taken together, shall constitute but one and the same Amendment. This Amendment shall become effective upon the execution of a counterpart of this Amendment by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above. SAMUELS JEWELERS, INC., a Delaware corporation By /s/ E. PETER HEALEY ------------------------------------- Title: E. Peter Healey ---------------------------------- Executive Vice President and CFO ---------------------------------- FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent and as a Lender By /s/ ROBERT CASTINE ------------------------------------- Title: Vice President ---------------------------------- LASALLE BUSINESS CREDIT, INC., a Delaware corporation By /s/ HERBERT KIDD ------------------------------------- Title: S.V.P. ---------------------------------- SUNROCK CAPITAL CORP., a Delaware corporation By /s/ JOHN IRWIN ------------------------------------- Title: S.V.P. ---------------------------------- 6 7 SCHEDULE C-1 COMMITMENTS AS OF EFFECTIVE DATE OF AMENDMENT NO. 2 TO THIS AGREEMENT
Lender Commitment - ------ ---------- Foothill Capital Corporation $16,000,000 LaSalle Business Credit, Inc. $16,000,000 Sunrock Capital Corp. $ 8,000,000
7 8 SCHEDULE P-2 Private Label Accounts All capitalized terms not separately defined herein are used herein as defined in the Purchase and Sale Agreement, dated July 27, 1999 between Borrower and World Financial Network National Bank (the "Agreement"). Private Label Accounts means: (i) all of the Accounts and the Receivables (excluding all Ineligible Accounts) as of the Cut-Off Time; (ii) all Account Documentation; (iii) all Books and Records; (iv) all pending Credit Card applications and Borrower's rights with respect to applications for new Accounts; and (v) the Cardholder List; The following terms are defined in the Agreement as follows: "Account" shall mean (i) a Credit Card accessed open-end consumer credit account established by Borrower, (ii) the numbers associated with such accounts, and (iii) any and all rights, remedies, benefits, interests and titles, both legal and equitable, to which Borrower may be entitled with respect to any of the foregoing. "Account" shall exclude any Ineligible Accounts. "Account Documentation" shall mean, with respect to an Account, any and all documentation from time to time relating to such Account, including, without limitation, Cardholder Agreements, applications and all legally required forms, notices and disclosures relating to such applications and Accounts, historical statements and microfilm records thereof, paper and systemic records of customer service and collection notes and letters, all computer master file records and any records of whatever form or nature related to any of the foregoing, all Transaction Records and all tangible and intangible information, arising from any of the foregoing or pertaining thereto. "Books and Records" shall mean all books, records, files, credit or collection information, periodic statement applications, business records, reports, correspondence, and other financial and computer data owned by Borrower for use in connection with, or relating to, the Credit Card Business or the Private Label Accounts whether in documentary form or on microfilm, microfiche, magnetic tape, computer disk or other form and whether maintained by Borrower or an agent or servicer of Borrower. 9 "Cardholder" shall mean an individual (i) to whom a Credit Card has been issued pursuant to a Cardholder Agreement, (ii) in whose name an Account, in connection with which the Credit Card may be used, is established, or (iii) who is or may become an obligor on the Account. "Cardholder Agreement" shall mean an agreement between Borrower, on the one hand, and a Cardholder, on the other hand, under which Credit Cards are issued, containing the terms and conditions applicable to an Account as such agreement may be amended, modified and supplemented from time to time. "Credit Card" shall mean the plastic card or temporary card with the name "Jewelcard" on it which card is owned by Borrower in respect of an Account and evidences a Cardholder's right to purchase goods and services on credit. "Credit Card Business" shall mean, collectively, all the Accounts and Receivables and all of the elements of Borrower's business of operating the open-ended credit card revolving retail credit plan. "Receivables" shall mean any and all amounts owing by Cardholders on Accounts, including, without limitation, amounts owed due to outstanding extensions of credit, interest and finance charges (whether billed or accrued) and fees for returned checks, late payments or otherwise. Notwithstanding the foregoing, to the extent that any of the Private Label Accounts are repurchased by or reacquired by Borrower (whether pursuant to the Agreement or otherwise), such assets shall be Collateral subject to the security interest of Agent. EX-10.7 4 PRIVATE LABEL CREDIT CARD AGREEMENT 1 EXHIBIT 10.7 PRIVATE LABEL CREDIT CARD PROGRAM AGREEMENT BETWEEN WORLD FINANCIAL NETWORK NATIONAL BANK AND SAMUELS JEWELERS, INC. DATED AS OF JULY , 1999 2 TABLE OF CONTENTS
PAGE ---- SECTION 1 DEFINITIONS.....................................................................................1 1.1 Certain Definitions.........................................................................1 1.2 Other Definitions...........................................................................5 SECTION 2 THE PLAN........................................................................................5 2.1 Establishment and Operation Of The Plan.....................................................5 2.2 Applications for Credit Under the Plan; Billing Statements..................................6 2.3 Operating Procedures........................................................................7 2.4 Plan Documents..............................................................................7 2.5 Marketing...................................................................................8 2.6 Administration of Accounts..................................................................8 2.7 Credit Decision.............................................................................8 2.8 Ownership of Accounts and Mailing Lists.....................................................8 2.9 Credit Insurance and Enhancement Services...................................................9 2.10 Ownership of Samuels' Name..................................................................9 SECTION 3 OPERATION OF THE PLAN...........................................................................9 3.1 Honoring Credit Cards.......................................................................9 3.2 Additional Operating Procedures.............................................................9 3.3 Cardholder Disputes Regarding Goods or Services............................................10 3.4 No Special Agreements......................................................................10 3.5 Cardholder Disputes Regarding Violations of Law or Regulation..............................11 3.6 Payment to Samuels; Ownership of Accounts; Fees; Accounting................................11 3.7 Insertion of Samuels' Promotional Materials................................................12 3.8 Payments...................................................................................12 3.9 Chargebacks................................................................................13 3.10 Assignment of Title in Charged Back Accounts...............................................13 3.11 Promotion of Program and Card Plan; Non-Competition........................................14 3.12 Postage....................................................................................15 3.13 Reports....................................................................................15 3.14 Contingent Purchase Price..................................................................15 SECTION 4 REPRESENTATIONS AND WARRANTIES OF SAMUELS......................................................17 4.1 Organization, Power and Qualification......................................................17 4.2 Authorization, Validity and Non-Contravention..............................................17 4.3 Accuracy of Information....................................................................18 4.4 Validity of Charge Slips...................................................................18 4.5 Compliance with Law........................................................................18 4.6 Samuels' Name, Trademarks and Service Marks................................................18
i 3 TABLE OF CONTENTS, CONTINUED
PAGE ---- SECTION 5 COVENANTS OF SAMUELS...........................................................................19 5.1 Notices of Changes.........................................................................19 5.2 Financial Statements.......................................................................19 5.3 Inspection.................................................................................19 5.4 Samuels' Business..........................................................................18 5.5 Samuels' Stores............................................................................19 SECTION 6 REPRESENTATIONS AND WARRANTIES OF BANK.........................................................20 6.1 Organization, Power and Qualification......................................................20 6.2 Authorization, Validity and Non-Contravention..............................................20 6.3 Accuracy of Information....................................................................20 6.4 Compliance with Law........................................................................20 SECTION 7 COVENANTS OF BANK..............................................................................21 7.1 Notices of Changes.........................................................................21 7.2 Inspection.................................................................................21 7.3 Bank's Business............................................................................21 SECTION 8 INDEMNIFICATION................................................................................21 8.1 Indemnification Obligations................................................................22 8.2 Limitation on Liability....................................................................22 8.3 No Warranties..............................................................................22 8.4 Notification of Indemnification; Conduct of Defense........................................23 SECTION 9 TERM AND TERMINATION...........................................................................23 9.1 Term.......................................................................................23 9.2 Termination with Cause by Bank; Bank Termination Events....................................23 9.3 Termination with Cause by Samuels; Samuels Termination Events..............................24 9.4 Termination of Particular State............................................................25 9.5 [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]....................................26 9.6 Obligations not Affected by Termination....................................................26
ii 4 TABLE OF CONTENTS, CONTINUED
PAGE ---- SECTION 10 MISCELLANEOUS.................................................................................26 10.1 Entire Agreement...............................................................................26 10.2 Coordination of Public Statements..............................................................26 10.3 Amendment......................................................................................26 10.4 Successors and Assigns.........................................................................26 10.5 Waiver.........................................................................................27 10.6 Severability...................................................................................27 10.7 Notices........................................................................................27 10.8 Captions and Cross-References..................................................................27 10.9 Governing Law..................................................................................27 10.10 Counterparts...................................................................................27 10.11 Force Majeure..................................................................................28 10.12 Year 2000 Compliance...........................................................................28 10.13 Relationship of Parties........................................................................28 10.14 Survival.......................................................................................29 10.15 Mutual Drafting................................................................................29 10.16 Independent Contractor.........................................................................29 10.17 No Third Party Beneficiaries...................................................................29 10.18 Counterparts...................................................................................29 10.19 Confidentiality................................................................................29 10.20 Purchase Agreement.............................................................................31 10.21 Additional Documentation......................................................................... SCHEDULES 1.1 Discount Rate .................................................................................32 2.1 Service Standards..............................................................................33 2.4 Credit Collateral Specifications...............................................................34 2.8 Monthly Master File Information................................................................55 3.13 Reports........................................................................................56
iii 5 PRIVATE LABEL CREDIT CARD PROGRAM AGREEMENT THIS PRIVATE LABEL CREDIT CARD PROGRAM AGREEMENT is made as of this day of July, 1999, by and between Samuels Jewelers, Inc. with its principal office at 2914 Montopolis, Suite 200, Austin, Texas 78741 (hereinafter referred to as "Samuels"), and WORLD FINANCIAL NETWORK NATIONAL BANK, with its principal office at 800 TechCenter Drive, Gahanna, Ohio 43230, (hereinafter referred to as "Bank"). RECITALS: WHEREAS, Samuels has requested Bank to extend credit, to qualifying individuals in the form of private label open-ended credit card accounts for the purchase of Goods and Services from Samuels' Stores and to issue Credit Cards to such individuals; and WHEREAS, Bank shall own the Accounts, and Cardholder payments will be sent to such location as Bank shall from time to time direct; and WHEREAS, subject to the terms of Section 10.20 hereof, Bank shall purchase from Samuels those certain eligible private label credit card accounts owned by Samuels bearing the name Samuels Jewelers, Schubach's Jewelers, Hatfield Jewelers, A. Hirsch & Son or Mission Jewelers (the "Existing Accounts") which are conveyed to Bank pursuant to a purchase agreement to be entered into between Bank and Samuels; and WHEREAS, Bank shall operate and administer a program of private label credit card accounts which shall include both the Existing Accounts and the new Accounts created by Bank. WHEREAS, Bank has agreed to extend credit under the Accounts subject to the terms and conditions as more fully set forth herein. NOW THEREFORE, in consideration of the terms and conditions hereof, and for other good and valuable consideration, the receipt of which is hereby mutually acknowledged by the parties, Bank and Samuels agree as follows: SECTION 1. DEFINITIONS 1.1 Certain Definitions. As used herein and unless otherwise required by the context, the following terms shall have the following respective meanings: "Account" shall mean an individual open-end revolving line of credit established by Bank for a Customer pursuant to the terms of a Credit Card Agreement, including without limitation, upon acquisition from Samuels, each of the Existing Accounts; "Agreement" shall mean this Private Label Credit Card Program Agreement and any future amendments or supplements thereto. Page 1 6 "Applicable Law" shall mean any applicable federal, state or local law, rule, or regulation. "Applicant" shall mean an individual who is a Customer of Samuels' Stores, who applies for an Account under the Plan. "Business Day" shall mean any day, except Saturday, Sunday or a day on which banks in Ohio are required to be closed. "Cardholder" shall mean any natural person to whom an Account has been issued by Bank and/or any authorized user of the Account. "Charge Data" shall mean Account identification and transaction information with regard to each Purchase by Cardholders on credit and each return of a Purchase or a credit to the Account. "Charge Slip" shall mean a sales receipt, register receipt tape, invoice or other documentation, whether in hard copy or electronic form, in each case evidencing a Purchase that is to be charged to a Cardholder's Account. "Contingent Purchase Price Shortfall" shall have the meaning set forth in Section 3.14 (c). "Contract Year" shall mean each one-year period (except in the case of the last Contract Year of the Term, which shall end on the termination date) commencing on the first day of the first full calendar month following the start of Bank's processing of Net Proceeds and each anniversary thereof. "Credit Card" shall mean the plastic credit card issued by Bank to qualifying Applicants exclusively for purchasing Goods and Services pursuant to the Plan. "Credit Card Agreement" shall mean the open-end revolving credit agreement between a Cardholder and Bank governing the Account and Cardholder's use of the Credit Card, together with any modifications or amendments which may be made to such agreement. "Credit Sales Day" shall mean any day, whether or not a Business Day, on which Goods and/or Services are sold by Samuels' Stores. "Credit Slip" shall mean a sales credit receipt or other documentation, whether in hard copy or electronic form, evidencing a return or exchange of Goods or a credit on an Account as an adjustment by Samuels or Samuels' Stores for goodwill or for Services rendered or not rendered by Samuels' Stores to a Cardholder. Page 2 7 "Customer" shall mean any individual who is a customer or potential customer of Samuels' Stores. "Deferred Billing Programs" shall mean any special repayment terms approved by Bank, including without limitation deferred finance charges, deferred payments and same as cash. "Discount Fee" shall mean an amount to be charged by Bank equal to Net Sales multiplied by the Discount Rate. "Discount Rate" shall have the meaning set forth in Schedule 1.1. "Existing Accounts" shall have the meaning set forth in the third recital. "Extended Term" shall have the meaning set forth in Section 9.1. "Forms" shall have the meaning set forth in Section 2.4. "Goods and/or Services" shall mean those goods and/or services sold at retail by Samuels' Stores as of the date of execution of this Agreement by Samuels. "Initial Term" shall have the meaning set forth in Section 9.1. "Net Proceeds" shall mean Purchases on Accounts, less (i) credits to Accounts for the return of Goods or adjustments by Samuels and Samuels' Stores for goodwill or for Services, all as shown in the Transaction Records (as corrected by Bank in the event of any computational error), calculated each Business Day, (ii) payments from Cardholders received by Samuels and Samuels' Stores from Cardholders on Bank's behalf, (iii) any applicable Discount Fees in effect on the date received by Bank, (iv) any Contingent Purchase Price Shortfall, and (v) any other fees required by this Agreement in effect on the date of calculation by Bank. "Net Sales" shall mean Purchases, less credits or refunds for Goods and Services, all as shown in the Transaction Records (as corrected by Bank in the event of any computational error), calculated each Business Day; "Net Write-Off Amount" shall mean, for any period, an amount equal to the Receivables (excluding interest and fees) written-off by Bank minus the net amount (less attorneys' and agencies' fees and other collection costs and fees) of cash Recoveries related to written-off Receivables received during such period. "Operating Procedures" shall mean Bank's instructions and procedures as written by Bank and provided to Samuels to be followed by Samuels and Samuels' Stores in connection with the Plan. Such Operating Procedures may be amended or modified by Bank from time to time at its sole discretion; provided, however, unless required by law, Bank shall first consult with Samuels regarding any proposed changes and a copy of any such amendment or modification shall be provided to Samuels at least ten (10) Business Days before its effective date, and for those changes required by law, notice shall be given as soon as practicable; "Plan" shall mean the revolving lines of credit established by Bank for Customers of Samuels' Stores by virtue of this Agreement. Page 3 8 "Plan Commencement Date" shall mean the date on which Bank purchases the Existing Accounts from Samuels. "Purchase" shall mean a specific extension of credit as provided for under this Agreement by Bank to a Cardholder for the purchase of Goods and/or Services. "Purchase Agreement" shall mean that purchase and sale agreement referred to in Section 10.20. "Quick Credit" shall mean an in-store application procedure designed to open Accounts as expeditiously as possible at point of sale, whereby an application for an Account is processed without a paper application being completed by an Applicant. An Applicant's credit card (Visa, MasterCard, American Express, Discover or other Bank approved private label card) is electronically read by a terminal that captures the Applicant's name and credit card account number. Other data as required by the Operating Procedures is entered into that same terminal by the Samuels' Store associate. This data is used by Bank to request a credit bureau report and make a decision whether to approve or decline the Applicant. "Receivable" shall mean any and all amounts owing on the date of calculation on an Account, including, without limitation, principal balances from outstanding Purchases, accrued finance charges, late fees and any other fees assessed on the Accounts, less any payments and credits received with respect to the Accounts as of the close of business on the preceding day, but excluding any receivables which have been written-off on the Accounts. "Recoveries" shall mean payments, net of collection fees and expenses, including without limitation, agency and attorneys' fees, received on Accounts previously written-off by Bank. "Renewal Term" shall have the meaning set forth in Section 9.1. "Samuels Deposit Account" shall mean a deposit account maintained by Samuels as set forth in Section 3.6 (a); "Samuels' Stores" shall mean those certain retail locations selling Goods and/or Services which, subject to change or adjustment pursuant to the terms of this Agreement, are owned and operated by Samuels or which are licensees or franchisees of Samuels and which operate under any one (1) of the following tradenames: Mission Jewelers, Schubach's Jewelers, Harts, Hatfield Jewelers, A. Hirsch & Son, or Samuels Jewelers, Silverman's or the successor store name designated by Samuels to the 20 (or less) Silverman's Stores which Samuels proposes to acquire, or any other retail locations included in the Plan pursuant to Section 3.11(b). "Statemented Account" shall mean each Account for which a billing statement is generated within a particular billing cycle; and "Term" shall mean the Initial Term, the Renewal Term and the Extended Term. Page 4 9 "Transaction Record" shall mean, with respect to each Purchase of Goods or Services by Cardholders from Samuels' Stores, each credit or return applicable to a Purchase of Goods or Services, and each payment received by Samuels and Samuels' Stores from Cardholders on Bank's behalf: (a) the Charge Slip or Credit Slip corresponding to the Purchase, credit or return; or (b) an electronic tape or transmission containing the following information: the Account number of the Cardholder, the Samuels' Store number at which the Purchase, credit or return was made, the total of (i) the Purchase price of Goods or Services purchased or amount of the credit, as applicable, plus (ii) the date of the transaction, a description of the Goods or Services purchased, credited or returned and the authorization code, if any, obtained by Samuels' Store prior to completing the transaction; or (c) electronic draft capture whereby Samuels' Store electronically transmits the information described in subsection (b) hereof to a network provider (selected by Samuels at its expense) of electronic draft capture transmission, which in turn transmits such information to Bank by an electronic tape or transmission. "Year 2000 Compliant" shall mean the ability to correctly process, sequence, and calculate without interruption, all data and date related data for all dates to, through and after January 1, 2000, including leap year calculations. 1.2 Other Definitions. As used herein, terms defined in the introductory paragraph hereof and in other sections of this Agreement shall have such respective defined meanings. Defined terms stated in the singular shall include reference to the plural and vice versa. SECTION 2. THE PLAN 2.1 Establishment and Operation of the Plan. (a) The Plan is hereby established for the sole purpose of providing Customer financing for Goods and Services purchased from Samuels' Stores. Bank shall use reasonable efforts to commence the Plan in substantially all Samuels' Stores on or before August 27, 1999, or such other date as the parties mutually agree upon in writing. Bank shall on or after July 15, 1999 commence the Plan in the 20 (or less) Samuels' Stores operating under the Silverman's name as of June 1, 1999, if acquired by Samuels. Qualified Applicants desiring to use the Plan shall be granted an Account by Bank with a credit line in an amount to be determined by Bank in its discretion for each individual Applicant. Subject to Section 3.6 (d), Bank shall determine the terms and conditions of the Account to be contained in a Credit Card Agreement, which Credit Card Agreement shall be subject to change at Bank's sole discretion upon notice given by Bank to the Cardholders in accordance with Applicable Law. Page 5 10 (b) Commencing on the Plan Commencement Date, Bank shall operate the Plan in accordance with the Service Standards set forth in Schedule 2.1. However, Bank shall not be liable for any failure to perform in accordance with the Service Standards solely to the extent that such failure is the result of an act or omission of Samuels, Samuels' Stores or a force majeure event specified in Section 10.1. Samuels will notify Bank at least 45 days in advance of any sales or other events conducted by Samuels or Samuels' Stores which may result in increases in customer service inquiries, credit authorizations, Applicants and/or Purchases volumes. If Samuels fails to notify Bank within such 45 day time period, Bank shall not be required to meet the Service Standards during such sales or other events period. If Samuels fails to provide at least 45 days advance notice, but provides Bank with less advance notice, Bank shall propose to Samuels in writing the support and Service Standards, if any, which Bank could offer for the proposed event, and any costs to be borne by Samuels for the same, and Samuels shall have the option to accept or reject Bank's proposal. 2.2 Applications for Credit Under the Plan; Billing Statements. (a) Applicants who wish to apply for an Account under the Plan (except for Quick Credit Applicants) must submit a completed application on a form approved by Bank, and Bank shall grant or deny the request for credit based solely upon Bank's credit criteria. Samuels or Samuels' Stores shall provide a copy of the Credit Card Agreement to the Applicant to be retained for the Applicant's records. The application shall thereafter be mailed to Bank by Applicant or submitted by Samuels or Samuels' Stores on behalf of the Applicant. If Bank grants the request for an Account, Bank will issue a Credit Card to the Applicant which accesses an individual line of credit in an amount determined by Bank. (b) Bank will make available to Samuels a Quick Credit application procedure for Applicants who wish to purchase, at the time of application, Goods or Services from Samuels' Stores. If an Applicant wishes to submit a Quick Credit application, Applicant will provide the information required by Bank to authorized employees at Samuels' Stores. Such employees will be responsible for making sure that the Applicant is given the Credit Card Agreement to keep for his or her records. Samuels' Stores will then promptly transmit the application information to Bank, and Bank will make the decision to approve or deny the application based upon Bank's credit criteria. Quick Credit decisions shall be communicated electronically directly to Samuels' Stores. Bank will issue a Credit Card to approved Applicants. Samuels shall provide at its own expense terminals, cash registers or other equipment necessary to handle Quick Credit based upon Bank's specifications, and shall have the capability to handle Quick Credit within sixty (60) days after the Plan Commencement Date. [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC.] Bank may offset such fees against amounts payable by Bank to Samuels. (c) Samuels agrees that Samuels shall promptly forward all original applications to Bank for retention as set forth in the Operating Procedures. Samuels further agrees that it and Samuels' Stores will keep confidential the information on such applications and copies of applications and shall not disclose the information to anyone other than authorized representatives of Bank. (d) All Cardholders will receive from Bank a periodic statement (the "Billing Statement") listing the amounts of Purchases made and credits received and other information, as required by Applicable Law or deemed desirable by Bank. Page 6 11 (e) Bank may at its option, to the extent permitted by Applicable Law, make available to Samuels Internet application and Charge Slip processing. In such event, and if Samuels elects to make such Internet applications and processing available to Customers, Samuels shall be responsible for integrating and maintaining the Internet application processing on its website at its sole expense. WFN may impose a different Discount Rate or other fees for Internet Net Sales and applications, provided that Bank shall notify Samuels in advance from time to time of the amount of such Discount Rate or other fees, in writing, and Samuels may elect not to utilize Internet application processing at any time. 2.3 Operating Procedures. Samuels and Samuels' Stores shall observe and comply with the Operating Procedures and such other reasonable procedures as Bank may prescribe on not less than ten (10) days prior notice to Samuels otherwise required by Applicable Law. Samuels shall ensure that Samuels' Stores are trained regarding the Operating Procedures and shall use commercially reasonable efforts to ensure their compliance with them. 2.4 Plan Documents. Samuels shall design, with Bank's assistance and approval, not to be unreasonably withheld, the application, Credit Card, card mailer and billing statement to be used under the Plan, subject to the requirements of Applicable Law and the Credit Collateral Specifications reasonably set by Bank from time to time, the initial specifications are set forth in Schedule 2.4. The degree to which Samuels' tradenames, trademarks, servicemarks or logos (collectively referred to as the "Design") appear on applications, card mailers, Credit Cards, billing statements, letters, and other documents and forms (collectively, "Forms") is a matter to be determined by Bank after consultation and coordination with Samuels and subject to Samuels' right to reject any Form as provided in Section 2.10, and in accordance with Applicable Law. Bank shall provide at Bank's expense appropriate quantities of the applications, Credit Card plastics, card mailer and billing statements, however, there shall only be one Design for these and all other Forms. In the event Samuels desires more than one Design for the Forms, Samuels shall pay for the Forms containing any other Design(s) approved by Bank. Samuels shall pay the costs of all Credit Card plastics, including embossing and encoding, requested by Samuels for reissuance of Credit Cards to Cardholders (other than replacements made on an individual basis) as well as the postage costs for the mailing of such Credit Cards. Bank shall, at its expense, issue new Credit Cards to the Existing Accounts' Cardholders after completion of the purchase. In the event any Forms become obsolete as a result of changes requested by Samuels (other than changes required by Applicable Law), Samuels shall reimburse Bank for the costs associated with any unused obsolete Forms. 2.5 Marketing. Samuels agrees to prominently advertise and actively promote the Plan wherever Applicants can apply for an Account. Bank and Samuels will cooperate to execute programs to market the Plan, both initially and on a continuing basis. Once Samuels and Bank agree upon standards for advertising and promotion and the use of Bank's and Samuels' names or any trademark, service mark or trade name of Bank and Samuels, neither party will deviate from such standards without express prior approval of the other party. 2.6 Administration of Accounts. Bank shall perform all functions necessary to administer and service the Accounts, including but not limited to: making all necessary credit investigations; notifying Applicants in writing of acceptance or rejection of credit; preparing and mailing billing statements; making collections; processing adjustments, handling Cardholder inquiries, and processing payments. Page 7 12 2.7 Credit Decision. The decision to extend credit to any Applicant under the Plan shall be Bank's decision. Bank will consult in good faith with Samuels regarding Bank's development of credit standards and scorecards in order to maximize the potential of the Plan and mutually benefit Bank and Samuels. Samuels may from time to time request Bank to consider offering certain types of special credit programs. Bank shall reasonably consider Samuels' requests and negotiate with Samuels in good faith. However, Bank shall, in its sole discretion, subject to Applicable Laws and safety and soundness considerations, determine whether or not to offer any of such programs. In the event Bank agrees to any special credit program, Bank and Samuels shall mutually agree upon any special terms associated with the program. 2.8 Ownership of Accounts and Mailing Lists. The Accounts and all information related thereto, including without limitation the receivables, names, addresses, credit and transaction information of Cardholders, as set forth in Bank's records shall be the exclusive property of Bank during and after the Term of this Agreement unless the Accounts are purchased by Samuels pursuant to Section 9. Bank will not transfer, sell or otherwise disclose the Account information to competitors of Samuels. Bank shall have the right to take a security interest in the Goods purchased with an Account to the extent permitted by Applicable Law. During the Term of this Agreement, Bank shall provide to Samuels on or before the 7th Business Day of the following month one (1) master file tape containing the information set forth on Schedule 2.8, provided such information resides on Bank's system and any other information agreed to by Bank and Samuels, to the extent permitted by Applicable Law, (but excluding any Cardholders who have requested that such information not be shared or disclosed), which Samuels may use solely for the purpose of marketing its Goods and Services to Cardholders as permitted by Applicable Law. Bank shall provide Samuels with additional master file tapes, or extracts, as requested by Samuels at Bank's then current (commercially reasonable) price for such files or extracts. Samuels shall keep such Cardholder information confidential (unless such information was obtained independently by Samuels from the Cardholder and the Cardholder has not requested any restriction on disclosure of such information), and shall not sell, lease or transfer such information to any third party without Bank's prior written consent. The names and addresses of Customers, as set forth in Samuels' records, shall be the exclusive property of Samuels, but Samuels, subject to Applicable Law, shall make the names and addresses of Customers available to Bank during the Term of this Agreement to be used only for purposes of solicitation of Applicants by Bank and administration of the Plan in accordance with the terms of this Agreement. 2.9 Credit Insurance and Enhancement Services. (a) Bank will make available to Cardholders various types of credit-related insurance products offered by Bank and/or its vendors or affiliates. Such products shall include, but not be limited to, credit life, accidental death and disability insurance. (b) Bank will make available to Cardholders various types of other products and services. Such products and services may include but are not limited to travel clubs, legal services and renters insurance. (c) Samuels will assist Bank in the offering of such products and services so long as such support will not require Samuels to obtain a license of any kind or incur any direct expense or cost with respect to the offering or sale of any such products and services. [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. Page 8 13 2.10 Ownership of Samuels' Name. Anything in this Agreement to the contrary notwithstanding, Samuels shall retain all rights in and to Samuels' name and the name selected by Samuels for use on the Credit Card and all trademarks, service marks and other rights pertaining to such names (collectively, the "Name Rights") and all goodwill associated with the use of the Name Rights whether under this Agreement or otherwise shall inure to the benefit of Samuels. Samuels shall have the right, in its sole and absolute discretion, to prohibit the use of any of its Name Rights in any Forms, advertisements or other materials proposed to be used by Bank which Samuels in its reasonable business judgment deems objectionable or improper. Bank shall cease all use of the Name Rights upon the termination of this Agreement for any reason unless Bank retains the Accounts after termination of the Agreement, in which case Bank may use the Name Rights solely in connection with the administration and collection of the balance due on the Accounts. SECTION 3. OPERATION OF THE PLAN 3.1 Honoring Credit Cards. Samuels agrees that Samuels and Samuels' Stores will honor any Credit Card properly issued and currently authorized by Bank, and shall deliver to Bank all Transaction Records evidencing transactions made under the Plan in accordance with the provisions of this Agreement and the Operating Procedures. 3.2 Additional Operating Procedures. In addition to the procedures, instructions and practices contained in the Operating Procedures, Samuels agrees that Samuels and Samuels' Stores will comply with the following procedures: (a) Before completing a Credit Card sale, Samuels' Stores will examine the Credit Card and Charge Slip and use commercially reasonable efforts to determine: (i) that the Credit Card appears on its face to be a Credit Card; (ii) that the Credit Card has been signed; and (iii) that the signature on the Charge Slip reasonably appears to be the same as the authorized signature appearing on the Credit Card. (b) In each Credit Card transaction Samuels and Samuels' Stores must obtain all the information contained in clause (b) of the definition of Transaction Record. The date which appears on the Charge Slip or Credit Slip will be prima facie evidence of the transaction date, and Samuels shall be required to transmit all Transaction Records relating to such Charge Slip and/or Credit Slip so that Bank receives such Transaction Records no later than the second Business Day after the transaction date. From time to time, a Samuels' Store may be required by Bank to obtain identification from a Cardholder at the time of sale, and may be required to record this information on the Charge Slip. The "Cardholder Copy" of each Charge Slip shall be delivered to the Cardholder at the time of the transaction. (c) All Charge Slips will evidence the total price of the sale minus any cash down payment or trade-in. Samuels shall retain the "Merchant Copy" of all Samuels and Samuels' Store generated Charge and Credit Slips for each transaction for a period of sixty (60) months from the date of presentation to Bank. (d) Samuels and Samuels' Stores will maintain a fair policy for the exchange and return of Goods and adjustment for Services rendered and for that purpose will give credit to Accounts upon such exchange, return or adjustment. Samuels and Samuels' Stores will not make cash refunds to Cardholders on Credit Card Purchases. If any Goods are Page 9 14 returned, price adjustment is allowed, or debt for Services is adjusted, Samuels and Samuels' Stores will legibly complete, date and sign a Credit Slip in a form acceptable to Bank; and (ii) deliver a completed legible copy thereof to the Cardholder. Upon receipt of Transaction Records reflecting a credit to which there has been a corresponding debit, Bank will either offset against amounts payable by Bank to Samuels or charge against the Samuels' Deposit Account the total shown on the Credit Slip, and credit the Cardholder's Account in the amount of such Credit Slip. If the Samuels' Deposit Account contains insufficient funds, Samuels shall remit the amount of such Credit Slips, or any unpaid portion thereof, to Bank within five (5) Business Days after written demand. (e) Samuels' Stores shall not accept a transaction to be charged to an Account without presentation of a Credit Card or proper identification as outlined in the Operating Procedures. 3.3 Cardholder Disputes Regarding Goods or Services. Samuels and Samuels' Stores shall act promptly to resolve disputes with Cardholders regarding Goods or Services obtained through Samuels and Samuels' Stores pursuant to the Plan. Samuels and Samuels' Stores shall process credits or refunds for Cardholders utilizing the Plan within three (3) Business Days. 3.4 No Special Agreements. Neither Samuels nor Samuels' Stores will extract any special agreement, condition or security from Cardholders in connection with any Charge Slip, except for sales for non-returnable goods, which statement of non-return must be clearly stated on the Charge Slip. 3.5 Cardholder Disputes Regarding Violations of Law or Regulation. Samuels shall assist Bank in further investigating and using its reasonable efforts to help resolve any Applicant or Cardholder claim, dispute, or defense which may be asserted under Applicable Law. 3.6 Payment to Samuels; Ownership of Accounts; Fees; Accounting. (a) Samuels shall electronically transmit all Charge Data from Samuels and Samuels' Stores to Bank in a format acceptable to Bank. Upon receipt, Bank shall use commercially reasonable efforts to promptly verify and process such Charge Data, and in the time frames specified herein, Bank will remit to Samuels an amount equal to the Net Proceeds indicated by such Charge Data for the Credit Sales Day(s) for which such remittance is made. In the event Bank discovers any discrepancies in the amount of Charge Data submitted by Samuels or paid by Bank to Samuels, Bank shall notify Samuels in detail of the discrepancy, and credit or debit Samuels, as the case may be, in a subsequent daily settlement. Bank will transfer funds via Automated Clearing House ("ACH") to an account designated in writing by Samuels to Bank (the "Samuels Deposit Account"). If Charge Data is received by Bank's processing center before 1:00 p.m. Eastern time on a Business Day, Bank will initiate such ACH transfer by 12:00 noon Eastern time on the next Business Day thereafter. In the event that the Charge Data is received after 1:00 p.m. Eastern time on a Business Day, then Bank will initiate such transfer no later than 12 noon Eastern time on the second Business Day thereafter. Bank shall not remit funds to individual Samuels' Stores. (b) Bank shall own all the Accounts under the Plan from the time of establishment, and except as otherwise provided herein, neither Samuels nor Samuels' Stores shall have any right to any indebtedness on an Account or to any Account payment from a Cardholder arising out of or in connection with any Purchases under the Plan. Upon Page 10 15 the delivery of each Charge Slip by Samuels and Samuels' Stores to Bank, Samuels and Samuels' Stores shall be deemed to have disclaimed and surrendered all or any right, title or interest in all such Charge Slips and in all other rights and writings evidencing such Purchases, if any. (c) All Transaction Records are subject to review and acceptance by Bank. In the event of a computational or similar error of an accounting or record keeping nature with respect to such Transaction Records, Bank may credit to or charge against (as the case may be) the Samuels' Deposit Account the proper amount as corrected. Upon any such correction Bank shall give prompt notice thereof to Samuels. (d) Subject to Applicable Law and the terms and conditions set forth in the Credit Card Agreement, Bank shall initially charge each Cardholder (except for any special and/or promotional programs as set by Bank), a finance charge on the unpaid balance in their Account at an annual percentage rate equal to not less than [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]; a [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC] minimum finance charge; late fees equal to a minimum of [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]; returned check fees equal to a minimum of [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]; and a minimum payment requirement of [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. Bank may make any changes in the terms of the Credit Card Agreement at any time without notice to Samuels as required by Applicable Law or on an individual Account by Account basis in connection with its servicing of the Accounts. With respect to any other changes in terms affecting the APR or fees charged by Bank, as set forth above, Bank will, prior to making any changes, discuss such changes with Samuels. Notwithstanding the foregoing, Bank shall have the sole right to determine the terms and conditions applicable to the Accounts, however, Bank shall consult with Samuels regarding such terms and conditions in order to maximize the potential of the Plan and to make such Plan mutually beneficial to Bank and Samuels. Bank may at any time change the finance charge calculation method, including the average daily balance computation. (e) Samuels and Samuels' Stores shall obtain and maintain at their own expense such point of sale and authorization terminals and other items of equipment as are necessary for it to receive authorizations, transmit Charge Slip and Credit Slip information, process Credit Card applications and perform its obligations under this Agreement. The methods used to facilitate communications between Bank and Samuels and Samuels' Stores, including without limitation, computer programs and telecommunications protocols shall be determined by Bank from time to time and Bank shall provide Samuels with reasonable prior notice of any change in such methods. [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. (f) Samuels may from time to time offer Deferred Billing Programs to Cardholders. Samuels shall be responsible for ensuring that all Purchases subject to any Deferred Billing Programs are properly designated as such on the Transaction Record in accordance with Bank's instructions. 3.7 Insertion of Samuels' Promotional Materials. Bank will from time to time insert Samuels' promotional materials for Samuels' Goods and Services, which are provided by Samuels at Samuels' expense, into the Account billing statements and new Credit Card mailers, so long as the materials: (a) are provided to Bank at least ten (10) Business Days prior to the scheduled mailing date of such statements or notices; (b) if they reference Bank Page 11 16 or the Plan in any manner, are approved by Bank as to content, in Bank's reasonable discretion; (c) meet all size, weight, or other specifications for such inserts as shall be reasonably set by Bank from time to time, the initial specifications are set forth in Schedule 2.4; (d) there is sufficient space in Bank's standard envelope for the insert in addition to any legally required material, Cardholder notices and other materials which Bank is including in the mailing; and (e) Samuels pays any and all additional postage costs caused by Bank's insertion of materials provided by Samuels, if instructed by Samuels to insert regardless of the additional postage costs. 3.8 Payments. All payments to be made by Cardholders with respect to any amounts outstanding on the Accounts shall be made in accordance with the instructions of Bank and at the location or address specified by Bank. Samuels hereby authorizes Bank, or any of its employees or agents, to endorse "WORLD FINANCIAL NETWORK NATIONAL BANK" upon all or any checks, drafts, money orders or other evidence of payment, made payable to Samuels and intended as payment on an Account, that may come into Bank's possession from Cardholders and to credit said payment against the appropriate Cardholder's Account. Samuels further agrees that if Samuels is permitted by Bank to receive any payment made with respect to the Plan, Samuels and Samuels' Stores will on Bank's behalf hold such payment in trust for the Cardholder making the payment and will within one (1) Business Day after receipt transmit the Transaction Records to Bank pursuant to this Agreement. Bank will offset against amounts payable by Bank to Samuels, charge the amount of such payment against the Samuels' Deposit Account, or, if the Samuels' Deposit Account contains insufficient funds, Samuels shall remit the amount of such payment, or any unpaid portion thereof, to Bank within five (5) Business Days after upon written demand. Payments made by Cardholders at Samuels' Stores shall not be deemed received by Bank until Bank receives and accepts the Transaction Records. Bank has the sole right to receive and retain all payments made with respect to all Accounts and to pursue collection of all amounts outstanding, unless an Account or Purchase is charged back to Samuels pursuant to the provisions of Sections 3.9 and 3.10 hereof. Samuels shall promptly comply with any written instruction by Bank or any successor to Bank to cease accepting Account payments and thereafter inform Cardholders who wish to make payments that payments should be made to Bank. 3.9 Chargebacks. Bank shall have the right to demand immediate purchase by Samuels of any Purchase or Account and charge back to Samuels the unpaid balance of any such Purchase or Account, if and whenever: (a) Any Applicant or Cardholder claim, defense or dispute is asserted against Bank with respect to such Purchase or Account as a result of an action or inaction by Samuels and/or Samuels' Stores pursuant to and within the time limits under Applicable Law, including, but not limited to, a violation by Samuels and/or Samuels' Stores of the Federal Consumer Credit Protection Act, Federal Reserve Board Regulation Z or Federal Reserve Board Regulation B, as amended, regardless of whether such claim, dispute or defense has merit and without any requirements to conduct an investigation into the merits; (b) Bank determines in good faith and in its reasonable judgment that with respect to such Purchase or Account: (i) there is a breach of any warranty or representation made by or with respect to Samuels under this Agreement; (ii) there is a failure by Samuels to comply with any term or condition of this Agreement, which failure shall not have been cured within fifteen days after receipt of written notice thereof from Bank; (iii) after receipt of a fraud affidavit from the Cardholder Bank determines that the signature on any Charge Slip Page 12 17 has been forged or is counterfeit; (iv) an application, a Charge Slip or Credit Slip has not been submitted in compliance with the Operating Procedures; or (v) Samuels or Samuels' Stores have failed to comply with the Operating Procedures and such failure has not been cured (or is not capable of being cured) within fifteen days after receipt of written notice thereof from Bank; and (c) After 30 days prior written notice to Samuels, an Account or any Purchase amount is not paid when due, and the Cardholder has stated in writing that the Cardholder's reason for such nonpayment is an alleged breach of warranty or representation by Samuels or Samuels' Stores or the result of a dispute by a Cardholder in connection with the sale of Goods, or the furnishing of Services by Samuels or Samuels' Stores to such Cardholder. 3.10 Assignment of Title in Charged Back Accounts. With respect to any amount of a Purchase or an Account to be charged back to and to be purchased by Samuels, Samuels shall promptly pay such amount directly to Bank in immediately available funds or Bank will either debit the Samuels' Deposit Account or debit the Net Proceeds to be paid to Samuels, to the extent the balance thereof is sufficient. Upon payment or debiting of such amount by Samuels to Bank, Bank shall assign and transfer to Samuels, without recourse, all of Bank's right, title and interest in and to such Purchase or Account and deliver all documentation with respect thereto. Samuels further consents to all extensions or compromises given any Cardholder with respect to any such Purchase or Account, and agrees that such shall not affect any liability of Samuels hereunder or right of Bank to charge back any Account or Purchase as provided in this Agreement; provided, however, that Bank shall not have the right to charge back for any Purchase or Account an amount in excess of any reductions, extensions or compromises in amounts owed by a Cardholder to Bank. Samuels shall not resubmit or re-transmit any charged back purchases or Accounts to Bank, without Bank's prior written consent. 3.11 Promotion of Program and Card Plan; Non-Competition. (a) Throughout the Term of this Agreement, Samuels and Samuels' Stores shall actively and consistently market, promote, participate in and support the Plan as set forth in this Agreement. However, Samuels shall not be required to support or promote the Plan at stores which are subject to a pre-existing program with another lender which cannot be terminated or are stores which Bank does not include in the Plan pursuant to Section 3.11(b), nor in stores located in states terminated pursuant to Section 9.4. Samuels agrees that in consideration and as an inducement for Bank to make the Plan available to Samuels as outlined in this Agreement and the Operating Procedures, for as long as this Agreement is in existence, neither Samuels nor its subsidiaries or affiliates will, without the prior written consent of Bank, contract or establish with any other credit card processor/provider or provide or process on its own behalf any "private label" or "co-brand" revolving credit or other credit card issuance or processing arrangement or programs similar in purpose to the Plan or to the services and transactions contemplated under this Agreement, except that if either party provides notice of termination pursuant to Section 9.1 of this Agreement or if Samuels terminates under Section 9.3, Samuels may enter into a contract with another credit card processor/provider effective on or after termination of this Agreement. Notwithstanding the foregoing, nothing contained in this Agreement will be construed to prohibit or prevent Samuels from accepting any major general purpose credit card (including without limitation, American Express Card, MasterCard, Visa, or NOVUS), any form of general purpose debit card or revolving and/or fixed payment (installment) credit programs for Applicants declined by Bank, as a means of payment by Customers for purchase of Goods and Services. Page 13 18 (b) [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. 3.12 Postage. Any increase(s) in the cost of mailing Account billing statements or new Credit Cards due to an increase in the first class pre-sort cost of postage from the United States Postal Service which increase occurs on or after the date of execution of this Agreement shall be borne by Samuels. Adjustments will be made for any subsequent decreases in the cost of postage. Bank will use commercially reasonable efforts to obtain the best bulk rate discount. 3.13 Reports. Bank will deliver to Samuels the reports in Schedule 3.13. Bank may provide any additional reports requested by Samuels upon such terms and at the costs mutually agreed to by the parties. 3.14 Contingent Purchase Price. [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. SECTION 4. REPRESENTATIONS AND WARRANTIES OF SAMUELS Samuels hereby represents and warrants to Bank as follows: 4.1 Organization, Power and Qualification. Samuels is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware and has full corporate power and authority to enter into this Agreement and to carry out the provisions of this Agreement. Samuels is duly qualified and in good standing to do business in all the states where Samuels is located, except where the failure to so qualify would not have a material adverse effect on the business of Samuels, or where the failure to so qualify would not have a material adverse effect on Samuels' or Bank's ability to continue operation of the Plan. 4.2 Authorization, Validity and Non-Contravention. (a) This Agreement has been duly authorized by all necessary corporate proceedings, has been duly executed and delivered by Samuels and is a valid and legally binding agreement of Samuels duly enforceable in accordance with its terms (except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equity principles). (b) No consent, approval, authorization, order, registration or qualification of or with any court or regulatory authority or other governmental body having jurisdiction over Samuels is required for, and the absence of which would adversely affect, the legal and valid execution and delivery of this Agreement, and the performance of the transactions contemplated by this Agreement. (c) The execution and delivery of this Agreement by Samuels hereunder and the compliance by Samuels with all provisions of this Agreement (i) will not conflict with or violate any Applicable Law, and (ii) will not result in a breach of or default under any of the terms or provisions of any indenture, loan agreement or other contract or agreement under which Samuels is an obligor or by which its property is bound where such conflict, breach or default would have a material adverse effect on Samuels, nor will such execution, delivery or compliance violate or result in the violation of the Articles of Incorporation or By-Laws of Samuels. Page 14 19 4.3 Accuracy of Information. All factual information furnished by Samuels to Bank in writing at any time pursuant to any requirement of, or furnished in response to any written request of Bank under this Agreement or any transaction contemplated hereby has been, and all such factual information hereafter furnished by Samuels to Bank will be, true and accurate in every respect material to the transactions contemplated hereby on the date as of which such information was or will be stated or certified. 4.4 Validity of Charge Slips. (a) As of the date any Transaction Records are presented to Bank in accordance with the provisions of this Agreement, each Charge Slip relating to such Transaction Records shall represent the obligation of a Cardholder in the respective amount set forth therein for Goods sold or Services rendered, together with applicable taxes, if any, and shall not involve any element of credit for any other purpose. (b) As of the date any Transaction Records are presented to Bank in accordance with the provisions of this Agreement, Samuels has no actual knowledge nor should have known, or notice of any fact or matter which would immediately or ultimately impair the validity of any Charge Slip relating to such Transaction Records, the transaction evidenced thereby, or its collectibility. 4.5 Compliance with Law. Any action or inaction taken by Samuels in connection with the Plan shall be in compliance with all Applicable Law except where the failure to so comply (i) is caused by some action or inaction of the Bank, or (ii) would not have an adverse effect on Samuels, the Bank or the Plan. 4.6 Samuels' Name, Trademarks and Service Marks. Samuels has the legal right to use and to permit the Bank to use, to the extent set forth herein, the various tradenames, trademarks, logos and service marks utilized by Samuels in the conduct of its business. Page 15 20 SECTION 5. COVENANTS OF SAMUELS Samuels agrees that during the Term of this Agreement, Samuels shall: 5.1 Notices of Changes. Samuels will as soon as reasonably possible notify Bank of any: (a) actual or planned change in the name or form of business organization of Samuels, change in the location of its chief executive office or the location of the office where its records concerning the Plan are kept; (b) actual or planned merger or consolidation of Samuels or the sale of a significant portion of its stock or of any substantial amount of its assets not in the ordinary course of business or any change in the control of Samuels; (c) material adverse change in its financial condition or operations or the commencement of any litigation which would have a material adverse effect on Samuels; or (d) the planned opening or closing of any Samuels' Store. Samuels will furnish such additional information with respect to any of the foregoing as Bank may request for the purpose of evaluating the effect of such change on the financial condition and operations of Samuels and on the Plan. 5.2 Financial Statements. Samuels shall furnish to Bank as soon as available the following information pertaining to Samuels: (a) a consolidated balance sheet as of the close of each fiscal year; (b) a consolidated statement of income, retained earnings and paid-in capital to the close of each fiscal year; (c) a consolidated statement of cash flow to the close of each such period; (d) a copy of the opinion submitted by Samuels' independent certified public accountants in connection with such of the financial statements as have been audited, and (e) on a monthly basis the total volume of sales of Goods and Services. 5.3 Inspection. Samuels will permit authorized representatives designated by Bank, at Bank's expense, to visit and inspect its corporate offices and any of the Samuels' Stores, including its books of account pertaining to Transaction Records and to make copies and take extracts therefrom, and to discuss the same with its officers and independent public accountants, all at such reasonable times during normal business hours, as often as may be reasonably requested, not more frequently than once per Contract Year, unless Bank has reasonable cause to do so. 5.4 Samuels' Business. Samuels shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and to comply with all Applicable Laws in connection with its business and the sale of Goods and Services. Samuels shall provide to Bank annually a copy of Samuels' operating plan for the next one (1) year or a longer period if available. 5.5 Samuels' Stores. Samuels shall cause all of Samuels' Stores to comply with the obligations, restrictions, limitations and prohibitions of this Agreement as such are applicable at the point of sale of the Goods and Services. Page 16 21 SECTION 6. REPRESENTATIONS AND WARRANTIES OF BANK Bank hereby represents and warrants to Samuels as follows: 6.1 Organization, Power and Qualification. Bank is a national banking association duly organized, validly existing and in good standing under the laws of the United States of America and has full corporate power and authority to enter into this Agreement and to carry out the provisions of this Agreement. Bank is duly qualified in all jurisdictions where such qualification is necessary for Bank to carry out its obligations under this Agreement. 6.2 Authorization, Validity and Non-Contravention. (a) This Agreement has been duly authorized by all necessary corporate proceedings, has been duly executed and delivered by Bank and is a valid and legally binding agreement of Bank duly enforceable in accordance with its terms (except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equity principles). (b) No consent, approval, authorization, order, registration or qualification of or with any court or regulatory authority or other governmental body having jurisdiction over Bank is required for, and the absence of which would materially adversely affect, the legal and valid execution and delivery of this Agreement, and the performance of the transactions contemplated by this Agreement. (c) The execution and delivery of this Agreement by Bank hereunder and the compliance by Bank with all provisions of this Agreement (i) will not conflict with or violate any Applicable Law, (ii) will not conflict with or result in a breach of the terms or provisions of any indenture, loan agreement or other contract or agreement under which Bank is an obligor or by which its property is bound where such conflict, breach or default would have a material adverse effect on Bank, nor will such execution, delivery or compliance violate or result in the violation of the Charter or By-Laws of Bank. 6.3 Accuracy of Information. All factual information furnished by Bank to Samuels in writing at any time pursuant to any requirement of, or furnished in response to any written request of Samuels under this Agreement or any transaction contemplated hereby has been, and all such factual information hereafter furnished by Bank to Samuels will be true and accurate in every respect material to the transactions contemplated hereby on the date as of which such information has or will be stated or certified. 6.4 Compliance with Law. The Plan and each Credit Card Agreement comply and will comply with all Applicable Law except where the failure to so comply: (i) is caused by some action or inaction of Samuels or Samuels' Stores; or (ii) would not have an adverse effect on the Bank, Samuels or the Plan. Page 17 22 SECTION 7. COVENANTS OF BANK Bank agrees that during the Term of this Agreement, Bank shall: 7.1 Notices of Changes. Bank will as soon as reasonably possible notify Samuels of any: (a) actual or planned change in the name or form of business organization of Bank, change in the location of its chief executive office or the location of the office where its records concerning the Plan are kept; (b) actual or planned merger or consolidation of Bank or the sale of a significant portion of its stock or of any substantial amount of its assets not in the ordinary course of business or any change in the control of Bank; (c) material adverse change in its financial condition or operations or the commencement of any litigation which would have a material adverse effect on the Plan. Bank will furnish such additional information with respect to any of the foregoing as Samuels may request for the purpose of evaluating the effect of such transaction on the financial condition and operations of Bank and on the Plan. 7.2 Inspection. Bank will permit, once per Contract Year unless Samuels has reasonable cause to do so more frequently, authorized representatives designated by Samuels, at Samuels' expense, to visit and inspect, to the extent permitted by Applicable Law, any of Bank's books and records (not including Bank's internal profit and loss statement) pertaining to the Accounts, the credit insurance and enhancement services set forth in Section 2.9, and Purchases and to make copies and take extracts therefrom, and to discuss the same with its officers and independent public accountants, all at such reasonable times during normal business hours and as often as may be reasonably requested. Bank shall permit Samuels, during normal business hours and upon reasonable notice, and in a manner which does not disrupt the operations, to visit the offices at which services relating to the Plan are provided, to monitor the activities of Bank and its subcontractors and to discuss the Plan and the services with Bank's and its subcontractors' management personnel. 7.3 Bank's Business. Bank shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and to comply with all Applicable Laws in connection with its business and the issuance of credit by Bank. Bank shall use commercially reasonable efforts to prevent unauthorized access to its computer systems. SECTION 8. INDEMNIFICATION 8.1 Indemnification Obligations. (a) Samuels shall be liable to and shall indemnify and hold Bank and its affiliates, subsidiaries and parent and their respective officers, directors, employees, subcontractors and their successors and assigns, harmless from any and all Losses (as hereinafter defined) to the extent they arise from: (i) Samuels' breach of any representation, warranty or covenant hereunder, (ii) Samuels' failure to perform its obligations hereunder, (iii) any Goods or Services charged to an Account, and (iv) any action or failure to act by Samuels and/or Samuels' Stores and their respective officers, directors and employees, which results in a claim against Bank, its officers, employees, affiliates, subsidiaries, and parent, unless the proximate cause of any such claim is an act or failure to act by Bank, its officers, directors or employees. (b) Bank shall be liable to and shall indemnify and hold Samuels and its affiliates, subsidiaries and parent and their respective officers, directors, employees, sub-contractors Page 18 23 and their successors and assigns, harmless from any and all Losses (as hereinafter defined) to the extent they arise from: (i) Bank's breach of any representation, warranty or covenant hereunder, (ii) Bank's failure to perform its obligations hereunder, and (iii) any action or failure to act by Bank and its officers, directors, and employees which results in a claim against Samuels, its officers, employees, affiliates, subsidiaries and parent, unless the proximate cause of any such claim is an act or failure to act by Samuels or Samuels' Stores and their respective officers, directors or employees. (c) For purposes of this Section 8.1 the term "Losses" shall mean any liability, damage, costs, fees, losses, judgments, penalties, fines, and expenses, including without limitation, any reasonable attorneys' fees, disbursements, settlements (which require the other party's consent which shall not be unreasonably withheld), and court costs, reasonably incurred by Bank or Samuels, as the case may be, without regard to whether or not such Losses would be deemed material under this Agreement except that Losses may not include any overhead costs that either party would normally incur in conducting its everyday business. 8.2 LIMITATION ON LIABILITY. (a) IN NO EVENT SHALL BANK BE LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT. BANK'S TOTAL ANNUAL LIABILITY TO SAMUELS FOR ALL DAMAGES FOR ANY CAUSE WHATSOEVER OCCURRING DURING ANY YEAR OF THE TERM OF THIS AGREEMENT, SHALL NOT EXCEED TEN PERCENT (10%) OF THE ACTUAL DISCOUNT FEES RECEIVED BY BANK FROM SAMUELS DURING SUCH YEAR. BANK'S TOTAL CUMULATIVE LIABILITY TO SAMUELS FOR ALL DAMAGES FOR ANY CAUSE WHATSOEVER, SHALL NOT EXCEED TEN PERCENT (10%) OF THE ACTUAL DISCOUNT FEES RECEIVED BY BANK FROM SAMUELS DURING THE TERM OF THIS AGREEMENT. (b) IN NO EVENT SHALL SAMUELS BE LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT. SAMUELS' TOTAL ANNUAL LIABILITY TO BANK FOR ALL DAMAGES FOR ANY CAUSE WHATSOEVER OCCURRING DURING ANY YEAR OF THE TERM OF THIS AGREEMENT, SHALL NOT EXCEED TEN PERCENT (10%) OF THE ACTUAL DISCOUNT FEES PAID BY SAMUELS TO BANK DURING SUCH YEAR. SAMUELS' TOTAL CUMULATIVE LIABILITY TO BANK FOR ALL DAMAGES FOR ANY CAUSE WHATSOEVER, SHALL NOT EXCEED TEN PERCENT (10%) OF THE ACTUAL DISCOUNT FEES PAID BY SAMUELS TO BANK DURING THE TERM OF THIS AGREEMENT. 8.3 NO WARRANTIES. EXCEPT AS PROVIDED HEREIN, THERE ARE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, RESPECTING THE SERVICES AND/OR OTHER PRODUCTS SOLD OR PROVIDED BY BANK PURSUANT TO THIS AGREEMENT. THE REMEDIES SET FORTH IN THIS SECTION WITH RESPECT TO SUCH SERVICES AND/OR OTHER PRODUCTS ARE THE SOLE REMEDIES RELATING TO BANK'S LIABILITY TO SAMUELS FOR MONEY DAMAGES. 8.4 Notification of Indemnification; Conduct of Defense. (a) In no case shall the indemnifying party be liable under Section 8.1 of this Agreement with respect to any claim or claims made against the indemnified party or any other person so indemnified unless it shall be notified in writing of the nature of the claim within a reasonable time after the Page 19 24 assertion thereof, but failure to so notify the indemnifying party shall not relieve it from any liability which it may have under other provisions of this Agreement. (b) The indemnifying party shall be entitled to participate, at its own expense, in the defense, or, if it so elects, within a reasonable time after receipt of such notice, to assume the defense of any suit brought to enforce any such claim, but, if it so elects to assume the defense, such defense shall be conducted by counsel chosen by it and approved by the indemnified party or the person or persons so indemnified, who are the defendant or defendants in any suit so brought, which approval shall not be unreasonably withheld. If the indemnifying party elects to assume the conduct of the defense of any suit brought to enforce any such claim and retains counsel to do so, the indemnified party or the person or persons so indemnified who are the defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel thereafter retained by the indemnified party or such other person or persons. SECTION 9. TERM AND TERMINATION 9.1 Term. This Agreement shall have an initial term (the "Initial Term") commencing on the date of execution set forth in the first paragraph on Page 1 and ending on the fifth anniversary of the Plan Commencement Date and shall automatically renew for an additional two-year term (the "Renewal Term") unless Bank provides Samuels with at least six (6) month's written notice of its intention to terminate the Agreement prior to the expiration of the Initial Term, or unless otherwise terminated as provided herein. At the end of the Renewal Term, this Agreement shall continue in full force and effect (the "Extended Term") until terminated by either Bank or Retailer by giving to the other at least six (6) month's prior written notice of its intention to terminate the Agreement, or unless otherwise terminated as provided herein. 9.2 Termination with Cause by Bank; Bank Termination Events. Any of the following conditions or events shall constitute a "Bank Termination Event" hereunder, and Bank may terminate this Agreement immediately without further action if Samuels causes such Bank Termination Event to occur and be continuing: (a) If Samuels shall (i) generally not pay its debts as they become due; (ii) file, or consent by answer or otherwise to the filing against it, of a petition for relief, reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction; (iii) make an assignment for the benefit of its creditors; (iv) consent to the appointment of a custodian, receiver, trustee or other officer with similar powers of itself or of any substantial part of its property; (v) be adjudicated insolvent or be liquidated; (vi) take corporate action for the purpose of any of the foregoing; (vii) have a materially adverse change in its financial condition; (viii) receive an adverse opinion by its auditors or accountants as to its viability as a going concern; or (ix) breach or fail to perform or observe any covenant or agreement contained in any loan agreement, debt instrument or any other contract or agreement to which it is bound, which results in an acceleration of debt in an amount outstanding equal to or greater than $1,000,000. (b) If a court or government authority of competent jurisdiction shall enter an order appointing, without consent by Samuels, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or if an order for relief shall be entered in any case or proceeding for liquidation or Page 20 25 reorganization or otherwise to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding up or liquidation of Samuels, or if any petition for any such relief shall be filed against Samuels and such petition shall not be dismissed within 60 days; or (c) If Samuels shall default in the performance of or compliance with any term or violates any of the covenants, representations, warranties or agreements contained in this Agreement and Samuels shall not have remedied such default within thirty (30) days after written notice thereof shall have been received by Samuels from Bank; or (d) If Samuels is acquired by, or merges or consolidates with or into any other corporation (other than with a subsidiary or affiliate of Samuels) without the prior written consent of Bank, Samuels terminates or otherwise ceases its business operations or Samuels sells, transfers, abandons or otherwise disposes of all or substantially all of its assets. (e) If Bank exercises its option to terminate pursuant to Section 3.6 (e) and has provided Samuels with the notice required therein. 9.3 Termination with Cause by Samuels; Samuels Termination Events. Any of the following conditions or events shall constitute a "Samuels Termination Event" hereunder, and Samuels may terminate this Agreement immediately without further action if Bank causes such Samuels Termination Event to occur and be continuing: (a) If Bank shall (i) generally not be paying its debts as they become due; (ii) file or consent by answer or otherwise to the filing against it, of a petition for relief, reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction; (iii) make an assignment for the benefit of its creditors; (iv) consent to the appointment of a custodian, receiver, trustee or other officer with similar powers of itself or of any substantial part of its property; (v) be adjudicated insolvent or be liquidated; (vi) take corporate action for the purpose of any of the foregoing and such event shall materially adversely affect the ability of Bank to perform under this Agreement or the operation of the Plan; (vii) have a materially adverse change in its financial condition; (viii) receive an adverse opinion by its auditors or accountants as to its viability as a going concern; or (ix) breach or fail to perform or observe any covenant or agreement contained in any loan agreement, debt instrument or any other contract or agreement to which it is bound, which results in an acceleration of debt in an amount outstanding equal to or greater than $5,000,000. (b) If a court or government authority of competent jurisdiction shall enter an order appointing, without consent by Bank, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or if an order for relief shall be entered in any case or proceeding for liquidation or reorganization or otherwise to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding up or liquidation of Bank, or if any petition for any such relief shall be filed against Bank and such petition shall not be dismissed within sixty (60) days; or (c) If Bank shall default in the performance of or compliance with any term or violates any of the covenants, representations, warranties or agreements contained in this Agreement and Bank shall not have remedied such default within thirty (30) days ten (10) Page 21 26 days in the case of failure to pay Samuels pursuant to Section 3.6(a)) after written notice thereof shall have been received by Bank from Samuels; or (d) [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. (e) [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. 9.4 Termination of Particular State. In addition, Bank may terminate the operation of the Plan in a particular state (immediately in the case of 9.4(i) and upon one- hundred eighty (180) days prior written notice in the case of 9.4(ii)) (i) if the Applicable Law of the state or jurisdiction is amended or interpreted in such a manner so as to render all or any material part of the Plan illegal or unenforceable; or (ii) there is a material change in circumstances after the date hereof that causes or will cause Bank's operation and administration of the Plan to become materially burdensome. [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. 9.5 [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. 9.6 Obligations not Affected by Termination. The termination of this Agreement or termination of the Plan in a particular state pursuant to the provisions of Section 9 hereof shall not, in any case, affect the obligations of the parties with respect to Section 8, Section 9.5, Section 3.14, Section 10.9, Section 10.14 hereof, the obligations of Samuels with respect to complaints and inquiries concerning billings and merchandise under the provisions of Sections 2 or 3 hereof or with respect to the chargeback provisions of Section 3.9 and 3.10 above, the obligations of Bank under Sections 2.10 and 3.10, and the parties' respective obligations under these Sections shall continue so long as any Accounts remain in existence. SECTION 10. MISCELLANEOUS 10.1 Entire Agreement. This Agreement constitutes the entire Agreement and supersedes all prior agreements and understandings, whether oral or written, among the parties hereto with respect to the subject matter hereof and merges all prior discussions between them. 10.2 Coordination of Public Statements. Neither party will make any public announcement of the Plan or provide any information concerning the Plan to any representative of any news, trade or other media without the prior approval of the other party, and will not respond to any inquiry from any public or governmental authority, except as required by law, concerning the Plan without prior consultation and coordination with the other party. This Section 10.2 shall not apply to SEC filings. 10.3 Amendment. Except as otherwise provided for in this Agreement, the provisions herein may be modified only upon the mutual agreement of the parties, however, no such modification shall be effective until reduced to writing and executed by both parties. 10.4 Successors and Assigns. This Agreement and all obligations and rights arising hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, transferees and assigns. Samuels may not assign its rights and obligations under this Agreement without the prior written consent of Bank, which shall not be unreasonably withheld. The transfer of control of Samuels or a majority of the Page 22 27 outstanding capital stock of Samuels, the sale of substantially all of the assets of Samuels or the merger of Samuels with another corporation or other entity shall not constitute an assignment of this Agreement or of Samuels' rights and obligation hereunder. 10.5 Waiver. No waiver of the provisions hereto shall be effective unless in writing and signed by the party to be charged with such waiver. No waiver shall be deemed to be a continuing waiver in respect of any subsequent breach or default either of similar or different nature unless expressly so stated in writing. No failure or delay on the part of either party in exercising any power or right under this Agreement shall be deemed to be a waiver, nor does any single or partial exercise of any power or right preclude any other or further exercise, or the exercise of any other power or right. 10.6 Severability. If any of the provisions or parts of the Agreement are determined to be illegal, invalid or unenforceable in any respect under any applicable statute or rule of law, such provisions or parts shall be deemed omitted without affecting any other provisions or parts of the Agreement which shall remain in full force and effect, unless the declaration of the illegality, invalidity or unenforceability of such provision or provisions substantially frustrates the continued performance by, or entitlement to benefits of, either party, in which case this Agreement may be terminated by the affected party, without penalty. 10.7 Notices. All communications and notices pursuant hereto to either party shall be in writing and addressed or delivered to it at its address shown below, or at such other address as may be designated by it by notice to the other party, and shall be deemed given when delivered by hand, or two (2) Business Days after being mailed (with postage prepaid) or when sent by receipted courier service: If to Bank: If to Samuels: 800 TechCenter Drive 2914 Montopolis, Suite 200 Gahanna, OH 43230 Austin, Texas 78741 Attn.: Daniel T. Groomes, President Attn.: E. Peter Healey With a Copy to: With a Copy to: Karen A. Morauski, Counsel Doug Bullock 10.8 Captions and Cross-References. The table of contents and various captions in this Agreement are included for convenience only and shall not affect the meaning or interpretation of any provision of this Agreement. References in this Agreement to any Section are to such Section of this Agreement. 10.9 GOVERNING LAW. THIS AGREEMENT SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF OHIO, REGARDLESS OF THE DICTATES OF OHIO CONFLICTS OF LAW, AND THE PARTIES HEREBY SUBMIT TO EXCLUSIVE JURISDICTION AND VENUE IN THE UNITED STATES FEDERAL DISTRICT COURT FOR THE NORTHERN DISTRICT OF OHIO OR ANY OF THE STATE COURTS LOCATED IN FRANKLIN COUNTY, OHIO. 10.10 Counterparts. This Agreement may be signed in one or more counterparts, all of which shall be taken together as one agreement. 10.11 Force Majeure. Neither party will be responsible for any failure or delay in performance of its obligations under this Agreement because of circumstances beyond its Page 23 28 control, including, but not limited to, acts of God, flood, criminal acts, fire, riot, accident, strikes or work stoppage, embargo, sabotage, inability to obtain material, equipment or phone lines, government action (including any laws, ordinances, regulations or the like which restrict or prohibit the providing of the services contemplated by this Agreement), and other causes whether or not of the same class or kind as specifically named above. In the event a party is unable to perform substantially for any of the reasons described in this Section, it will notify the other party promptly of its inability so to perform, and if the inability continues for at least one-hundred and eighty (180) consecutive days [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC], the party so notified may then terminate this Agreement forthwith. This provision shall not, however, release the party unable to perform from using its best efforts to avoid or remove such circumstance and such party unable to perform shall continue performance hereunder with the utmost dispatch whenever such causes are removed. [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. 10.12 Year 2000 Compliance. (a) Bank shall use commercially reasonable efforts to ensure that software or systems proprietary to Bank and used in the performance of its Services hereunder shall be Year 2000 Compliant. However, Bank shall not be responsible for: (i) software or system failures based on improvements, enhancements, modifications or updates to, and any inaccuracies, delays, interruptions, or errors caused by any software or systems that are not proprietary to Bank; (ii) any inaccuracies, delays, interruptions or errors occurring as a result of incorrect data or data from other systems, software, hardware, processes or third parties provided in a format that is inconsistent with the format and protocols established for the Bank software and systems including date data in two-digit format, even if such data is required for the operation of the software or systems; and (iii) any inaccuracies, delays, interruptions or errors occurring, at no fault of Bank, as a result of incorrect data or data from telecommunication systems. (b) Samuels shall use commercially reasonable efforts to ensure that software or systems proprietary to Samuels and used by Samuels in connection with its business shall be Year 2000 Compliant. However, Samuels shall not be responsible for: (i) software or system failures based on improvements, enhancements, modifications or updates to, and any inaccuracies, delays, interruptions, or errors caused by any software or systems that are not proprietary to Samuels; (ii) any inaccuracies, delays, interruptions or errors occurring as a result of incorrect data or data from other systems, software, hardware, processes or third parties provided in a format that is inconsistent with the format and protocols established for Samuels' software and systems including date data in two-digit format, even if such data is required for the operation of the software or systems; and (iii) any inaccuracies, delays, interruptions or errors occurring, at no fault of Samuels, as a result of incorrect data or data from telecommunication systems. 10.13 Relationship of Parties. This Agreement does not constitute the parties as partners or joint venturers and neither party will so represent itself. 10.14 Survival. No termination of this Agreement shall in any way affect or impair the powers, obligations, duties, rights, indemnities, liabilities, covenants or warranties and/or representations of the parties with respect to times and/or events occurring prior to such termination, including the obligation to make payments arising prior to the termination date. No powers, obligations, duties, rights, indemnities, liabilities, covenants or warranties and/or representations of the parties with respect to times and/or events occurring after termination shall survive termination except for the following Sections: Section 2.8, Section 3.3, Section Page 24 29 3.5, Section 3.6, Section 3.8, Section 3.9, Section 3.10, Section 3.14, Section 8, Section 9.5, Section 9.6 and Section 10. 10.15 Mutual Drafting. This Agreement is the joint product of Bank and Samuels and each provision hereof has been subject to mutual consultation, negotiation and agreement of Bank and Samuels, and shall not be construed for or against any party hereto. 10.16 Independent Contractor. The parties hereby declare and agree that Bank is engaged in an independent business, and shall perform its obligations under this Agreement as an independent contractor; that any of Bank's personnel performing the services hereunder are agents, employees, affiliates, or subcontractors of Bank and are not agents, employees, affiliates, or subcontractors of Samuels; that Bank has and hereby retains the right to exercise full control of and supervision over the performance of Bank's obligations hereunder and full control over the employment, direction, compensation and discharge of any and all of the Bank's agents, employees, affiliates, or subcontractors, including compliance with workers' compensation, unemployment, disability insurance, social security, withholding and all other federal, state and local laws, rules and regulations governing such matters; that Bank shall be responsible for Bank's own acts and those of Bank's agents, employees, affiliates, and subcontractors; and that except as expressly set forth in this Agreement, Bank does not undertake by this Agreement or otherwise to perform any obligation of Samuels, whether regulatory or contractual, or to assume any responsibility for Samuels' business or operations. 10.17 No Third Party Beneficiaries. The provisions of this Agreement are for the benefit of the parties hereto and not for any other person or entity. 10.18 Counterparts. This Agreement may be executed in several counterparts all of which taken together shall constitute one single agreement between the parties. 10.19 Confidentiality. (a) Neither party shall disclose any information not of a public nature concerning the business or properties of the other party which it learns as a result of negotiating or implementing this Agreement, including, without limitation, the terms and conditions of this Agreement, Customer names, sales volumes, test results, and results of marketing programs, trade secrets, business and financial information, source codes, business methods, procedures, know-how and other information of every kind that relates to the business of either party except to the extent disclosure is required by Applicable Law or court order, is necessary for the performance of the disclosing party's obligation under this Agreement, or is agreed to in writing by the other party; provided that: (i) prior to disclosing any confidential information to any third party, the party making the disclosure shall give notice to the other party of the nature of such disclosure and of the fact that such disclosure will be made; and (ii) prior to filing a copy of this Agreement with any governmental authority or agency, the filing party will consult with the other party with respect to such filing and shall redact such portions of this Agreement which the other party requests be redacted, unless, in the filing party's reasonable judgment based on the advice of its counsel (which advice shall have been discussed with counsel to the other party), the filing party concludes that such request is inconsistent with the filing party's obligations under applicable laws. Neither party shall acquire any property or other right, claim or interest, including any patent right or copyright interest, in any of the systems, procedures, processes, equipment, computer programs and/or information of the other by virtue of this Page 25 30 Agreement. Neither party shall use the other party's name for advertising or promotional purposes without such other party's written consent. (b) The obligations of this Section, shall not apply to any information: (i) which is generally known to the trade or to the public at the time of such disclosure; or (ii) which becomes generally known to the trade or the public subsequent to the time of such disclosure; provided, however, that such general knowledge is not the result of a disclosure in violation of this Section; or (iii) which is obtained by a party from a source other than the other party, without breach of this Agreement or any other obligation of confidentiality or secrecy owed to such other party or any other person or organization; or (iv) which is independently conceived and developed by the disclosing party and proven by the disclosing party through tangible evidence not to have been developed as a result of a disclosure of information to the disclosing party, or any other person or organization which has entered into a confidential arrangement with the non-disclosing party. (c) If any disclosure is made pursuant to the provisions of this Section, to any parent company, subsidiary, affiliate or third party, the disclosing party shall be responsible for ensuring that such parent, subsidiary, affiliate or third party keeps all such information in confidence and that any third party executes a confidentiality agreement provided by the non-disclosing party. Each party covenants that at all times it shall have in place procedures designed to assure that each of its employees who is given access to the other party's confidential information shall protect the privacy of such information. Each party acknowledges that any breach of the confidentiality provisions of this Agreement by it will result in irreparable damage to the other party and therefore in addition to any other remedy that may be afforded by law any breach or threatened breach of the confidentiality provisions of this Agreement may be prohibited by restraining order, injunction or other equitable remedies of any court. The provisions of this Section will survive termination or expiration of this Agreement. 10.20 Purchase Agreement. Bank and Samuels shall use good faith efforts to enter into a purchase and sale agreement in a mutually satisfactory form and substance, under which Bank will purchase the Existing Accounts from Samuels. 10.21 Additional Documentation. The parties acknowledge that Samuels is currently evaluating various structural alternatives which may result in benefits to Samuels. In the event Samuels desires to implement any such alternatives in the future the parties agree, if such alternatives affect this Agreement, to evaluate those alternatives in good faith and to negotiate in good faith any necessary documentation. IN WITNESS WHEREOF, the parties hereto have executed this Agreement in manner and form sufficient to bind them as of the date first above written. Page 26 31 WORLD FINANCIAL NETWORK SAMUELS JEWELERS, INC. NATIONAL BANK By: By: ----------------------------------- --------------------------------- Title: Title: -------------------------------- ------------------------------ Date: Date: --------------------------------- ------------------------------- Page 27 32 SCHEDULE 1.1 DISCOUNT RATE [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. Page 28 33 SCHEDULE 2.1 SERVICE STANDARDS [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. Page 29 34 SCHEDULE 2.4 [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. Page 30 35 SCHEDULE 2.8 MONTHLY MASTER FILE INFORMATION [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. Page 31 36 SCHEDULE 3.13 REPORTS [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC]. Page 32 EX-10.8 5 PURCHASE AND SALE AGREEMENT 1 EXHIBIT 10.8 PURCHASE AND SALE AGREEMENT between WORLD FINANCIAL NETWORK NATIONAL BANK, as Purchaser and SAMUELS JEWELERS, INC. as Seller Dated as of July __, 1999 2 TABLE OF CONTENTS ARTICLE 1 DEFINITIONS 1 1.1 Definition of Terms 1 ARTICLE 2 PURCHASE AND SALE 5 2.1 Purchase and Sale 5 2.2 Assumption of Rights and Liabilities 5 2.3 Repurchase of Ineligible Accounts 6 ARTICLE 3 THE CLOSING 6 3.1 Time and Place of the Closing 6 3.2 Delivery of Instruments at the Closing 6 3.3 Purchase Price 7 3.4 Payments at Closing 7 3.5 Post-Closing Reconciliation 7 3.6 Audit Adjustment 7 3.7 Payment of Taxes and Other Charges 8 3.8 Other Adjustments 8 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER 9 4.1 Organization 9 4.2 Capacity; Authorization; Validity 9 4.3 Conflicts; Defaults; Etc. 9 4.4 Title to Subject Assets 9 4.5 Receivables and Accounts 10 4.6 Litigation and Claims 11 4.7 Conduct 11 4.8 Executive Offices 11 4.9 Solvency 11 4.10 Permits, Licenses, Etc. 11 4.11 Compliance with Applicable Laws 12 4.12 Absence of Undisclosed Liabilities 12 4.13 Agreements 12 4.14 Consents 12 4.15 Contracts With Third Parties 13 4.16 Finders or Brokers 13 4.17 Books and Records 13 4.18 Accuracy of Information 13 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER 13 5.1 Organization 13 5.2 Capacity; Authority; Validity 13 5.3 Conflicts; Defaults; Etc. 14 5.4 Litigation 14
3 5.5 Finders or Brokers 14 5.6 Compliance with Applicable Laws 14 ARTICLE 6 CERTAIN COVENANTS 14 6.1 Mutual Covenants and Agreements 16 6.2 Certain Covenants of Seller 16 ARTICLE 7 CONDITIONS OF CLOSING 17 7.1 Conditions to Obligations of Purchaser and Seller 17 7.2 Conditions Applicable to Purchaser 17 7.3 Conditions Applicable to Seller 19 ARTICLE 8 INDEMNIFICATION 20 8.1 Indemnification by Seller 20 8.2 Indemnification by Purchaser 21 8.3 Procedures 21 ARTICLE 9 TERMINATION 21 9.1 Termination 21 9.2 Expenses 21 ARTICLE 10 MISCELLANEOUS 22 10.1 Survival of Representations and Warranties 22 10.2 Notices 22 10.3 Assignment 22 10.4 Waiver 22 10.5 Entire Agreement 23 10.6 Amendments and Supplements 23 10.7 Captions 23 10.8 Counterparts 23 10.9 Governing Law 23 10.10 Binding Effect 23 10.11 Severability 23 10.12 Waiver of Jury Trial 23 10.13 Consent to Jurisdiction 24 10.14 Mutual Drafting 24 EXHIBITS: EXHIBIT 1.1 INELIGIBLE ACCOUNTS 25 EXHIBIT 3.2 ASSIGNMENT AND ASSUMPTION AGREEMENT 26
4 PURCHASE AND SALE AGREEMENT This Purchase and Sale Agreement is made and entered into this ___ day of July, 1999 (this "Agreement"), between World Financial Network National Bank ("Purchaser") and Samuels Jewelers, Inc. ("Seller"). All capitalized terms contained in this Agreement that are not otherwise defined in this Agreement shall have the respective meanings assigned to such terms in Article 1. Recitals WHEREAS, Seller is currently the owner of the Subject Assets. Purchaser desires to purchase, and Seller desires to sell, the Subject Assets on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing premises and the various agreements, promises and covenants contained in this Agreement, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1. Definition of Terms. As used in this Agreement: "Account" shall mean (i) a Credit Card accessed open-end consumer credit account established by Seller, (ii) the numbers associated with such accounts, and (iii) any and all rights, remedies, benefits, interests and titles, both legal and equitable, to which Seller may be entitled with respect to any of the foregoing. "Account" shall exclude any Ineligible Accounts. "Account Balance" shall mean, with respect to any Account, the outstanding balance of such Account at the time of determination, which shall consist of, without limitation (i) the sum of (A) the aggregate outstanding amount of Receivables posted to such Account at such time, and (B) the aggregate amount of any and all fees and charges posted to such Account at such time, including, without limitation, interest and finance charges, returned check charges, late charges, insurance premiums and attorneys' fees, MINUS (ii) the aggregate amount of all credits, other adjustments and credit balances posted to such Account at such time. "Account Documentation" shall mean, with respect to an Account, any and all documentation from time to time relating to such Account, including, without limitation, Cardholder Agreements, applications and all legally required forms, notices and disclosures relating to such applications and Accounts, historical statements and microfilm records thereof, paper and systemic records of customer service and collection notes and letters, all computer master file records and any records of whatever form or nature related to any of the foregoing, all Transaction Records and all 1 5 tangible and intangible information, arising from any of the foregoing or pertaining thereto. "Affiliate" shall mean any Person that, directly or indirectly, through one or more entities controls or is controlled by or is under common control with the Person specified. "Ancillary Documents" shall mean any agreement, certificate or other document delivered at or prior to the Closing in connection herewith. "BHCA" means the Bank Holding Company Act of 1956, as amended. "Books and Records" shall mean all books, records, files, credit or collection information, periodic statement applications, business records, reports, correspondence, and other financial and computer data owned by Seller for use in connection with, or relating to, the Credit Card Business or the Subject Assets whether in documentary form or on microfilm, microfiche, magnetic tape, computer disk or other form and whether maintained by Seller or an agent or servicer of Seller. "Business Day" shall mean any day, other than a Saturday or Sunday, on which banking institutions in the State of Ohio are not authorized or obligated by applicable Law, regulation or executive order, to close. "Cardholder" shall mean an individual (i) to whom a Credit Card has been issued pursuant to a Cardholder Agreement, (ii) in whose name an Account, in connection with which the Credit Card may be used, is established, or (iii) who is or may become an obligor on the Account. "Cardholder Agreement" shall mean an agreement between Seller, on the one hand, and a Cardholder, on the other hand, under which Credit Cards are issued, containing the terms and conditions applicable to an Account as such agreement may be amended, modified and supplemented from time to time. "Cardholder Lists" shall mean all lists of names and/or addresses of Cardholders. "Closing" shall have the meaning set forth in Section 3.1. "Closing Date" shall have the meaning set forth in Section 3.1. "Closing Date Statement" shall mean a statement prepared by Seller on or before the Closing Date, a copy of which shall be delivered to Purchaser which contains a computation of the Purchase Price as of the Cut-Off Time. "Credit Card" shall mean the plastic card or temporary card with the name "Jewelcard" on it which card is owned by Seller in respect of an Account and evidences a Cardholder's right to purchase goods and services on credit. 2 6 "Credit Card Business" shall mean, collectively, all the Accounts and Receivables and all of the elements of Seller's business of operating the open-ended credit card revolving retail credit plan. "Cut-Off Time" shall mean the end of Seller's processing on the Business Day immediately preceding the Closing Date. "GAAP" shall mean generally accepted accounting principles in the United States applied on a basis consistent with the prior accounting practices of the applicable party or parties. "Governmental Authority" shall mean any government, any state, or any other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, in each case whether national, state or local. "Ineligible Account" shall mean any account as defined in Exhibit 1.1. "Law" shall mean all laws, codes, statutes, ordinances, rules, regulations, decrees and orders of any Governmental Authority. "Lien" shall mean any mortgage, pledge, hypothecation, assignment, claim, lien (statutory or other), right of first refusal, charge or encumbrance, imperfection of title or other matters affecting title, and any rights of third parties whatsoever, including, without limitation, any liens or encumbrances arising in respect of taxes. "Master File" means, at the time of determination, the computer files containing the most recently-posted financial, Account status and demographic information with respect to any of the Accounts, including, without limitation, active, inactive and recovery Accounts, which computer files represent the aggregate amount of Account Balances on such date, together with corresponding control reports. "Materials and Information" shall have the meaning set forth in Section 4.18. "Permit" shall mean any license, permit, certificate, consent, authorization, franchise or other approval from any Governmental Authority. "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, public benefit corporation, entity or Governmental Authority. "Prime Rate" means, on the date of determination, the bank prime loan rate reported in the "Money Rates" section of The Wall Street Journal (or, if such publication is discontinued, such other publication of similar type mutually agreed upon by the parties) as the "Prime Rate" on such date, whether or not such rate is ever actually charged or paid by any Person. 3 7 "Private Label Program Agreement" shall mean that certain Private Label Program Agreement entered into by and between Purchaser and Seller, dated July 16, 1999. "Purchaser" shall have the meaning set forth in the first paragraph of this Agreement. "Receivables" shall mean any and all amounts owing by Cardholders on Accounts, including, without limitation, amounts owed due to outstanding extensions of credit, interest and finance charges (whether billed or accrued) and fees for returned checks, late payments or otherwise. "Scorecards" shall mean with respect to any Account, authorization or collection, the statistical model which uses customized risk quantification to assign numeric values or scores for each credit applicant, Cardholder or prospect and which the Seller has used in evaluation of credit granting and control. "Seller" shall have the meaning set forth in the first paragraph of this Agreement. "Settlement Master File" means the Master File as of the Cut-Off Time. "Solvent" shall mean, when used with respect to any Person on a particular date, that on such date (i) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (ii) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (iii) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (iv) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (v) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute unreasonably small capital. "Subject Assets" shall have the meaning set forth in Section 2.1. "Subsidiary" shall mean any corporation or other Person of which more than 50% of the outstanding capital stock, or other equitable interests having ordinary voting or other power to elect or appoint a majority of the Board of Directors or other governing body of such corporation or Person, is at the time directly or indirectly owned by the Person specified. "Transaction Records" shall mean all records (in any form, paper, electronic, magnetic or otherwise) of charges, credits, adjustments, payments or other items, received by Seller for posting to Cardholder's Accounts, including but not limited to charge slips and credit or adjustment slips. 4 8 "UCC" shall mean the Uniform Commercial Code in effect in the state of Ohio and in any other State where the filing of a financing statement is deemed necessary by Purchaser. ARTICLE 2 PURCHASE AND SALE 2.1. Purchase and Sale. (a) At the Closing, on the terms and subject to the conditions set forth in this Agreement, Seller shall sell, transfer, assign, convey and deliver to Purchaser in exchange for the Purchase Price, and Purchaser shall purchase and acquire from Seller, free and clear of all Liens, all of Seller's right, title and interest in and to all of the following: (i) all of the Accounts and the Receivables (excluding all Ineligible Accounts) as of the Cut-Off Time; (ii) all Account Documentation; (iii) all Books and Records; (iv) all pending Credit Card applications and Seller's rights with respect to applications for new Accounts; and (v) the Cardholder List; (b) The items to be sold, transferred, assigned and conveyed to Purchaser pursuant to Section 2.1(a) are collectively referred to herein as the "Subject Assets". 2.2. Assumption of Rights and Liabilities. (a) As of the Cut-Off Time, Purchaser shall assume all of Seller's rights and perform or discharge (or cause to be performed or discharged), Seller's obligations arising after the Cut-Off Time with respect to the Subject Assets conveyed to Purchaser at the Closing, including, but not limited to, (i) the right to receive all payments on Accounts due from Cardholders after the Cut-Off Time, and (ii) the obligations of Seller after the Cut-Off Time under the terms of the Cardholder Agreements, but excluding Seller's obligations related to any breach of such Cardholder Agreements occurring before the Closing Date. (b) Except as expressly provided herein, Purchaser does not assume, agree to pay, perform or discharge or otherwise have, any liability or obligation of any nature (whether fixed, contingent, accrued, unliquidated, absolute or otherwise) of Seller or any other Person, whether arising or to be paid, performed or discharged prior to, at, or after the Cut-Off Time. 2.3. Repurchase of Ineligible and Other Accounts. If Seller transfers any Ineligible Accounts or related Receivables to Purchaser, during the 180 day period 5 9 following the Closing Date, Seller shall promptly, following written notice to Seller by Purchaser, repurchase all such Ineligible Accounts. Seller shall pay to Purchaser, for any such repurchases, an amount equal to the Purchase Price of the Accounts and/or Receivables (excluding the Contingent Purchase Price related to such Accounts and/or Receivables) together with interest at the Prime Rate on such amount from the Closing Date to the date of payment, and Purchaser will reassign such Accounts and/or Receivables to Seller and Purchaser will promptly credit against Seller's payment all Cardholders' payments received for such Accounts. Seller will assume any obligations of Purchaser to refund such Cardholder payments credited against the Ineligible Accounts. ARTICLE 3 THE CLOSING 3.1. Time and Place of the Closing. The closing of the transactions contemplated hereby (the "Closing") shall take place after all of the conditions contained in Article 7 are satisfied or waived by the appropriate party, but in no event later than August 27, 1999,or at such other time and/or date as the parties hereto may agree (the date of the Closing being referred to herein as the "Closing Date"). 3.2. Delivery of Instruments at the Closing. At the Closing, Seller shall execute and deliver to Purchaser and Purchaser shall deliver to Seller an Assignment and Assumption Agreement (the "Assignment Agreement"), which conveys to Purchaser on the Closing Date all of Seller's rights, title and interest in and to the Subject Assets, free and clear of all Liens, and under which Purchaser shall assume the liabilities to be assumed by Purchaser hereunder. Said Assignment Agreement shall be in the form of Exhibit 3.2 attached hereto, dated the Closing Date, and shall be appropriately completed and duly executed. Seller shall deliver to Purchaser Form UCC-1 financing statements under the Uniform Commercial Code as in effect in the jurisdictions of the principal executive offices of Seller and Purchaser, executed by Seller and Form UCC-3 executed by the secured party in whose favor Seller has executed a financing statement with respect to the Subject Assets and/or their proceeds, terminating such financing statement or releasing the Subject Assets from the property described therein, and a separate release executed by such secured party of all of its right, title and interest in or to the Subject Assets. Purchaser and Seller shall, at or prior to the Closing, execute and deliver all such additional instruments, documents or certificates as may be necessary for the consummation of the Closing of the transactions contemplated by this Agreement. Seller shall have also delivered such other documents and instruments as required under Article 7. 3.3. Purchase Price. [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC] 3.4. Payments at Closing. [INTENTIONALLY OMITTED FOR PURPOSES OF FILING WITH SEC] 6 10 3.5. Post-Closing Reconciliation. (a) As soon as practicable after the Closing Date, but in no event more than thirty (30) days thereafter, Purchaser and Seller shall recompute the Purchase Price based on the Settlement Master File, and if there shall be a difference between the Purchase Price as stated in the Closing Date Statement and the Purchase Price as recomputed based on the Settlement Master File, the Seller shall pay to the Purchaser any deficiency or the Purchaser shall repay to the Seller any excess amount paid by Seller. (b) If Purchaser and Seller are unable in good faith to reach agreement with respect to the Purchase Price they shall jointly select and engage a nationally recognized firm of independent certified public accountants (the "Third-Party Accountants") to calculate the final Purchase Price based on the Settlement Master File and the terms of this Agreement. The Third-Party Accountants' determination of the final Purchase Price shall be conclusive and binding upon the parties hereto. In determining the final Purchase Price, the Third Party Accountants shall have no authority to resolve any disagreement which does not relate directly to the determination of the final Purchase Price. (c) Purchaser and Seller shall cooperate with any and all reasonable requests by the Third-Party Accountants made in connection with the Third-Party Accountants' determination of the Purchase Price, as described in Section 3.5(b). 3.6. Audit Adjustment. (a) In the event the determination of the final Purchase Price requires either party to make payment to the other of any additional amount, such party shall make such payment no later than five (5) Business Days following determination of the final Purchase Price plus interest on any amount due at the Prime Rate for each day during such period. (b) Purchaser and Seller shall each be responsible for the fees and expenses of their respective personnel incurred in connection with the examination and review described in this Article 3. The fees and expenses of the Third-Party Accountants, if any, shall be paid equally by Purchaser and Seller. 3.7. Payment of Taxes and Other Charges. Seller shall pay, or cause to be paid, promptly when due, (a) all taxes arising out of or relating to the operations and conduct of the Credit Card Business and/or the Subject Assets prior to the Cut-Off Time, (b) all taxes imposed on Seller and payable by reason of the transactions contemplated hereby and (c) use or transfer taxes imposed on Purchaser with respect to the sale of the Subject Assets hereunder. Purchaser shall pay all taxes arising out of or in connection with the operations and conduct of the Credit Card Business and/or the Subject Assets after the Cut-Off Time, other than taxes for which Seller is responsible under the first sentence of this Section 3.7. 3.8. Other Adjustments. (a) Payments Received Before Cut-Off Time. Seller shall be entitled to retain all payments on Accounts from Cardholders received and posted to Accounts by Seller prior to the Cut-Off Time. 7 11 (b) Payments Received After Cut-Off Time. Seller shall instruct the U.S. Postal Service to forward, beginning on the Closing Date, all payments from Seller's lockbox to Purchaser's lockbox. All payments received by Seller prior to or after the Cut-Off Time, which were not posted to Accounts prior to the Cut-Off Time and which constitute Account Balances or payments thereon for any Account shall be deposited by Seller in its own account and thereafter settled with Purchaser in accordance with the provisions of this Section 3.8(b). Purchaser hereby authorizes and empowers Seller to sign and endorse (without recourse by Purchaser against Seller with respect to such endorsement) Purchaser's name as Purchaser's attorney-in-fact on all checks, drafts, money orders or other forms of payment relating to such Account so received by Seller but payable to the order of Purchaser. Within 24 hours after the end of each Business Day, Seller will provide Purchaser with a computer tape listing all said payments containing the amount and Account number for each payment so received by Seller. Seller will transfer via wire transmission said funds to Purchaser, without cost to Purchaser, for the first 30 days after the Closing Date, on each Friday following the Closing and monthly thereafter. If Purchaser receives any checks, drafts, money orders or other forms of payment relating to the Accounts subsequent to the Cut-Off Time, which instruments are payable to the order of Seller, Seller hereby authorizes and empowers Purchaser to sign and endorse (without recourse by Seller against Purchaser with respect to such endorsement) Seller's name as Seller's attorney-in-fact on such Accounts to facilitate the deposit thereof. If any such payment is sent to Purchaser later than specified above, such payment shall be accompanied by interest on such amount calculated on the basis of an interest rate equal to the Prime Rate for each day during the period between the date of receipt of such payment by Seller and the date Seller pays Purchaser. (c) Credits Received After Cut-Off Time. If a credit is posted to an Account after the Cut-Off Time with respect to a Receivable arising prior to the Cut-Off Time, Purchaser shall notify Seller and Seller shall send to Purchaser the amount of such credit. Such payments shall be transmitted to Purchaser on each Friday following the Closing Date. If any such payment is sent to Purchaser later than specified above, such payment shall be accompanied by interest on such amount calculated on the basis of an interest rate equal to the Prime Rate for each day during the period between the date of such credit and the date Seller pays Purchaser. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Purchaser as of the date hereof and as of the Closing Date as follows: 4.1. Organization. Seller is a corporation duly organized, validly existing and in good standing under the Laws of the state of Delaware. 4.2. Capacity; Authorization; Validity. Seller has all necessary power and authority to enter into this Agreement and Ancillary Documents and to perform all of the 8 12 obligations to be performed by it under this Agreement and Ancillary Documents. This Agreement and the consummation by Seller of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action of Seller, and this Agreement and Ancillary Documents have been duly executed and delivered by Seller and this Agreement constitutes a legal, valid and binding obligation of Seller, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, receivership, conservatorship, and other laws relating to or affecting creditors' rights generally and by general equity principles. 4.3. Conflicts; Defaults; Etc. Except for the consents required under the Samuels Loan Agreement (as defined below) which Samuels shall use its best efforts to obtain, neither the execution and delivery of this Agreement and Ancillary Documents by Seller nor the consummation of the transactions contemplated hereby by Seller will (i) conflict with, result in the breach of, constitute an event which would, or with the lapse of time or action by a third party or both would, result in a default under, or accelerate the performance required by, the terms of any contract, instrument or commitment to which Seller is a party or by which it is bound; (ii) violate the articles of incorporation or by-laws, or any other equivalent organizational document, of Seller; (iii) result in the creation of any Lien upon any of the Subject Assets; (iv) to Seller's knowledge result in the creation of any Purchaser tax liability on the purchase of the Subject Assets; or (v) require any consent or approval of any regulatory authority, or under any judgment, order, writ, decree, permit or license to which Seller is a party or bound or to which any of the Subject Assets are subject. 4.4. Title to Subject Assets. Except for Liens existing and/or arising under that certain Loan and Security Agreement, dated as of October 2, 1998, between Samuels Jewelers, Inc., as Borrower, and Foothill Capital Corporation, as Agent (the "Samuels Loan Agreement"), which Liens Seller shall cause to be released on or before the Closing Date, Seller has good and valid title to all of the Subject Assets, free and clear of any Lien. No person other than Seller has owned at any time, or had any right, title or interest in at any time, any of the Receivables or Accounts. The Assignment Agreement and the consummation of the transactions contemplated hereby will vest in the Purchaser all right, title and interest of Seller in and to the Subject Assets, free and clear of any Lien. 4.5. Receivables and Accounts. (a) All underwriting and origination of Accounts were performed in accordance with the then applicable written policies and procedures of Seller, true and complete copies of which have previously been furnished to Purchaser. The Credit Card Business has been operated as a part of the business of Seller and under the control of Seller. All aspects of the Credit Card Business have been operated solely by Seller. There are no Receivables that have been criticized by any Governmental Authority, regulatory authority or any internal auditor in any written communication to Seller, or classified by any regulatory authority as "Other Assets Specially Mentioned," "Substandard," "Doubtful," "Loss" or any similar classifications. 9 13 (b) (i) Each of the Receivables and Accounts and the interest rates, fees and charges in connection therewith comply, and have at all times complied with, all applicable Laws; (ii) each Account, Receivable and the related Cardholder Agreement is the legal, valid and binding obligation of the Cardholder-obligor and any guarantor named therein and each is enforceable and legally collectible (not including the ability of the Cardholder to pay) in accordance with its terms under all applicable Laws, and to Seller's knowledge is subject to no defense, including without limitation, bankruptcy, offset or counterclaim; (iii) a Credit Card has been issued in connection with each Account; (iv) all Accounts are with natural persons for use primarily for personal, family or household purposes, and no Account has been entered into with any corporation, partnership, association or other similar entity; (v) to Seller's knowledge, no Receivable is a "commercial loan", as that term is used in the BHCA; (vi) each Receivable is free and clear of any and all Liens incurred or existing by, through or on behalf of, or in favor of any Person; (vii) each Receivable arose in connection with a bona fide sale and delivery of merchandise or Services by Seller; (viii) each Receivable is for an amount payable in U.S. dollars, subject to returns, allowances and other adjustments in the ordinary course of business; (ix) to the best of Seller's knowledge none of the Receivables arose out of any fraud or malfeasance of any Cardholder, customer of Seller, or any other person, or any fraud, malfeasance or negligence of any employee or agent of Seller; (x) each Receivable is collectible in the ordinary course of business (not including the ability of the Carholder to pay); (xi) each Receivable consists of an "account", "chattel paper" or a "general intangible", and is not an "instrument", under and as defined in Article or Division 9 of the UCC; (xii) each Cardholder Agreement constitutes the entire agreement of the Seller and the Cardholder and Seller has made no amendment, modification or supplement to any Cardholder Agreement which is not reflected in writing in such agreement; and (xiii) the Credit Card Business has been conducted by Seller in all material respects in compliance with all applicable Laws. 4.6. Litigation and Claims. To the best of Seller's knowledge, there is no litigation, proceeding, or arbitration pending against or to which Seller is a party. To the best of Seller's knowledge, there is no claim, investigation or material controversy pending against or affecting Seller or to which Seller is a party, materially and adversely affecting or which could materially and adversely affect the Subject Assets, the Credit Card Business or the ability of Seller to consummate the transactions contemplated hereby or under the Ancillary Documents; (b) to the best of Seller's knowledge, no such claim, litigation, proceeding, arbitration, investigation or controversy has been threatened or is contemplated and no facts exist which would provide a basis for any such claim or proceeding; (c) the Subject Assets and Credit Card Business are subject to no proceeding pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940; (d) Seller is not subject to any agreement with any regulatory authority with respect to its operations affecting the Subject Assets, the Credit Card Business or the ability of Seller to consummate the transactions contemplated hereby or under the Ancillary Documents; and (e) there are no violations, with respect to which refunds or restitutions on any Account may be required, cited in any compliance report relating to the Credit Card Business as a result of an examination or review by any regulatory authority. 10 14 4.7. Conduct. Since April 9, 1999, (a) there has been no material and adverse change in the results of operations of the Credit Card Business jeopardizing the collectibility of the Accounts and there has been no material and adverse change with respect to the Subject Assets; Seller has not effected any change in its policies, practices or procedures relating to the Accounts, Seller has not amended the Cardholder Agreements except for the amendments provided to Purchaser; (b) Seller has carried on the Credit Card Business in the ordinary course of business, diligently and in a manner consistent with its past practices, and (c) except in the ordinary course of business, Seller has not disposed of or discontinued any portion of its Credit Card Business or any Receivables. Seller has performed all obligations required to be performed by it to date under the Cardholder Agreements and is not in default under, and no event has occurred which, with the lapse of time or action by a third party, could result in a default under, any such agreements. All such agreements are legal, valid and binding obligations of Seller, the Cardholder and any guarantor named therein, fully enforceable by the respective parties thereto in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, receivership, conservatorship, and other laws relating to or affecting creditors' rights generally and by general equity principles. 4.8. Executive Offices. The chief executive office and principal place of business of Seller is 2914 Montopolis, Suite 200, Austin, Texas 78741. 4.9. Solvency. Seller is, and immediately after the consummation of the transactions contemplated by this Agreement, will be, Solvent. 4.10. Permits, Licenses, Etc. Seller has all Permits that are required in order to carry on the Credit Card Business (including, without limitation, Permits relating to consumer finance) and to consummate the transactions contemplated by this Agreement (collectively, the "Business Permits"). Seller is not in violation or default of any of the Business Permits. All the Business Permits are in full force and effect, and, to the knowledge of Seller, no suspension, cancellation or non-renewal of any Business Permit is threatened, nor does any basis for such suspension, cancellation or non-renewal exist. 4.11. Compliance with Applicable Laws. Neither (a) the origination, establishment, maintenance, servicing or use of any Account, any Receivable or any of the other Subject Assets by Seller; (b) any of the Account Documentation; (c) the conduct of the Credit Card Business by Seller, nor (d) the consummation of the transactions contemplated by this Agreement or any Ancillary Document, violates or has violated any Law now in effect or in effect when any Account, Receivable, or any other Subject Asset was established or used. Seller has not received any notice of any violation of Law applicable to the Credit Card Business, any Account, any Receivable or any other Subject Asset, and to Seller's knowledge no basis for the allegation of any such violation exists. No Governmental Authority has placed any restriction on the Credit Card Business or any of the Accounts, the Receivables or the other Subject Assets, or the consummation of the transactions contemplated by this Agreement or any Ancillary Document. No investigation or review by any Governmental Authority with 11 15 respect to the Credit Card Business or any of the Accounts, the Receivables, the other Subject Assets or the consummation of the transactions contemplated by this Agreement or any Ancillary Document is pending or, to Seller's knowledge, threatened, nor to Sellers' knowledge has any Governmental Authority indicated an intention to conduct such an investigation or review. 4.12. Absence of Undisclosed Liabilities. Seller has no liability or obligation of any nature, secured or unsecured (whether accrued, absolute, contingent or otherwise) which are reasonably likely to have an adverse effect on the Subject Assets. To the best of Seller's knowledge, there is no basis, for assertion against it as of the Closing Date of any liability or obligation of any nature which are reasonably likely to have an adverse effect on the Subject Assets. 4.13. Agreements. Seller has furnished to Purchaser true and complete copies of the form of Cardholder Agreement, periodic statement, application form and all notices relating to any change of terms regarding any Credit Card. 4.14. Consents. Except for the consents required under the Samuels Loan Agreement, which Seller shall obtain prior to the Closing Date, no consent, authorization or approval of, or exemption by, or filing with, any Governmental Authority or any other Person is required to be obtained by Seller in connection with the execution, delivery and performance by Seller of this Agreement or any other Ancillary Document to which Seller is a party or the consummation by Seller of the transactions contemplated hereby or thereby. 4.15. Contracts With Third Parties. Purchaser will not be assuming any contracts of Seller. 4.16. Finders or Brokers. Seller has not agreed to pay any fee or commission to any agent, broker, finder, or other person for or on account of services rendered as a broker or finder in connection with this Agreement or the transactions contemplated hereby which would give rise to any claim against Purchaser for any brokerage commission or finder's fee or like payment. 4.17. Books and Records. All of Seller's Books and Records are in all material respects, complete and correct, and are and have been maintained in accordance with GAAP and all Laws applicable to the Credit Card Business and/or all of the Subject Assets. 4.18. Accuracy of Information. This Agreement, the Master File of Accounts and all reports, statements, lists, certificates and other documents delivered, and any information heretofore or hereafter furnished, by Seller in writing to Purchaser in connection with this Agreement or any of the transactions contemplated hereby, and all written information supplied by Seller in the due diligence review by Purchaser (collectively, the "Materials and Information"), are materially true and complete with respect to all such information presented therein and materially accurate and do not omit to state a material fact required to be stated therein or necessary to make the 12 16 statements herein or therein, in the light of the circumstances under which they were made, not misleading. Such Materials and Information shall be deemed to constitute representations and warranties of Seller under this Agreement to the same extent as if set forth in this Agreement in full. Seller has provided in writing all information requested from it in writing by Purchaser. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to Seller as of the date hereof and of the Closing Date as follows: 5.1. Organization. Purchaser is a national banking association duly organized, validly existing and in good standing under the laws of the United States. 5.2. Capacity; Authority; Validity. Purchaser has all necessary power and authority to enter into this Agreement and the Ancillary Documents and to perform all the obligations to be performed by it under this Agreement and the Ancillary Documents. This Agreement and the Ancillary Documents and the consummation by Purchaser of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action of Purchaser, and this Agreement and the Ancillary Documents have been duly executed and delivered by Purchaser and this Agreement constitutes a legal, valid and binding obligation of Purchaser, enforceable in accordance with its terms, and except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, receivership, conservatorship, and other laws relating to or affecting creditors' rights generally and by general equity principles. 5.3. Conflicts; Defaults; Etc. Neither the execution and delivery of this Agreement by Purchaser nor the consummation of the transactions contemplated hereby by Purchaser will: (i) conflict with, result in the breach of, constitute an event which would, or with the lapse of time or action by a third party or both would, result in a default under, or accelerate the performance required by, the terms of any contract, instrument or commitment to which Purchaser is a party or by which it is bound; (ii) violate the articles of incorporation or by-laws of Purchaser; (iii) require any consent or approval under any judgment, order, writ, decrees, permit or license, to which Purchaser is a party or by which it is bound; or (iv) require the consent or approval of any Governmental Authority or other Person. 5.4. Litigation. There is no claim, or any litigation, proceeding, arbitration, investigation or controversy pending against or affecting Purchaser and by which it is bound, which adversely affects in any material respect Purchaser's ability to consummate the transactions contemplated hereby; to Purchaser's knowledge, no such claim, litigation, proceeding, arbitration, investigation or controversy has been threatened or is contemplated; to Purchaser's knowledge, no facts exist which would provide a basis for any such claim, litigation, proceeding, arbitration, investigation, or 13 17 controversy; and Purchaser is not subject to any agreement with any regulatory authority which would prevent the consummation of the transactions contemplated by this Agreement or the Ancillary Documents by the Purchaser. 5.5. Finders or Brokers. Purchaser has not agreed to pay any fee or commission to any agent, broker, finder or other person for or on account of services rendered as a broker or finder in connection with this Agreement or the transactions contemplated hereby which would give rise to any claim against Seller for any brokerage commission or finder's fee or like payment. 5.6 Compliance with Applicable Laws. The consummation of the transactions contemplated by this Agreement or any Ancillary Document does not violate nor has violated any Law now in effect. ARTICLE 6 CERTAIN COVENANTS 6.1. Mutual Covenants and Agreements. Seller and Purchaser each hereby covenant and agree that: (a) Cooperation. It shall cooperate fully with the other party hereto in furnishing any information or performing any action reasonably requested by such party, which information or action is necessary to the speedy and successful consummation of the transactions contemplated by this Agreement. Subject to its further rights under this Agreement, it shall promptly cause the Closing to occur at the earliest practicable time, with time being of the essence. (b) Confidentiality. All information furnished by one party (the "Protected Party") to the other party in connection with this Agreement and the transactions contemplated hereby shall be received in confidence and kept confidential by such other party and shall be used by it only in connection with this Agreement and the transactions contemplated hereby except to the extent that such information: (i) is necessary or required to be disclosed to Affiliates, auditors, investment advisors, legal counsel or rating agencies, provided that such party is advised of the confidential nature of the information; (ii) is already lawfully known to such other party when received; (iii) thereafter becomes lawfully obtainable from other sources; (iv) is required to be disclosed to, or by, a Governmental Authority; or (v) is, based on the advice of counsel, required by Law to be disclosed by such other party; provided, however, that notice of such disclosure has been given to the Protected Party, when legally permissible, and that such other party making the disclosure uses its best efforts to provide notice to permit a Protected Party to take legal action to prevent the disclosure; or (vi) is required by court order. (c) Press Releases. Except as may be required by Law or a court or Governmental Authority, neither Seller nor Purchaser, nor any of their respective Affiliates, shall, prior to, on or after the Closing, issue a press release or make a public 14 18 announcement related to the transactions contemplated hereby without the prior consent of the other party hereto, which consent shall not be unreasonably withheld or delayed. (d) Notice to Cardholders. Seller and Purchaser shall cooperate with each other in good faith, consistent with applicable Law, to prepare, print and mail on a timely basis to each Cardholder a notice notifying each Cardholder of (i) the purchase of the Accounts by Purchaser; (ii) matters of which Cardholders are required, in Purchaser's good faith judgment, by applicable Law to be notified as a result of the transactions contemplated by this Agreement, and (iii) other matters which Purchaser reasonably determines to be appropriate. Each such notice shall be prepared, printed and mailed by Purchaser in such manner and at such time as determined by Purchaser. (e) Advice of Changes. Between the date hereof and the Closing Date, each party shall promptly advise the other in writing of any fact which, if existing or known at the date hereof, would have been required to be set forth or disclosed in or pursuant to this Agreement or of any fact which, if existing or known at the date hereof, would have made any of the representations contained herein untrue in any material respect; provided, however, that for the purposes of determining whether the conditions set forth in Section 7.2.(b) and Section 7.3.(b) are satisfied, the representations and warranties set forth in Article 4 and Article 5 shall be unaffected by any update provided pursuant to this Section 6.1.(e). 6.2. Certain Covenants of Seller. Seller hereby agrees with Purchaser as follows: (a) Preservation of Credit Card Business. From the date of this Agreement and continuing until the Closing Date, Seller shall: (i) maintain and service the Accounts in substantially the same manner as previously maintained and serviced and in compliance with applicable Law; (ii) not pledge (other than the existing Lien created by Samuels Loan Agreement), sell or transfer any Account without the prior written consent of the Purchaser; (iii) not make any change to their policies and procedures that could have an adverse effect on the Accounts except as required by Law or without Purchaser's prior written consent, including without limitation their write-off policy, credit scoring criteria and new account approval criteria; (iv) not send a change in terms notice to Cardholders without the prior written approval of Purchaser; (v) take no action or fail to take any action which impairs any rights of Purchaser under this Agreement; (vi) not amend any Cardholder Agreements; and (vii) not close any Accounts, except in accordance with established policies and procedures in existence at the date of this Agreement. (b) Other Negotiations. During the period from the date of this Agreement to the Closing Date, Seller shall not, directly or indirectly, (i) initiate, solicit or encourage discussions with; (ii) provide (or permit access to) information to, or (iii) approve or enter into a transaction with, any Person or group of Persons concerning any proposed or possible transfer of any of the Subject Assets (all such transactions being referred to herein as "Acquisition Transactions"). Seller shall promptly communicate to Purchaser 15 19 the terms of any proposal which they may receive in respect of an Acquisition Transaction and any request by or indication of interest on the part of any third party with respect to initiation of any Acquisition Transaction or discussions with respect thereto. (c) Access. Seller shall permit Purchaser and its representatives full access to its Books and Records. Seller shall furnish (or cause to be furnished) Purchaser with true, accurate and complete copies of properties, books, records, files, contracts and other records related to the Subject Assets as Purchaser may reasonably request. Seller shall cause its personnel to provide Purchaser assistance in Purchaser's investigation of matters related to the Subject Assets; provided, however, that Purchaser's investigation shall be conducted in a manner which does not unreasonably interfere with Seller's normal operations, customer and employee relations. Seller shall permit Purchaser (or its designee) to review all Accounts to verify none of the Accounts is subject to a bankruptcy proceeding. (d) Further Assistance. On and after the Closing Date, Seller (i) shall give such further assurances to Purchaser, execute, acknowledge and deliver all such acknowledgments and other instruments and take such further action as may be necessary and appropriate to carry out fully and effectively the transactions contemplated hereby, including, without limitation, the conveyance of the Subject Assets and full legal and equitable title to such Subject Assets, and to discharge Purchaser from any obligations not otherwise assumed by Purchaser on the Closing Date relating to the Subject Assets; and (ii) shall execute and deliver such documents as are reasonable necessary in Purchaser's opinion to vest in Purchaser, good and valid title to the Accounts and Receivables, including, without limitation, UCC financing statements and amendments to existing UCC financing statements. (e) Books and Records. At or prior to the Closing, Seller shall deliver (or cause to be delivered), at its expense, to Purchaser, the originals and all copies of all notices, Cardholder Lists, Books and Records. Such documents, when delivered shall be organized in substantially the same manner as organized by Seller in the normal conduct of the Credit Card Business. Any such documents not delivered at or prior to the Closing, shall be delivered by Seller within 24 hours (except in the case in the case of credit card applications and agreements which shall be provided as soon as practicable, but in no event later than 10 Business Days) of any request for such documentation by Purchaser. (f) Limited Right to Use Marks. Seller hereby grants Purchaser a royalty-free license to use, after the Closing, the name "Jewelcard" and such other marks of Seller as have been used in connection with the Accounts and the Receivables for identification purposes, to the extent permitted by Law, in any collection efforts or other Cardholder communications and for the purpose of otherwise enforcing all of Purchaser's rights in the Subject Assets. Purchaser shall cease all use of the Marks when Purchaser no longer owns any Accounts. 16 20 ARTICLE 7 CONDITIONS OF CLOSING 7.1. Conditions to Obligations of Purchaser and Seller. The obligations of Purchaser and Seller under this Agreement to consummate the transactions contemplated by this Agreement are subject to the satisfaction of the following conditions as of the Closing Date: (a) Approvals and Authorizations. All necessary approvals and authorizations of, filings and registrations with and notifications to, all Governmental Authorities with respect to the transactions contemplated by this Agreement shall have been duly obtained or made and shall be in full force and effect at the Closing Date. 7.2. Conditions Applicable to Purchaser. The obligations of Purchaser under this Agreement to consummate the transactions contemplated by this Agreement are, in addition to the condition contained in Section 7.1, subject to the satisfaction of the following conditions as of the Closing Date: (a) Performance of This Agreement. Each of the terms, covenants and conditions of this Agreement to be complied with and performed by the Seller at or prior to the Closing Date shall have been fully complied with and performed in all material respects. (b) Accuracy of Representations and Warranties. There shall be no material inaccuracy in any of the representations and warranties of Seller set forth in Article 4 as of the date of this Agreement or as of the Closing Date, assuming that such representations and warranties are made anew with the same force and effect on and as of the Closing Date. (c) No Material and Adverse Change. Since the date of this Agreement, there shall have been no material and adverse change in the condition (financial or otherwise, including no material increase in the percentage of delinquent accounts) of the Subject Assets or the Credit Card Business. (d) Litigation. No action, suit, litigation, proceeding or investigation related to any of the transactions contemplated hereby shall have been threatened or instituted which in the opinion of the Purchaser is reasonably likely to (i) materially restrict or prohibit or otherwise have a material and adverse effect on the consummation of any of the transactions contemplated hereby, or (ii) have a material and adverse effect on Purchaser, the Subject Assets or the Credit Card Business. (e) Seller's Certificate Concerning Agreement. Seller shall have furnished to Purchaser a certificate dated the Closing Date, signed by an authorized officer of Seller (no less senior than a Vice President) that, the conditions set forth in Sections 7.2(a), 7.2(b) 7.2(c), and 7.2(d) have been satisfied with respect to the Seller. Seller shall have 17 21 furnished a Certificate of Incumbency, signed by the Secretary of Seller, as to the title and status of the authorized officers signing the above-referenced certificate. (f) Effect of Acquisition. The acquisition of the Subject Assets shall (i) be lawful for Purchaser under all applicable Laws; (ii) shall not cause Purchaser or any of its parent companies or other Affiliates to lose any rights or privileges, or have imposed on them any obligations, under the BHCA or to be in any respect not in compliance with any Law, and (iii) not cause Purchaser or any of its Affiliates to become a "bank holding company", as that term is defined in Section 2(a) of the BHCA. Neither Purchaser nor any of its Affiliates, as a result of a change in any Law applicable thereto, shall be subject or face a significant possibility of being subjected to any requirement, restriction or condition with respect to its structure or operations which, in the judgment of Purchaser exercised in good faith, will have a material and adverse effect upon, or will be materially burdensome with respect to Purchaser or any of its Affiliates. (g) Financing Statements. Seller shall have executed and delivered to Purchaser for filing all such UCC financing statements, in a form reasonably acceptable to Purchaser, as are reasonably required by Purchaser. (h) Perfection. Purchaser shall have received evidence, in form and substance reasonably satisfactory to it, that all actions necessary to perfect its interest in and to the Accounts, the Receivables and the other Subject Assets, and to ensure that Purchaser has good and valid title in and to the Accounts, the Receivables and the other Subject Assets, have been taken. (i) Licenses and Consents. Purchaser shall have received evidence, in form and substance reasonably satisfactory to it, that all licenses and consents required by or necessary for the consummation of the transactions contemplated by this Agreement have been obtained. (j) Governmental Authority. Purchaser shall have received evidence, in form and substance reasonably satisfactory to it, that all registrations and filings required by or with any Governmental Authority for the consummation of the transactions contemplated by this Agreement have been taken. (k) Identification of Accounts. The Accounts shall have been identified and all Ineligible Accounts shall have been separately identified. Purchaser and Seller are able to process such Accounts and Ineligible Accounts separately. Separate lockboxes shall have been established for the remittance of payments under the Accounts and the Ineligible Accounts. 7.3. Conditions Applicable to Seller. The obligations of Seller under this Agreement to consummate the transactions contemplated hereby are, in addition to the conditions contained in Section 7.1, subject to the satisfaction of the following conditions as of the Closing Date: (a) Performance of This Agreement. Each of the terms, covenants and conditions of this Agreement to be complied with and performed by the Purchaser at or 18 22 prior to the Closing Date shall have been fully complied with and performed in all material respects. (b) Accuracy of Representations and Warranties. There shall be no material inaccuracy in the representations and warranties of Purchaser set forth in Article 5 as of the date of this Agreement or as of the Closing Date, assuming that such representations and warranties are made anew with the same force and effect on and as of the Closing Date. (c) Purchaser's Certificate Concerning Agreement. Purchaser shall have furnished to Seller a certificate dated the Closing Date, signed by an authorized officer of Purchaser (no less senior than a Vice President) that, to the best of the knowledge and information of such officer, the conditions set forth in Sections 7.3(a) and 7.3(b) have been satisfied with respect to Purchaser. (d) No Material and Adverse Change. Since the date of this Agreement, there shall have been no material and adverse change in the condition (financial or otherwise) of Bank. (e) Litigation. No action, suit, litigation, proceeding or investigation related to any of the transactions contemplated hereby shall have been threatened or instituted which in the opinion of the Seller is reasonably likely to (i) materially restrict or prohibit or otherwise have a material and adverse effect on the consummation of any of the transactions contemplated hereby, or (ii) have a material and adverse effect on Seller. (f) Licenses and Consents. Seller shall have received evidence, in form and substance reasonably satisfactory to it, that all licenses and consents required by or necessary for the consummation of the transactions contemplated by this Agreement have been obtained. (g) Governmental Authority. Seller shall have received evidence, in form and substance reasonably satisfactory to it, that all registrations and filings required by or with any Governmental Authority for the consummation of the transactions contemplated by this Agreement have been taken. ARTICLE 8 INDEMNIFICATION 8.1. Indemnification by Seller. Seller shall indemnify and hold harmless Purchaser, its Affiliates, their respective officers, directors, employees and agents from and against any and all claims, losses, liabilities, actions or causes of action, assessments, damages, fines, penalties, costs and expenses (including, without limitation, reasonable fees and disbursements of counsel) (collectively, "Losses"), based upon, in connection with, arising out of, or resulting from, any of the following: (a) any inaccuracy of any of the representations or warranties made by Seller in this Agreement or in any Ancillary Document; 19 23 (b) any breach or failure by Seller to perform any of its covenants or agreements contained in this Agreement or in any Ancillary Document; (c) any act or omission of Seller and its agents and dealers with respect to any of the Subject Assets prior to the Closing Date; or (d) any liability or obligation of any nature of Seller whether arising or to be paid, performed or discharged prior to, at or after the Cut-Off Time. 8.2. Indemnification by Purchaser. Purchaser shall indemnify and hold harmless Seller, its Affiliates, their respective officers, directors, employees and agents, from and against, any and all Losses based upon, in connection with, arising out of, or resulting from any of the following: (a) any inaccuracy of any of the representations or warranties made by Purchaser in this Agreement or in any Ancillary Document; (b) any breach or failure by Purchaser to perform any of its covenants or agreements contained in this Agreement or in any Ancillary Document; (c) all of Purchaser's liabilities and obligations under the Cardholder Agreements to be performed by Purchaser after the Cut-Off Time; or (d) any act or omission of Purchaser and its agents with respect to any of the Subject Assets on or after the Closing Date. 8.3. Procedures. Each party shall promptly notify the other party of any claim, demand, suit or threat of suit of which that party becomes aware (except with respect to a threat of suit either party might institute against the other) which may give rise to a right of indemnification pursuant to this Agreement. The indemnifying party will be entitled to participate in the settlement or defense thereof and, if the indemnifying party elects, to take over and control the settlement or defense thereof with counsel satisfactory to the indemnified party. In any case, the indemnifying party and the indemnified party shall cooperate (at no cost to the indemnified party) in the settlement or defense of any such claim, demand, suit or proceeding. ARTICLE 9 TERMINATION 9.1. Termination. (a) In the event the requirements of Sections 7.2 or 7.3 are not satisfied or waived by August 27, 1999, either party may terminate this Agreement without any further obligation or liability (except for obligations which expressly survive) to the party who did not satisfy the conditions of Section 7.2 or 7.3, as the case may be, effective upon filing notice of such termination to such other party. (b) Effect of Termination. If this Agreement is terminated, the agreements of the parties hereto contained in Section 6.1(b), Section 6.1(c), Section 9.2 and Article 8 20 24 shall survive such termination. Termination of this Agreement will not relieve either party of liability for breaches of this Agreement. 9.2. Expenses. Each party shall pay all of its own fees and expenses incurred in connection with the transactions contemplated in this Agreement, except as otherwise provided expressly herein. ARTICLE 10 MISCELLANEOUS 10.1. Survival of Representations and Warranties. Notwithstanding any investigation made by or on behalf of any party at any time, each representation and warranty shall survive the Closing Date. 10.2. Notices. All notices, consents, approvals and other communications to be given hereunder shall be in writing, shall be deemed to have been duly given upon receipt, and shall be delivered (i) in person, (ii) by United States registered or certified mail, with postage prepaid, return receipt requested, or (iii) by a nationally recognized overnight courier service that provides written evidence of receipt, and addressed as follows: (a) If to Purchaser: World Financial Network With a Copy to: National Bank Attn: Karen A. Morauski, Counsel 800 TechCenter Drive Fax: (614) 729-4949 Gahanna, OH 43230 Attn: Daniel T. Groomes, President Fax: (614) 729-4899 (b) If to Seller: Samuels Jewelers, Inc. 2914 Montopolis, Suite 200 Austin, Texas 78741 Attn: E. Peter Healey Fax: (512) 369-1515 or to such other address or addresses as Purchaser and Seller may from time to time designate by notice as provided herein, except that notices of change of address shall be effective only upon receipt. 10.3. Assignment. No party hereto shall assign or delegate this Agreement or any rights or obligations hereunder without the prior written consent of the other party, except that either party shall be permitted to assign its rights hereunder to any of its Affiliates without the other party's consent. 21 25 10.4. Waiver. One party hereto may, by written notice to the other party hereto, (a) extend the time for the performance of any of the obligations or other actions of the other party under this Agreement; (b) waive any inaccuracies in the representations or warranties of the other party contained in this Agreement or in any document delivered pursuant to this Agreement; (c) waive compliance with any of the conditions or covenants of the other party contained in this Agreement; or (d) waive or modify performance of any of the obligations of the other party under this Agreement. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of one party, shall be deemed to constitute a waiver by such party of compliance with any of the representations, warranties, covenants, conditions or agreements contained in this Agreement. The waiver by one party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. 10.5. Entire Agreement. This Agreement (including the Exhibits hereto) supersedes any other agreement, whether written or oral, that may have been made or entered into by Seller and Purchaser relating to the matters contemplated hereby, and together with the Private Label Credit Card Program Agreement between Purchaser and Seller constitutes the entire agreement of the parties. 10.6. Amendments and Supplements. This Agreement may be amended, modified or supplemented only by the written agreement of the parties hereto. 10.7. Captions. The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement. 10.8. Counterparts. This Agreement may be executed with counterpart signature pages or in two or more counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. 10.9. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Ohio without regard to internal principles of conflict of laws. 10.10. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and the provisions of Article 8 shall inure to the benefit of the indemnified parties referred to therein. 10.11. Severability. If any provision of this Agreement is held to be invalid, void or unenforceable, all other provisions shall remain valid and be enforced and construed as if such invalid provision were never a part of this Agreement. 10.12. Waiver of Jury Trial. Each of the parties hereto shall, and hereby does, waive trial by jury in any action or proceeding involving any of the parties hereto on any matters whatsoever arising out of or in any way connected with this Agreement; provided that such waiver shall not apply to cross claims in any bona fide action 22 26 originally involving a third-party and a jury trial or any bona fide action brought by a third-party against one or more of the parties hereto and involving a jury trial. 10.13. Consent to Jurisdiction. Each party (i) consents and submits to the jurisdiction of the Courts of the State of Ohio and of the Courts of the United States for the Eastern Division of the Southern District of Ohio for all purposes of this Agreement, including, without limitation, any action or proceeding instituted for the enforcement of any right, remedy, obligation or liability arising under or by reason hereof or thereof. 10.14. Mutual Drafting. This Agreement is the joint product of Seller and Purchaser and each provision hereof has been subject to mutual consultation, negotiation and agreement of Seller and Purchaser and shall not be construed for or against any party hereto. IN WITNESS WHEREOF, each of Seller and Purchaser have caused this Agreement to be duly executed and delivered as of the date first above written. WORLD FINANCIAL NETWORK SAMUELS JEWELERS, INC. NATIONAL BANK By: By: -------------------------------- -------------------------------- Name: Name: ------------------------------ ------------------------------ Title: Title: ----------------------------- ----------------------------- 23 27 EXHIBIT 1.1 TO PURCHASE AND SALE AGREEMENT INELIGIBLE ACCOUNTS An open-end credit card account shall be deemed an "Ineligible Account" if as of the Cut-Off Time one or more of the following criteria shall be applicable, whether or not the revelant facts are then known to Seller or Purchaser: 1) as to which any Receivable has been written off by Seller or has not been written off but was required to have been written off according to GAAP or the normal operating policies of Seller or has been referred to a collection agency or an attorney for collection; 2) as to which the Cardholder is deceased or has been declared incompetent; 3) as to which the Cardholder is the subject of any petition under the United States Bankruptcy Code of 1978, as amended, or is a party to any other insolvency proceedings under state law, or as to which Seller has executed a reaffirmation agreement with a Cardholder who filed a petition for protection under any chapter of the United States Bankruptcy Code of 1978, as amended; 4) as to which the Cardholder's Account does not have in effect a valid written Cardholder Agreement enforceable in accordance with its terms, or is subject to a dispute by the Cardholder or is subject to defense, offset, claim or counterclaim as a result of Seller's action or inaction; 5) which has been identified in the exercise of diligence and good faith by Seller on its books and records as being fraudulent; 6) as to which the Cardholder is under the age of 18 years; 7) which is a non-Credit Card accessed account; 8) as to which the Cardholder is not an individual, or the account is maintained in a corporate or other business name; 9) as to which the account is one-hundred eighty (180) or more days past due; 10) any account which was opened prior to January 1, 1996 which has no outstanding balance and which has had no financial activity including purchases, payments or credits within the prior 12 month period; or 11) as to which there is pending litigation, proceeding or arbitration against or affecting Seller. 24 28 EXHIBIT 3.2 TO PURCHASE AND SALE AGREEMENT [FORM OF] ASSIGNMENT AND ASSUMPTION AGREEMENT This Assignment and Assumption Agreement is made and delivered this day of July, 1999 by and between Samuels Jewelers, Inc. ("Seller") and World Financial Network National Bank ("Purchaser"), pursuant to the Purchase and Sale Agreement between the parties dated July , 1999 (the "Purchase Agreement"), and for the consideration and on the terms stated therein, the terms defined therein being used herein shall have the meaning as defined in the Purchase Agreement. 1. Assignment. Seller does hereby sell, convey, transfer and assign to Purchaser, its successors and assigns, for its own use and benefit forever, and not as security for any indebtedness, all of the Subject Assets. 2. Assumption. Purchaser does hereby assume each of Seller's obligations under the Cardholder Agreements relating to Accounts including the liability for Credit Balances and the obligation to refund them, but excluding Seller's obligations for any breach of such Cardholder Agreements occurring before the Closing Date or arising from any act or omission of Seller or its dealers, all subject to the terms and conditions of the Purchase Agreement. 3. Assignments; Governing Law. This Assignment and Assumption Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto, and shall be governed by and construed and interpreted in accordance with the Purchase Agreement, the internal laws of the State of Ohio without reference to rules of conflicts of laws, and applicable federal law. 4. Purchase Agreement Continued. Nothing herein shall be deemed to supersede any of the obligations, agreements, covenants, representations or warranties of Seller or Purchaser contained in the Purchase Agreement. WORLD FINANCIAL NETWORK NATIONAL BANK SAMUELS JEWELERS, INC. By: By: -------------------------------- -------------------------------- Name: Name: ------------------------------ ------------------------------ Title: Title: ----------------------------- ----------------------------- 25 EX-23.1 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-80199 on Form S-8 of Samuels Jewelers, Inc. ("Successor Company") of our report dated September 10, 1999, which report expresses an unqualified opinion and includes an explanatory paragraph regarding AICPA Statement of Position 90-7, "Financial Reporting for Entities in Reorganization Under the Bankruptcy Code," for the Successor Company as a new entity with assets, liabilities, and a capital structure having carrying values not comparable with prior periods, appearing in and incorporated by reference in this Annual Report on Form 10-K of Samuels Jewelers, Inc. for the year ended May 29, 1999. Deloitte & Touche LLP Dallas, Texas September 10, 1999 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR MAY-29-1999 MAY-31-1998 MAY-29-1999 1,456 0 50,218 5,120 32,684 80,445 19,730 2,109 115,209 71,354 0 0 0 5 43,850 115,209 108,537 118,451 71,289 115,486 0 5,509 4,569 54,092 0 0 0 (11,545) 0 68,111 (.49) (.49)
-----END PRIVACY-ENHANCED MESSAGE-----