-----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, Le86W//EzoTNDgQLJObpOotWjdtgZPKIvSO1X5csll0qCZ7D+/lixW1u23Xk26pg ArMJDoVGrHqM+ADPlfy6Rg== 0000950148-96-001988.txt : 19960913 0000950148-96-001988.hdr.sgml : 19960913 ACCESSION NUMBER: 0000950148-96-001988 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960912 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BARRYS JEWELERS INC /CA/ CENTRAL INDEX KEY: 0000790360 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-JEWELRY STORES [5944] IRS NUMBER: 953746316 STATE OF INCORPORATION: CA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15017 FILM NUMBER: 96628958 BUSINESS ADDRESS: STREET 1: 111 W LEMON AVE CITY: MONROVIA STATE: CA ZIP: 91016 BUSINESS PHONE: 8183034741 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-15017 BARRY'S JEWELERS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 95-3746316 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 111 WEST LEMON AVENUE, MONROVIA, CA 91016 (Address of principal executive offices) Registrant's telephone number, including area code: (818) 303-4741 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Name of each exchange on Title of each class which registered: NONE NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock ---------------- (Title of class) Warrants ---------------- (Title of class) 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. [X] Yes [ ] No 2 Indicate by check mark 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of August 15, 1996 (computed by reference to the mean between the last reported bid and ask price of the registrant's Common Stock on NASDAQ on such date): $12,561,479. 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 of securities under a plan confirmed by a court. [X] Yes [ ] No Number of shares of Common Stock of the registrant outstanding as of August 15, 1996: Common Stock, without par value: 3,999,416 shares. Documents Incorporated by Reference Portions of the Registrant's Proxy Statement (to be filed within 120 days following the end of the fiscal year) are incorporated herein by reference in Part III with respect to directors and executive officers of the Registrant, executive compensation, security ownership of certain beneficial owners and management, and certain relationships and related transactions. Portions of the following documents are incorporated herein by reference in Part IV: Current Report on Form 8-K filed November 1, 1994; and certain exhibits to the Registrant's Annual Reports on Form 10-K for the years ended May 31, 1993, 1994 and 1995; and the Quarterly Report on Form 10-Q for the quarter ended November 30, 1993. 2 3 PART I ITEM 1. BUSINESS GENERAL Barry's Jewelers, Inc. (the "Company," including the operations of its predecessor; see Item 6), as of May 31, 1996, operates 161 retail jewelry stores, principally in California, Texas, Arizona, Utah, Colorado, Montana, North Carolina, and South Carolina. As measured by the number of retail locations, the Company is the fifth largest specialty retailer of fine jewelry in the country. The Company's stores, located in regional malls, offer fine jewelry items in a wide range of styles and prices, with a principal emphasis on diamond and gemstone jewelry. The Company's corporate office is located at 111 West Lemon Avenue, Monrovia, California, 91016, and its telephone number is (818) 303-4741. The Company's operating strategy is to provide quality fine jewelry displayed in attractive store locations at affordable prices and to enhance sales by making credit financing available to qualified customers. The Company's sales capabilities are supported by a trained and knowledgeable sales staff, a fully automated, centralized credit and collection system for the authorization of credit sales and collection of accounts, and a sophisticated distribution system to efficiently replenish merchandise to the stores. During 1992, the Company effected a comprehensive restructuring of its long-term debt obligations and capital structure. On February 26, 1992, the Company voluntarily initiated a case under Chapter 11 of the United States Bankruptcy Code and filed its pre-negotiated Plan of Reorganization in the United States Bankruptcy Court for the Central District of California (the "Court"). The Company remained debtor in possession in the case. On June 19, 1992, the Court entered an order confirming the Company's Amended Plan of Reorganization, as modified, under Chapter 11 of the United States Bankruptcy Code (the "Reorganization Plan"). The effective date of the Reorganization Plan was June 30, 1992. On December 22, 1993, the Company completed separate recapitalization transactions (collectively, the "Recapitalization"). Prior to the Recapitalization, substantially all of the Company's long-term debt obligations consisted of loans under the 1992 Credit and Restructure Agreement dated as of June 30, 1992 (as amended, the "Old Credit Agreement"), among the Company, Wells Fargo Bank, N.A. ("Wells Fargo") and The Bank of California, N.A. ("Bank of California"), as Lenders, and Wells Fargo, as Agent. Immediately prior to the date of the Recapitalization, the Company had term loans outstanding under the Old Credit Agreement in the aggregate principal amount of approximately $26,000,000 and revolving loans outstanding in the aggregate principal amount of approximately $61,000,000 (collectively, the "Old Bank Debt"). On June 14, 1993, Fidelity Summer Street Trust: Fidelity Capital & Income Fund ("Fidelity Capital"), Fidelity Puritan Trust: Fidelity Puritan Fund ("Fidelity Puritan") and Variable Insurance Products Fund: High Income Portfolio ("Fidelity Variable"), each an entity 3 4 to which Fidelity Management & Research Company provided investment advisory services (collectively, "Fidelity"), purchased from Bank of California all of the Company's obligations to Bank of California under the Old Credit Agreement. As part of the Recapitalization, the Company entered into an Exchange Agreement (the "Exchange Agreement") dated as of December 22, 1993 (the "Recapitalization Date"), with Wells Fargo and Fidelity (collectively, the "Purchasers"). Pursuant to the Recapitalization, on the Recapitalization Date, the Purchasers, in the aggregate, exchanged approximately $86,498,000 outstanding principal amount of Old Bank Debt for (i) 1,941,219 shares (as adjusted for the reverse stock split on November 1, 1994) of the Company's Common Stock (the "Shares"), (ii) $70,000,000 in aggregate principal amount of the Company's 11% Senior Secured Notes due December 22, 2000 (the "Notes") and (iii) approximately $1,498,000 in cash. The cash paid to the Purchasers included cash to repay the balance of the outstanding principal amount of the Old Bank Debt not converted into Shares or Notes. In addition, all accrued interest with respect to the Old Bank Debt was paid on the Recapitalization Date. Following the Recapitalization, there was no Old Bank Debt outstanding. Immediately following the Recapitalization, the Shares issued to Wells Fargo represented approximately 37.02% and the Shares issued to Fidelity in the aggregate represented approximately 11.88% (and together, approximately 48.91%) of the outstanding shares of Common Stock of the Company. For a discussion of the terms of the current bank facility, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." STORE PERFORMANCE The following table sets forth selected data with respect to the Company's operations for the five fiscal years ended May 31, 1996.
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Number of Stores Acquired during year 0 15 0 0 0 Opened during year 7 8 1 0 1 Closed during year 8 5 1 1 62(1) Total at year end 161 162 144 144 145 Percentage increase/ (decrease) in sales of comparable stores (2) 2.2% 11.0% 7.4% 9.1% (3.3%) Average sales per comparable store (3) $905,000 $871,000 $792,000 $736,000 $674,000
____________________________________ (1) Includes sixty stores in 1992 closed or sold as part of the Company's operational restructuring. (2) Comparable stores are stores that were open for the same period in both the current and preceding years. 4 5 (3) Computation based on comparable stores open during the year. Fiscal year 1992 excludes the inventory clearance sales conducted in sixty stores that closed during the first fiscal quarter in connection with the Company's operational restructuring. DIAMOND AND GEMSTONE JEWELRY The Company purchases most of its diamonds and gemstones directly from international markets located in Antwerp, Tel Aviv, New York, Bombay and elsewhere. The Company buys only cut and polished stones, primarily in sizes of one carat or less. The Company purchases gold castings for rings, pendants, earrings, bracelets, and other items from several domestic and foreign sources and contracts with independent goldsmiths who polish the castings and set the stones supplied by the Company. The Company also purchases finished merchandise when it can be obtained at attractive prices. Management believes that its direct purchases of diamonds, gemstones and mountings provide a cost advantage over many competitors who purchase a substantial portion of their diamonds, gemstones and mountings as finished merchandise from wholesalers and manufacturers and that this purchasing strategy enables the Company to establish competitive prices while maintaining favorable gross profit margins. WATCHES, GOLD JEWELRY AND OTHER ITEMS All watches, gold jewelry and other non-precious stone merchandise are purchased by buyers located in the Company's corporate office, with each store's inventory being replenished on a weekly basis and more often during peak selling periods. Each store has a minimum inventory level for all inventory classifications which is based on individual store sales history and can therefore be tailored to regional jewelry tastes. Management believes that centralized merchandise purchasing gives the Company price advantages with suppliers through economies of scale. MERCHANDISE MIX Diamond and gemstone jewelry, primarily wedding sets, cocktail rings, men's rings, pendants and earrings, accounted for approximately 70% of the Company's sales for fiscal 1996 and 1995. The Company also offers a wide range of prices and styles of gold jewelry, watches, repair services, and a limited selection of giftware. The Company's strategy is to offer merchandise at competitive prices, but not necessarily at the lowest prices in any given market area. The approximate percentage of the Company's net sales represented by each major merchandise category for fiscal 1996 and 1995, based on internally generated reports, is as follows: 5 6
Percentage of Net Sales 1996 1995 ------ ----- Diamond and Gemstone Jewelry . . . . . . . . . . . . . . . 70% 70% Gold Jewelry . . . . . . . . . . . . . . . . . . . . . . . 15% 15% Watches . . . . . . . . . . . . . . . . . . . . . . . . . 5% 5% Non-Diamond Rings . . . . . . . . . . . . . . . . . . . . 3% 3% Miscellaneous . . . . . . . . . . . . . . . . . . . . . . 7% 7% --- --- Total . . . . . . 100% 100%
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 some 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 Historically, when the Company acquired a store or chain, it retained the trade name when management believed that significant customer loyalty and store identification existed. The Company predominantly operates under four trade names representing 148 of the 161 stores: Hatfield Jewelers, Mission Jewelers, Samuels Jewelers, and Schubach Jewelers. Four other trade names make up the remaining 13 stores: Barry's Jewelers, Barons Jewelers, A. Hirsh & Son Jewelers, and The Ringmaker. CREDIT PROGRAM The Company's credit policy is intended to complement its overall merchandising and sales 6 7 strategy. The Company encourages creditworthy customers to use the cash they have available for a jewelry purchase as a down payment on a more expensive, better quality item rather than as payment in full for a less expensive item. The Company also offers consumer 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. Sales under the Company's credit program accounted for approximately 54% of fiscal 1996 sales, net of down payments. Customers are encouraged to make a cash downpayment on all credit sales, with payment periods for the credit balance generally ranging from 9 to 24 months. Customers may also purchase jewelry for cash and by using major national credit cards. SEASONALITY The level of success of the Company is heavily dependent each year on the success of 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. Sales during the Christmas season (which includes the period from the day following Thanksgiving day to December 31) generally account for approximately 26% of net sales and all or nearly all of annual earnings. For the month of December 1995, net sales were $32,352,000. 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, including in particular Zale Corporation and Sterling, Inc., 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, breadth, depth, price and quality of merchandise offered, credit terms and store location and design. Management believes that the Company competes successfully because of its highly experienced and knowledgeable personnel, the personal attention given to its customers, direct involvement of senior officers in monitoring store operations, wide selection of merchandise, purchasing and pricing policies, timely credit approval and effective sales techniques. However, 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. 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 7 8 information systems, and the ability to provide customer service through trained and knowledgeable sales staffs. EMPLOYEES At May 31, 1996, the Company had 1,335 full- and part-time employees, of whom approximately 1,215 were credit and store sales employees and approximately 120 were administrative personnel. Unions represented 36 employees, or 3% of the Company's employees, at such date. Union contracts covering these employees expired on August 31, 1996. The contracts are currently being renegotiated. The Company believes it provides working conditions and wages which compare favorably with those offered by other retailers in the industry and that its employee relations are good. The Company has never experienced any material labor unrest, disruption of operations or strikes. ITEM 2. PROPERTIES The Company leases approximately 38,000 square feet for its headquarters location under a lease expiring in 2005. In addition, all of the Company's stores are located on leased premises. Most of the store leases provide for the payment of base rentals plus real estate taxes, insurance, common area maintenance fees and mall association dues as well as contingent rentals based on the store's gross sales. Most of the Company's leases provide for initial terms of 10 to 15 years, with varying provisions for extensions or renewals. None of these leases individually is material to the operations of the Company. The Company believes that its leased space is adequate for its current and prospective operations. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time involved in routine litigation incidental to the conduct of its business. The Company believes that no litigation currently pending against it will have a material adverse effect on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 8 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information. The Company's Common Stock is traded in the over-the-counter market on the NASDAQ. In November 1994, a one-for-five reverse stock split of the Company's Common Stock was effected; all share and per share data in this Form 10-K have been restated to reflect such reverse stock split. For each quarter of the fiscal years ended May 31, 1996 and 1995, the high and low bid prices per share were:
Quarter Ended High Low ------------- ---- --- August 31, 1994 7-11/32 2-13/16 November 30, 1994 8-7/16 6 February 28, 1995 7-1/8 4-7/8 May 31, 1995 5-1/16 2-7/8 August 31, 1995 4-5/8 2-7/8 November 30, 1995 5-7/8 3-3/4 February 28, 1996 4-1/8 3-1/8 May 31, 1996 4-7/8 3
Beginning in July 1992, the Company's warrants commenced trading in the over-the-counter market on the NASDAQ. Since then, the trading volume has been very low, and the reported high and low bid prices for the fiscal year ended May 31, 1996 were 3/4 and 1/8, respectively. (b) Holders. Management believes that there are approximately 1,160 beneficial owners of Common Stock as of August 15, 1996. (c) Dividends. The present policy of the Company is to retain earnings to provide funds for the operation and expansion of its business. The Company has paid no cash dividends on its Common Stock during the past two fiscal years and management does not anticipate that it will do so in the foreseeable future. Any payment of future dividends and the amounts thereof will be dependent upon the Company's earnings, financial requirements and other factors deemed relevant by the Board of Directors. The New Credit Agreement and the Indenture governing the Notes also place limitations on the Company's ability to declare and pay dividends. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data of the Company (through the effective date of the Reorganization Plan, referred to as "Predecessor") as of and for the years ended May 31, 1992, and the month ended June 30, 1992, and the Company (referred to as such following the 9 10 effective date of the Reorganization Plan) as of and for the year ended May 31, 1996, 1995, and 1994, and the eleven months ended May 31, 1993. The data should be read in conjunction with the financial statements, related notes and other financial information included herein.
Company Predecessor -------------------------------------------- ------------------------- Eleven Year Year Year Months Month Ended Ended Ended Ended Ended Year Ended May 31, May 31, May 31, May 31, June 30, May 31, 1996 1995 1994 1993 1992 1992 ---- ----- ---- ------ ------ ------ (in thousands, except per share data and number of common shares outstanding) Net sales .......................... $140,145 $136,055 $114,023 $99,270 $7,070 $112,384 Finance and credit insurance charges ................ 16,008 15,681 14,487 13,037 1,229 16,155 Selling, general and administrative expenses(1) ...................... 51,974 50,966 46,341 41,863 3,859 53,667 Operating income (loss) ........................... 8,651 11,670 10,294 5,764 (541) (5,917) Interest expense, net .............. 11,146 9,764 7,746 6,401 644 13,906 Income (loss) before extraordinary item ................ (2,783) 1,906 1,539 (637) (1,185) (19,823) Net income (loss)(2) ............... (2,783) 1,906 1,539 (637) 48,044 (19,823) Net income (loss) per share(2)(3) .................. (0.70) 0.48 0.53 (0.32) 48.02 (19.79) Weighted average number of common shares outstanding (3) .... 3,977,791 3,968,998 2,902,359 2,008,182 1,000,413 1,001,651 Total assets ....................... 145,973 144,959 122,252 119,200 116,448 130,939 Total debt ......................... 103,579 92,368 75,935 90,251 91,417 142,152
(1) Selling, general and administrative expenses for the eleven months ended May 31, 1993, the month ended June 30, 1992, and the twelve months ended May 31, 1992 include $100,000, $450,000, and $4,200,000, respectively, of nonrecurring restructuring expenses. 10 11 (2) The month ended June 30, 1992 includes an extraordinary gain of $49,229,000 ($49.20 per share), which represents the gain on cancellation of Predecessor 12-5/8% Subordinated Notes and related accrued interest, net of write-off of deferred debt expenses, in connection with the Reorganization Plan. (3) In November 1994, a one-for-five reverse stock split of the Common Stock was effected; share and per share data have been restated to reflect such reverse stock split. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth the percentage relationship to net sales of certain items included in Item 6, "Selected Financial Data."
Year Ended May 31, ------------------------------------ 1996 1995 1994 ---- ---- ---- Net Sales 100.0% 100.0% 100.0% Finance and credit insurance charges 11.4 11.5 12.7 Selling, general and administrative expenses 37.1 37.5 40.6 Operating income 6.2 8.6 9.0 Interest expense 8.0 7.2 6.8 Net (loss) income (2.0) 1.4 1.3
Fiscal Year Ended May 31, 1996 ("fiscal 1996") Compared with Fiscal Year Ended May 31, 1995 ("fiscal 1995") Net sales in fiscal 1996 were $140,145,000, an increase of $4,090,000, or 3%, from net sales of $136,055,000 in fiscal 1995. The increase was the combined result of the full operation of the 23 new stores opened in the prior year and an increase of 2% in sales of comparable stores (those open for the same period in both the current and preceding years) versus the prior year. Finance and credit insurance charges on credit sales in fiscal 1996 were $16,008,000, an increase of $327,000, or 2%, from the prior year primarily due to an increase in the average total outstanding customer receivables. 11 12 Cost of goods sold, buying and occupancy expenses were 60% of net sales for fiscal 1996 compared to 58% for the prior year. The gross margin percentage declined in fiscal 1996 primarily due to the Company's continued value pricing strategy instituted in the prior year in response to increased competitive pressure in the retail jewelry industry. Selling, general and administrative expenses were $51,974,000, an increase of $1,008,000, or 2%, from the prior year, primarily due to approximately $972,000 of expenses related to the settlement of legal actions and fees related to the recent sale of 1.5 million shares of the Company's stock by Wells Fargo Bank to private investors. Such increases were more than offset by the increase in net sales. Selling, general and administrative expenses declined as a percentage of net sales to 37% in fiscal 1996 from 38% for the fiscal 1995. The provision for doubtful accounts was $11,759,000, an increase of $1,566,000 from the prior year. The provision was approximately 8% of net sales for fiscal 1996 and 1995. Interest expense was $11,146,000, an increase of $1,382,000, or 14% from the prior year. Such increase was a result of a higher average interest rate on the Company's long-term debt, higher average borrowings to finance the higher inventory per store, and the write-off of $232,000 of deferred financing fees relating to redemption of the Notes as discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company's provision for income taxes is $288,000. The provision primarily reflects the increase in the valuation allowance against certain deferred income tax assets based on management's estimates of the realization of these net deferred income tax assets. As described more fully below under "Liquidity and Capital Resources," the Company has available net operating loss carryovers to offset future taxable income. Fiscal Year Ended May 31, 1995 Compared with Fiscal Year Ended May 31, 1994 ("fiscal 1994") Net sales in fiscal 1995 were $136,055,000, an increase of $22,032,000, or 19%, from net sales of $114,023,000 in fiscal 1994. Sales of comparable stores (those open for the same period in both the current and preceding years) also increased, by 11%, versus the prior year. Increased sales reflect the benefits from the 23 new stores opened during fiscal year 1995 and higher inventories that include an expanded merchandise mix to appeal to a larger, more diverse customer base. Finance and credit insurance charges on credit sales in fiscal 1995 were $15,681,000, an increase of $1,194,000, or 8%, from the prior year primarily due to an increase in the average total outstanding accounts receivable. Cost of goods sold, buying and occupancy expenses were 58% of net sales for fiscal 1995 compared to 55% for the prior year. The gross margin percentage declined in fiscal 1995 primarily due to the Company's new value pricing strategy instituted in response to increased 12 13 competitive pressure in the retail jewelry industry and an increase in the Company's inventory shrinkage. Selling, general and administrative expenses were $50,966,000, an increase of $4,625,000, or 10%, from the prior year, primarily due to opening and operating the 23 new stores. Such increases were more than offset by the increase in net sales. Selling, general and administrative expenses declined as a percentage of net sales to 38% in fiscal 1995 from 41% for the prior year. The provision for doubtful accounts was $10,193,000, an increase of $470,000 from the prior year. The provision was 8% of net sales for fiscal 1995 compared with 9% for the prior year. The lower provision in fiscal 1995 reflects improved collection results realized from the installation of automated credit systems in fiscal 1993, lower write-offs of accounts receivable balances, and improving economic conditions. Interest expense was $9,764,000, an increase of $2,018,000, or 26% from the prior year. This was a result of a higher average interest rate on the Company's long-term debt resulting from recapitalization transactions completed in December 1993 and due to higher average borrowing to finance the new stores and additional inventory per store. No provision for income taxes was recorded in fiscal 1995. The provision for income taxes for the prior year was $1,009,000. The decline in provision is due to a decrease in pre-tax income and the reduction of valuation allowances on certain deferred tax assets, as management believes it is more likely than not that these assets will be realized. As described more fully below under "Liquidity and Capital Resources," the Company has available net operating loss carryovers to offset future taxable income. Since the carryovers utilized arose prior to the Reorganization Plan, for financial reporting purposes the reduction of tax payments for the year ended May 31, 1995 was reflected as a credit to common stock. LIQUIDITY AND CAPITAL RESOURCES General Sales under the Company's credit program accounted for approximately 54% of fiscal 1996 sales, net of down payments. The Company's policy is to attempt to obtain a cash downpayment on all credit sales, with monthly payments established such that the payment of the credit balance will occur, generally, over a period ranging from 9 to 24 months. None of the receivables are of the installment variety with a fixed maturity; rather, all of 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. As of May 31, 1996, May 31, 1995, and May 31, 1994, the aggregate customer receivables balances were $79,304,000, $81,054,000 and $74,361,000, respectively. Aggregate credit collections during the twelve months ended May 31, 1996 were $89,819,000. A change in its customers' payment patterns could affect the Company's working capital requirements. Customers may also purchase jewelry for cash and by using major national credit cards. 13 14 The Company's operations require working capital to fund the purchase of inventory and growth of customer receivables. Also, the seasonality of the Company's business requires a significant build-up of inventory for the December holiday selling period. These additional inventory needs must be funded during the late summer 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. In addition, the Company requires working capital to fund capital expenditures. Capital expenditures for fiscal 1996, 1995 and 1994 were $4,500,000, $6,516,000 and $2,848,000, respectively. Historically, such expenditures have been made in connection with store openings and acquisitions, store remodeling, and the centralization and automation of the Company's information systems. The Company intends to continue improving its existing operations through increased inventory investment in existing high-volume locations while also carrying out a planned new store expansion. Financing Transactions On December 21, 1995, the Company entered into an accounts receivable securitization facility (the "Securitization Facility") with Barry's Funding Corp., a wholly owned subsidiary of the Company ("BFC"), Triple-A One Funding Corporation ("Triple-A One"), and Capital Markets Assurance Corporation ("CapMAC"), as agent for Triple-A One. Pursuant to the Securitization Facility, from time to time the Company sold its accounts receivable to BFC, and BFC financed its purchases thereof by selling an undivided interest in the accounts receivable to Triple-A One, which financed its purchase thereof through the issuance of commercial paper. The Securitization Facility provided for a maximum funding commitment of $80,000,000, subject to an asset-based funding formula and certain other conditions. In connection with the Securitization Facility, the Company also entered into an amended and restated revolving credit facility with FNBB, as lender and agent thereunder, pursuant to an amended and restated Revolving Credit Agreement that provided for maximum aggregate loans and letters of credit at any time outstanding of not more than $20,000,000 (the "Revolving Credit Agreement"). The Revolving Credit Agreement provided for the making of loans based upon the amount of the Company's eligible inventory from time to time. In addition, proceeds of the initial purchase from the Company of accounts receivable by BFC, under the Securitization Facility, were used in part to repay at par $20 million of the Company's $70 million in outstanding Notes plus accrued and unpaid interest thereon to the date of repayment. The Notes bear interest at 11% per annum payable semiannually on April 30 and October 31, and are secured by an interest in the Company's assets that is second in priority to the obligations pursuant to the New Revolving Credit Agreement (as defined below). On July 26, 1996, CapMAC advised the Company that it wished to terminate the commitment under the Securitization Facility. Accordingly, on August 30, 1996, the Company entered into a Second Amended and Restated Revolving Credit Agreement with FNBB, as lender and agent thereunder (the "Amended Revolving Credit Agreement"). The Amended Revolving Credit Agreement, which is secured by substantially all of the Company's assets, provides for maximum aggregate loans and letters of credit at any time outstanding of not more than $85,000,000, based upon the 14 15 Company's eligible inventory and eligible customer receivables from time to time. The Amended Revolving Credit Agreement has a term of three years and contains various restrictive and financial covenants that are customary in transactions of this nature. Proceeds of the initial funding under the Amended Revolving Credit Agreement in the amount of approximately $41.2 million were used to refinance the Company's and BFC's obligations under the Securitization Facility, following which the Securitization Facility was terminated. In connection with such termination, all of the customer receivables that had been previously sold to BFC were transferred back to the Company, and BFC was merged into the Company, with the Company surviving the merger. In addition, upon consummation of the Amended Revolving Credit Agreement, the Company incurred fees of approximately $2.1 million, which will be amortized over three years. As of August 30, 1996, after giving effect to the foregoing transactions and including conversion of loans outstanding under the old Revolving Credit Agreement, the aggregate principal amount outstanding under the Amended Revolving Credit Agreement was approximately $53.4 million and the additional borrowing availability thereunder was approximately $10.1 million. The Company anticipates fiscal 1997 interest expense to be higher than fiscal 1996 interest expense due to the Amended Revolving Credit Agreement. On August 30, 1996, the indenture governing the Notes was also amended to the extent required to permit the consummation of the Amended Revolving Credit Agreement and the termination of the Securitization Facility. The Company believes that funds available under the Amended Revolving Credit Agreement and funds generated from operations will provide sufficient working capital for the financing of inventory and customer receivables as well as for the Company's expansion plans and other purposes for the foreseeable future. As of May 31, 1996, the Company has available approximately $14,000,000 of remaining useable aggregate net operating loss carryovers for federal income tax return purposes expiring through 2008. As a result of the Company's Chapter 11 reorganization, an ownership change occurred and the utilization of the loss carryovers of the predecessor company was limited to approximately $1,159,000 of taxable income annually for up to 15 years, commencing June 1992. An ownership change occurs if, immediately after any owner shift or equity structure shift, the percentage of stock owned by one or more "5-percent shareholders" has increased by more than 50 percentage points over the lowest percentage held by such shareholders at any time during the testing period. Additionally, recapitalization transactions completed on December 22, 1993 resulted in the issuance of approximately 49 percent of the aggregate outstanding shares of Common Stock of the Company, and therefore resulted in approximately 49 percentage points of change of ownership for federal income tax purposes. For financial reporting purposes, utilization of net operating loss carryovers of the predecessor company is reflected as a credit to Common Stock. QUARTERLY RESULTS OF OPERATION The following is a summary of the unaudited quarterly results of operations for the years ended May 31, 1996 and 1995: 15 16
Three Months Ended ----------------------------------------------------------------- May 31, February 29, November 30, August 31, 1996 1996 1995 1995 ---- ---- ---- ---- 1996 ---- Net sales $29,413,000 $50,868,000 $33,124,000 $26,740,000 Cost of goods sold, buying and occupancy 20,210,000 27,865,000 19,305,000 16,389,000 Income (loss) before income taxes (5,339,000) 5,265,000 (745,000) (1,676,000) Net income (loss) (4,489,000) 3,159,000 (447,000) (1,006,000) - - - - Income (loss) per share $(1.12) $.79 $(.11) $(.25) Weighted average number of common shares outstanding 3,999,416 3,973,658 3,968,975 3,968,975
Three Months Ended ----------------------------------------------------------------- May 31, February 28, November 30, August 31, 1995 1995 1994 1994 ---- ---- ---- ---- 1995 ---- Net sales $29,149,000 $50,948,000 $31,410,000 $24,548,000 Cost of goods sold, buying and occupancy 17,513,000 28,024,000 18,534,000 14,836,000 Income (loss) before income taxes (1,612,000) 5,971,000 (985,000) (1,468,000) Net income (loss) (205,000) 3,583,000 (591,000) (881,000) Income (loss) per share $(.05) $.90 $(.15) $(.22) (1) Weighted average number of common shares outstanding 3,968,976 3,968,980 3,969,019 3,969,019 (1)
(1) See Note (3) on Page 11. 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 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. 16 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and Financial Statement Schedule of the Company, and the reports of independent auditors are listed at Item 14 and are included beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. The Registrant determined not to renew the engagement of Ernst & Young LLP as the Registrant's independent auditors effective November 1, 1994. During the Registrant's two most recent fiscal years and all subsequent interim periods preceding the dismissal, there were no "reportable events" (as set forth in Item 304(a)(l)(v) of regulation S-K). The Registrant has engaged Deloitte & Touche LLP as the Registrant's independent auditors effective November 1, 1994. PART III ITEMS 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, ETC. The information contained in Barry's Jewelers, Inc.'s definitive Proxy Statement relating to its 1996 Annual Meeting of Shareholders, with respect to Directors and Executive Officers 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. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K.
1. Financial statements: Page Number ----------- Report of Independent Auditors - Deloitte & Touche LLP F-1 Report of Independent Auditors - Ernst & Young LLP F-2 Consolidated Balance Sheets as of May 31, 1996 and 1995 F-3
17 18 For the Years Ended May 31, 1996, May 31, 1995 and May 31, 1994: Consolidated Statements of Operations F-5 Consolidated Statements of Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-9
2. Consolidated Financial Statement Schedules For the Years Ended May 31, 1996, May 31, 1995 and May 31, 1994 : Schedule II - Valuation and Qualifying Accounts and Reserves F-21
All financial statement schedules, other than the above, for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required and therefore have been omitted. 3. Index to Exhibits:
(a) Exhibit No. Description ----------- ----------- 3 Restated Articles of Incorporation filed November 16, 1994 in connection with the Reverse Stock Split (5) 4.1(a) Indenture, dated as of December 22, 1993, between Barry's Jewelers, Inc. and First Trust National Association, as trustee (the "Trustee"), with respect to the 11% Senior Secured Notes due December 22, 2000, including form of Note certificate (1) 4.1(b) Amendment No. 1 to Indenture, dated as of February 14, 1994, between Barry's Jewelers, Inc. and the Trustee (5) 4.1(c) Amendment No. 2 to Indenture, dated as of March 18, 1994, between Barry's Jewelers, Inc. and the Trustee (5) 4.1(d) Amendment No. 3 to Indenture, dated as of December 21, 1995, between the Company and the Trustee (6) 4.1(e) Amendment No. 4 to Indenture, dated as of August 30, 1996, between the Company and the Trustee (9)
18 19 4.2 Exchange Agreement, dated as of December 22, 1993, by and among the Company and the holders signatories thereto (1) 4.3 Senior Secured Notes Registration Rights Agreement, dated as of December 22, 1993, by and among the Company and the holders signatories thereto (1) 4.4 Common Stock Registration Rights Agreement, dated as of December 22, 1993, by and among the Company and the holders signatories thereto (1) 4.5 Second Amended and Restated Revolving Credit Agreement, dated as of August 30, 1996, by and among the Company, The First National Bank of Boston ("FNBB"), as lender and as agent thereunder (9) 4.6(a) Collateral Agency and Intercreditor Agreement, dated as of December 22, 1993, among FNBB, as collateral agent for the secured parties and as agent for the lenders (under the New Revolving Credit Agreement), the Trustee, on behalf of the holders of the Notes, and the Company (1) 4.6(b) Amendment Agreement No. 1, dated as of December 21, 1995, to Collateral Agency and Intercreditor Agreement dated as of December 22, 1993 among FNBB, the Trustee and the Company (6) 4.6(c) Amendment Agreement No. 2, dated as of August 30, 1996, to Collateral Agency and Intercreditor Agreement dated as of December 22, 1993 among FNBB, the Trustee and the Company (9) 4.7 Second Amended and Restated Security Agreement dated as of August 30, 1996, between the Company and FNBB, as collateral agent for the secured parties (9) 4.8 Second Amended and Restated Trademark Collateral Security and Pledge Agreement dated as of August 30, 1996, between the Company and FNBB (9) 10.1 Lease dated February 1, 1990 between the El Monte Partnership as Landlord and Barry's Jewelers, Inc. as Tenant (8) 10.2 Executive Incentive Bonus Plan for the year ended May 31, 1994 (2) 10.3 Executive Incentive Bonus Plan for the year ended May 31, 1995 (5)
19 20 10.4 Lease dated December 1, 1990, between Gerson I. Fox and David Blum, as Lessors, and BBF Jewelers Management, Inc., as Lessee (2) 10.5 Deferred Compensation Plan (4) 10.6 Executive Deferral Plan (6) 10.7 Executive Bonus Plan - Master Plan Document (4) 10.8 Executive Bonus Plan - Trust Agreement (4) 10.9 Employee Stock Purchase Plan (5) 10.10 Employment Agreement dated April 8, 1996, between the Company and Thomas S. Liston (9) 10.11 Employment Agreement dated April 8, 1996, between the Company and Robert Bridel (9) 21 Barry's Jewelers, Inc. had a subsidiary, Barry's Funding Corp., as of May 31, 1996. 23 Consents of Independent Auditors (9) 27 Financial Data Schedule (9)
(1) Incorporated herein by reference to Current Report on Form 8-K filed December 23, 1993. (2) Incorporated herein by reference to the indicated exhibits filed in response to Item 14, "Exhibits," of the Company's Annual Report on Form 10-K for the year ended May 31, 1993. (3) Incorporated herein by reference to the indicated exhibits filed in response to Item 6, "Exhibits," of the Company's Quarterly Report on Form 10-Q for the Quarter ended November 30, 1993. (4) Incorporated herein by reference to the indicated exhibits filed in response to Item 14, "Exhibits," of the Company's Annual Report on Form 10-K for the year ended May 31, 1994. (5) Incorporated herein by reference to the indicated exhibits filed in response to Item 14, "Exhibits," of the Company's Annual Report on Form 10-K for the year ended May 31, 1995. 20 21 (6) Incorporated herein by reference to Current Report on Form 8-K filed December 21, 1995. (7) Incorporated herein by reference to the indicated exhibits filed in response to Item 14, "Exhibits," of the Company's Annual Report on Form 10-K/A for the year ended May 31, 1995. (8) Incorporated herein by reference to the indicated exhibits filed in response to Item 14, "Exhibits," of the Company's Annual Report on Form 10-K for the year ended May 31, 1990. (9) Filed herewith. (b) Reports on Form 8-K None filed for the quarter ended May 31, 1996. 21 22 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. BARRY'S JEWELERS, INC. September 11, 1996 By:/S/ROBERT W. BRIDEL ---------------------------------- ROBERT W. BRIDEL PRESIDENT AND CHIEF EXECUTIVE OFFICER 22 23 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 on September 11, 1996
Signature Title --------- ----- /S/WILLIAM EBERLE Chairman of the Board of - -------------------------------- WILLIAM EBERLE Directors /S/THOMAS S. LISTON Vice Chairman of the Board - -------------------------------- THOMAS S. LISTON of Directors, Secretary, Treasurer, Chief Financial Officer (Principal Financial and Accounting Officer) /S/ROBERT W. BRIDEL President, Chief Executive - -------------------------------- ROBERT W. BRIDEL Officer and Director /S/DAVID BLUM Director - -------------------------------- DAVID BLUM /S/WILLIAM P. O'DONNELL Director - -------------------------------- WILLIAM P. O'DONNELL /S/JOHN W. GILDEA Director - -------------------------------- JOHN W. GILDEA /S/CLEAVELAND D. MILLER Director - -------------------------------- CLEAVELAND D. MILLER /S/DAVID COCHRAN Director - -------------------------------- DAVID COCHRAN /S/BART A. BROWN, JR. Director - -------------------------------- BART A. BROWN, JR. /S/ROBERT N. DANGREMOND Director - -------------------------------- ROBERT N. DANGREMOND
23 24 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Barry's Jewelers, Inc. Monrovia, California We have audited the accompanying consolidated balance sheets of Barry's Jewelers, Inc. and subsidiary (the "Company") as of May 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. Our audits also included the consolidated financial statement schedule listed in the Index at Item 14a. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Barry's Jewelers, Inc. and subsidiary at May 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Los Angeles, California August 12, 1996, except for Note 2, paragraphs 6 and 7, as to which the date is August 30, 1996. F-1 25 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Barry's Jewelers, Inc. We have audited the accompanying statement of operations, shareholders' equity, and cash flows of Barry's Jewelers, Inc. for the year ended May 31, 1994. These financial statements are the responsibility of the Company's management. Our audit also included the financial statement schedule listed in the Index at Item 14(a). Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Barry's Jewelers, Inc. for the year ended May 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Los Angeles, California August 8, 1994 F-2 26 BARRY'S JEWELERS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
MAY 31, 1996 1995 -------------- -------------- ASSETS (NOTES 1 AND 2) Current assets: Cash $ 1,765,000 $ 954,000 Customer receivables, net of allowance for doubtful accounts of $10,930,000 (1996) and $11,662,000 (1995) 68,374,000 69,392,000 Merchandise inventories 54,559,000 53,835,000 Deferred income taxes (Note 3) - 1,000,000 Prepaid expenses and other current assets 2,031,000 2,027,000 -------------- -------------- Total current assets 126,729,000 127,208,000 Property and equipment: Leasehold improvements, furniture and fixtures 23,013,000 20,275,000 Machinery and equipment 3,778,000 3,438,000 -------------- -------------- 26,791,000 23,713,000 Less accumulated depreciation and amortization 10,425,000 8,013,000 -------------- -------------- Net property and equipment 16,366,000 15,700,000 Deferred income taxes (Note 3) 122,000 - Other assets, net of accumulated amortization of deferred debt issuance costs of $1,864,000 (1996) and $789,000 (1995) 2,756,000 2,051,000 -------------- -------------- Total assets $ 145,973,000 $ 144,959,000 ============== ==============
See notes to consolidated financial statements. F-3 27 BARRY'S JEWELERS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
MAY 31, 1996 1995 -------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY (NOTES 1 AND 2) Current liabilities: Current portion of long-term debt (Note 2) $ 181,000 $ 488,000 Accounts payable - trade 3,837,000 10,133,000 Accrued wages and benefits 2,045,000 2,649,000 Accrued interest 594,000 786,000 Other accrued liabilities 2,697,000 3,279,000 -------------- -------------- Total current liabilities 9,354,000 17,335,000 Long-term debt, less current maturities (Note 2) 103,398,000 91,880,000 Lease commitments and contingencies (Notes 4 and 5) Shareholders' equity (Note 5) Common stock, no par value, authorized, 8,000,000 shares; issued and outstanding, 3,999,416 shares (1996) and 3,968,975 shares (1995) 33,196,000 32,936,000 Retained earnings 25,000 2,808,000 -------------- -------------- Total shareholders' equity 33,221,000 35,744,000 -------------- -------------- Total liabilities and shareholders' equity $ 145,973,000 $ 144,959,000 ============== ==============
See notes to consolidated financial statements. F-4 28 BARRY'S JEWELERS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31, 1996 1995 1994 --------------- -------------- -------------- Net sales $140,145,000 $136,055,000 $114,023,000 Finance and credit insurance charges 16,008,000 15,681,000 14,487,000 --------------- -------------- -------------- 156,153,000 151,736,000 128,510,000 Costs and expenses: Cost of goods sold, buying and occupancy 83,769,000 78,907,000 62,152,000 Selling, general and administrative expenses 51,974,000 50,966,000 46,341,000 Provision for doubtful accounts 11,759,000 10,193,000 9,723,000 --------------- -------------- -------------- 147,502,000 140,066,000 118,216,000 --------------- -------------- -------------- Operating income 8,651,000 11,670,000 10,294,000 Interest expense, net 11,146,000 9,764,000 7,746,000 --------------- -------------- -------------- (Loss) income before income taxes (2,495,000) 1,906,000 2,548,000 Income taxes (Note 3) 288,000 - 1,009,000 --------------- -------------- -------------- Net (loss) income ($2,783,000) $1,906,000 $1,539,000 =============== ============== ============== Net (loss) income per share ($0.70) $0.48 $0.53 =============== ============== ============== Weighted average number of common shares outstanding 3,977,791 3,968,998 2,902,359 =============== ============== ==============
See notes to consolidated financial statements. F-5 29 BARRY'S JEWELERS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK RETAINED ------------------------------- EARNINGS SHARES AMOUNT (DEFICIT) -------------- -------------- -------------- BALANCE AT MAY 31, 1993 2,030,000 $17,049,000 ($637,000) Net income for the year - - 1,539,000 Shares issued pursuant to recapitalization (Note 2) 1,941,219 14,735,000 - Utilization of pre-reorganization net operating loss carryovers (Notes 1 and 3) - 931,000 - Collections on notes due from former directors - - - Shares cancelled pursuant to restricted stock plan (2,200) - - Amortization of deferred compensation - - - -------------- -------------- -------------- BALANCE AT MAY 31, 1994 3,969,019 32,715,000 902,000 Net income for the year - - 1,906,000 Utilization of pre-reorganization net operating loss carryovers (Notes 1 and 3) - 221,000 - Shares cancelled pursuant to reverse stock split (Note 1) (44) - - Amortization of deferred compensation - - - -------------- -------------- -------------- BALANCE AT MAY 31, 1995 3,968,975 32,936,000 2,808,000 Net loss for the year - - (2,783,000) Utilization of pre-reorganization net operating loss carryovers (Notes 1 and 3) - 173,000 - Shares issued pursuant to employee stock purchase plan (Note 5) 30,441 87,000 - -------------- -------------- -------------- BALANCE AT MAY 31, 1996 3,999,416 $33,196,000 $25,000 ============== ============== ==============
NOTES DUE FROM FORMER DEFERRED DIRECTORS COMPENSATION TOTAL -------------- -------------- -------------- BALANCE AT MAY 31, 1993 ($138,000) ($100,000) $16,174,000 Net income for the year - - 1,539,000 Shares issued pursuant to recapitalization (Note 2) - - 14,735,000 Utilization of pre-reorganization net operating loss carryovers (Notes 1 and 3) - - 931,000 Collections on notes due from former directors 138,000 - 138,000 Shares cancelled pursuant to restricted stock plan - - - Amortization of deferred compensation - 50,000 50,000 -------------- -------------- -------------- BALANCE AT MAY 31, 1994 - (50,000) 33,567,000 Net income for the year - - 1,906,000 Utilization of pre-reorganization net operating loss carryovers (Notes 1 and 3) - - 221,000 Shares cancelled pursuant to reverse stock split (Note 1) - - - Amortization of deferred compensation - 50,000 50,000 -------------- -------------- -------------- BALANCE AT MAY 31, 1995 - - 35,744,000 Net loss for the year - - (2,783,000) Utilization of pre-reorganization net operating loss carryovers (Notes 1 and 3) - - 173,000 Shares issued pursuant to employee stock purchase plan (Note 5) - 87,000 -------------- -------------- -------------- BALANCE AT MAY 31, 1996 $ - $ - $33,221,000 ============== ============== ==============
See notes to consolidated financial statements. F-6 30 BARRY'S JEWELERS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31, 1996 1995 1994 --------------- ---------------- --------------- OPERATING ACTIVITIES Net (loss) income ($2,783,000) $1,906,000 $1,539,000 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 4,626,000 3,854,000 3,257,000 Compensation on issuance of common stock (Note 5) - 50,000 50,000 Provision for doubtful accounts 11,759,000 10,193,000 9,723,000 Loss on sale or abandonment of property and equipment 274,000 101,000 13,000 Deferred income taxes 878,000 (882,000) (118,000) Changes in operating assets and liabilities: Customer receivables (10,741,000) (16,386,000) (11,742,000) Merchandise inventories (724,000) (11,260,000) 677,000 Prepaid expenses and other current assets (4,000) (1,141,000) (42,000) Other assets (1,780,000) (351,000) (2,000) Accounts payable - trade (6,296,000) 2,703,000 (1,432,000) Accrued liabilities (1,205,000) 1,615,000 2,338,000 --------------- ---------------- --------------- Net cash (used in) provided by operating activities (5,996,000) (9,598,000) 4,261,000 INVESTING ACTIVITIES Purchase of property and equipment (4,500,000) (6,516,000) (2,848,000) Proceeds on sale of assets 9,000 24,000 - --------------- ---------------- --------------- Net cash used in investing activities (4,491,000) (6,492,000) (2,848,000) FINANCING ACTIVITIES Net (repayments) borrowing under revolving facility (13,435,000) 16,507,000 7,186,000 Net borrowings under securitization facility 45,119,000 - - Proceeds from employee stock purchase plan 87,000 - - Principal payments on long-term debt (473,000) (561,000) (5,269,000) Reduction of long-term debt from securitization transaction (20,000,000) - - Reduction of long-term debt pursuant to recapitalization - - (1,498,000) Recapitalization costs - - (2,412,000) Decrease in notes due from former directors - - 138,000 --------------- ---------------- --------------- Net cash provided by (used in) financing activities 11,298,000 15,946,000 (1,855,000) --------------- ---------------- --------------- Increase (decrease) in cash 811,000 (144,000) (442,000) Cash at beginning of period 954,000 1,098,000 1,540,000 --------------- ---------------- --------------- Cash at end of period $1,765,000 $954,000 $1,098,000 =============== ================ ===============
See notes to consolidated financial statements. F-7 31 BARRY'S JEWELERS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31, 1996 1995 1994 ------------ ---------- ---------- Supplemental disclosure of cash flow information: Cash paid for: Interest $11,338,000 $9,105,000 $7,106,000 Income taxes $543,000 $976,000 $56,000
Supplemental schedule of noncash investing and financing activities: During 1996 and 1995, capital lease obligations of $19,000 and $487,000 respectively, were incurred when the Company entered into lease agreements for new equipment. During fiscal 1996, 1995 and 1994, the Company recognized the utilization of the pre-reorganization net operating loss carryovers for tax purposes of $173,000, $221,000 and $931,000, respectively, as an increase to common stock and a reduction to current taxes payable (see Note 3). See notes to consolidated financial statements. F-8 32 BARRY'S JEWELERS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1996, 1995 AND 1994. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS DESCRIPTION Barry's Jewelers, Inc. (the "Company") operates a chain of retail stores that sell fine jewelry and watches, and utilizes credit financing to enhance sales. It operated 161 stores on May 31, 1996, 162 stores on May 31, 1995, and 144 stores on May 31, 1994. The consolidated financial statements include the accounts of Barry's Jewelers Inc. and its wholly owned subsidiary (referred to collectively as the "Company," unless the context otherwise requires). All material intercompany transactions and balances have been eliminated. REORGANIZATION PLAN On February 26, 1992, Barry's Jewelers, Inc. voluntarily initiated a case under Chapter 11 of the United States Bankruptcy Code and filed its prenegotiated plan of reorganization. On June 19, 1992, the United States Bankruptcy Court for the Central District of California entered an order confirming the Company's Amended Plan of Reorganization, as modified, under Chapter 11 of the United States Bankruptcy Code (the "Reorganization Plan"). The effective date of the Reorganization Plan was June 30, 1992. 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. 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. F-9 33 BARRY'S JEWELERS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CUSTOMER RECEIVABLES Customer receivables consist solely of revolving charge accounts with monthly payment amounts established such that the payment of the credit balance will occur, generally, over a period of nine to twenty-four months. In accordance with usual trade practice, customer receivables are included in current assets. The Company performs a credit evaluation using a point scoring system and other factors and grants credit to customers meeting the Company's requirements. Down payments are required on most credit sales. Additionally, the Company routinely assesses the collectibility of its customer receivables. The Company's receivables are with customers residing principally in California and Texas. The Company does business in 17 states, primarily Arizona, California, Colorado, Texas and Utah, as well as in Ohio, Indiana, Montana, and North and South Carolina. MERCHANDISE INVENTORIES Merchandise inventories, substantially all of which represent finished goods, are stated at the lower of weighted average cost or market. Weighted average cost is determined on the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment in existence at June 30, 1992 were stated at fair values as of that date pursuant to fresh start reporting adopted in connection with the Reorganization Plan. Additions since June 30, 1992 are stated at cost. Depreciation and amortization of equipment and leasehold improvements are computed by the straight-line method over the shorter of the following periods or the life of the leases for leasehold improvements:
Years ------- Leasehold improvements 10 - 15 Furniture and fixtures 5 - 10 Machinery and equipment 5
F-10 34 BARRY'S JEWELERS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED DEBT ISSUANCE COSTS Deferred debt issuance costs are amortized using the straight-line method over the terms of the various related financing agreements. INCOME TAXES The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities and are measured at the enacted tax rates that will be in effect when these differences reverse. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accrued liabilities and the securitization facility (Note 2) approximate fair value because of the short maturity of these instruments. The carrying value of the New Credit Agreement approximates fair value due to its variable rate nature. The fair value of the 11% Senior Secured Notes is approximately $46,622,000 based on recent market transactions. Considerable judgement is required in interpreting market data to develop the estimates of the fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. EARNINGS PER SHARE Earnings per share are based on the weighted average number of shares of common stock and common stock equivalents outstanding during the periods presented. Common stock equivalents consist of shares issuable upon the exercise of stock options and warrants, and are included in the calculation of the weighted average number of shares outstanding when their effect is dilutive. On November 1, 1994, the Company's Board of Directors declared a 1-for-5 reverse stock split of the Company's common stock and decreased authorized common shares to 8,000,000, effective November 16, 1994. All references in the financial statements to the number of shares and per share amounts have been retroactively adjusted for the reverse stock split and the decrease in the number of authorized shares. F-11 35 BARRY'S JEWELERS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECLASSIFICATIONS Certain reclassifications have been made to prior year amounts to conform to the current year presentation. PROSPECTIVE ACCOUNTING CHANGES The Financial Accounting Standards Board has issued 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". This statement is effective for fiscal years beginning after December 15, 1995; however, earlier application is permitted. Among other provisions, the statement standardizes the accounting practices for the recognition and measurement of impairment losses on certain long-lived assets. The Company has decided not to elect early adoption of the statement; however, the Company anticipates that adoption of the change in the accounting will not have a material impact on its financial statements. The Company currently accounts for its stock-based compensation plans using the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). In 1995, the Financial Accounting Standards Board issued a new statement on accounting for stock-based compensation (SFAS 123). This statement is effective for fiscal years beginning after December 15, 1995; however, earlier application is permitted. Among other provisions, the statement allows companies to elect to account for stock-based compensation plans using a fair-value-based method or continue measuring compensation expense for those plans using the intrinsic value method prescribed in APB 25. SFAS 123 requires that companies electing to continue using the intrinsic value method must make pro forma disclosures of net income and earnings per share as if the fair-value-based method of accounting had been applied. The adoption of SFAS 123 will be reflected in the Company's fiscal 1997 consolidated financial statements. As the Company anticipates continuing to account for stock-based compensation using the intrinsic value method, SFAS 123 will not have an impact on the Company's results of operations or financial position but will require additional disclosures. 2. RECAPITALIZATION AND DEBT On December 22, 1993, the Company completed certain recapitalization transactions (the "Recapitalization") pursuant to which the lenders under the then-existing revolving facility (the"Old Revolving Facility") and the then-existing term loan (the "Old Term Loan") exchanged the bank debt outstanding thereunder (approximately $86,498,000 at December 22, 1993 (the "Old Bank F-12 36 BARRY'S JEWELERS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. RECAPITALIZATION AND DEBT (CONTINUED) Debt")) for, in the aggregate, (i) 1,941,219 shares (as adjusted for the reverse stock split on November 1, 1994) of Common Stock, (ii) $70,000,000 aggregate principal amount of 11% Senior Secured Notes due December 22, 2000 (the "Senior Secured Notes") (issued at par), and (iii) cash of approximately $1,498,000. In addition, all accrued interest with respect to the Old Bank Debt was paid on such date. Following the Recapitalization, there was no Old Bank Debt outstanding. Simultaneously on December 22, 1993, the Company entered into a new revolving credit facility (the "New Credit Agreement") with a new bank (First National Bank of Boston or "FNBB"), which has been amended and replaced as discussed below. On December 21, 1995, the Company completed an accounts receivable securitization (the "Securitization Facility"). The Securitization Facility provided for a maximum funding commitment of $80,000,000, subject to an asset-based funding formula and other terms and conditions. In connection with the Securitization Facility, the Company also entered into an amended and restated revolving credit facility (amending the December 22, 1993 New Credit Agreement) with FNBB, as lender and agent thereunder which provided for maximum aggregate loans and letters of credit outstanding at any time of not more than $20,000,000 (the "Revolving Credit Agreement"). As amended and restated, the Revolving Credit Agreement provided for the making of loans based upon the amount of the Company's eligible inventory from time to time. The Company granted the lender under the Revolving Credit Agreement a lien on substantially all of its assets and properties. Both the Securitization Facility and the Revolving Credit Agreement were three-year facilities. Loans outstanding of $8,190,000 under the Revolving Credit Agreement at May 31, 1996 bear a weighted average interest rate of 8.19%. Proceeds of the initial loan under the Securitization Facility were used in part to repay at par $20,000,000 of the Company's $70,000,000 in outstanding Senior Secured Notes plus accrued and unpaid interest thereon to the date of repayment. The Senior Secured Notes bear interest at 11% per annum payable semiannually on April 30 and October 31, and are secured by an interest in the Company's assets that is second in priority to the obligations pursuant to the Revolving Credit Agreement. Subsequent to May 31, 1996, the Company was notified that the Agent of the Securitization Facility desired to extinguish the commitment under the facility. On August 30, 1996, the Company entered into a Second Amended and Restated Revolving Credit Agreement with FNBB (the "Amended Revolving Credit Agreement"). The Amended Revolving Credit Agreement, which is secured by substantially all of the Company's assets, provides for maximum aggregate loans and letters of credit outstanding at any time of not more than $85,000,000, based upon the Company's eligible F-13 37 BARRY'S JEWELERS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. RECAPITALIZATION AND DEBT (CONTINUED) inventory and eligible customer receivables. Base Rate Loans under the Amended Revolving Credit Agreement bear interest at a per annum rate calculated as (i) the higher of (a) the annual rate of interest announced from time to time by FNBB as its "base rate" and (b) one-half of one percent (1/2%) above the Federal Funds Effective Rate (as defined in the Amended Revolving Credit Agreement), plus (ii) one and one-half percent (1.5%). Subject to certain restrictions on the availability of Eurodollar Rate Loans, Eurodollar Rate Loans bear interest at the Eurodollar rate (as defined in the Amended Revolving Credit Agreement) plus three percent (3.0%). The Amended Revolving Credit Agreement has a term of three years and contains various restrictive and financial covenants. Proceeds of the initial funding under the Amended Revolving Credit Agreement in the amount of approximately $41,200,000 were used to repay the Company's obligations under the Securitization Facility. Simultaneously, the Securitization Facility was terminated. In connection with such termination, the Company's wholly owned subsidiary was merged into the Company, with the Company surviving the merger. On August 30, 1996, the indenture governing the Senior Secured Notes was also amended to the extent required to permit the consummation of the Amended Revolving Credit Agreement and the termination of the Securitization Facility. In connection with the Amended Revolving Credit Agreement, the Company incurred fees of approximately $2,100,000. The Company anticipates recording an extraordinary pre-tax charge of approximately $876,000, during the first quarter of fiscal 1997, related to the terminated agreements. Long-term debt consists of the following:
May 31, 1996 1995 ------------ --------------- Securitization facility $45,119,000 $ - Revolving Credit Agreement 8,190,000 21,625,000 11% Senior Secured Notes 50,000,000 70,000,000 Equipment loans 8,000 23,000 12-5/8% Senior Subordinated Notes - 320,000 Capital Lease 262,000 400,000 ------------ --------------- 103,579,000 92,368,000 Less current portion 181,000 488,000 ------------ --------------- Long-term debt $103,398,000 $91,880,000 ============ ===============
F-14 38 BARRY'S JEWELERS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. RECAPITALIZATION AND DEBT (CONTINUED) The aggregate maturities of long-term debt for the years subsequent to May 31, 1996 are as follows: 1997 $ 181,000 1998 84,000 1999 53,314,000 2000 50,000,000 ------------ Total $103,579,000 ============
3. INCOME TAXES At May 31, 1996, the Company had available approximately $14,000,000 of remaining pre-reorganization usable net operating loss (the "NOL") carryovers for federal income tax purposes that expire in the years ending May 31, 2006 through 2008. For financial statement purposes, utilization of the NOL is recorded as a credit to common stock. Additionally, the Company had approximately $1,336,000 of post-reorganization net operating loss carryovers that originated in fiscal 1996 and expire in 2011. Pursuant to Internal Revenue Service guidelines, the NOL is subject to further limitation immediately after any owner shift or equity structure shift, if the percentage of stock owned by one or more "five percent shareholders" has increased by more than 50 percentage points over the lowest percentage held by such five percent shareholders at any time during the testing period. In management's opinion, the Company experienced such a change in ownership in fiscal 1995. Accordingly, the Company reduced the existing May 31, 1994 NOL by approximately 50%. Subsequently, management determined that the ownership change that occurred in fiscal 1995 did not cause such a reduction in the NOL. Accordingly, during fiscal 1996, the Company reestablished approximately $6,700,000 of the NOL and recorded approximately $173,000 to common stock for the additional utilization of the NOL during fiscal 1995. The utilization of the remaining NOL is limited to $1,159,000 of taxable income annually. The utilization of the pre-reorganization NOL resulted in a credit to common stock of approximately $221,000 and $931,000 at May 31, 1995 and 1994, respectively. In addition, the Company reduced the current provision for May 31, 1994 by approximately $273,000 through the utilization of operating loss carryovers which arose subsequent to the Reorganization. F-15 39 BARRY'S JEWELERS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INCOME TAXES (CONTINUED) At May 31, 1996, the Company has recorded a noncurrent deferred tax asset of $122,000, representing alternative minimum tax ("AMT") credit carryforwards. The AMT is considered a prepayment of regular taxes and will reduce the Company's tax liability at some future date when regular tax is payable. The AMT credit has an indefinite carryforward period, unlike NOL carryovers, which have a maximum carryover period of 15 years for U.S. tax purposes and 7 years for California tax purposes. The Company maintains a valuation allowance against the net deferred tax assets, which in management's opinion, reflects the net deferred tax asset which is more likely than not to be realized. The provision for income taxes includes the following:
Year Ended May 31, 1996 1995 1994 ---------- ----------- ----------- Current: Federal . . . . . . . . . . . . . . . . . $ (630,000) $ 853,000 $ 793,000 State . . . . . . . . . . . . . . . . . . 40,000 29,000 334,000 ---------- ----------- ----------- (590,000) 882,000 1,127,000 Deferred: Federal . . . . . . . . . . . . . . . . . 285,000 (652,000) (118,000) State . . . . . . . . . . . . . . . . . . 593,000 (230,000) - ---------- ----------- ----------- 878,000 (882,000) (118,000) ---------- ----------- ----------- $ 288,000 $ - $ 1,009,000 ========== =========== ===========
The Company's effective tax rate differs from the statutory federal income tax rate as follows:
Year Ended May 31, 1996 1995 1994 ------- ------- ------- Statutory rate . . . . . . . . . . . . . . . (35.0)% 35.0% 34.0% Surtax benefit . . . . . . . . . . . . . . . 1.0 (1.0) - State taxes (net of federal tax) . . . . . . 1.1 3.6 3.1 Net operating loss carryforward . . . . . . - - (15.9) Valuation allowance . . . . . . . . . . . . 41.7 (34.8) 18.4 Alternative minimum tax credits . . . . . . - (3.8) - Other . . . . . . . . . . . . . . . . . . . 2.7 1.0 - ------- ------- ------- Effective tax rate . . . . . . . . . . . 11.5% - % 39.6% ======= ======= =======
F-16 40 BARRY'S JEWELERS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INCOME TAXES (CONTINUED) Significant components of the Company's deferred income taxes are as follows:
May 31, 1996 1995 ----------- ----------- Current deferred tax assets: Accounts receivable . . . . . . . . . . . . . . . $ 4,734,000 $ 5,051,000 Inventory . . . . . . . . . . . . . . . . . . . . 1,225,000 1,158,000 Vacation accrual . . . . . . . . . . . . . . . . 283,000 367,000 State franchise taxes . . . . . . . . . . . . . . (4,000) 60,000 Other . . . . . . . . . . . . . . . . . . . . . . (64,000) - ----------- ----------- 6,174,000 6,636,000 Noncurrent tax assets: State franchise taxes . . . . . . . . . . . . . . (745,000) (521,000) Property and leasehold improvements . . . . . . . (111,000) 351,000 Net operating loss carryforwards . . . . . . . . 6,053,000 2,891,000 Other . . . . . . . . . . . . . . . . . . . . . . 421,000 208,000 ----------- ----------- 5,618,000 2,929,000 ----------- ----------- Total deferred tax assets . . . . . . . . . . . . 11,792,000 9,565,000 Valuation allowance . . . . . . . . . . . . . . . (11,670,000) (8,565,000) ----------- ----------- Net deferred tax assets . . . . . . . . . . . . . $ 122,000 $ 1,000,000 =========== ===========
4. LEASE 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 2007. 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:
May 31, 1996 1995 1994 ----------- ----------- ----------- Minimum rentals $10,514,000 $ 9,914,000 $ 8,201,000 Contingent rentals 2,829,000 2,816,000 2,236,000 ----------- ----------- ----------- $13,343,000 $12,730,000 $10,437,000 =========== =========== ===========
Included in the above table is rent expense paid to officers/shareholders related to certain stores and the office facility, of $684,000 (1996), $787,000 (1995), and $784,000 (1994). F-17 41 BARRY'S JEWELERS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LEASE COMMITMENTS AND CONTINGENCIES (CONTINUED) Minimum rental commitments for all noncancelable leases in effect as of May 31, 1996 are as follows:
Shareholders Others Total ------------ ------ ----- 1997 702,000 9,272,000 9,974,000 1998 702,000 7,727,000 8,429,000 1999 702,000 7,053,000 7,755,000 2000 702,000 6,062,000 6,764,000 2001 702,000 4,726,000 5,428,000 Thereafter 2,808,000 10,429,000 13,237,000 ---------- ----------- ----------- $6,318,000 $45,269,000 $51,587,000 ========== =========== ===========
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 will not have a material adverse effect on the Company's financial position or results of operations. 5. SHAREHOLDERS' EQUITY Stock Option Plans In 1992, the Company adopted a stock incentive plan (the "1992 Stock Option Plan") to enable key employees to acquire shares of the Company's common stock. The 1992 Stock Option Plan was terminated and replaced by the Company's 1994 Employee Stock Option Plan. At May 31, 1996, there were options to purchase 110,876 shares of the Company's common stock outstanding under the 1992 Stock Option Plan. The 1994 Employee Stock Option Plan provides for the grant of Incentive Stock Options (ISOs) and Nonqualified Stock Options (NSOs). Options granted are at the fair market value at the date of grant for ISOs (or not less than 85% of fair market value for NSOs) and, subject to termination of employment, expire no later than ten years from the date of grant, are not transferable, and vest in three equal annual installments as specified by the Audit and Compensation Committee of the Board of Directors. Up to 220,000 shares of common stock may be issued under the 1994 Employee Stock Option Plan. In fiscal 1996, the Board of Directors granted 102,400 stock options in excess of the 220,000 shares. Such grants are subject to the approval of the shareholders. F-18 42 BARRY'S JEWELERS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. SHAREHOLDERS' EQUITY (CONTINUED) Under the 1994 Employee Stock Option Plan, nonemployee directors automatically receive options to purchase 2,000 shares of common stock upon their being added to the Board of Directors and options to purchase 1,000 shares of common stock on the date of each annual meeting of shareholders at which they are reelected to the Board. Changes for all options are summarized as follows:
Stock Options ------------- Per Share Shares Price Range ------ ----------- (1) Outstanding, May 31, 1993 155,287 $4.13 - $7.50 Granted 8,199 $4.13 - $7.50 Terminated (6,356) $4.13 - ------------------------- ---------- ------------- Outstanding, May 31, 1994 157,130 $4.13 - $7.50 Granted 105,800 $4.13 - $7.35 Terminated (5,830) $4.13 - ------------------------- ---------- ------------- Outstanding, May 31, 1995 257,100 $4.13 - $7.50 Granted 254,600 $3.44 - $4.43 Terminated (78,424) $3.44 - $7.50 - ------------------------- ---------- ------------- Outstanding, May 31, 1996 433,276 $3.44 - $7.50 ========================= ========== =============
Warrants In connection with the Reorganization Plan, the Company's then lenders received warrants to purchase an aggregate of 50,000 shares of the Company's common stock at a price of $16.75 per share, expiring June 30, 2002. Employee Incentive Stock Plan The Employee Incentive Stock Plan provides for the grant by the Company of shares of common stock for no consideration (other than past services). The Employee Incentive Stock Plan has a term of ten years. A total of 100,000 shares of common stock were initially reserved for issuance pursuant to the Employee Incentive Stock Plan. A total of 90,000 shares were issued under the plan during 1992 and 1993. The fair market value of the shares of $150,000 at the date of grant was charged to expense over the three-year vesting period. F-19 43 BARRY'S JEWELERS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. SHAREHOLDERS' EQUITY (CONTINUED) Employee Stock Purchase Plan On November 1, 1994, shareholders of the Company approved the Company's Employee Stock Purchase Plan, which enables substantially all employees of the Company with more than one year of service to purchase shares of the Company's common stock at not less than 85% of the fair market value at the date of purchase during one or more offering periods specified by the Company. A total of 50,000 shares were authorized for issuance under this plan. During fiscal 1996, 30,441 shares of common stock were purchased under this plan. Nonqualified Deferred Compensation Plan On June 1, 1994, a Nonqualified Deferred Compensation Plan was established for the benefit of a select group of management, highly compensated employees and/or Directors who contribute materially to continued growth, development and business success of the Company. The plan is unfunded for tax purposes and for the purposes of Title I of ERISA. 401(k) Retirement Plan The Board of Directors adopted a qualified 401(k) retirement plan effective June 1, 1995. Substantially all employees of the Company are eligible to participate in the Company's 401(k) plan upon attaining age 21 and six consecutive months of service. Employees may elect to contribute 1% to 15% of their compensation subject to certain IRS limitations. Employer matching contributions are determined annually by a Board of Directors resolution. No employer matching contributions were granted during 1996. Participants are partially vested in employer matching contributions after 2 years and fully vested after 5 years. F-20 44 SCHEDULE II BARRY'S JEWELERS, INC. AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions -------------------------- Balance at Charged to to Other Balance Beginning Costs and Accounts- Deductions- at End Description of Period Expenses Describe Describe of Period - ------------------------------------------------------------------------------------------------------------ Allowance for doubtful accounts: Year Ended May 31, 1996 $11,662,000 $11,839,000 $1,780,000(a) $14,351,000(b) $10,930,000 Year Ended May 31, 1995 11,162,000 10,501,000 1,832,000(a) 11,833,000(b) 11,662,000 Year Ended May 31, 1994 11,500,000 10,018,000 1,936,000(a) 12,292,000(b) 11,162,000
- ------------------------------------ (a) Recoveries from accounts written off. (b) Uncollectible accounts written off. F-21 EX-4.1.(E) 2 AM #4 TO INDENTURE (8/30/96) 1 EXHIBIT 4.1(e) AMENDMENT NO. 4 to INDENTURE, Dated as of December 22, 1993 BARRY'S JEWELERS, INC. Issuer, and FIRST TRUST NATIONAL ASSOCIATION Trustee 2 THIS IS AMENDMENT NO. 4 TO INDENTURE (this "Amendment"), dated as of August 30, 1996, by and between Barry's Jewelers, Inc., a California corporation (the "Company"), and First Trust National Association, a national banking association, as Trustee (the "Trustee"), to that certain Indenture, dated as of December 22, 1993, by and between the Company and the Trustee, as amended by Amendment No. 1 thereto dated as of February 14, 1994, Amendment No. 2 thereto dated as of March 18, 1994 and Amendment No. 3 (the "Third Amendment") thereto dated as of December 21, 1995 (as amended, the "Indenture"), pursuant to which an aggregate of $70,000,000 principal amount of the Company's 11% Senior Secured Notes due 2000 (the "Securities") were issued, of which $50,000,000 principal amount are outstanding as of the date hereof. All capitalized terms used herein and not otherwise defined herein shall have the same meanings as in the Indenture. WITNESSETH: A. The Company and its wholly owned subsidiary, Barry's Funding Corp., a Delaware special purpose corporation ("BFC"), previously entered into that certain Originator Purchase Agreement dated as of December 21, 1995 (the "OPA"), and the Company, BFC, Triple-A One Funding Corporation, a Delaware corporation ("Triple-A"), and Capital Markets Assurance Corporation, a New York stock insurance company ("CapMAC"), previously entered into that certain Receivables Purchase Agreement dated as of December 21, 1995 (the "RPA"). Pursuant to the OPA, the Company sells to BFC from time to time receivables of the Company and, pursuant to the RPA, BFC finances its purchase of such receivables by selling an undivided interest therein to Triple-A. The transactions contemplated by the OPA, the RPA and the related agreements entered into in connection therewith are referred to herein collectively as the "Securitization Transaction," and the RPA, the OPA and the related agreements entered into in connection therewith are referred to herein collectively as the "Securitization Documents." B. The Company also previously entered into that certain Amended and Restated Revolving Credit Agreement dated as of December 21, 1995 by and among the Company, The First National Bank of Boston (the "Bank"), and the other lending institutions listed on Schedule 1 thereto, providing for a revolving line of credit of up to $20.0 million (the "Old Credit Facility"). C. Concurrently herewith, the Company is entering into a Second Amended and Restated Revolving Credit Agreement of even date herewith by and among the Company, the Bank and the other lending institutions listed on Schedule 1 thereto, providing for a revolving line of credit of up to $85.0 million (the "New Credit Facility"), proceeds of which will be -1- 3 used in part to refinance the Company's obligations under the Old Credit Facility. D. Also concurrently herewith, pursuant to an Agreement Regarding Termination of Securitization Transaction of even date herewith (the "Termination Agreement") by and among the Company, BFC, Triple-A and CapMAC, the Securitization Transaction and the Securitization Documents are being terminated, and the obligations of the Company and BFC thereunder are being refinanced with proceeds of the New Credit Facility. The transactions contemplated by the Termination Agreement, the New Credit Facility, and the refinancing of the Company's and BFC's obligations under the Securitization Documents and the Old Credit Facility with proceeds of the New Credit Facility are referred to collectively herein as the "1996 Refinancing." E. In connection with and in order to permit the 1996 Refinancing, the Company desires, and the Trustee and the Holders of the Securities whose consents are attached hereto have agreed, to amend the Indenture as herein provided. F. Section 9.02 of the Indenture provides that the Company, when duly authorized by a resolution of its Board of Directors, and the Trustee may amend or supplement the Indenture in the manner set forth below with the written consent of the Holders of at least 51% of the aggregate principal amount of the Securities then outstanding. G. The Company's Board of Directors has authorized this Amendment by a resolution. H. All consents required by Section 9.02 of the Indenture have been obtained, as evidenced by Annex A of this Amendment. I. All things necessary to make this Amendment a valid amendment to the Indenture, including the furnishing by the Company to the Trustee of an Officers' Certificate and an Opinion of Counsel, as provided in Sections 9.06 and 11.04 of the Indenture, have been completed. J. All other conditions and requirements necessary to make this Amendment, when duly executed and delivered, a valid and binding agreement, enforceable in accordance with its terms, have been performed and fulfilled. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company, the Trustee and the Holders whose consents are attached hereto hereby agree as follows: -2- 4 1. Amendment of Indenture. The parties hereto hereby agree to amend the Indenture by deleting the amendments thereto contained in Sections 1.1, 1.3, 1.4 and 1.5 of the Third Amendment, with the exception that the definition of the "Securitization Closing Date" contained in Section 1.1 shall not be deleted. Among other things, such amendment shall have the effect of returning the Securitization Receivables (as defined in the Third Amendment) to the types of property constituting Collateral for purposes of the Indenture and the Securities. 2. Consent; Amendment of Related Agreements; Increase of Maximum Bank Debt Principal. By execution of the consent hereto, the Holders hereby (i) consent to the 1996 Refinancing and the transactions contemplated thereby, (ii) in connection with the 1996 Refinancing, authorize the Trustee to execute the consent to the Termination Agreement, enter into Amendment Agreement No. 2 to the Intercreditor Agreement (which, among other things, provides that "'Maximum Bank Debt Principal' means $100,000,000" as used therein and in the Indenture, thereby increasing the principal amount of indebtedness that is permitted under the New Credit Facility pursuant to the Indenture to $100,000,000) and execute such amendments or modifications of the other Security Documents as the Company may reasonably request in connection with the 1996 Refinancing, and (iii) agree that the Trustee and the Holders shall be bound by the terms of the Intercreditor Agreement and the other Security Documents as so amended and by the Termination Agreement. 3. Further Assurances. The Trustee hereby agrees to and, by execution of the consent hereto, the Holders hereby authorize the Trustee on their behalf to, cooperate fully with the Company, execute such further instruments, documents and agreements (including, without limitation, further amendments to the Indenture and the Securities), and take such additional steps as may be reasonably requested by the Company to evidence, reflect and carry into effect the intents and purposes of this Amendment and to permit the Company to consummate the 1996 Refinancing in accordance with the terms of the Indenture. 4. Miscellaneous. 4.1 Trustee Acceptance. The Trustee accepts the amendment of the Indenture effected by this Amendment and agrees to execute the trust created by the Indenture, as hereby amended, but only upon the terms and conditions set forth in the Indenture, as hereby amended, including the terms and provisions defining and limiting the liabilities and responsibilities of the Trustee, which terms and provisions shall in like manner define and limit its liabilities in the performance of the trust created by the Indenture, as hereby amended. -3- 5 4.2 Indenture Ratified. Except as expressly amended hereby, the Indenture is in all respects ratified and confirmed, and all the terms, conditions and provisions thereof shall remain in full force and effect. 4.3 Holders Bound. This Amendment shall form a part of the Indenture for all purposes, and every Holder of the Securities heretofore or hereafter authenticated and delivered shall be bound hereby. 4.4 Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 4.5 Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and all of such counterparts shall together constitute one and the same instrument. -4- 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. BARRY'S JEWELERS, INC. By:__________________________ Thomas S. Liston, Chief Financial Officer [Seal] Attest:_________________________ Thomas Hoekstra, Assistant Secretary FIRST TRUST NATIONAL ASSOCIATION By:_______________________ Name:_____________________ Title:____________________ [Seal] Attest:____________________ Name: -5- 7 ANNEX A CONSENT OF HOLDER The undersigned, as the Holder of record of that aggregate principal amount noted below of 11% Senior Secured Notes due 2000 of Barry's Jewelers, Inc. (the "Company"), hereby consents to Amendment No. 4 (the "Amendment") by and between the Company and First Trust National Association, a national banking association (the "Trustee"), to that certain Indenture, dated as of December 22, 1993, by and between the Company and the Trustee, and hereby authorizes the Trustee to enter into such Amendment in substantially the form attached hereto (but with such modifications as the Trustee deems reasonably appropriate under the circumstances) and perform its obligations thereunder on behalf of itself and the undersigned. Dated: __________________, 1996 ________________________________ [Name of Securityholder] By: __________________________ Name: Title: Principal amount of Securities held: $_______________________ EX-4.5 3 SECOND AM AND RESTATED REVOLVING CREDIT AGT 1 EXHIBIT 4.5 BOS-BUS: 297659 SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT Dated as of August 30, 1996 Among BARRY'S JEWELERS, INC., THE FIRST NATIONAL BANK OF BOSTON, AS AGENT, THE FIRST NATIONAL BANK OF BOSTON and the LENDERS party hereto 2 TABLE OF CONTENTS ----------------- Section 1. DEFINITIONS AND RULES OF INTERPRETATION Section 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . Section 1.2 Rules of Interpretation . . . . . . . . . . . . . . . . . . . Section 2. THE REVOLVING CREDIT FACILITY Section 2.1 Commitment to Lend . . . . . . . . . . . . . . . . . . . . . . Section 2.2 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . Section 2.3 Reduction of Total Commitment . . . . . . . . . . . . . . . . Section 2.4 The Notes . . . . . . . . . . . . . . . . . . . . . . . . . . Section 2.5 Interest on Loans . . . . . . . . . . . . . . . . . . . . . . Section 2.6 Requests for Loans . . . . . . . . . . . . . . . . . . . . . . Section 2.7 Conversion Options . . . . . . . . . . . . . . . . . . . . . . Section 2.8 Settlement; Failure to Make Funds Available . . . . . . . . . Section 2.9 Restrictions on Borrowings of Eurodollar Rate Loans . . . . . Section 3. REPAYMENT OF THE LOANS Section 3.1 Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 3.2 Repayments of Loans Prior to Event of Default . . . . . . . . Section 3.3 Repayments of Loans and Distribution of Collateral Proceeds After Event of Default . . . . . . . . . . . . . . . . . . . Section 3.4 Optional Repayments of Loans . . . . . . . . . . . . . . . . . Section 4. LETTERS OF CREDIT Section 4.1 Letter of Credit Commitments . . . . . . . . . . . . . . . . . Section 4.2 Reimbursement Obligation of the Borrower . . . . . . . . . . . Section 4.3 Letter of Credit Payments . . . . . . . . . . . . . . . . . . Section 4.4 Obligations Absolute . . . . . . . . . . . . . . . . . . . . . Section 4.5 Reliance by Issuer . . . . . . . . . . . . . . . . . . . . . . Section 4.6 Letter of Credit Fee . . . . . . . . . . . . . . . . . . . . . Section 4.7 Cash Collateral for Letters of Credit . . . . . . . . . . . . Section 5. CERTAIN GENERAL PROVISIONS Section 5.1 Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . Section 5.2 Collateral Administration Fee . . . . . . . . . . . . . . . . Section 5.3 Funds for Payments . . . . . . . . . . . . . . . . . . . . . . Section 5.4 Computations . . . . . . . . . . . . . . . . . . . . . . . . . Section 5.5 Inability to Determine Eurodollar Rate . . . . . . . . . . . . Section 5.6 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ii Section 5.7 Additional Costs, Etc. . . . . . . . . . . . . . . . . . . . . Section 5.8 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . Section 5.9 Certificate . . . . . . . . . . . . . . . . . . . . . . . . . Section 5.10 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . Section 5.11 Interest After Default . . . . . . . . . . . . . . . . . . . . Section 6. COLLATERAL SECURITY . . . . . . . . . . . . . . . . . . . . . Section 7. REPRESENTATIONS AND WARRANTIES Section 7.1 Corporate Authority . . . . . . . . . . . . . . . . . . . . . Section 7.2 Governmental Approvals . . . . . . . . . . . . . . . . . . . . Section 7.3 Title to Properties; Leases . . . . . . . . . . . . . . . . . Section 7.4 Financial Statements and Projections . . . . . . . . . . . . . Section 7.5 No Material Changes, Etc. . . . . . . . . . . . . . . . . . . Section 7.6 Franchises, Permits, Copyrights, Etc. . . . . . . . . . . . . Section 7.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . Section 7.8 No Materially Adverse Contracts, Etc. . . . . . . . . . . . . Section 7.9 Compliance with Other Instruments, Laws, Etc. . . . . . . . . Section 7.10 Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . Section 7.11 No Event of Default . . . . . . . . . . . . . . . . . . . . . Section 7.12 Holding Company and Investment Company Acts . . . . . . . . . Section 7.13 Absence of Financing Statements, Etc. . . . . . . . . . . . . Section 7.14 Perfection of Security Interest . . . . . . . . . . . . . . . Section 7.15 Certain Transactions . . . . . . . . . . . . . . . . . . . . . Section 7.16 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . Section 7.17 Regulations U and X . . . . . . . . . . . . . . . . . . . . . Section 7.18 Environmental Compliance . . . . . . . . . . . . . . . . . . . Section 7.19 Subsidiaries, etc. . . . . . . . . . . . . . . . . . . . . . . Section 7.20 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . Section 7.21 Asset Locations . . . . . . . . . . . . . . . . . . . . . . . Section 8. AFFIRMATIVE COVENANTS OF THE BORROWER Section 8.1 Punctual Payment . . . . . . . . . . . . . . . . . . . . . . . Section 8.2 Maintenance of Office . . . . . . . . . . . . . . . . . . . . Section 8.3 Records and Accounts . . . . . . . . . . . . . . . . . . . . . Section 8.4 Financial Statements, Certificates and Information . . . . . . Section 8.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 8.6 Corporate Existence, Maintenance of Properties . . . . . . . . Section 8.7 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . Section 8.8 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 8.9 Inspection of Properties and Books, Etc. . . . . . . . . . . . Section 8.10 Compliance with Laws, Contracts, Licenses and Permits . . . . Section 8.11 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . Section 8.12 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . Section 8.13 Additional Mortgaged Property . . . . . . . . . . . . . . . . 4 iii Section 8.14 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . Section 8.15 Inventory Restrictions . . . . . . . . . . . . . . . . . . . . Section 8.16 Further Assurances . . . . . . . . . . . . . . . . . . . . . . Section 8.17 Cash Transfer Agreement . . . . . . . . . . . . . . . . . . . Section 8.18 Interest Rate Protection . . . . . . . . . . . . . . . . . . . Section 9. CERTAIN NEGATIVE COVENANTS OF THE BORROWER Section 9.1 Restrictions on Indebtedness . . . . . . . . . . . . . . . . . Section 9.2 Restrictions on Liens . . . . . . . . . . . . . . . . . . . . Section 9.3 Restrictions on Investments . . . . . . . . . . . . . . . . . Section 9.4 Distributions . . . . . . . . . . . . . . . . . . . . . . . . Section 9.5 Merger, Consolidation and Disposition of Assets . . . . . . . Section 9.6 Sale and Leaseback . . . . . . . . . . . . . . . . . . . . . . Section 9.7 Compliance with Environmental Laws . . . . . . . . . . . . . . Section 9.8 Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . Section 9.9 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . Section 9.10 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . Section 9.11 Consignment Transactions . . . . . . . . . . . . . . . . . . . Section 9.12 Transactions with Affiliates . . . . . . . . . . . . . . . . . Section 9.13 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . Section 9.14 Amendments to Credit Policy . . . . . . . . . . . . . . . . . Section 10. FINANCIAL COVENANTS OF THE BORROWER Section 10.1 Minimum EBITDA . . . . . . . . . . . . . . . . . . . . . . . . Section 10.2 Debt Service . . . . . . . . . . . . . . . . . . . . . . . . . Section 10.3 Total Liabilities to Shareholders Equity . . . . . . . . . . . Section 10.4 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . Section 10.5 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . Section 11. CLOSING CONDITIONS Section 11.1 Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . Section 11.2 Certified Copies of Charter Documents . . . . . . . . . . . . Section 11.3 Corporate Action . . . . . . . . . . . . . . . . . . . . . . . Section 11.4 Incumbency Certificate . . . . . . . . . . . . . . . . . . . . Section 11.5 Validity of Liens . . . . . . . . . . . . . . . . . . . . . . Section 11.6 Perfection Certificates and UCC Search Results . . . . . . . . Section 11.7 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 11.8 Title Insurance . . . . . . . . . . . . . . . . . . . . . . . Section 11.9 Amendment to Mortgage . . . . . . . . . . . . . . . . . . . . Section 11.10 Certificates of Insurance . . . . . . . . . . . . . . . . . . Section 11.11 Bank Accounts; Lock-Box Agreements . . . . . . . . . . . . . . Section 11.12 Borrowing Base Report . . . . . . . . . . . . . . . . . . . . Section 11.13 Accounts Receivable Aging Report . . . . . . . . . . . . . . . Section 11.14 Solvency Certificate . . . . . . . . . . . . . . . . . . . . . 5 iv Section 11.15 Opinions of Counsel . . . . . . . . . . . . . . . . . . . . . Section 11.16 Payment of Fees . . . . . . . . . . . . . . . . . . . . . . . Section 11.17 Receivables Securitization Facility . . . . . . . . . . . . . Section 11.18 The Debentures . . . . . . . . . . . . . . . . . . . . . . . . Section 11.19 Financial Statements, Etc . . . . . . . . . . . . . . . . . . Section 11.20 Cash Management Systems . . . . . . . . . . . . . . . . . . . Section 11.21 Credit Policy . . . . . . . . . . . . . . . . . . . . . . . . Section 11.22 Initial Loan Request . . . . . . . . . . . . . . . . . . . . . Section 12. CONDITIONS TO ALL BORROWINGS Section 12.1 Representations True; No Event of Default . . . . . . . . . . Section 12.2 No Legal Impediment . . . . . . . . . . . . . . . . . . . . . Section 12.3 Governmental Regulation . . . . . . . . . . . . . . . . . . . Section 12.4 Proceedings and Documents . . . . . . . . . . . . . . . . . . Section 12.5 Borrowing Base Report . . . . . . . . . . . . . . . . . . . . Section 12.6 Payment of Fees . . . . . . . . . . . . . . . . . . . . . . . Section 13. EVENTS OF DEFAULT; ACCELERATION; ETC. Section 13.1 Events of Default and Acceleration . . . . . . . . . . . . . . Section 13.2 Termination of Commitments . . . . . . . . . . . . . . . . . . Section 13.3 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 13.4 Cash Collateral to Secure Outstanding Letters of Credit . . . Section 14. SETOFF . . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 15. THE AGENT Section 15.1 Authorization . . . . . . . . . . . . . . . . . . . . . . . . Section 15.2 Employees and Agents . . . . . . . . . . . . . . . . . . . . . Section 15.3 No Liability . . . . . . . . . . . . . . . . . . . . . . . . . Section 15.4 No Representations . . . . . . . . . . . . . . . . . . . . . . Section 15.5 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 15.6 Holders of Notes . . . . . . . . . . . . . . . . . . . . . . . Section 15.7 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . Section 15.8 Agent as Lender . . . . . . . . . . . . . . . . . . . . . . . Section 15.9 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . Section 15.10 Notification of Defaults and Events of Default . . . . . . . . Section 16. EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 17. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . Section 18. SURVIVAL OF COVENANTS, ETC. . . . . . . . . . . . . . . . . . Section 19. ASSIGNMENT AND PARTICIPATION . . . . . . . . . . . . . . . . . 6 v Section 19.1 Conditions to Assignment by Lenders . . . . . . . . . . . . . Section 19.2 Certain Representations and Warranties; Limitations; Covenants Section 19.3 Register . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 19.4 New Notes . . . . . . . . . . . . . . . . . . . . . . . . . . Section 19.5 Participations . . . . . . . . . . . . . . . . . . . . . . . . Section 19.6 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . Section 19.7 Assignee or Participant Affiliated with the Borrower . . . . . Section 19.8 Miscellaneous Assignment Provisions . . . . . . . . . . . . . Section 19.9 Assignment by Borrower . . . . . . . . . . . . . . . . . . . . Section 20. NOTICES, ETC. . . . . . . . . . . . . . . . . . . . . . . . . Section 21. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . Section 22. HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 23. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . Section 24. ENTIRE AGREEMENT, ETC. . . . . . . . . . . . . . . . . . . . . Section 25. WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . Section 26. CONSENTS, AMENDMENTS, WAIVER, ETC. . . . . . . . . . . . . . . Section 27. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . Section 28. TRANSITIONAL ARRANGEMENTS . . . . . . . . . . . . . . . . . . Section 28.1 Prior Credit Agreement Superseded . . . . . . . . . . . . . . Section 28.2 Return and Cancellation of Notes . . . . . . . . . . . . . . . Section 28.3 Interest and Fees Under Superseded Agreement . . . . . . . . . Section 29. CONSENT TO AMENDMENT TO INDENTURE . . . . . . . . . . . . . . 7 vi SCHEDULES AND EXHIBITS Schedule 1 Lenders, Commitment Schedule 7.3 Title to Properties, Leases Schedule 7.7 Litigation Schedule 7.15 Transactions with Officers, etc. Schedule 7.16 Employee Benefit Plans Schedule 7.18 Environmental Compliance Schedule 7.19 Joint Ventures, etc. Schedule 7.20 Bank Accounts Schedule 7.21 Permitted Inventory Locations Schedule 9.1 Permitted Indebtedness Schedule 9.2 Permitted Liens Schedule 9.3 Permitted Investments Exhibit A Form of Note Exhibit B Form of Loan Request Exhibit C Form of Confirmation of Telephone Loan Request Exhibit D Form of Security Agreement Exhibit E Form of Trademark Security Agreement Exhibit F Form of Stock Pledge Agreement Exhibit G Form of Cash Collateral Agreement Exhibit H Form of Borrowing Base Report Exhibit I Form of Compliance Certificate Exhibit J Form of Landlord Waiver Exhibit K Form of Assignment and Acceptance Exhibit L Form of Agency Account Agreement Exhibit M Form of Accounts Receivable Aging Report Exhibit N Form of Collateral Agency Agreement Exhibit O List of Committed Leases Exhibit P Form of Recency Roll Rates Report Exhibit Q Form of First Payment Default and Add On (FBD) Report 8 SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT This SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT is made as of the 30th day of August, 1996, by and among BARRY'S JEWELERS, INC. (the "Borrower"), a California corporation having its principal place of business at 111 West Lemon Avenue, Monrovia, CA 91016, THE FIRST NATIONAL BANK OF BOSTON and the other lending institutions listed on Schedule 1 and THE FIRST NATIONAL BANK OF BOSTON as agent for itself and such other lending institutions. WHEREAS, pursuant to that certain Amended and Restated Revolving Credit Agreement dated as of December 21, 1995 (as heretofore amended, the "Prior Credit Agreement") which amended and restated in its entirety that certain Revolving Credit Agreement dated as of December 22, 1993 (as amended from time to time, the "Original Credit Agreement"), certain Lenders which are party to this Credit Agreement have made loans to the Borrower for the purposes described therein; WHEREAS, the Lenders, the Agent and the Borrower wish to amend and restate the Prior Credit Agreement in order to convert the loans under the Prior Credit Agreement into loans hereunder, to increase the Commitments of the Lenders thereunder and to make certain other changes to the terms and provisions of the Prior Credit Agreement; NOW THEREFORE, the Borrower, the Lenders and the Agent hereby agree that the Prior Credit Agreement is hereby amended and restated in its entirety and remains in force and effect only as set forth herein and the Loans and Letters of Credit (as defined in the Prior Credit Agreement) shall constitute Loans and Letters of Credit hereunder. Section 1. DEFINITIONS AND RULES OF INTERPRETATION. Section 1.1. DEFINITIONS. The following terms shall have the meanings set forth in this Section 1 or elsewhere in the provisions of this Credit Agreement referred to below: Acceleration. See Section 13.1. Accounts Receivable. All rights of the Borrower or any of its Subsidiaries relating to any Individual Account to payment for goods sold, leased or otherwise marketed in the ordinary course of business and all rights of the Borrower or any of its Subsidiaries to payment for services rendered in the ordinary course of business and all sums of money or other proceeds due thereon pursuant to transactions with account debtors, recorded on books of account in accordance with generally accepted accounting principles; provided that, notwithstanding the foregoing, Accounts 9 -2- Receivable shall not include the amounts, if any, represented by a check, money order or similar instrument following receipt by the Borrower thereof. Additional Capital Expenditures. The amount in excess of the maximum Capital Expenditures permitted for any fiscal year under Section 10.5(a) not to exceed $1,250,000 in the aggregate for any fiscal year. Affiliate. Any Person that would be considered to be an affiliate of the Borrower under Rule 144(a) of the Rules and Regulations of the Securities and Exchange Commission, as in effect on the date hereof, if the Borrower were issuing securities. Agency Account Agreements. The several Agency Account Agreements in the form of Exhibit L hereto (or a form otherwise approved by the Agent in its sole discretion) entered into by the Borrower, the Agent, the Agency Account Institutions or any other depository institution satisfactory to the Agent. Agency Account Institutions. FNBB, Bank of America, N.A. or any other depository institution which receives deposits directly, or indirectly (as a result of interim concentration of depository accounts), from in aggregate eight or more retail stores of the Borrower and its Subsidiaries. Agency Accounts. The depository accounts maintained by the Borrower with the Agency Account Institutions or other depository institutions satisfactory to the Agent, the funds from which are periodically transferred to the FNBB Concentration Account pursuant to the Agency Account Agreements. Agent's Head Office. The Agent's head office located at 100 Federal Street, Boston, Massachusetts 02110, or at such other location as the Agent may designate in a notice made in accordance with Section 20 hereof from time to time. Agent. The First National Bank of Boston acting as agent for the Lenders. Agent's Special Counsel. Bingham, Dana & Gould LLP or such other counsel as may be approved by the Agent. AR Advance Rate. Seventy-five percent (75%), provided, however, that if on the date that the Borrower is required to deliver any Borrowing Base Report pursuant to Section 8.4(f) hereof (a) the Net Charge Off Percentage on the last day of either of the two months most recently ended equals or exceeds 2.04%, then, until the next date on which a Borrowing Base Report is delivered pursuant to Section 8.4(f), the AR Advance Rate shall be reduced by three percentage points plus additional three percentage point reductions for each additional one-half percentage point increment by which the Net Charge Off Percentage exceeds 2.04% during such months, (b) the Roll Rate Percentage on the last day of either of the two months most recently ended equals or exceeds 6.47%, then, until the next date on which a Borrowing Base Report is delivered pursuant to Section 8.4(f), the AR Advance Rate shall be reduced by 10 -3- one percentage point plus additional one percentage point reductions for each additional one percentage point increment by which the Roll Rate Percentage exceeds 6.47% and (c) the First Payment Delinquency Rate Percentage on the last day of either of the two months most recently ended equals or exceeds 5.80%, then, until the next date on which a Borrowing Base Report is delivered pursuant to Section 8.4(f), the AR Advance Rate shall be reduced by one percentage point plus additional one percentage point reductions for each additional two percentage point increments by which the First Payment Deliquency Rate Percentage exceeds 5.80%. Assignment and Acceptance. See Section 19.1. Balance Sheet Date. May 31, 1996. Base Rate. The higher of (a) the annual rate of interest announced from time to time by FNBB at its head office in Boston, Massachusetts, as its "base rate" and (b) one-half of one percent (1/2%) above the Federal Funds Effective Rate. For the purposes of this definition, "Federal Funds Effective Rate" shall mean for any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three funds brokers of recognized standing selected by the Agent. Base Rate Applicable Margin. One and one-half percent (1.5%) per annum. Base Rate Loans. Loans bearing interest calculated by reference to the Base Rate. BFC. Barry's Funding Corp., a Delaware corporation and wholly-owned Subsidiary of the Borrower. Borrower. As defined in the preamble hereto. Borrowing Base. At the relevant time of reference thereto, an amount determined by the Agent by reference to the most recent Borrowing Base Report delivered to the Lenders and the Agent pursuant to Section 8.4(f), which is equal to the sum of: (a) the AR Advance Rate of the result of: (i) Eligible Accounts Receivable for which invoices have been issued and are payable; minus 11 -4- (ii) all amounts received by the Borrower on account of Eligible Inventory which has been sold under any installment sale or "lay away" plan and which do not represent a final sale; minus (iii) an amount equal to (A) the aggregate sale price of inventory returned to the Borrower following a sale for the calendar month ended immediately preceding the delivery of the most recent Borrowing Base Report pursuant to Section 8.4(f) multiplied by (B) the result of (y) the gross sales of the Borrower made through use of the Borrower's private label credit cards for such calendar month divided by (z) the gross sales of the Borrower for such calendar month (the "Return Rate"); minus (iv) the Charge Off Reserve; plus (b) forty percent (40%) of the result of: (i) the net book value (without giving effect to the Borrower's reserve for inventory shrink), valued at the lower of the amount set forth on the Borrower's (A) general ledger or (B) perpetual SKU and perpetual diamond inventory systems, determined on a first-in first-out basis at lower of weighted average cost or market of Eligible Inventory (the "Inventory Value"); minus (ii) the Shrink Reserve; minus (c) the amount of any Landlord Lien Reserve. For purposes of this Credit Agreement and the other Loan Documents, the Agent may assume, subject to adjustment based upon the provisions of this Credit Agreement, that the Borrowing Base in effect on any given date is the Borrowing Base as indicated on the most recent Borrowing Base Report delivered on a timely basis to the Lenders and the Agent in accordance with the provisions of Section 8.4(f) hereof. Borrowing Base Report. A Borrowing Base Report signed by the chief financial officer of the Borrower and in substantially the form of Exhibit H hereto. Business. With respect to any Person, the assets, properties, business, operations, condition (financial and otherwise) and prospects of such person. Business Day. Any day on which banking institutions in Boston, Massachusetts and Los Angeles, California, are open for the transaction of banking business and, in the case of Eurodollar Rate Loans, also a day which is a Eurodollar Business Day. 12 -5- Capital Assets. Fixed assets, both tangible (such as land, buildings, fixtures, machinery and equipment) and intangible (such as patents, copyrights, trademarks, franchises and good will); provided that Capital Assets shall not include any item customarily charged directly to expense or depreciated over a useful life of twelve (12) months or less in accordance with generally accepted accounting principles. Capital Expenditures. Amounts paid or indebtedness incurred by the Borrower or any of its Subsidiaries in connection with the purchase or lease by the Borrower or any of its Subsidiaries of Capital Assets that would be required to be capitalized and shown on the balance sheet of such Person in accordance with generally accepted accounting principles; provided that Capital Expenditures shall not include any amounts expended by the Borrower or any of its Subsidiaries from insurance proceeds for the repair or replacement of the item(s) covered by such insurance. Capitalized Leases. Leases under which the Borrower or any of its Subsidiaries is the lessee or obligor, the discounted future rental payment obligations under which are required to be capitalized on the balance sheet of the lessee or obligor in accordance with generally accepted accounting principles; provided, however, in connection with the upgrade of the Borrower's computer systems the discounted future rental payment obligations shall be calculated net of the future discounted rental payment obligations of any lease which it replaces. CapMAC. Capital Markets Assurance Corporation, a New York stock insurance company. Cash Collateral Agreement. See Section 4.7. CERCLA. See Section 7.18. Change of Control. The occurrence of the following event: any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of forty percent (40%) or more of the outstanding shares of common stock of the Borrower on a fully-diluted basis. Charge Off Reserve. An amount equal to the result of (a) the highest Monthly Charge Off Percentage of the Borrower during the twelve (12) calendar month period ended immediately preceding the delivery of the most recent Borrowing Base Report pursuant to Section 8.4(f) multiplied by (b) Eligible Accounts Receivable. Closing. The closing under the Credit Agreement and the other Loan Documents. 13 -6- Closing Date. The first date on which the conditions set forth in Section 11 have been satisfied and any Loans are to be made or any Letter of Credit is to be issued hereunder. Code. The Internal Revenue Code of 1986. Collateral. All of the property, rights and interests of the Borrower and its Subsidiaries that are or are intended to be subject to the security interests and mortgages created by the Security Documents. Collateral Agent. FNBB, in its capacity as collateral agent for the benefit of (i) the Lenders and the Agent, and (ii) the holders of the Debentures and the Trustee, under and with respect to any of the Security Documents. Collateral Agency Agreement. The Collateral Agency and Intercreditor Agreement, dated as of December 22, 1993, among the Agent, the Trustee and the Borrower, a copy of which is attached hereto as Exhibit N, and in form and substance satisfactory to the Lenders and the Agent, as amended as of December 21, 1995 and by the amendment dated as of the date hereof and as further amended and in effect from time to time. Commitment. With respect to each Lender, the amount set forth on Schedule 1 hereto as the amount of such Lender's commitment to make Loans to, and to participate in the issuance, extension and renewal of Letters of Credit for the account of, the Borrower, as the same may be reduced from time to time; or if such commitment is terminated pursuant to the provisions hereof, zero. Commitment Percentage. With respect to each Lender, the percentage set forth on Schedule 1 hereto as such Lender's percentage of the aggregate Commitments of all of the Lenders. Compliance Certificate. See Section 8.4(d). Consolidated or consolidated. With reference to any term defined herein, shall mean that term as applied to the accounts of the Borrower and its Subsidiaries, consolidated in accordance with generally accepted accounting principles. Consolidated EBIT. Consolidated Net Income for any period, plus income taxes and interest expense of the Borrower and its Subsidiaries for such period, determined in accordance with generally accepted accounting principles. Consolidated EBITDA. Consolidated EBIT for any period plus (a) depreciation for such period, plus (b) amortization for such period, all determined in accordance with generally accepted accounting principles. 14 -7- Consolidated Net Income. The consolidated net income (before accounting for extraordinary items other than extraordinary nonrecurring items of loss which would have an impact on current cash flows) of the Borrower and its Subsidiaries, after deduction of all expenses, taxes, and other proper charges, determined in accordance with generally accepted accounting principles. Consolidated Operating Cash Flow. For any period, an amount equal to the sum of Consolidated EBITDA for such period less cash payments made in respect of income taxes during such period less Capital Expenditures made by the Borrower or any of its Subsidiaries during such period. Consolidated Total Assets. All assets of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles. Consolidated Total Debt Service. With respect to any period, an amount equal to the sum of all payments on Indebtedness relating to the borrowing of money or the obtaining of credit (other than Indebtedness permitted under Section 9.1(b) hereof and other Indebtedness consisting of non-interest bearing ordinary course obligations), or in respect of Capitalized Leases or under Section 2(c) of either Registration Rights Agreement that were required to be paid or accrued during such fiscal period (including interest and fees but excluding any amounts accrued during a prior fiscal period) pursuant to any agreement or instrument to which the Borrower or any of its Subsidiaries is a party (in all cases determined in accordance with generally accepted accounting principles); provided, however, Consolidated Total Debt Service shall not include the amortization of fees and expenses paid in connection with the closing of the Prior Credit Agreement and the transactions contemplated hereby which are capitalized on the balance sheet of the Borrower in accordance with generally accepted accounting principles. Demand obligations shall be deemed to be due and payable during any fiscal period during which such obligations are outstanding. Consolidated Total Liabilities. All Indebtedness of the Borrower and its Subsidiaries determined on a consolidated basis that in accordance with generally accepted accounting principles should be classified upon the obligor's balance sheet as liabilities. Conversion Request. A notice given by the Borrower to the Agent of the Borrower's election to convert or continue a Loan in accordance with Section 2.7. Credit Agreement. This Second Amended and Restated Revolving Credit Agreement, including the Schedules and Exhibits hereto. Credit Policy. The criteria for extension of credit for Accounts Receivable of the Borrower and its Subsidiaries including, without limitation, the payment plans offered to customers of the Borrower and its Subsidiaries and collection policies of the Borrower and its Subsidiaries, in the form delivered to the Agent on or prior to 15 -8- the Closing Date and as amended, supplemented or modified from time to time in accordance with Section 9.15. Debentures. The 11% Senior Secured Notes due 2000 issued by the Borrower pursuant to the Indenture or any refinancing thereof as permitted under Section 9.1(f) in an aggregate principal amount not to exceed $50,000,000. Default. See Section 13.1. Distribution. The declaration or payment of any dividend on or in respect of any shares of any class of capital stock of the Borrower, other than dividends payable solely in shares of common stock of the Borrower; the purchase, redemption, or other retirement of any shares of any class of capital stock of the Borrower, directly or indirectly through a Subsidiary of the Borrower or otherwise; the return of capital by the Borrower to its shareholders as such; or any other distribution on or in respect of any shares of any class of capital stock of the Borrower. Dollars or $. Dollars in lawful currency of the United States of America. Domestic Lending Office. Initially, the office of each Lender designated as such in Schedule 1 hereto; thereafter, such other office of such Lender, if any, located within the United States that will be making or maintaining Base Rate Loans. Drawdown Date. The date on which any Loan is made or is to be made, and the date on which any Loan is converted or continued in accordance with Section 2.7. Eligible Accounts Receivable. The aggregate of the unpaid portions of the Borrower's Accounts Receivable (net of any credits, rebates, offsets, holdbacks or other adjustments or commissions payable to third parties that are adjustments to such Accounts Receivable other than amounts due to vendors for sales on account of inventory on consignment with the Borrower which are settled no less frequently than sixty (60) days) (a) that the Borrower reasonably and in good faith determines to be collectible based upon its credit underwriting criteria existing as of the date hereof; (b) that are with account debtors that (i) are not Affiliates of the Borrower, (ii) purchased the goods or services giving rise to the relevant Account Receivable in an arm's length transaction, (iii) are not insolvent or involved in any case or proceeding of which the Borrower (with respect to any of the foregoing) has or should have knowledge, whether voluntary or involuntary, under any bankruptcy, reorganization, arrangement, insolvency, adjustment of debt, dissolution, liquidation or similar law of any jurisdiction and (iv) are, in the Agent's reasonable judgment, creditworthy; (c) that are in payment of obligations that have been fully performed or services which the Borrower is contractually obligated to perform and are not subject to dispute or any other similar claims that would reduce the cash amount payable therefor; (d) that are not subject to any pledge, restriction, security interest or other lien or encumbrance other than those created by the Loan 16 -9- Documents; (e) in which the Collateral Agent has a valid and perfected first priority security interest; (f) that are not related to any Individual Account which is more than sixty (60) days past the due date; (g) which are not Retermed Receivables; (h) that are not finance charges or late charges which have accrued prior to the account debtor being sent a bill on such account; (i) that are payable in Dollars; and (j) that are not payable from an office outside of the United States. Eligible Assignee. Any of (a) a commercial bank or finance company organized under the laws of the United States, or any State thereof or the District of Columbia, and having total assets in excess of $1,000,000,000; (b) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof or the District of Columbia, and having a net worth of at least $100,000,000, calculated in accordance with generally accepted accounting principles; (c) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having total assets in excess of $1,000,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; (d) the central bank of any country which is a member of the OECD; and (e) if, but only if, any Event of Default has occurred and is continuing, any other bank, insurance company, commercial finance company or other financial institution or other Person approved by the Agent, such approval not to be unreasonably withheld; provided that the institutions referenced in clauses (c) through (e) comply with Section 5.3(c) hereof. Eligible Inventory. With respect to the Borrower, finished goods inventory owned by the Borrower; provided that Eligible Inventory shall not include any inventory (i) which has been held on consignment, or not otherwise owned by the Borrower, or of a type no longer sold by the Borrower, (ii) which is "findings" or raw materials (other than loose diamonds), including, without limitation, stones other than diamonds and "breakouts" (inventory being or already separated into its component parts), (iii) which is a work in progress, (iv) which is damaged (including categories counted as refurbish and repair) or subject to any legal encumbrance other than Permitted Liens, (v) which originally became inventory of the Borrower more than three years prior to the date of determination of the Borrowing Base, (vi) which is not in the possession of the Borrower, (vii) as to which the Collateral Agent does not have a valid and perfected first priority security interest, (viii) which has been shipped to a customer of the Borrower regardless of whether such shipment is on a consignment basis, (ix) which is not located within the United States of America, (x) which is covered by an open invoice unless the Borrower can specifically identify such inventory as finished goods, (xi) which is not located at a Permitted Inventory Location, (xii) which the Agent reasonably deems to be obsolete or not marketable, or (xiii) other such ineligible categories determined by the Agent. Employee Benefit Plan. Any employee benefit plan within the meaning of Section 3(3) of ERISA maintained or contributed to by the Borrower or any ERISA Affiliate, other than a Multiemployer Plan. 17 -10- Environmental Laws. See Section 7.18(a). ERISA. The Employee Retirement Income Security Act of 1974. ERISA Affiliate. Any Person which is treated as a single employer with the Borrower under Section 414 of the Code. ERISA Reportable Event. A reportable event with respect to a Guaranteed Pension Plan within the meaning of Section 4043 of ERISA and the regulations promulgated thereunder as to which the requirement of notice has not been waived. Eurocurrency Reserve Rate. For any day with respect to a Eurodollar Rate Loan, the maximum rate (expressed as a decimal) at which any lender subject thereto would be required to maintain reserves under Regulation D of the Board of Governors of the Federal Reserve System (or any successor or similar regulations relating to such reserve requirements) against "Eurocurrency Liabilities" (as that term is used in Regulation D), if such liabilities were outstanding. The Eurocurrency Reserve Rate shall be adjusted automatically on and as of the effective date of any change in the Eurocurrency Reserve Rate. Eurodollar Applicable Margin. Three percent (3.0%) per annum. Eurodollar Business Day. Any day on which commercial banks are open for international business (including dealings in Dollar deposits) in London or such other eurodollar interbank market as may be selected by the Agent in its sole discretion acting in good faith. Eurodollar Lending Office. Initially, the office of each Lender designated as such in Schedule 1 hereto; thereafter, such other office of such Lender, if any, that shall be making or maintaining Eurodollar Rate Loans. Eurodollar Rate. For any Interest Period with respect to a Eurodollar Rate Loan, the rate of interest equal to (a) the rate of interest at which the Agent's Eurodollar Lending Office is offered Dollar deposits two Eurodollar Business Days prior to the beginning of such Interest Period in the interbank eurodollar market where the eurodollar and foreign currency and exchange operations of such Eurodollar Lending Office are customarily conducted, for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of the Eurodollar Rate Loan of the Agent to which such Interest Period applies, divided by (b) a number equal to 1.00 minus the Eurocurrency Reserve Rate, if applicable. Eurodollar Rate Loans. Loans bearing interest calculated by reference to the Eurodollar Rate. Event of Default. See Section 13.1. 18 -11- Fee Letter. The letter agreement regarding certain fees, dated on or prior to the Closing Date, between the Borrower and the Agent. First Payment Delinquency Rate Percentage. As of any date of determination and with reference to the Borrower's most recent First Payment Default and Add On (FBD) Report, a form of which is attached hereto as Exhibit Q, for any twelve (12) calendar month period, the average of the amounts set forth for each month in the First Purchase Merchandise 3-Due column of such report, calculated in a manner consistent with the Borrower's manner of calculation as of the Closing Date. FNBB. The First National Bank of Boston, a national banking association, in its individual capacity. FNBB Concentration Account. The concentration account established at FNBB in the name of the Borrower under the control of the Collateral Agent, for the benefit of the Lenders, the holders of the Debentures, the Borrower, the Agent and the Collateral Agent, into which all proceeds of Collateral shall be directed, whether from a Store Account, a Lock-Box Account, an Agency Account or as otherwise received by the Borrower. generally accepted accounting principles. (a) When used in Section 10, whether directly or indirectly through reference to a capitalized term used therein, means (i) principles that are consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, in effect for the fiscal year ended on the Balance Sheet Date, and (ii) to the extent consistent with such principles, the accounting practice of the Borrower reflected in its financial statements for the year ended on the Balance Sheet Date, and (b) when used in general, other than as provided above, means principles that are (i) consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, as in effect from time to time, and (ii) consistently applied with past financial statements of the Borrower adopting the same principles, provided that in each case referred to in this definition of "generally accepted accounting principles" a certified public accountant would, insofar as the use of such accounting principles is pertinent, be in a position to deliver an unqualified opinion (other than a qualification regarding changes in generally accepted accounting principles) as to financial statements in which such principles have been properly applied. Guaranteed Pension Plan. Any employee pension benefit plan within the meaning of Section 3(2) of ERISA maintained or contributed to by the Borrower or any ERISA Affiliate the benefits of which are guaranteed on termination in full or in part by the PBGC pursuant to Title IV of ERISA, other than a Multiemployer Plan. Guaranty. The Guaranty dated or to be dated on or prior to the Closing Date, made by BFC in favor of the Lenders, the holders of the Debentures, the 19 -12- Agent and the Collateral Agent pursuant to which BFC guaranties to the Lenders, the holders of the Debentures, the Agent and the Collateral Agent the payment and performance of the Obligations, in form and substance satisfactory to the Collateral Agent. Hazardous Substances. See Section 7.18(b). Indebtedness. All obligations, contingent and otherwise, that in accordance with generally accepted accounting principles should be classified upon the obligor's balance sheet as liabilities, or to which reference should be made by footnotes thereto, including in any event and whether or not so classified: (a) all debt and similar monetary obligations, whether direct or indirect; (b) all liabilities secured by any mortgage, pledge, security interest, lien, charge or other encumbrance existing on property owned or acquired subject thereto, whether or not the liability secured thereby shall have been assumed; and (c) all guarantees, endorsements and other contingent obligations whether direct or indirect in respect of indebtedness of others, including any obligation to supply funds to or in any manner to invest in, directly or indirectly, the debtor, to purchase indebtedness, or to assure the owner of indebtedness against loss, through an agreement to purchase goods, supplies, or services for the purpose of enabling the debtor to make payment of the indebtedness held by such owner or otherwise, and the obligations to reimburse the issuer in respect of any letters of credit. Indenture. The Indenture dated as of December 22, 1993, among the Borrower and the Trustee, under which the Trustee acts for the holders of the Debentures, as amended on or prior to the date hereof and in form and substance satisfactory to the Agent. Individual Account. The revolving credit card account of any Person relating to the Borrower's private label credit cards. Interest Payment Date. (a) As to any Base Rate Loan, the first day of the calendar month; and (b) as to any Eurodollar Rate Loan, the last day of the corresponding Interest Period. Interest Period. With respect to each Loan, (a) initially, the period commencing on the Drawdown Date of such Loan and ending on the day set forth below, as selected by the Borrower in a Loan Request (i) for any Base Rate Loan, the last day of any calendar month; and (ii) for any Eurodollar Rate Loan, the last day of one of the periods of 1, 2 or 3 months; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Loan and ending on the last day of one of the periods set forth above, as selected by the Borrower in a Conversion Request; provided that all of the foregoing provisions relating to Interest Periods are subject to the following: (A) if any Interest Period with respect to a Eurodollar Rate Loan would otherwise end on a day that is not a Eurodollar Business Day, that Interest 20 -13- Period shall be extended to the next succeeding Eurodollar Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Eurodollar Business Day; (B) if any Interest Period with respect to a Base Rate Loan would end on a day that is not a Business Day, that Interest Period shall end on the next succeeding Business Day; (C) if the Borrower shall fail to give notice as provided in Section 2.7, the Borrower shall be deemed to have requested a conversion of the affected Eurodollar Rate Loan to a Base Rate Loan and the continuance of all Base Rate Loans as Base Rate Loans on the last day of the then current Interest Period with respect thereto; (D) any Interest Period relating to any Eurodollar Rate Loan that begins on the last Eurodollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Eurodollar Business Day of a calendar month; and (E) any Interest Period relating to any Eurodollar Rate Loan that would otherwise extend beyond the Maturity Date shall end on the Maturity Date. Interest Rate Protection Arrangements. See Section 8.18. Inventory Value. As defined in the definition of Borrowing Base. Investments. All expenditures made and all liabilities incurred (contingently or otherwise) for the acquisition of stock or Indebtedness of, or for loans, advances, capital contributions or transfers of property to, or in respect of any guaranties (or other commitments as described under Indebtedness), or obligations of, any Person. In determining the aggregate amount of Investments outstanding at any particular time: (a) the amount of any Investment represented by a guaranty shall be taken at not less than the principal amount of the obligations guaranteed and still outstanding; (b) there shall be included as an Investment all interest accrued with respect to Indebtedness constituting an Investment unless and until such interest is paid; (c) there shall be deducted in respect of each such Investment any amount received as a return of capital (but only by repurchase, redemption, retirement, repayment, liquidating dividend or liquidating distribution); (d) there shall not be deducted in respect of any Investment any amounts received as earnings on such Investment, whether as dividends, interest or otherwise, except that accrued interest included as provided in the foregoing clause (b) may be deducted when paid; and (e) there shall not be deducted from the aggregate amount of Investments any decrease in the value thereof. Landlord Lien Reserve. The sum of (a) all rent past due for more than thirty (30) days on any Specified Lease at the time of reference and (b) all rent which may 21 -14- become due under any Specified Lease during the twelve month period commencing at the time of reference, in each case, unless otherwise requested by the Agent, calculated on June 1 and December 1 of each calendar year by reference to the average monthly rent on such Specified Lease during the immediately preceding calendar year. Landlord Waiver. A waiver from the lessor or sublessor of property leased by the Borrower as lessee in substantially the form of Exhibit J hereto or otherwise approved by the Agent in its sole discretion. Lenders. FNBB and the other lending institutions listed on Schedule 1 hereto and any other Person who becomes an assignee of any rights and obligations of a Lender pursuant to Section 19. Letter of Credit. See Section 4.1(a). Letter of Credit Application. See Section 4.1(a). Letter of Credit Cash Collateral Account. See Section 4.7. Letter of Credit Participation. See Section 4.1(d). Loans. Revolving credit loans made or to be made by the Lenders to the Borrower pursuant to Section 2. Loan Documents. This Credit Agreement, the Notes, the Letter of Credit Applications, the Letters of Credit, the Security Documents, the Fee Letter and all other documents executed and/or delivered in connection therewith. Loan Request. See Section 2.6. Lock-Box Accounts. Accounts maintained in the name of the Borrower at a Lock-Box Bank approved by the Agent for the purpose of receiving collections of Accounts Receivable, which account is subject to the terms of a Lock-Box Agreement. Lock-Box Agreement. An agreement with respect to a Lock-Box Account at a Lock-Box Bank, among the Borrower, the Agent and such Lock- Box Bank, in form and substance satisfactory to the Agent. Lock-Box Bank. Any of the depository institutions holding one or more lock-box accounts for receiving collections from Accounts Receivable. Majority Lenders. As of any date, the Lenders holding at least fifty-one percent (51%) of the outstanding principal amount of the Notes on such date; and if no such principal is outstanding, the Lenders whose aggregate Commitments constitute at least fifty-one percent (51%) of the Total Commitment. 22 -15- Maturity Date. August 31, 1999. Maximum Drawing Amount. The maximum aggregate amount from time to time that the beneficiaries may draw under outstanding Letters of Credit, as such aggregate amount may be reduced from time to time pursuant to the terms of the Letters of Credit. Monthly Charge Off Percentage. The percentage obtained by dividing the charge offs (net of recoveries) of Accounts Receivable of the Borrower during any month by Accounts Receivable of the Borrower as of the first day of the next month. Mortgaged Property. Any Real Estate which is subject to any Mortgage. Mortgages. The Leasehold Deed of Trust dated as of December 22, 1993, as previously amended and as further amended by an amendment dated as of the date hereof, from the Borrower to the Collateral Agent with respect to the leasehold interest of the Borrower in its headquarters and distribution center and such other mortgages and deeds of trust from the Borrower and its Subsidiaries to the Collateral Agent with respect to the fee and leasehold interests of the Borrower and its Subsidiaries in the Real Estate (other than the Borrower's leasehold interest with respect to retail stores) which may from time to time be executed and in effect, in form and substance satisfactory to the Collateral Agent. Multiemployer Plan. Any multiemployer plan within the meaning of Section 3(37) of ERISA maintained or contributed to by the Borrower or any ERISA Affiliate. Net Charge Off Percentage. As of any date of determination, for any twelve (12) calendar month period, the average of the Monthly Charge Off Percentages for each month. Notes. See Section 2.4. Obligations. All indebtedness, obligations and liabilities of any of the Borrower and its Subsidiaries to any of the Lenders, the Agent and the Collateral Agent, individually or collectively, existing on the date of this Credit Agreement or arising thereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise, arising or incurred under this Credit Agreement or any of the other Loan Documents or in respect of any of the Loans made, Reimbursement Obligations incurred, Interest Rate Protection Arrangements or any of the Notes, Letter of Credit Application, Letter of Credit or other instruments at any time evidencing any thereof. Operating Accounts. See Section 2.6(b). Original Credit Agreement. As defined in the preamble. 23 -16- Originator Purchase Agreement. That certain Originator Purchase Agreement between the Borrower and BFC dated as of December 21, 1995. outstanding. With respect to the Loans, the aggregate unpaid principal thereof as of any date of determination. PBGC. The Pension Benefit Guaranty Corporation created by Section 4002 of ERISA and any successor entity or entities having similar responsibilities. Perfection Certificate. The Perfection Certificate as defined in the Security Agreement. Permitted Inventory Locations. The retail stores and distribution centers of the Borrower located in the United States of America and listed on Schedule 7.21 hereto and any future retail stores used by the Borrower and located in any state of the United States of America so long as appropriate Uniform Commercial Code financing statements or other applicable documents showing the Borrower as debtor and the Collateral Agent as secured party have been filed or continued in the proper filing office or offices in a manner and form sufficient to perfect the Collateral Agent's first priority security interest in inventory of the Borrower. Permitted Liens. Liens, security interests and other encumbrances permitted by Section 9.2. Person. Any individual, corporation, partnership, trust, unincorporated association, business, or other legal entity, and any government or any governmental agency or political subdivision thereof. Prior Credit Agreement. As defined in the preamble. Real Estate. All real property at any time owned or leased (as lessee or sublessee) by the Borrower or any of its Subsidiaries. Receivables Purchase Agent. The Agent, as defined in the Receivables Securitization Facility Documents. Receivables Purchase Agreement. The Receivables Purchase Agreement dated as of December 21, 1995 among BFC, Triple-A, CapMAC, the Receivables Purchase Agent and the Borrower in its capacity as initial "Servicer" (as defined therein) and their successors and assigns. Receivables Securitization Facility. The receivables securitization facility among the Borrower, BFC, Triple-A, CapMAC and certain other parties pursuant to the Receivables Securitization Facility Documents. 24 -17- Receivables Securitization Facility Documents. Collectively, the Receivables Purchase Agreement, the Originator Purchase Agreement and the other documents executed in connection therewith. Record. The grid attached to a Note, or the continuation of such grid, or any other similar record, including computer records, maintained by any Lender with respect to any Loan referred to in such Note. Registration Rights Agreement. The Senior Secured Notes Registration Rights Agreement dated December 22, 1993, and the Common Stock Registration Rights Agreement dated December 22, 1993, each by and among the Borrower and the holders of the Debentures party thereto. Reimbursement Obligation. The Borrower's obligation to reimburse the Agent and the Lenders on account of any drawing under any Letter of Credit as provided in Section 4.2. Rental Obligations. All present or future obligations of the Borrower or any of its Subsidiaries under any rental agreements or leases of real or personal property, other than (a) obligations that can be terminated by the giving of notice without liability to the Borrower or such Subsidiary in excess of the liability for rent due as of the date on which such notice is given and under which no penalty or premium is paid as a result of any such termination, and (b) obligations in respect of Capitalized Leases. Requisite Party. As defined in the Collateral Agency Agreement. Retermed Receivables. Individual Accounts which have at any time gone five consecutive months without a payment and for which the monthly payment schedule has been reduced or in any way altered. Return Rate. As defined in (a)(iii) of the definition of Borrowing Base. Roll Rate Percentage. As of any date of determination, the Roll Rate Percentage will be calculated as the result of (a) the Current Receivable Roll Rate Percentage, multiplied by (b) the Thirty Day Receivable Roll Rate Percentage, multiplied by (c) the Sixty Day Receivable Roll Rate Percentage. As used in this definition of Roll Rate Percentage and with reference to the Borrower's most recent Credit Card Center report entitled "Month End - Recency Roll Rate", a form of which is attached hereto as Exhibit P, calculated in a manner consistent with the Borrower's manner of calculation as of the Closing Date, (i) "Current Receivable Roll Rate Percentage" shall mean at any time of determination, the result of (A) the sum of the most recent twelve month roll dollars set forth in the "0-1" column of such report divided by (B) the sum of the twelve month roll dollars beginning one month prior in the "Age-0" column, (ii) "Thirty Day Receivable Roll Rate Percentage" shall mean at any time of determination, the result of (A) the sum of the most recent twelve month roll dollars set forth in the "0-1" column of such report divided by (B) the sum of the twelve month roll dollars beginning one month prior in the "Age-0" column, (ii) "Thirty Day Receivable Roll Rate Percentage" shall mean at any time of determination, the result of (A) the sum 25 -18- of the most recent twelve month roll dollars set forth in the "1-2" column of such report divided by (B) the sum of the twelve month roll dollars beginning one month prior in the "0-1" column, and (iii) "Sixty Day Receivable Roll Rate Percentage" shall mean at any time of determination, the result of (A) the sum of the most recent twelve month roll dollars set forth in the "2-3" column of such report divided by (B) the sum of the twelve month roll dollars beginning one month prior in the "1-2" column. Security Agreement. The Second Amended and Restated Security Agreement, dated or to be dated on or prior to the Closing Date, between the Borrower and the Collateral Agent, in substantially the form of Exhibit D hereto. Security Documents. The Security Agreement, the Mortgages, the Trademark Security Agreement, the Trademark Assignments, the Guaranty, the Stock Pledge Agreement, the Agency Account Agreements and the Collateral Agency Agreement. Settlement. The making among the Lenders of, or receiving of payments among the Lenders, in immediately available funds, to the extent necessary to cause each Lender's actual share of the outstanding amount of Loans (after giving effect to any Loan Request) to be equal to each Lender's Commitment Percentage of the outstanding amount of such Loans (after giving effect to any Loan Request), in any case where, prior to such event or action, the actual share is not so equal. Settlement Amount. See Section 2.8(a). Settlement Date. (a) The Drawdown Date relating to any Loan Request, (b) Tuesday of each week, or if Tuesday is not a Business Day, the Business Day immediately following such Tuesday, (c) the Business Day immediately following the Agent becoming aware of the existence of an Event of Default, (d) any Business Day on which the amount of Loans outstanding from FNBB plus FNBB's Commitment Percentage of the sum of the Maximum Drawing Amount and any Unpaid Reimbursement Obligations is equal to or greater than FNBB's Commitment Percentage of the Total Commitment, (e) the Business Day immediately following any Business Day on which the amount of Loans outstanding increases or decreases by more than $5,000,000 as compared to the previous Settlement Date, (f) any day on which any conversion of a Base Rate Loan to a Eurodollar Rate Loan occurs or (g) any Business Day on which (i) the amount of outstanding Loans decreases and (ii) the amount of the Agent's Loans outstanding equals zero Dollars ($0). Settling Lender. See Section 2.8(a). Shareholders Equity. An amount equal to Consolidated Total Assets less Consolidated Total Liabilities. 26 -19- Shrink Reserve. The result of the Inventory Value multiplied by the Shrink Reserve Percentage. Shrink Reserve Percentage. As of the Closing Date through August 31, 1997, two and three-tenths percent (2.3%), and thereafter the result of (a) the Borrower's annual shrink reserve percentage for the prior fiscal year of the Borrower, as shown on the books and records of the Borrower, rounded to the nearest tenth, multiplied by (b) one and one-half (1-1/2). The Shrink Reserve Percentage shall be adjusted on September 1 of each year, commencing with September 1, 1997. Specified Lease. A lease by the Borrower as lessee of Real Estate at which Eligible Inventory is held and as to which at any time the Agent has not received evidence, in form and substance satisfactory to the Agent, that, based upon then existing law (as determined by the Agent in the exercise of their reasonable discretion and on the advice of counsel), the landlord of such property would not have a lien on inventory superior to the security interest granted under the Security Agreement, securing rent obligations more than thirty (30) days past due or securing future rent obligations accruing after the first anniversary of the Closing Date; provided however, that no lease for which the Borrower and Agent have received a Landlord Waiver shall be a Specified Lease. Stock Pledge Agreement. The Amended and Restated Stock Pledge Agreement, dated or to be dated on or prior to the Closing Date, between the Borrower and the Collateral Agent, in form and substance satisfactory to the Collateral Agent. Store Accounts. Depository accounts in depository institutions for, or on behalf of, the Borrower or any of its Subsidiaries and listed on Schedule 7.20 hereto (as such may be amended from time to time in accordance with Section 9.10 hereof). Subsidiary. Any corporation, association, trust, or other business entity of which the designated parent shall at any time own directly or indirectly through a Subsidiary or Subsidiaries at least a majority (by number of votes) of the outstanding Voting Stock. Termination Agreement. The Agreement Regarding Termination of Securitization Transaction dated as of the date hereof by and among the Borrower, BFC, Triple-A and CapMAC Title Insurance Company. Chicago Title Insurance Company. Title Policy. In relation to each Mortgaged Property, an ALTA standard form title insurance policy issued by the Title Insurance Company (with such reinsurance or co-insurance as the Agent may require, any such reinsurance to be with direct access endorsements) in such amount as may be determined by the Agent insuring the priority of the Mortgage of such Mortgaged Property and that the Borrower or one of its Subsidiaries holds marketable fee simple or leasehold title to such 27 -20- Mortgaged Property, subject only to the encumbrances permitted by such Mortgage and which shall not contain exceptions for mechanics liens, persons in occupancy or matters which would be shown by a survey (except as may be permitted by such Mortgage), shall not insure over any matter except to the extent that any such affirmative insurance is acceptable to the Agent in its sole discretion, and shall contain such endorsements and affirmative insurance as the Agent in its discretion may require, including but not limited to (a) comprehensive endorsement, (b) variable rate of interest endorsement, (c) usury endorsement (d) revolving credit endorsement, (e) tie-in endorsement, (f) doing business endorsement; provided, however, that in the case of the leasehold interest of the Borrower in its headquarters and distribution center, Title Policy shall mean an ALTA standard form title insurance policy issued by the Title Insurance Company in an amount equal to $1,000,000 insuring the priority of the Mortgage of such Mortgaged Property and that the Borrower or one of its Subsidiaries holds leasehold title to such Mortgaged Property, subject only to the encumbrances permitted by such Mortgage and which shall not contain exceptions for mechanics liens or persons in occupancy (except as may be permitted by such Mortgage), but which may contain an exception for matters which would be shown by a survey, shall not insure over any matter except to the extent that any such affirmative insurance is acceptable to the Agent in its sole discretion, and shall contain such endorsements and affirmative insurance as the Agent in its sole discretion may require, including but not limited to a revolving credit endorsement. Total Commitment. The sum of the Commitments of the Banks which, as of the Closing Date, is $85,000,000, as the same may be reduced from time to time in accordance with the provisions hereof, or if the Commitments are terminated pursuant to the provisions hereof, zero. Trademark Assignments. The several Trademark Assignments made by the Borrower and its Subsidiaries in favor of the Collateral Agent and in form and substance satisfactory to the Lenders, the Agent and the Collateral Agent. Trademark Security Agreement. The Second Amended and Restated Trademark Collateral Security and Pledge Agreement dated or to be dated on or prior to the Closing Date, made by and between the Borrower and the Collateral Agent in substantially the form of Exhibit E hereto, pursuant to which security interests are granted for the benefit of the Lenders and the Agent and the holders of the Debentures and the Trustee and the Trademark Assignments delivered in connection therewith. Triple-A. Triple-A One Funding Corporation, a Delaware corporation. Trustee. First Trust National Association, as trustee under the Indenture, and any successor thereto. Type. As to any Loan, its nature as a Base Rate Loan or a Eurodollar Rate Loan. 28 -21- Uniform Customs. With respect to any Letter of Credit, the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 or any successor version thereto adopted by the Agent in the ordinary course of its business as a letter of credit issuer and in effect at the time of issuance of such Letter of Credit. Unpaid Reimbursement Obligation. Any Reimbursement Obligation for which the Borrower does not reimburse the Agent and the Lenders on the date specified in, and in accordance with, Section 4.2. Voting Stock. Stock or similar interests, of any class or classes (however designated), the holders of which are at the time entitled, as such holders, to vote for the election of a majority of the directors (or persons performing similar functions) of the corporation, association, trust or other business entity involved, whether or not the right so to vote exists by reason of the happening of a contingency. Section 1.2. RULES OF INTERPRETATION. (a) A reference to any document or agreement shall include such document or agreement as amended, modified or supplemented from time to time in accordance with its terms and the terms of this Credit Agreement. (b) The singular includes the plural and the plural includes the singular. (c) A reference to any law includes any amendment or modification to such law. (d) A reference to any Person includes its permitted successors and permitted assigns. (e) Accounting terms not otherwise defined herein have the meanings assigned to them by generally accepted accounting principles applied on a consistent basis by the accounting entity to which they refer. (f) The words "include", "includes" and "including" are not limiting. (g) All terms not specifically defined herein or by generally accepted accounting principles, which terms are defined in the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts, have the meanings assigned to them therein. (h) Reference to a particular "Section" refers to that section of this Credit Agreement unless otherwise indicated. 29 -22- (i) The words "herein", "hereof", "hereunder" and words of like import shall refer to this Credit Agreement as a whole and not to any particular section or subdivision of this Credit Agreement. Section 2. THE REVOLVING CREDIT FACILITY. Section 2.1. COMMITMENT TO LEND. Subject to the terms and conditions set forth in this Credit Agreement, each of the Lenders severally agrees (i) on the Closing Date, to convert the loans outstanding and owed under the Prior Credit Agreement, if any, to Loans under this Credit Agreement and (ii) to lend to the Borrower and the Borrower may borrow, repay, and reborrow from time to time from the Closing Date to the Maturity Date upon notice by the Borrower to the Agent given in accordance with Section 2.6, such sums as are requested by the Borrower up to a maximum aggregate amount outstanding (after giving effect to all amounts requested) at any one time equal to such Lender's Commitment minus such Lender's Commitment Percentage of the sum of the Maximum Drawing Amount and all Unpaid Reimbursement Obligations, provided that the sum of the outstanding amount of the Loans (after giving effect to all amounts requested) plus the Maximum Drawing Amount and all Unpaid Reimbursement Obligations shall not at any time exceed the lesser of (a) the Total Commitment and (b) the Borrowing Base. The Loans shall be made pro rata in accordance with each Lender's Commitment Percentage. Each request for a Loan hereunder shall constitute a representation and warranty by the Borrower that the conditions set forth in Section 11 and Section 12, in the case of the initial Loans to be made or converted on the Closing Date, and Section 12, in the case of all other Loans, have been satisfied on the date of such request. Section 2.2. COMMITMENT FEE. The Borrower agrees to pay to the Agent for the accounts of the Lenders in accordance with their respective Commitment Percentages a commitment fee calculated at the rate of one-half of one percent (1/2%) per annum on the average daily amount during each calendar month or portion thereof from the Closing Date to the Maturity Date by which the Total Commitment minus the sum of the Maximum Drawing Amount and all Unpaid Reimbursement Obligations exceeds the outstanding amount of Loans during such calendar month. The commitment fee shall be payable monthly in arrears on the first Business Day of each calendar month for the immediately preceding calendar month commencing on the first such date following the Closing Date, with a final payment on the Maturity Date or any earlier date on which the Commitments shall terminate. Section 2.3. REDUCTION OF TOTAL COMMITMENT. The Borrower shall have the right at any time and from time to time upon five (5) Business Days' prior written notice to the Agent to reduce by $5,000,000 or an integral multiple thereof or terminate entirely the Total Commitment, whereupon the Commitments of the Lenders shall be reduced pro rata in accordance with their respective Commitment Percentages of the amount specified in such notice or, as the case may be, terminated. Promptly after receiving any notice of the Borrower delivered pursuant 30 -23- to this Section 2.3, the Agent will notify the Lenders of the substance thereof. Upon the effective date of any such reduction or termination, the Borrower shall pay to the Agent for the respective accounts of the Lenders the full amount of any commitment fee then accrued on the amount of the reduction. No reduction or termination of the Commitments may be reinstated. Section 2.4. THE NOTES. The Loans shall be evidenced by separate promissory notes of the Borrower in substantially the form of Exhibit A hereto (each a "Note"), dated as of the Closing Date (or such other date on which a Lender may become a party hereto in accordance with Section 19 hereof) and completed with appropriate insertions. One Note shall be payable to the order of each Lender in a principal amount equal to such Lender's Commitment or, if less, the outstanding amount of all Loans made by such Lender, plus interest accrued thereon, as set forth below. The Borrower irrevocably authorizes each Lender to make or cause to be made, at or about the time of the Drawdown Date of any Loan or at the time of receipt of any payment of principal on such Lender's Note, an appropriate notation on such Lender's Record reflecting the making of such Loan or (as the case may be) the receipt of such payment. The outstanding amount of the Loans set forth on such Lender's Record shall be prima facie evidence of the principal amount thereof owing and unpaid to such Lender, but the failure to record, or any error in so recording, any such amount on such Lender's Record shall not limit or otherwise affect the obligations of the Borrower hereunder or under any Note to make payments of principal of or interest on any Note when due. Section 2.5. INTEREST ON LOANS. Except as otherwise provided in Section 5.11, (a) Each Base Rate Loan shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of the Interest Period with respect thereto at the rate of the Base Rate Applicable Margin plus the Base Rate. (b) Each Eurodollar Rate Loan shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of the Interest Period with respect thereto at the rate of the Eurodollar Applicable Margin plus the Eurodollar Rate determined for such Interest Period. (c) The Borrower promises to pay interest on each Loan in arrears on each Interest Payment Date with respect thereto. Section 2.6. REQUESTS FOR LOANS. (a) Subject to Section 2.9 hereof, the Borrower shall give to the Agent written notice in the form of Exhibit B hereto (or telephonic notice confirmed in a writing in the form of Exhibit C hereto) of each Loan requested hereunder (a "Loan Request") no less than (i) one (1) Business Day prior to the proposed Drawdown Date of any Base Rate Loan and (ii) three (3) Eurodollar Business Days prior to the proposed Drawdown Date of any Eurodollar Rate Loan. Each such notice shall specify (A) the 31 -24- principal amount of the Loan requested, (B) the proposed Drawdown Date of such Loan, (C) the Interest Period for such Loan and (D) the Type of such Loan. Promptly upon receipt of any such notice, the Agent shall notify each of the Lenders thereof. Each Loan Request shall be irrevocable and binding on the Borrower and shall obligate the Borrower to accept the Loan requested from the Lenders on the proposed Drawdown Date. Each Loan Request shall be in a minimum aggregate amount of $100,000 or an integral multiple thereof. (b) Notwithstanding the notice and minimum amount requirements set forth in Section 2.6(a) but otherwise in accordance with the terms and conditions of this Credit Agreement, the Agent may, in its sole discretion and without conferring with the Lenders, make Loans to the Borrower (i) by entry of credits to the Borrower's operating account(s) (the "Operating Accounts") with the Agent to cover checks or other charges which the Borrower has drawn or made against such account or (ii) in an amount as otherwise requested by the Borrower. The Borrower hereby requests and authorizes the Agent to make from time to time such Loans by means of appropriate entries of such credits sufficient to cover checks and other charges then presented. The Borrower acknowledges and agrees that the making of such Loans shall, in each case, be subject in all respects to the provisions of this Credit Agreement as if they were Loans covered by a Loan Request including, without limitation, the limitations set forth in Section 2.1 and the requirements that the applicable provisions of Section Section 11 and 12 (in the case of Loans made on the Closing Date) and Section 12 be satisfied. All actions taken by the Agent pursuant to the provisions of this Section 2.6(b) shall be conclusive and binding on the Borrower and the Lenders absent the Agent's gross negligence or willful misconduct. Loans made pursuant to this Section 2.6(b) shall be Base Rate Loans until converted in accordance with the provisions of the Credit Agreement and, prior to a Settlement, interest accruing thereon shall be for the account of the Agent. Section 2.7. CONVERSION OPTIONS. (a) Conversion to Different Type of Loan. Subject to Section 2.9 hereof, the Borrower may elect from time to time to convert any outstanding Loan to a Loan of another Type, provided that (i) with respect to any such conversion of a Eurodollar Rate Loan to a Base Rate Loan, the Borrower shall give the Agent at least one (1) Business Day's prior written notice of such election; (ii) with respect to any such conversion of a Base Rate Loan to a Eurodollar Rate Loan, the Borrower shall give the Agent at least three (3) Eurodollar Business Days' prior written notice of such election; (iii) with respect to any such conversion of a Eurodollar Rate Loan into a Base Rate Loan, such conversion shall only be made on the last day of the Interest Period with respect thereto; and (iv) no Base Rate Loan may be converted into a Eurodollar Rate Loan when any Default or Event of Default has occurred and is continuing. On the date on which such conversion is being made each Lender shall take such action as is necessary to transfer its Commitment Percentage of such Loans to its Domestic Lending Office or its Eurodollar Lending Office, as the case may be. All or any part of outstanding Loans of any Type may be converted into a Loan of another Type as provided herein, provided that any partial conversion shall 32 -25- be in an aggregate principal amount of $100,000 or a whole multiple thereof. Each Conversion Request relating to the conversion of a Base Rate Loan to a Eurodollar Rate Loan shall be irrevocable by the Borrower. (b) Continuation of Type of Loan. Subject to Section 2.9 hereof, any Loan of any Type may be continued as a Loan of the same Type upon the expiration of an Interest Period with respect thereto by compliance by the Borrower with the notice provisions contained in Section 2.7(a); provided that no Eurodollar Rate Loan may be continued as such when any Default or Event of Default has occurred and is continuing, but shall be automatically converted to a Base Rate Loan on the last day of the first Interest Period relating thereto ending during the continuance of any Default or Event of Default of which officers of the Agent active upon the Borrower's account have actual knowledge. The Agent shall notify the Lenders promptly when any such automatic conversion contemplated by this Section 2.7 is scheduled to occur. (c) Eurodollar Rate Loans. Subject to Section 2.9 hereof, any conversion to or from Eurodollar Rate Loans shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of all Eurodollar Rate Loans having the same Interest Period shall not be less than $1,000,000 or a whole multiple of $100,000 in excess thereof. Section 2.8. SETTLEMENT; FAILURE TO MAKE FUNDS AVAILABLE (a) On each Settlement Date, the Agent shall, not later than 11:00 a.m. (Boston time), give telephonic or facsimile notice (i) to the Lenders and the Borrower of (A) the respective outstanding amount of Base Rate Loans made by the Agent on behalf of the Lenders from the immediately preceding Settlement Date through the close of business on the prior day and (B) the amount of any Eurodollar Rate Loans to be made (following the giving of notice pursuant to Section 2.6(a)(ii)) on such date pursuant to a Loan Request and (ii) to the Lenders of the amount (a "Settlement Amount") that each Lender (the "Settling Lender") shall pay to effect a Settlement of any Loan. A statement of the Agent submitted to the Lenders and the Borrower or to the Lenders with respect to any amounts owing under this Section 2.8(a) shall be prima facie evidence of the amount due and owing. The Settling Lender shall, not later than 2:00 p.m. (Boston time) on such Settlement Date, effect a wire transfer of immediately available funds to the Agent in the amount of the Settlement Amount. All funds advanced by any Lender as a Settling Lender pursuant to this Section 2.8(a) shall for all purposes be treated as a Loan made by such Settling Lender to the Borrower and all funds received by any Lender pursuant to this Section 2.8(a) shall for all purposes be treated as repayment of amounts owed with respect to Loans made by such Lender. In the event that any bankruptcy, reorganization, liquidation, receivership or similar cases or proceedings in which the Borrower is a debtor prevent a Settling Lender from making any Loan to effect a Settlement as contemplated hereby, such Settling Lender will make such disposition and arrangements with the other Lenders with respect to such Loans, either by way of purchase of participations, distribution, pro tanto assignment of claims, subrogation or otherwise as shall result in each Lender's share of the outstanding Loans being 33 -26- equal, as nearly as may be, to such Lender's Commitment Percentage of the outstanding amount of the Loans. (b) The Agent may, unless notified to the contrary by any Lender prior to a Settlement Date, assume that such Lender has made or will make available to the Agent on such Settlement Date the amount of such Lender's Settlement Amount, and the Agent may (but it shall not be required to), in reliance upon such assumption, make available to the Borrower a corresponding amount. If any Lender makes available to the Agent such amount on a date after such Settlement Date, such Lender shall pay to the Agent on demand an amount equal to the product of (i) the average computed for the period referred to in clause (iii) below, of the weighted average interest rate paid by the Agent for federal funds acquired by such Agent during each day included in such period, times (ii) the amount of such Settlement Amount, times (iii) a fraction, the numerator of which is the number of days that elapse from and including such Settlement Date to the date on which the amount of such Settlement Amount shall become immediately available to the Agent, and the denominator of which is 365. A statement of the Agent submitted to such Lender with respect to any amounts owing under this paragraph shall be prima facie evidence of the amount due and owing to the Agent by such Lender. If such Lender's Settlement Amount is not made available to the Agent by such Lender within three (3) Business Days following such Settlement Date, the Agent shall be entitled to recover such amount from the Borrower on demand, with interest thereon at the rate per annum applicable to the Loans as of such Settlement Date. (c) The failure or refusal of any Lender to make available to the Agent at the aforesaid time and place on any Settlement Date the amount of its Settlement Amount (i) shall not relieve any other Lender from its several obligations hereunder to make available to the Agent the amount of such other Lender's Settlement Amount and (ii) shall not impose upon such other Lender any liability with respect to such failure or refusal or otherwise increase the Commitment of such other Lender. Section 2.9. RESTRICTIONS ON BORROWINGS OF EURODOLLAR RATE LOANS. (a) Notwithstanding anything contained elsewhere in this Credit Agreement, the Borrower shall not be permitted to borrow Eurodollar Rate Loans and no request for a Eurodollar Rate Loan shall be honored by the Banks (i) prior to the date on which the Borrower shall have delivered its financial statements for the quarter ending February 28, 1997 in accordance with Section 8.4(c) and (ii) after such date, only if at the time of such request: (A) No Default or Event of Default shall have occurred and be continuing; (B) The Consolidated EBITDA of the Borrower and its Subsidiaries for the period of four consecutive fiscal quarters (or such lesser period as shall have elapsed since June 1, 1996) ending as of the date set forth in the table below as to 34 -27- which the Borrower has delivered the financial statements required pursuant to Section 8.4(a) or, as applicable, Section 8.4(b), exceeds the amount set forth opposite such date:
Quarter Ending Minimum Consolidated EBITDA -------------- --------------------------- 02/28/97 $11,900,000 05/31/97 $14,200,000 08/31/97 $16,400,000 11/30/97 $16,900,000 02/28/98 $17,200,000 05/31/98 $17,500,000 08/31/98 $17,800,000 11/30/98 $18,200,000 02/28/99 $19,000,000 05/31/99 $19,400,000
(b) If at the time of delivery of any financial statements required pursuant to Section 8.4(a), or, as applicable, Section 8.4(b), the Borrower has failed to meet the minimum Consolidated EBITDA set forth in Section 2.9(a)(ii)(B) above, then the Eurodollar Applicable Margin on all outstanding Eurodollar Rate Loans shall be increased to 3.75% commencing as of such date. Section 3. REPAYMENT OF THE LOANS. Section 3.1. MATURITY. The Borrower promises to pay on the Maturity Date, and there shall become absolutely due and payable on the Maturity Date, all of the Loans outstanding on such date, together with any and all accrued and unpaid interest thereon. Section 3.2. REPAYMENTS OF LOANS PRIOR TO EVENT OF DEFAULT. (a) (i) All funds and cash proceeds in the form of money, checks and like items received in the FNBB Concentration Account as contemplated by Section 8.14(a) shall be credited, on the first Business Day immediately following the date of the Agent's receipt of such amounts (or on such later date as the Agent determines that good collected funds have been received), to the Obligations or to the Operating Accounts as contemplated by Section 3.2(c), and (ii) all funds and cash proceeds in the form of a wire transfer received in the FNBB Concentration Account as contemplated by Section 8.14(a) shall be credited on the same Business Day as the Agent's receipt of such amounts if received prior to 2:00 p.m. (Boston time) and on the following Business Day if received after 2:00 p.m. (Boston time) (or on such later date as the Agent determines that good collected funds have been received), to the Obligations or to the Operating Accounts as contemplated by Section 3.2(c). (b) If at any time the sum of the outstanding amount of the Loans, the Maximum Drawing Amount and all Unpaid Reimbursement Obligations exceeds the lesser of (i) the Total Commitment and (ii) the Borrowing Base, the Borrower 35 -28- shall immediately pay the amount of such excess to the Agent for the respective accounts of the Lenders for application in accordance with Section 3.2(c). (c) Any amounts required to be repaid pursuant to Section 3.2(a) or (b) shall be applied to the Obligations as follows: (A) first, to pay Obligations then due and payable; (B) second, to reduce Base Rate Loans; (C) third, to reduce Eurodollar Rate Loans (except as provided below); and (D) fourth, to the Borrower's Operating Accounts. All prepayments of Eurodollar Rate Loans prior to the end of an Interest Period shall obligate the Borrower to pay any breakage costs associated with such Eurodollar Rate Loans in accordance with Section 5.6 hereof. Prior to the occurrence of an Event of Default, the Borrower may elect to avoid such breakage costs by requesting that the Agent apply such amounts that would otherwise be used to reduce Eurodollar Rate Loans to cash collateralize such Eurodollar Rate Loans, but in no event shall the Borrower be deemed to have paid such Eurodollar Rate Loans until such cash has been paid to the Agent for application to such Eurodollar Rate Loans. The Agent may elect to cause such cash collateral to be deposited into either (i) a cash collateral account (which may, at the discretion of the Agent, be an interest bearing or a non-interest bearing account) or (ii) the Borrower's internal depository account with the Agent. All prepayments of the Loans pursuant to this Section 3.2(c) shall be allocated among the Lenders making such Loans, in proportion, as nearly as practicable, to the respective unpaid principal amount of such Loans outstanding, with adjustments to the extent practicable to equalize any prior payments or repayments not exactly in proportion. Prior to any Settlement Date, all prepayments of the Loans shall be applied in accordance with this Section 3.2(c), first to outstanding Loans of the Agent. Section 3.3. REPAYMENTS OF LOANS AND DISTRIBUTION OF COLLATERAL PROCEEDS AFTER EVENT OF DEFAULT. In the event that following the occurrence and during the continuance of an Event of Default, the Collateral Agent, the Agent or any Lender, as the case may be, received any monies, whether pursuant to Section 8.14 or Section 13.4 or otherwise with respect to the realization upon any of the Collateral, such monies shall be distributed for application, without duplication, as follows: (a) First, to the payment of, or (as the case may be) the reimbursement of the Agent and the Collateral Agent for or in respect of all reasonable costs, expenses, disbursements and losses which shall have been incurred or sustained by the Agent and the Collateral Agent in connection with the collection of such monies by the Agent, for the exercise, protection or enforcement by the Collateral Agent of all or any of the rights, remedies, powers and privileges of the Collateral Agent, for 36 -29- the benefit of the Agent and the Lenders, under the Credit Agreement or any of the other Loan Documents or in respect of the Collateral or in support of any provision of adequate indemnity to the Agent and the Collateral Agent against any taxes or liens which by law shall have, or may have, priority over the rights of the Agent and the Collateral Agent to such monies; (b) Second, to all other Obligations in such order or preference as the Majority Lenders may determine; provided, however, that (i) distributions in respect of such Obligations shall be made pari passu among Obligations with respect to the Agent's fees payable pursuant to Sections 5.1 and 5.2 and all other Obligations and (ii) distributions in respect of Obligations owing to the Lenders with respect to each type of Obligation such as interest, principal, fees and expenses, shall be made among the Lenders pro rata based upon each Lender's share of the outstanding Obligations, and provided, further, that the Agent may in its discretion make proper allowance to take into account any Obligations not then due and payable; (c) Third, upon payment and satisfaction in full or other provisions for payment in full satisfactory to each of the Lenders and the Agent of all of the Obligations, to the payment of any obligations required to be paid pursuant to the Collateral Agency Agreement; (d) Fourth, thereafter to obligations required to be paid pursuant to Section 9-504(1)(c) of the Uniform Commercial Code of the Commonwealth of Massachusetts; and (e) Fifth, the excess, if any, shall be returned to the Borrower or to such other Persons as are entitled thereto. Section 3.4. OPTIONAL REPAYMENTS OF LOANS. The Borrower shall have the right, at its election, to repay the outstanding amount of the Loans, as a whole or in part, at any time without penalty or premium, provided that any full or partial prepayment of the outstanding amount of any Eurodollar Rate Loans pursuant to this Section 3.4 may be made only on the last day of the Interest Period relating thereto. The Borrower shall give the Agent, no later than 12:00 noon, Boston time, at least three (3) Business Days' prior written notice of any proposed prepayment pursuant to this Section 3.4 of Base Rate Loans, and four (4) Eurodollar Business Days' notice of any proposed prepayment pursuant to this Section 3.4 of Eurodollar Rate Loans, in each case specifying the proposed date of prepayment of Loans and the principal amount to be prepaid. Each such partial prepayment shall be applied, in the absence of instruction by the Borrower, first to the principal of Base Rate Loans and then to the principal of Eurodollar Rate Loans. Each partial prepayment shall be allocated among the Lenders, in proportion, as nearly as practicable, to the respective unpaid principal amount of each Lender's Note, with adjustments to the extent practicable to equalize any prior repayments not exactly in proportion. Notwithstanding the foregoing provisions of this Section 3.4, daily prepayments of the Loans may be made in accordance with Section 3.2 hereof. 37 -30- Section 4. LETTERS OF CREDIT. Section 4.1. LETTER OF CREDIT COMMITMENTS. (a) Commitment to Issue Letters of Credit. Subject to the terms and conditions hereof and the execution and delivery by the Borrower of a letter of credit application on the Agent's customary form (a "Letter of Credit Application"), the Agent on behalf of the Lenders and in reliance upon the agreement of the Lenders set forth in Section 4.1(d) and upon the representations and warranties of the Borrower contained herein, agrees, in its individual capacity, to issue, extend and renew for the account of the Borrower one or more standby or documentary letters of credit (individually, a "Letter of Credit"), in such form as may be requested from time to time by the Borrower and agreed to by the Agent; provided, however, that, after giving effect to such request, (i) the sum of the aggregate Maximum Drawing Amount and all Unpaid Reimbursement Obligations shall not exceed $10,000,000 at any one time and (ii) the sum of (a) the Maximum Drawing Amount on all Letters of Credit, (b) all Unpaid Reimbursement Obligations, and (c) the amount of all Loans outstanding shall not exceed the lesser of (A) the Total Commitment and (B) the Borrowing Base. (b) Letter of Credit Applications. Each Letter of Credit Application shall be completed to the satisfaction of the Agent. In the event that any provision of any Letter of Credit Application shall be inconsistent with any provision of this Credit Agreement, then the provisions of this Credit Agreement shall, to the extent of any such inconsistency, govern. (c) Terms of Letters of Credit. Each Letter of Credit issued, extended or renewed hereunder shall, among other things, provide for the payment of sight drafts for honor thereunder when presented in accordance with the terms thereof and when accompanied by the documents described therein. Each Letter of Credit so issued, extended or renewed shall be subject to the Uniform Customs. (d) Reimbursement Obligations of Lenders. Each Lender severally agrees that it shall be absolutely liable, without regard to the occurrence of any Default or Event of Default or any other condition precedent whatsoever, to the extent of such Lender's Commitment Percentage, to reimburse the Agent on demand for the amount of each draft paid by the Agent under each Letter of Credit to the extent that such amount is not reimbursed by the Borrower pursuant to Section 4.2 (such agreement for a Lender being called herein the "Letter of Credit Participation" of such Lender). (e) Participations of Lenders. Each such payment made by a Lender shall be treated as the purchase by such Lender of a participating interest in the Borrower's Reimbursement Obligation under Section 4.2 in an amount equal to such payment. Each Lender shall share in accordance with its participating interest in any interest which accrues pursuant to Section 4.2. 38 -31- Section 4.2. REIMBURSEMENT OBLIGATION OF THE BORROWER. In order to induce the Agent to issue, extend and renew each Letter of Credit and the Lenders to participate therein, the Borrower hereby agrees to reimburse or pay to the Agent, for the account of the Agent or (as the case may be) the Lenders, with respect to each Letter of Credit issued, extended or renewed by the Agent hereunder, (a) except as otherwise expressly provided in Section 4.2(b) and (c), on each date that any draft presented under such Letter of Credit is honored by the Agent, or the Agent otherwise makes a payment with respect thereto, (i) the amount paid by the Agent under or with respect to such Letter of Credit, and (ii) the amount of any taxes, fees, charges or other costs and expenses whatsoever incurred by the Agent or any Lender in connection with any payment made by the Agent or any Lender under, or with respect to, such Letter of Credit, (b) upon the reduction (but not termination) of the Total Commitment to an amount less than the Maximum Drawing Amount, an amount equal to such difference, which amount shall be held by the Agent for the benefit of the Lenders and the Agent as cash collateral for all Reimbursement Obligations, and (c) upon the termination of the Total Commitment, or the acceleration of the Reimbursement Obligations with respect to all Letters of Credit in accordance with Section 13, an amount equal to one hundred and five percent (105%) of the then Maximum Drawing Amount on all Letters of Credit, which amount shall be held by the Agent for the benefit of the Lenders and the Agent as cash collateral for all Reimbursement Obligations. Each such payment shall be made to the Agent at the Agent's Head Office in immediately available funds. Interest on any and all amounts remaining unpaid by the Borrower under this Section 4.2 at any time from the date such amounts become due and payable (whether as stated in this Section 4.2, by acceleration or otherwise) until payment in full (whether before or after judgment) shall be payable to the Agent on demand at the rate specified in Section 5.11. Section 4.3. LETTER OF CREDIT PAYMENTS. If any draft shall be presented or other demand for payment shall be made under any Letter of Credit, the Agent shall notify the Borrower of the date and amount of the draft presented or demand for payment and of the date and time when it expects to pay such draft or honor such demand for payment. If the Borrower fails to reimburse the Agent as provided in Section 4.2 on or before the date that such draft is paid or other payment is made by the Agent, the Agent may at any time thereafter notify the Lenders of the amount of any such Unpaid Reimbursement Obligation. No later than 2:00 p.m. (Boston time) on the Business Day next following the receipt of such notice, each Lender shall make available to the Agent, at its Head Office, in immediately available funds, such Lender's Commitment Percentage of such Unpaid Reimbursement Obligation, together with an amount equal to the product of (a) the average, computed for the period referred to in clause (c) below, of the weighted average interest rate paid by 39 -32- the Agent for federal funds acquired by the Agent during each day included in such period, times (b) the amount equal to such Lender's Commitment Percentage of such Unpaid Reimbursement Obligation, times (c) a fraction, the numerator of which is the number of days that elapse from and including the date the Agent paid the draft presented for honor or otherwise made payment to the date on which such Lender's Commitment Percentage of such Unpaid Reimbursement obligation shall become immediately available to the Agent, and the denominator of which is 365. The responsibility of the Agent to the Borrower and the Lenders shall be only to determine that the documents (including each draft) delivered under each Letter of Credit in connection with such presentment shall be in conformity in all material respects with such Letter of Credit. Section 4.4. OBLIGATIONS ABSOLUTE. The Borrower's obligations under this Section 4 shall be absolute and unconditional under any and all circumstances and irrespective of the occurrence of any Default or Event of Default or any condition precedent whatsoever or any setoff, counterclaim or defense to payment which the Borrower may have or have had against the Agent, any Lender or any beneficiary of a Letter of Credit. The Borrower further agrees with the Agent and the Lenders that the Agent and the Lenders shall not be responsible for, and the Borrower's Reimbursement Obligations under Section 4.2 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among the Borrower, the beneficiary of any Letter of Credit or any financing institution or other party to which any Letter of Credit may be transferred or any claims or defenses whatsoever of the Borrower against the beneficiary of any Letter of Credit or any such transferee. The Agent and the Lenders shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit. The Borrower agrees that any action taken or omitted by the Agent or any Lender under or in connection with each Letter of Credit and the related drafts and documents, if done in good faith and in the absence of willful misconduct or gross negligence, shall be binding upon the Borrower and shall not result in any liability on the part of the Agent or any Lender to the Borrower. Section 4.5. RELIANCE BY ISSUER. To the extent not inconsistent with Section 4.4, the Agent shall be entitled to rely, and shall be fully protected in relying upon, any Letter of Credit, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Credit Agreement unless it shall first have received such advice or concurrence of the Majority Lenders as it reasonably deems appropriate or it shall first be indemnified to its reasonable satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing 40 -33- to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Credit Agreement in accordance with a request of the Majority Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Lenders and all future holders of the Notes or of a Letter of Credit Participation. Section 4.6. LETTER OF CREDIT FEE. The Borrower shall, quarterly in arrears on the first day of each calendar quarter for the immediately preceding calendar quarter, pay a fee (in each case, a "Letter of Credit Fee") to the Agent in respect of each standby or documentary Letter of Credit equal to two and one-half percent (2.5%) per annum of the face amount of such Letter of Credit plus the Agent's customary issuance, amendment, negotiation or document examination fee, such Letter of Credit Fee (but not such issuance, amendment, negotiation or document examination fee) to be for the accounts of the Lenders in accordance with their respective Commitment Percentages. Section 4.7. CASH COLLATERAL FOR LETTERS OF CREDIT. Thirty days prior to the then scheduled Maturity Date, the Borrower shall, with respect to each Letter of Credit then outstanding and pursuant to a cash collateral agreement (the "Cash Collateral Agreement") in substantially the form of Exhibit G, (a) pay to the Agent in cash for deposit into an interest bearing cash collateral account established with the Agent (the "Letter of Credit Cash Collateral Account") an amount equal to one hundred and five percent (105%) of the Maximum Drawing Amount of such Letter of Credit as of such date, which amount shall be deemed cash collateral for any Reimbursement Obligations incurred with respect to such Letter of Credit or (b) deliver to the Agent a "back-to-back" letter of credit issued by a financial institution satisfactory to the Agent in its sole discretion and naming the Agent as beneficiary in an amount equal to one hundred and five percent (105%) of the Maximum Drawing Amount of such Letter of Credit as of such date. Any cash sums deposited into the Letter of Credit Cash Collateral Account pursuant to clause (a) and naming the Agent as beneficiary of this Section 4.7 shall be released, and any back-to-back letter of credit issued pursuant to clause (b) and naming the Agent as beneficiary of this Section 4.7 shall be reduced, if and to the extent that the Maximum Drawing Amount with respect to the applicable Letter of Credit has been reduced or terminated and all Unpaid Reimbursement Obligations have been paid. Section 5. CERTAIN GENERAL PROVISIONS. Section 5.1. FACILITY FEE. The Borrower shall pay to the Agent the facility fee in accordance with the Fee Letter. Section 5.2. COLLATERAL ADMINISTRATION FEE. The Borrower shall pay to the Collateral Agent the collateral administration fee in accordance with the provisions of the Collateral Agency Agreement. 41 -34- Section 5.3. FUNDS FOR PAYMENTS. (a) Payments to Agent. All payments of principal, interest, Reimbursement Obligations, commitment fees, Letter of Credit Fees and any other amounts due hereunder or under any of the other Loan Documents shall be made to the Agent, for the respective accounts of the Lenders and the Agent, at the Agent's Head Office or at such other location in the Boston, Massachusetts area that the Agent may from time to time designate in a notice made in accordance with Section 20 hereof, in each case in immediately available funds. To the extent permitted by applicable law, the Agent shall be entitled to debit any account of the Borrower with the Agent in the amount of any payment to be made by the Borrower when due, in order to effect timely payment thereof. (b) No Offset, etc. All payments by the Borrower hereunder and under any of the other Loan Documents shall be made without setoff or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory loans, restrictions or conditions of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless the Borrower is compelled by law to make such deduction or withholding. If any such obligation is imposed upon the Borrower with respect to any amount payable by it hereunder or under any of the other Loan Documents, the Borrower will pay to the Agent, for the account of the Lenders or (as the case may be) the Agent, on the date on which such amount is due and payable hereunder or under such other Loan Document, such additional amount in Dollars as shall be necessary to enable the Lenders or the Agent to receive the same net amount which the Lenders or the Agent would have received on such due date had no such obligation been imposed upon the Borrower. The Borrower will deliver promptly to the Agent certificates or other valid vouchers for all taxes or other charges deducted from or paid with respect to payments made by the Borrower hereunder or under such other Loan Document. (c) Withholding. Each Lender that is or may become a party to this Credit Agreement and that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to the Borrower, within seven (7) Business Days of the Closing Date, or, in the case of a Lender which becomes a Lender pursuant to an Assignment and Acceptance, on the date which such Assignment and Acceptance becomes effective, a copy of United States Internal Revenue Service form 1001 or 4224 (or other applicable form prescribed by the United States Internal Revenue Service), in each case certifying that such Lender is entitled to receive payments under this Credit Agreement and the Note without deduction or withholding of any United States federal income taxes or at reduced withholding rates, as applicable. Section 5.4. COMPUTATIONS. All computations of interest on the Loans and of commitment fees, Letter of Credit Fees or other fees shall be based on a 360-day year and paid for the actual number of days elapsed. Except as otherwise provided in the definition of the term "Interest Period" with respect to Eurodollar Rate 42 -35- Loans, whenever a payment hereunder or under any of the other Loan Documents becomes due on a day that is not a Business Day, the due date for such payment shall be extended to the next succeeding Business Day, and interest shall accrue during such extension. The outstanding amount of the Loans as reflected on the Records from time to time shall be considered correct and binding on the Borrower unless within five (5) Business Days after receipt by the Borrower of any notice from the Agent or any of the Lenders of such outstanding amount, the Agent or such Lender shall receive notice from the Borrower to the contrary. Section 5.5. INABILITY TO DETERMINE EURODOLLAR RATE. In the event, prior to the commencement of any Interest Period relating to any Eurodollar Rate Loan, the Agent shall determine that adequate and reasonable methods do not exist for ascertaining the Eurodollar Rate that would otherwise determine the rate of interest to be applicable to any Eurodollar Rate Loan during any Interest Period, the Agent shall forthwith give notice of such determination (which shall be conclusive and binding on the Borrower and the Lenders) to the Borrower and the Lenders. In such event (a) any Loan Request or Conversion Request with respect to Eurodollar Rate Loans shall be automatically withdrawn and shall be deemed a request for Base Rate Loans, (b) each Eurodollar Rate Loan will automatically, on the last day of the then current Interest Period relating thereto, become a Base Rate Loan, and (c) the obligations of the Lenders to make Eurodollar Rate Loans shall be suspended until the Agent determines that the circumstances giving rise to such suspension no longer exist, whereupon the Agent shall so notify the Borrower and the Lenders. Section 5.6. ILLEGALITY. Notwithstanding any other provisions herein, if any present or future law, regulation, treaty or directive or the interpretation or application thereof shall make it unlawful for any Lender to make or maintain Eurodollar Rate Loans, such Lender shall forthwith give notice of such circumstances to the Borrower and the other Lenders and thereupon (a) the commitment of such Lender to make Eurodollar Rate Loans or convert Base Rate Loans to Eurodollar Rate Loans shall forthwith be suspended and (b) such Lender's Loans then outstanding as Eurodollar Rate Loans, if any, shall be converted automatically to Base Rate Loans on the last day of each Interest Period applicable to such Eurodollar Rate Loans or within such earlier period as may be required by law. The Borrower hereby agrees promptly to pay the Agent for the account of such Lender, upon demand by such Lender, any additional amounts necessary to compensate such Lender for any costs incurred by such Lender in making any conversion in accordance with this Section 5.6, including any interest or fees payable by such Lender to lenders of funds obtained by it in order to make or maintain its Eurodollar Loans hereunder. Section 5.7. ADDITIONAL COSTS, ETC. If any present or future applicable law, which expression, as used herein, includes statutes, rules and regulations thereunder and interpretations thereof by any competent court or by any governmental or other regulatory body or official charged with the administration or the interpretation thereof and requests, directives, instructions and notices at any time or from time to 43 -36- time hereafter made upon or otherwise issued to any Lender or the Agent by any central bank or other fiscal, monetary or other authority (whether or not having the force of law), shall: (a) subject any Lender or the Agent to any tax, levy, impost, duty, charge, fee, deduction or withholding of any nature with respect to this Credit Agreement, the other Loan Documents, any Letters of Credit, such Lender's Commitment or the Loans (other than taxes based upon or measured by the income or profits of such Lender or the Agent), or (b) materially change the basis of taxation (except for changes in taxes on income or profits) of payments to any Lender of the principal of or the interest on any Loans or any other amounts payable to any Lender or the Agent under this Credit Agreement or any of the other Loan Documents, or (c) impose or increase or render applicable (other than to the extent specifically provided for elsewhere in this Credit Agreement) any special deposit, reserve, assessment, liquidity, capital adequacy or other similar requirements (whether or not having the force of law) against assets held by, or deposits in or for the account of, or loans by, or letters of credit issued by, or commitments of an office of any Lender, or (d) impose on any Lender or the Agent any other conditions or requirements with respect to this Credit Agreement, the other Loan Documents, any Letters of Credit, the Loans, such Lender's Commitment, or any class of loans, letters of credit or commitments of which any of the Loans or such Lender's Commitment forms a part, and the result of any of the foregoing is (i) to increase the cost to any Lender of making, funding, issuing, renewing, extending or maintaining any of the Loans or such Lender's Commitment or any Letter of Credit, or (ii) to reduce the amount of principal, interest, Reimbursement Obligation or other amount payable to such Lender or the Agent hereunder on account of such Lender's Commitment, any Letter of Credit or any of the Loans, or (iii) to require such Lender or the Agent to make any payment or to forego any interest or Reimbursement Obligation or other sum payable hereunder, the amount of which payment or foregone interest or Reimbursement Obligation or other sum is calculated by reference to the gross amount of any sum receivable or deemed received by such Lender or the Agent from the Borrower hereunder, then, and in each such case, the Borrower will, upon demand made by such Lender or (as the case may be) the Agent pursuant to a certificate as set forth in Section 5.9 hereof, at any time and from time to time and as often as the occasion therefor may 44 -37- arise, pay to such Lender or the Agent such additional amounts as will be sufficient to compensate such Lender or the Agent for such additional cost, reduction, payment or foregone interest or Reimbursement Obligation or other sum. Section 5.8. CAPITAL ADEQUACY. If after the date hereof any Lender or the Agent determines that (a) the adoption of or change in any law, governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) regarding capital requirements for banks or bank holding companies or any change in the interpretation or application thereof by a court or governmental authority with appropriate jurisdiction, or (b) compliance by such Lender or the Agent or any corporation controlling such Lender or the Agent with any law, governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) of any such entity regarding capital adequacy, has the effect of reducing the return on such Lender's or the Agent's commitment with respect to any Loans to a level below that which such Lender or the Agent could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or the Agent's then existing policies with respect to capital adequacy and assuming full utilization of such entity's capital) by any amount deemed by such Lender or (as the case may be) the Agent to be material, then such Lender or the Agent may notify the Borrower of such fact. To the extent that the amount of such reduction in the return on capital is not reflected in the Base Rate, the Borrower agrees to pay such Lender or (as the case may be) the Agent for the amount of such reduction in the return on capital as and when such reduction is determined upon presentation by such Lender or (as the case may be) the Agent of a certificate in accordance with Section 5.9 hereof. Each Lender shall allocate such cost increases among its customers in good faith and on an equitable basis. Section 5.9. CERTIFICATE. A certificate setting forth in reasonable detail the calculation and basis for any additional amounts payable pursuant to Sections 5.7 or 5.8 and a brief explanation of such amounts which are due, submitted by any Lender or the Agent to the Borrower, shall be conclusive, absent manifest error, that such amounts are due and owing. Section 5.10. INDEMNITY. The Borrower agrees to indemnify each Lender and to hold each Lender harmless from and against any loss, cost or expense (including loss of anticipated profits) that such Lender may sustain or incur as a consequence of (a) default by the Borrower in payment of the principal amount of or any interest on any Eurodollar Rate Loans as and when due and payable, including any such loss or expense arising from interest or fees payable by such Lender to lenders of funds obtained by it in order to maintain its Eurodollar Rate Loans, (b) default by the Borrower in making a borrowing or conversion after the Borrower has given (or is deemed to have given) a Loan Request or a Conversion Request relating thereto in accordance with Section 2.6 or Section 2.7 or (c) the making of any payment of a Eurodollar Rate Loan or the making of any conversion of any such Loan to a Base Rate Loan on a day that is not the last day of the applicable Interest Period with respect thereto, including interest or fees payable by such Lender to lenders of funds obtained by it in order to maintain any such Loans. 45 -38- Section 5.11. INTEREST AFTER DEFAULT. During the continuance of a Default or an Event of Default the principal of the Loans shall, until such Default or Event of Default has been cured or remedied or such Default or Event of Default has been waived by the Majority Lenders pursuant to Section 26, bear interest at a rate per annum equal to the greater of (a) two percent (2%) above the rate of interest otherwise applicable to such Loans pursuant to Section 2.5 and (b) three percent (3%) above the Base Rate. Section 6. COLLATERAL SECURITY. The Obligations shall be secured by a perfected first priority security interest (subject only to Permitted Liens entitled to priority under applicable law) in all of the assets of the Borrower and its Subsidiaries, whether now owned or hereafter acquired, pursuant to the terms of the Security Documents to which the Borrower or such Subsidiary is a party, but excluding retail store leases. Section 7. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Lenders and the Agent as follows: Section 7.1. CORPORATE AUTHORITY. (a) Incorporation; Good Standing. Each of the Borrower and its Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, (ii) has all requisite corporate power to own its property and conduct its business as now conducted and as presently contemplated, and (iii) is in good standing as a foreign corporation and is duly authorized to do business in each jurisdiction where such qualification is necessary except where a failure to be so qualified would not have a materially adverse effect on the business, assets or financial condition of the Borrower or such Subsidiary. (b) Authorization. The execution, delivery and performance of this Credit Agreement and the other Loan Documents to which the Borrower or any of its Subsidiaries is or is to become a party and the transactions contemplated hereby and thereby (i) are within the corporate authority of such Person, (ii) have been duly authorized by all necessary corporate proceedings, (iii) do not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which the Borrower or any of its Subsidiaries is subject or any judgment, order, writ, injunction, license or permit applicable to the Borrower or any of its Subsidiaries and (iv) do not conflict with any provision of the corporate charter or bylaws of, or any agreement or other instrument binding upon, the Borrower or any of its Subsidiaries. (c) Enforceability. The execution and delivery of this Credit Agreement and the other Loan Documents to which the Borrower or any of its Subsidiaries is or is to become a party will result in valid and legally binding obligations of such Person enforceable against it in accordance with the respective terms and provisions 46 -39- hereof and thereof, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors' rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. Section 7.2. GOVERNMENTAL APPROVALS. The execution, delivery and performance by the Borrower and any of its Subsidiaries of this Credit Agreement and the other Loan Documents to which the Borrower or any of its Subsidiaries is or is to become a party and the transactions contemplated hereby and thereby do not require the approval or consent of, or filing with, any governmental agency or authority other than those already obtained. Section 7.3. TITLE TO PROPERTIES; LEASES. Except as indicated on Schedule 7.3 hereto, the Borrower and its Subsidiaries own all of the assets reflected in the consolidated balance sheet of the Borrower and its Subsidiaries as at the Balance Sheet Date or acquired since that date, including, without limitation, the Accounts Receivable which are to be purchased in connection with the termination of the Receivables Securitization Facility (except property and assets sold or otherwise disposed of in the ordinary course of business since that date), subject to no rights of others, including any mortgages, leases, conditional sales agreements, title retention agreements, liens or other encumbrances except Permitted Liens. Section 7.4. FINANCIAL STATEMENTS AND PROJECTIONS. (a) Financial Statements. (i) There has been furnished to the Lenders a balance sheet of the Borrower as at the Balance Sheet Date, and a statement of income of the Borrower for the fiscal year then ended, certified by the Borrower's independent certified public accountants. Such balance sheet and statement of income have been prepared in accordance with generally accepted accounting principles and fairly present the financial condition of the Borrower as at the close of business on the date thereof and the results of operations for the fiscal year then ended. Except as set forth in Schedule 7.7 hereto and except for obligations under the plans and arrangements disclosed in Schedule 7.16 hereto, there are no contingent liabilities of the Borrower as of such date involving material amounts, known to the officers of the Borrower, which were not disclosed in such balance sheet and the notes related thereto. (ii) There has been furnished to the Lenders a pro forma balance sheet of the Borrower as at the end of the month concluded prior to the Closing Date, as adjusted on a pro forma basis to reflect the transactions contemplated by the Loan Documents and the termination of the Receivables Securitization Facility and other balance sheet adjustments for July and August. Such balance sheet has been prepared in accordance with generally 47 -40- accepted accounting principles and fairly presents the financial condition of the Borrower as at the close of business on the date thereof, as so adjusted on a pro forma basis. (b) Projections. The projections of the annual operating budgets of the Borrower, balance sheets and cash flow statements for the 1997 to 1999 fiscal years, copies of which have been delivered to the Lenders, disclose all assumptions made with respect to general economic, financial and market conditions used in formulating such projections. To the knowledge of the Borrower, no facts exist that (individually or in the aggregate) would result in any material change in any of such projections. The projections are based upon reasonable estimates and assumptions, have been prepared on the basis of the assumptions stated therein and reflect the reasonable estimates of the Borrower of the results of operations and other information projected therein. Section 7.5. NO MATERIAL CHANGES, ETC. Since the Balance Sheet Date there has occurred no materially adverse change in the financial condition or business of the Borrower and its Subsidiaries as shown on or reflected in the balance sheet of the Borrower as at the Balance Sheet Date, or the statement of income for the fiscal year then ended, other than changes in the ordinary course of business that have not had any materially adverse effect either individually or in the aggregate on the business or financial condition of the Borrower and other changes previously disclosed to the Agent relating to the termination of the Receivables Securitization Facility. Since the Balance Sheet Date and prior to the Closing Date, the Borrower has not made any Distribution. Section 7.6. FRANCHISES, PATENTS, COPYRIGHTS, ETC. Each of the Borrower and its Subsidiaries possesses all franchises, patents, copyrights, trademarks, trade names, licenses and permits, and rights in respect of the foregoing, adequate for the conduct of its business substantially as now conducted without known conflict with any rights of others. Section 7.7. LITIGATION. Except as set forth in Schedule 7.7 hereto, there are no actions, suits, proceedings or investigations of any kind pending or threatened against the Borrower or any of its Subsidiaries before any court, tribunal or administrative agency or board that, if adversely determined, might, either in any case or in the aggregate, materially adversely affect the properties, assets, financial condition or business of the Borrower and its Subsidiaries or materially impair the right of the Borrower and its Subsidiaries, considered as a whole, to carry on business substantially as now conducted by them, or result in any substantial liability not adequately covered by insurance, or for which adequate reserves are not maintained on the consolidated balance sheet of the Borrower and its Subsidiaries, or which question the validity of this Credit Agreement or any of the other Loan Documents, or any action taken or to be taken pursuant hereto or thereto. Section 7.8. NO MATERIALLY ADVERSE CONTRACTS, ETC. Neither the Borrower nor any of its Subsidiaries is subject to any charter, corporate or other legal restriction, 48 -41- or any judgment, decree, order, rule or regulation that has or is expected in the future to have a materially adverse effect on the business, assets or financial condition of the Borrower or any of its Subsidiaries. Neither the Borrower nor any of its Subsidiaries is a party to any contract or agreement that has or is expected, in the judgment of the Borrower's officers, to have any materially adverse effect on the business of the Borrower or any of its Subsidiaries. Section 7.9. COMPLIANCE WITH OTHER INSTRUMENTS, LAWS, ETC. Neither the Borrower nor any of its Subsidiaries is in violation of any provision of its charter documents, bylaws, or any agreement or instrument to which it may be subject or by which it or any of its properties may be bound or any decree, order, judgment, statute, license, rule or regulation, in any of the foregoing cases in a manner that could result in the imposition of substantial penalties or materially and adversely affect the financial condition, properties or business of the Borrower or any of its Subsidiaries. Section 7.10. TAX STATUS. The Borrower and its Subsidiaries (a) have made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which any of them is subject, (b) have paid all taxes and other governmental assessments and charges shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and by appropriate proceedings and (c) have set aside on their books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Borrower know of no basis for any such claim. Section 7.11. NO EVENT OF DEFAULT. No Default or Event of Default has occurred and is continuing. Section 7.12. HOLDING COMPANY AND INVESTMENT COMPANY ACTS. Neither the Borrower nor any of its Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935; nor is it an "investment company", or an "affiliated company" or a "principal underwriter" of an "investment company", as such terms are defined in the Investment Company Act of 1940. Section 7.13. ABSENCE OF FINANCING STATEMENTS, ETC. Except with respect to Permitted Liens and financing statements filed in connection with the Receivables Securitization Facility for which releases have been obtained, there is no financing statement, security agreement, chattel mortgage, real estate mortgage or other document filed or recorded with any filing records, registry or other public office, that purports to cover, affect or give notice of any present or possible future lien on, or security interest in, any assets or property of the Borrower or any of its Subsidiaries or any rights relating thereto. 49 -42- Section 7.14. PERFECTION OF SECURITY INTEREST. All filings, assignments, pledges and deposits of documents or instruments have been made and all other actions have been taken that are necessary or advisable, under applicable law, to establish and perfect the Collateral Agent's security interest in the Collateral except for the releases of the financing statements filed in connection with the Receivables Securitization Facility and the financing statements required to be filed to perfect the transfers contemplated by the Termination Agreement, which releases and financing statements have been obtained and delivered to the Collateral Agent. The Collateral and the Collateral Agent's rights with respect to the Collateral are not subject to any setoff, claims, withholdings or other defenses except as provided in the Agency Account Agreements and the bank account agreements entered into with CapMAC (the rights of CapMAC in respect of such bank account agreements have been assigned to the Collateral Agent). The Borrower is the owner of the Collateral free from any lien, security interest, encumbrance and any other claim or demand, except for Permitted Liens. Section 7.15. CERTAIN TRANSACTIONS. Except as set forth on Schedule 7.15 hereto and for arm's length transactions pursuant to which the Borrower or any of its Subsidiaries makes payments in the ordinary course of business upon terms no less favorable than the Borrower or such Subsidiary could obtain from third parties, none of the officers, directors, or employees of the Borrower or any of its Subsidiaries is presently a party to any transaction with the Borrower or any of its Subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Borrower, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. Section 7.16. EMPLOYEE BENEFIT PLANS. (a) In General. Schedule 7.16 sets forth all Employee Benefit Plans of the Borrower. Each Employee Benefit Plan has been maintained and operated in compliance in all material respects with the provisions of ERISA and, to the extent applicable, the Code, including but not limited to the provisions thereunder respecting prohibited transactions. (b) Terminability of Welfare Plans. Under each Employee Benefit Plan which is an employee welfare benefit plan within the meaning of Section 3(1) or Section 3(2)(B) of ERISA, no benefits are due unless the event giving rise to the benefit entitlement occurs prior to plan termination (except as required by Title I, Part 6 of ERISA). The Borrower or an ERISA Affiliate, as appropriate, may terminate each such Plan at any time (or at any time subsequent to the expiration of any applicable bargaining agreement) in the discretion of the Borrower or such ERISA Affiliate without liability to any Person. 50 -43- (c) Guaranteed Pension Plans. Neither the Borrower nor any of its Subsidiaries has any Guaranteed Pension Plans. (d) Multiemployer Plans. Neither the Borrower nor any ERISA Affiliate has incurred any material liability (including secondary liability) to any Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan under Section 4201 of ERISA or as a result of a sale of assets described in Section 4204 of ERISA. Neither the Borrower nor any ERISA Affiliate has been notified that any Multiemployer Plan is in reorganization or insolvent under and within the meaning of Section 4241 or Section 4245 of ERISA or that any Multiemployer Plan intends to terminate or has been terminated under Section 4041A of ERISA. Section 7.17. REGULATIONS U AND X. The proceeds of the Loans shall be used to repay amounts owing under the Receivables Securitization Facility and to finance inventory purchases and for working capital and general corporate purposes. The Borrower will obtain Letters of Credit solely for working capital and general corporate purposes. No portion of any Loan is to be used, and no portion of any Letter of Credit is to be obtained, for the purpose of purchasing or carrying any "margin security" or "margin stock" as such terms are used in Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224. Section 7.18. ENVIRONMENTAL COMPLIANCE. The Borrower has taken all necessary steps to investigate the past and present condition and usage of the Real Estate and the operations conducted thereon and, based upon such diligent investigation, has determined that: (a) none of the Borrower, its Subsidiaries or any operator of the Real Estate or any operations thereon is in violation, or alleged violation, of any judgment, decree, order, law, license, rule or regulation pertaining to environmental matters, including without limitation, those arising under the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or any state or local statute, regulation, ordinance, order or decree relating to health, safety or the environment (hereinafter "Environmental Laws"), which violation would have a material adverse effect on the environment or the business, assets or financial condition of the Borrower or any of its Subsidiaries; (b) neither the Borrower nor any of its Subsidiaries has received notice from any third party including, without limitation, any federal, state or local governmental authority, (i) that any one of them has been identified by the United States Environmental Protection Agency ("EPA") as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B (1986); (ii) that any hazardous waste, as defined by 42 U.S.C. Section 9601(5), any hazardous substances as defined by 42 U.S.C. Section 9601(14), any 51 -44- pollutant or contaminant as defined by 42 U.S.C. Section 9601(33) and any toxic substances, oil or hazardous materials or other chemicals or substances regulated by any Environmental Laws ("Hazardous Substances") which any one of them has generated, transported or disposed of has been found at any site at which a federal, state or local agency or other third party has conducted or has ordered that any Borrower or any of its Subsidiaries conduct a remedial investigation, removal or other response action pursuant to any Environmental Law; or (iii) that it is or shall be a named party to any claim, action, cause of action, complaint, or legal or administrative proceeding (in each case, contingent or otherwise) arising out of any third party's incurrence of costs, expenses, losses or damages of any kind whatsoever in connection with the release of Hazardous Substances; (c) except as set forth on Schedule 7.18 attached hereto: (i) no portion of the Real Estate has been used for the handling, processing, storage or disposal of Hazardous Substances except in accordance with applicable Environmental Laws; and no underground tank or other underground storage receptacle for Hazardous Substances is located on any portion of the Real Estate; (ii) in the course of any activities conducted by the Borrower, its Subsidiaries or operators of its properties, no Hazardous Substances have been generated or are being used on the Real Estate except in accordance with applicable Environmental Laws; (iii) there have been no releases (i.e. any past or present releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, disposing or dumping) or threatened releases of Hazardous Substances on, upon, into or from the properties of the Borrower or its Subsidiaries, which releases would have a material adverse effect on the value of any of the Real Estate or adjacent properties or the environment; (iv) to the best of the Borrower's knowledge, there have been no releases on, upon, from or into any real property in the vicinity of any of the Real Estate which, through soil or groundwater contamination, may have come to be located on, and which would have a material adverse effect on the value of, the Real Estate; and (v) in addition, any Hazardous Substances that have been generated on any of the Real Estate have been transported offsite only by carriers having an identification number issued by the EPA, treated or disposed of only by treatment or disposal facilities maintaining valid permits as required under applicable Environmental Laws, which transporters and facilities have been and are, to the best of the Borrower's knowledge, operating in compliance with such permits and applicable Environmental Laws; and (d) none of the Borrower and its Subsidiaries, any Mortgaged Property or any of the other Real Estate is subject to any applicable environmental law requiring the performance of Hazardous Substances site assessments, or the removal or remediation of Hazardous Substances, or the giving of notice to any governmental agency or the recording or delivery to other Persons of an environmental disclosure document or statement by virtue of the transactions set forth herein and contemplated hereby, or as a condition to the recording of any Mortgage or to the effectiveness of any other transactions contemplated hereby. 52 -45- Section 7.19. SUBSIDIARIES, ETC. The Borrower has no Subsidiaries other than BFC which shall be merged into the Borrower on the Closing Date. Except as set forth on Schedule 7.19 hereto, the Borrower is not engaged in any joint venture or partnership with any other Person. Section 7.20. BANK ACCOUNTS. Schedule 7.20 (as such may be amended from time to time in accordance with Section 9.10 hereof) sets forth the account numbers and location of all bank accounts of the Borrower or any of its Subsidiaries, including the Store Accounts, the Lock-Box Accounts and all accounts with Agency Account Institutions. Section 7.21. ASSET LOCATIONS. Schedule 7.21 (as such may be amended from time to time pursuant to Section 8.4(h)) sets forth all locations at which assets, including inventory, of the Borrower are located. Section 8. AFFIRMATIVE COVENANTS OF THE BORROWER. The Borrower covenants and agrees that, so long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit or Note is outstanding or any Lender has any obligation to make any Loans or the Agent has any obligation to issue, extend or renew any Letters of Credit: Section 8.1. PUNCTUAL PAYMENT. The Borrower will duly and punctually pay or cause to be paid the principal and interest on the Loans, all Reimbursement Obligations, the Letter of Credit Fees, the commitment fees, the Agent's fee, the Collateral Agent's fee and all other amounts provided for in this Credit Agreement and the other Loan Documents to which the Borrower or any of its Subsidiaries is a party, all in accordance with the terms of this Credit Agreement and such other Loan Documents. Section 8.2. MAINTENANCE OF OFFICE. The Borrower will maintain its chief executive office in 111 West Lemon Avenue, Monrovia, CA 91016, or at such other place in the United States of America as the Borrower shall designate upon written notice to the Agent, where notices, presentations and demands to or upon the Borrower in respect of the Loan Documents to which the Borrower is a party may be given or made. Section 8.3. RECORDS AND ACCOUNTS. The Borrower will (a) keep, and cause each of its Subsidiaries to keep, true and accurate records and books of account in which full, true and correct entries will be made in accordance with generally accepted accounting principles and (b) maintain adequate accounts and reserves for all taxes (including income taxes), depreciation, depletion, obsolescence and amortization of its properties and the properties of its Subsidiaries, contingencies, uncollectible Accounts Receivable and other reserves. Section 8.4. FINANCIAL STATEMENTS, CERTIFICATES AND INFORMATION. The Borrower will deliver to each of the Lenders: 53 -46- (a) as soon as practicable, but in any event not later than one hundred (100) days after the end of each fiscal year of the Borrower, the consolidated balance sheet of the Borrower and its Subsidiaries and the consolidating balance sheet of the Borrower and its Subsidiaries, each as at the end of such year, and the related consolidated statement of income and consolidated statement of cash flow and consolidating statement of income and consolidating statement of cash flow for such year, each setting forth in comparative form the figures for the previous fiscal year and all such consolidated and consolidating statements to be in reasonable detail and prepared (i) in accordance with generally accepted accounting principles, (ii) in accordance with generally accepted accounting principles as adjusted in clause (a) of the definition of generally accepted accounting principles and (iii) so as to reconcile the two generally accepted accounting principles definition, and such consolidated statements to be certified without qualification as to the accounting principles followed by the Borrower and its Subsidiaries being not in accordance with generally accepted accounting principles and scope limitations imposed by the Borrower or its Subsidiaries by the Borrower's accountants or by other independent certified public accountants satisfactory to the Agent, together with a written statement from such accountants to the effect that they have read a copy of this Credit Agreement, and that, in making the examination necessary to said certification, they have obtained no knowledge of any Default or Event of Default, or, if such accountants shall have obtained knowledge of any then existing Default or Event of Default they shall disclose in such statement any such Default or Event of Default; provided that such accountants shall not be liable to the Lenders for failure to obtain knowledge of any Default or Event of Default; (b) as soon as practicable, but in any event not later than fifty (50) days after the end of each of the first three (3) fiscal quarters of the Borrower, copies of the unaudited consolidated balance sheet of the Borrower and its Subsidiaries and the unaudited consolidating balance sheet of the Borrower and its Subsidiaries, each as at the end of such quarter, and the related consolidated statement of income and consolidated statement of cash flow and consolidating statement of income and consolidating statement of cash flow for the portion of the Borrower's fiscal year then elapsed, all in reasonable detail and prepared (i) in accordance with generally accepted accounting principles, (ii) in accordance with generally accepted accounting principles as adjusted in clause (a) of the definition of generally accepted accounting principles and (iii) so as to reconcile the two generally accepted accounting principles definitions, together with a certification by the principal financial or accounting officer of the Borrower that the information contained in such financial statements fairly presents the financial position of the Borrower and its Subsidiaries on the date thereof (subject to year-end adjustments); (c) as soon as practicable, but in any event within thirty (30) days after the end of each month in each fiscal year of the Borrower, unaudited monthly consolidated financial statements of the Borrower and its Subsidiaries for such month and unaudited monthly consolidating financial statements of the Borrower and its Subsidiaries for such month, each prepared in accordance with generally accepted accounting principles as adjusted in clause (a) of the definition of generally 54 -47- accepted accounting principles, together with a certification by the principal financial or accounting officer of the Borrower that the information contained in such financial statements fairly presents the financial condition of the Borrower and its Subsidiaries on the date thereof (subject to year-end adjustments); (d) simultaneously with the delivery of the financial statements referred to in subsections (a) and (b) above, a statement certified by the principal financial or accounting officer of the Borrower in substantially the form of Exhibit I hereto (a "Compliance Certificate") and setting forth in reasonable detail computations evidencing compliance with the covenants contained in Section 10 and (if applicable) reconciliations to reflect changes in generally accepted accounting principles since the Balance Sheet Date; (e) contemporaneously with the filing or mailing thereof, copies of all material of a financial nature filed with the Securities and Exchange Commission or sent to the stockholders of the Borrower; (f) (i) within three (3) Business Days after the end of each calendar week or at such earlier time as the Agent may reasonably request, a Borrowing Base Report setting forth the Borrowing Base with respect to Eligible Accounts Receivable as at the end of such calendar week or other date so requested by the Agent (subject to monthly adjustments for returns and bad debt) and (ii) within fifteen (15) days after the end of each calendar month or, if the Agent so requests, in its sole discretion, within three (3) Business Days after the end of each calendar week, or at such earlier time as the Agent may reasonably request, a Borrowing Base Report setting forth the Borrowing Base with respect to Eligible Inventory and setting forth calculations of the Return Rate, the Charge Off Reserve, the Net Charge Off Percentage and the Roll Rate Percentage; (g) within fifteen (15) days after the end of each calendar month, (i) an Accounts Receivable aging report as at the end of such calendar month substantially in the form of Exhibit M hereto and including, without limitation, the Borrower's AR 06040 Report, and (ii) an inventory report by location of inventory, in form and substance satisfactory to the Agent; (h) prior to the opening by the Borrower of any new retail store at which Eligible Inventory is to be located and, in addition, together with the delivery of each Compliance Certificate, a supplement to Schedule 7.21 listing any additions to the list of retail stores of the Borrower located in the United States, which supplement, together with Schedule 7.21 hereto and any prior supplements, shall be deemed to constitute Schedule 7.21 for all purposes of this Credit Agreement and the Borrower shall take all actions necessary or advisable, under applicable law, to establish and perfect the Collateral Agent's security interest in the Collateral located or to be located at such retail store, including, without limitation, the filing of appropriate Uniform Commercial Code financing statements or other applicable documents showing the Borrower as debtor and the Collateral Agent as secured 55 -48- party in the proper filing office or offices; a copy of such supplement shall also be delivered to the Agent's Special Counsel; (i) as soon as is practicable and in any event within thirty (30) days after the end of each fiscal year of the Borrower, the Borrower shall deliver and make itself available to discuss its financial projections, including all material modifications thereto made since the last date such financial projections were delivered; (j) on June 15 of each year, the opinion of counsel required by Section 10.02(b) of the Indenture, addressed to and for the benefit of each of the Lenders, the Agent and the Collateral Agent; and (k) from time to time such other financial data and information (including accountants' management letters) as the Agent or any Lender may reasonably request. Section 8.5. NOTICES. (a) Defaults. Upon knowledge thereof, the Borrower will promptly notify the Agent and each of the Lenders in writing of the occurrence of any Default or Event of Default. If any Person shall give any notice or take any other action in respect of a claimed default (whether or not constituting an Event of Default) under this Credit Agreement, the Indenture, the Debentures, or any other note, indenture or evidence of indebtedness or other obligation in an aggregate amount in excess of $500,000 to which or with respect to which the Borrower or any of its Subsidiaries is a party or obligor, whether as principal, guarantor, surety or otherwise, the Borrower shall forthwith give written notice thereof to the Agent and each of the Lenders, describing the notice or action and the nature of the claimed default. (b) Environmental Events. The Borrower will promptly give notice to the Agent and each of the Lenders (a) of any violation of any Environmental Law that the Borrower or any of its Subsidiaries reports in writing or is reportable by such Person in writing (or for which any written report supplemental to any oral report is made) to any federal, state or local environmental agency and (b) upon becoming aware thereof, of any inquiry, proceeding, investigation, or other action under or with respect to any Environmental Law, including a notice from any agency of potential environmental liability, or any federal, state or local environmental agency or board, that has the potential to materially affect the assets, liabilities, financial conditions or operations of the Borrower or any of its Subsidiaries, or the Collateral Agent's mortgages, deeds of trust or security interests pursuant to the Security Documents. (c) Notification of Claim against Collateral. The Borrower will, immediately upon becoming aware thereof, notify the Collateral Agent, the Agent and each of the Lenders in writing of any setoff, claims (including, with respect to the Real Estate, environmental claims), withholdings or other defenses to which any 56 -49- of the Collateral, or the Collateral Agent's rights with respect to the Collateral, are subject if such amounts exceed the aggregate amount of $500,000 at any one time. (d) Notice of Litigation and Judgments. The Borrower will, and will cause each of its Subsidiaries to, give notice to the Agent and each of the Lenders in writing within fifteen (15) days of becoming aware of any litigation or proceedings threatened in writing or any pending litigation and proceedings affecting the Borrower or any of its Subsidiaries or to which the Borrower or any of its Subsidiaries is or becomes a party involving an uninsured claim against the Borrower or any of its Subsidiaries that could reasonably be expected to have a materially adverse effect on the Borrower or any of its Subsidiaries and stating the nature and status of such litigation or proceedings. The Borrower will, and will cause each of its Subsidiaries to, give notice to the Agent and each of the Lenders, in writing, in form and detail satisfactory to the Agent, within ten (10) days of any judgment not covered by insurance, final or otherwise, against the Borrower or any of its Subsidiaries in an amount in excess of $500,000. Section 8.6. CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES. The Borrower will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights and franchises and those of its Subsidiaries. It (a) will cause all of its properties and those of its Subsidiaries used or useful in the conduct of its business or the business of its Subsidiaries to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment, (b) will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Borrower may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times, and (c) will, and will cause each of its Subsidiaries to, continue to engage primarily in the businesses now conducted by them and in related businesses; provided that nothing in this Section 8.6 shall prevent the Borrower from discontinuing the operation and maintenance of a non-material portion of its properties or franchises or any of those of its Subsidiaries or the corporate existence and rights of its Subsidiaries if such discontinuance is, in the judgment of the Borrower, desirable in the conduct of its or their business and that do not in the aggregate materially adversely affect the business of the Borrower and its Subsidiaries on a consolidated basis. Section 8.7. INSURANCE. (a) The Borrower will, and will cause each of its Subsidiaries to, maintain with financially sound and reputable insurers insurance with respect to its properties and business against such casualties and contingencies as shall be in accordance with the general practices of businesses engaged in similar activities in similar geographic areas and in amounts, containing such terms, in such forms and for such periods as may be reasonable and prudent and in accordance with the terms of the Security Agreement and appropriate and reasonable in the Agent's discretion; provided, however, that the Borrower shall have fifteen (15) days after notice from the Agent that its insurance does not comply with the foregoing 57 -50- provision to obtain such insurance. The Borrower will, and will cause each of its Subsidiaries to, maintain insurance on the Mortgaged Properties in accordance with the terms of the Mortgages. (b) Contemporaneously with the execution of this Credit Agreement, and within fifteen (15) days of any date when any additional or replacement insurance coverage is obtained, the Borrower shall deliver to the Agent true copies of certificates of insurance with respect to such additional insurance or replacement policies and, upon request and to the extent not previously delivered to the Agent, copies of the original insurance policies evidencing such additional or replacement insurance, which certificates and policies (i) in the case of property and casualty policies, shall contain an endorsement or rider naming the Collateral Agent as a mortgagee, loss payee and additional insured, and (ii) in the case of liability policies, shall contain an endorsement or rider naming the Collateral Agent as an additional insured, with each such policy providing that such insurance shall not be canceled or amended without ten (10) days prior written notice to the Collateral Agent and the Agent. Section 8.8. TAXES. The Borrower will, and will cause each of its Subsidiaries to, duly pay and discharge, or cause to be paid and discharged, before the same shall become overdue, all taxes, assessments and other governmental charges imposed upon it and its real properties, sales and activities, or any part thereof, or upon the income or profits therefrom, as well as all claims for labor, materials, or supplies that if unpaid might by law become a lien or charge upon any of its property; provided that any such tax, assessment, charge, levy or claim need not be paid if the validity or amount thereof shall currently be contested in good faith by appropriate proceedings and if the Borrower or such Subsidiary shall have set aside on its books adequate reserves with respect thereto; and provided further that the Borrower and each Subsidiary of the Borrower will pay all such taxes, assessments, charges, levies or claims forthwith upon the commencement of proceedings to foreclose any lien that may have attached as security therefor. Section 8.9. INSPECTION OF PROPERTIES AND BOOKS, ETC. (a) General. The Borrower shall permit the Agent, through its designated representatives, to visit and inspect any of the properties of the Borrower or any of its Subsidiaries, to examine the books of account of the Borrower and its Subsidiaries (and to make copies thereof and extracts therefrom), and to discuss the affairs, finances and accounts of the Borrower and its Subsidiaries with, and to be advised as to the same by, its and their officers, all at such reasonable times and intervals as the Agent or any Lender may reasonably request. (b) Collateral Reports. Upon the request of the Agent, the Borrower will cause to be delivered to the Agent a report of an independent collateral auditor or appraiser satisfactory to the Agent (which may be affiliated with one of the Lenders) with respect to the Accounts Receivable and inventory components included in the Borrowing Base, which report shall indicate whether or not the information set 58 -51- forth in the Borrowing Base Report most recently delivered is accurate and complete in all material respects based upon a review by such auditors or appraisers of the Accounts Receivable (including verification with respect to the amount, aging, identity and credit of the respective account debtors and the billing practices of the Borrower or its applicable Subsidiary) and inventory (including verification as to the value, location and respective types). All such collateral value reports shall be conducted and made at the expense of the Borrower. (c) Communications with Accountants. The Borrower authorizes the Agent and, if accompanied by the Agent, the Lenders to communicate directly with the Borrower's independent certified public accountants and authorizes such accountants to disclose to the Agent and the Lenders any and all financial statements and other supporting financial documents and schedules including copies of any management letter with respect to the business, financial condition and other affairs of the Borrower or any of its Subsidiaries. At the request of the Agent, the Borrower shall deliver a letter addressed to such accountants instructing them to comply with the provisions of this Section 8.9(c). Section 8.10. COMPLIANCE WITH LAWS, CONTRACTS, LICENSES, AND PERMITS. The Borrower will, and will cause each of its Subsidiaries to, comply with (a) the applicable laws and regulations wherever its business is conducted, including all Environmental Laws (unless the failure to so comply would not have a material adverse effect on the business or financial condition of the Borrower or such Subsidiary), (b) the provisions of its charter documents and by-laws, (c) all agreements and instruments by which it or any of its properties may be bound (unless the failure to so comply would not have a material adverse effect on the business or financial condition of the Borrower or such Subsidiary), and (d) all applicable decrees, orders, and judgments. If any authorization, consent, approval, permit or license from any officer, agency or instrumentality of any government shall become necessary or required in order that the Borrower or any of its Subsidiaries may fulfill any of its obligations hereunder or any of the other Loan Documents to which the Borrower or such Subsidiary is a party, the Borrower will, or (as the case may be) will cause such Subsidiary to, immediately take or cause to be taken all reasonable steps within the power of the Borrower or such Subsidiary to obtain such authorization, consent, approval, permit or license and furnish the Agent and the Lenders with evidence thereof. Section 8.11. EMPLOYEE BENEFIT PLANS. The Borrower will (i) promptly upon filing the same with the Department of Labor or Internal Revenue Service, furnish to the Agent a copy of the most recent actuarial statement required to be submitted under Section 103(d) of ERISA and Annual Report, Form 5500, with all required attachments, in respect of each Guaranteed Pension Plan; provided, however, that the Borrower shall have five days after receipt of notice of failure to comply with the foregoing provision to furnish to the Agent a copy of such statement and (ii) promptly upon receipt or dispatch, furnish to the Agent any notice, report or demand sent or received in respect of a Guaranteed Pension Plan under Sections 302, 59 -52- 4041, 4042, 4043, 4063, 4065, 4066 and 4068 of ERISA, or in respect of a Multiemployer Plan, under Sections 4041A, 4202, 4219, 4242, or 4245 of ERISA. Section 8.12. USE OF PROCEEDS. The Borrower will use the proceeds of the Loans solely to repay, on the Closing Date, amounts owing under the Receivables Securitization Facility and thereafter to finance inventory purchases and for general corporate and working capital purposes. The Borrower will obtain Letters of Credit solely for working capital and general corporate purposes. Section 8.13. ADDITIONAL MORTGAGED PROPERTY. If, after the Closing Date, the Borrower or any of its Subsidiaries acquires or leases for a term in excess of five (5) years real estate used as a manufacturing or warehouse facility, the Borrower shall, or shall cause such Subsidiary to, forthwith deliver to the Collateral Agent a fully executed mortgage or deed of trust over such real estate, in form and substance satisfactory to the Collateral Agent, together with title insurance policies, surveys, evidences of insurances with the Collateral Agent named as loss payee and additional insured, legal opinions and other documents and certificates with respect to such real estate as was required for Real Estate of the Borrower or such Subsidiary as of the Closing Date. The Borrower further agrees that, following the taking of such actions with respect to such real estate, the Agent shall have for the benefit of the Lenders, the Collateral Agent, the holders of the Debentures and the Trustee a valid and enforceable first priority mortgage or deed of trust over the Borrower's interest in such real estate, free and clear of all defects and encumbrances except for Permitted Liens. Section 8.14. BANK ACCOUNTS. (a) On or prior to the Closing Date, the Borrower will, and will cause each of its Subsidiaries to, (i) establish the FNBB Concentration Account, (ii) cause all proceeds from the sale of inventory and other amounts obtained by the Borrower to be deposited into the Store Accounts, (iii) direct all depository institutions with Store Accounts to cause all funds held in such Store Accounts to be transferred daily to, and only to the FNBB Concentration Account, (iv) direct all Agency Account Institutions (other than FNBB) to cause all funds of the Borrower and its Subsidiaries held in such Agency Account Institutions to be transferred daily to, and only to, the FNBB Concentration Account or such other location as the Agent shall designate, (v) direct all Lock-Box Banks to cause all funds sent to such Lock-Box Accounts to be transferred daily to and only to, the FNBB Concentration Account and (vi) at all times ensure that, within one (1) Business Day following the Borrower's receipt of any cash or cash equivalents or any other cash proceeds of Collateral, all such amounts shall have been deposited in the FNBB Concentration Account. (b) As soon as practicable but in any event no later than one hundred twenty (120) days after the Closing Date, the Borrower will, and will cause each of its Subsidiaries to, terminate all agency agreements to which CapMAC is a party and obtain Agency Account Agreements from each depository institution which was 60 -53- the agent under such agency agreements and ensure that within such period, all Agency Account Institutions shall have entered into an Agency Account Agreement. (c) Within sixty (60) days of notice from the Agent, which notice shall be given in the sole discretion of the Agent, the Borrower will, and will cause each of its Subsidiaries to, obtain Agency Account Agreements from those depository institutions at which a Store Account is located which have not yet executed Agency Account Agreements. (d) The Borrower hereby agrees that all amounts belonging to the Borrower and received by the Agent in the FNBB Concentration Account will be the sole and exclusive property of the Collateral Agent for the accounts of the Lenders and the holders of the Debentures to be applied in accordance with (i) Section 3.2(c) and (ii) Section 3.3 after the occurrence and during the continuance of a Default or an Event of Default. Section 8.15. INVENTORY RESTRICTIONS. The Borrower shall cause all Eligible Inventory to be located at all times solely at Permitted Inventory Locations, and to be sold or otherwise disposed of in the ordinary course of the Borrower's business, consistent with past practices or as required pursuant to the terms of this Credit Agreement. Section 8.16. FURTHER ASSURANCES. The Borrower will, and will cause each of its Subsidiaries to, cooperate with the Lenders and the Agent and execute such further instruments and documents as the Lenders or the Agent shall reasonably request to carry out to their satisfaction the transactions contemplated by this Credit Agreement and the other Loan Documents. Section 8.17. CASH TRANSFER AGREEMENT. The Borrower shall keep in full force and effect an agreement, in form and substance satisfactory to the Lenders and the Agent, with FNBB authorizing FNBB to transfer funds on multiple occasions from all or any of the Store Accounts to the FNBB Concentration Account. Section 8.18. INTEREST RATE PROTECTION. Within twenty-five (25) days of the Closing Date, the Borrower will enter into arrangements in form and substance satisfactory to the Agent to protect the Borrower against interest rate increases applicable to not less than $35,000,000 (the "Interest Rate Protection Arrangements") which shall be maintained in full force and effect in one-year increments for a total period of at least two (2) years. Section 9. CERTAIN NEGATIVE COVENANTS OF THE BORROWER. The Borrower covenants and agrees that, so long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit or Note is outstanding or any Lender has any obligation to make any Loans or the Agent has any obligations to issue, extend or renew any Letters of Credit: 61 -54- Section 9.1. RESTRICTIONS ON INDEBTEDNESS. The Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume, guarantee or be or remain liable, contingently or otherwise, with respect to any Indebtedness other than: (a) Indebtedness to the Lenders and the Agent arising under any of the Loan Documents; (b) current liabilities of the Borrower or such Subsidiary incurred in the ordinary course of business not incurred through (i) the borrowing of money, or (ii) the obtaining of credit except for credit on an open account basis customarily extended and in fact extended in connection with normal purchases of goods and services; (c) Indebtedness in respect of taxes, assessments, governmental charges or levies and claims for labor, materials and supplies to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of Section 8.8; (d) Indebtedness in respect of judgments or awards that have been in force for less than the applicable period for taking an appeal so long as execution is not levied thereunder or in respect of which the Borrower or such Subsidiary shall at the time in good faith be prosecuting an appeal or proceedings for review and in respect of which a stay of execution shall have been obtained pending such appeal or review; (e) endorsements for collection, deposit or negotiation and warranties of products or services, in each case incurred in the ordinary course of business; (f) Indebtedness evidenced by the Debentures or any refinancing on terms and conditions (including, without limitation, subordination provisions) satisfactory to the Agent and the Lenders; (g) Rental Obligations; (h) Indebtedness incurred in connection with the acquisition after the Closing Date of any real or personal property by the Borrower or such Subsidiary, and obligations under Capitalized Leases; provided that the aggregate principal amount of such Indebtedness and obligations of the Borrower and its Subsidiaries shall not exceed the aggregate amount of $2,500,000 outstanding at any one time; (i) Indebtedness owed by the Borrower to trade vendors, in the amount of the cost to the Borrower of inventory on consignment from such trade vendors; (j) Indebtedness existing on the date hereof and listed and described on Schedule 9.1 hereto; 62 -55- (k) Indebtedness of the Borrower to any of the Lenders with respect to the Interest Rate Protection Arrangements; and (l) other Indebtedness not to exceed $500,000 in the aggregate at any one time. Section 9.2. RESTRICTIONS ON LIENS. The Borrower will not, and will not permit any of its Subsidiaries to, (a) create or incur or suffer to be created or incurred or to exist any lien, encumbrance, mortgage, pledge, charge, restriction or other security interest of any kind upon any of its property or assets of any character whether now owned or hereafter acquired, or upon the income or profits therefrom; (b) transfer any of such property or assets or the income or profits therefrom for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to payment of its general creditors; (c) acquire, or agree or have an option to acquire, any property or assets upon conditional sale or other title retention or purchase money security agreement, device or arrangement; (d) suffer to exist for a period of more than thirty (30) days after the same shall have been incurred any Indebtedness or claim or demand against it that if unpaid might by law or upon bankruptcy or insolvency, or otherwise, be given any priority whatsoever over its general creditors; or (e) sell, assign, pledge or otherwise transfer any accounts, contract rights, general intangibles, chattel paper or instruments, with or without recourse; provided that the Borrower and any Subsidiary of the Borrower may create or incur or suffer to be created or incurred or to exist: (i) liens in favor of the Borrower on all or part of the assets of Subsidiaries of the Borrower securing Indebtedness owing by Subsidiaries of the Borrower to the Borrower; (ii) (A) liens or claims or demands to secure or with respect to taxes, assessments and other government charges in respect of obligations (1) not overdue or (2) contested in good faith, and with respect to which adequate reserves (in accordance with generally accepted accounting principles) have been set aside for the payment thereof on the books and records of the Borrower, so long as proceedings to enforce such liens, have not been commenced, or (B) liens or claims or demands on properties relating to labor, material or supplies in respect of obligations not overdue; (iii) deposits or pledges made in connection with, or to secure payment of, utilities, workmen's compensation, unemployment insurance, old age pensions or other social security obligations; (iv) liens on properties other than Mortgaged Properties in respect of judgments or awards, the Indebtedness with respect to which is permitted by Section 9.1(d); (v) liens of carriers, warehousemen, mechanics and materialmen, and other like liens on properties other than Mortgaged Properties, in 63 -56- existence less than 120 days from the date of creation thereof in respect of obligations not overdue; (vi) encumbrances on Real Estate other than the Mortgaged Property consisting of easements, rights of way, zoning restrictions, restrictions on the use of real property and defects and irregularities in the title thereto, landlord's or lessor's liens under leases to which the Borrower or a Subsidiary of the Borrower is a party, and other minor liens or encumbrances none of which in the opinion of the Borrower interferes materially with the use of the property affected in the ordinary conduct of the business of the Borrower and its Subsidiaries, which defects do not individually or in the aggregate have a materially adverse effect on the business of the Borrower individually or of the Borrower and its Subsidiaries on a consolidated basis; (vii) liens existing on the date hereof and listed on Schedule 9.2 hereto; (viii) liens on real or personal property other than Mortgaged Properties acquired after the Closing Date pertaining to the type and amount of Indebtedness permitted by Section 9.1(h), incurred in connection with the acquisition or lease of such property, which security interests or mortgages cover only the real or personal property so acquired or leased; (ix) liens and encumbrances on each Mortgaged Property as and to the extent permitted by the Mortgage applicable thereto; (x) liens on inventory and proceeds thereof (up to the cost to the Borrower of such inventory) held on consignment from trade vendors securing obligations to return or pay the purchase price of such inventory; and (xi) liens in favor of the Collateral Agent for the benefit of the Lenders, the Agent and the Trustee and the holders of the Debentures. Section 9.3. RESTRICTIONS ON INVESTMENTS. The Borrower will not, and will not permit any of its Subsidiaries to, make or permit to exist or to remain outstanding any Investment except Investments in: (a) marketable direct or guaranteed obligations of the United States of America that mature within one (1) year from the date of purchase by the Borrower; (b) demand deposits, certificates of deposit, bankers acceptances and time deposits of United States banks having total assets in excess of $1,000,000,000; (c) securities commonly known as "commercial paper" issued by a corporation organized and existing under the laws of the United States of America 64 -57- or any state thereof that at the time of purchase have been rated and the ratings for which are not less than "P 1" if rated by Moody's Investors Services, Inc., and not less than "A 1" if rated by Standard and Poor's; (d) Investments existing on the date hereof and listed on Schedule 9.3 hereto; (e) Investments consisting of promissory notes received as proceeds of asset dispositions permitted by Section 9.5(b); (f) Investments consisting of loans and advances to employees in the ordinary course of business not to exceed $250,000 in the aggregate at any time outstanding; (g) Investments consisting of Accounts Receivables; and (h) Investments consisting of obligations of the Borrower under leases of retail locations which the Borrower has subleased; provided that (A) the term of such lease was not extended in connection with such sublease, (B) the subleasee of such retail store shall be liable to pay rent at the then current rate under the lease, and (C) the Borrower shall not at any one time have more than ten (10) such subleases; provided, however, that, with the exception of loans and advances referred to in Section 9.3(f), such Investments will be considered Investments permitted by this Section 9.3 only if all actions have been taken to the satisfaction of the Agent to provide to the Agent, for the benefit of the Lenders and the Agent, a first priority perfected security interest in all of such Investments free of all encumbrances other than Permitted Liens. Section 9.4. DISTRIBUTIONS. The Borrower will not make any Distributions. Section 9.5. MERGER, CONSOLIDATION AND DISPOSITION OF ASSETS. (a) Mergers and Acquisitions. The Borrower will not, and will not permit any of its Subsidiaries to, become a party to any merger or consolidation, or agree to or effect any asset acquisition or stock acquisition (other than the acquisition of assets (other than new stores) in the ordinary course of business consistent with past practices) except the merger or consolidation of one or more of the Subsidiaries of the Borrower with and into the Borrower, or the merger or consolidation of two or more Subsidiaries of the Borrower. (b) Disposition of Assets. The Borrower will not, and will not permit any of its Subsidiaries to, become a party to or agree to or effect any disposition of assets, other than (i) the sales of inventory in the ordinary course of business, consistent with past practices, and (ii) if no longer useful in the Borrower's or its Subsidiaries' business, consistent with past practices, the sales of fixtures and 65 -58- equipment, assignments of store leases, and sales and leasebacks (to the extent permitted in Section 9.6 hereof). Section 9.6. SALE AND LEASEBACK. The Borrower will not, and will not permit any of its Subsidiaries to, enter into any arrangement, directly or indirectly, whereby the Borrower or any Subsidiary of the Borrower shall sell or transfer any property in excess of $100,000 in aggregate owned by it in order then or thereafter to lease such property or lease other property that the Borrower or any Subsidiary of the Borrower intends to use for substantially the same purpose as the property being sold or transferred. Section 9.7. COMPLIANCE WITH ENVIRONMENTAL LAWS. The Borrower will not, and will not permit any of its Subsidiaries to, (a) use any of the Real Estate or any portion thereof for the handling, processing, storage or disposal of Hazardous Substances (other than the handling and storage of ordinary cleaning products, copier toner and similar products used in the ordinary course of a retail jewelry business or office administration), (b) cause or permit to be located on any of the Real Estate any underground tank or other underground storage receptacle for Hazardous Substances, (c) generate any Hazardous Substances on any of the Real Estate, (d) conduct any activity at any Real Estate or use any Real Estate in any manner so as to cause a release (i.e. releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping) or threatened release of Hazardous Substances on, upon or into the Real Estate or (e) otherwise conduct any activity at any Real Estate or use any Real Estate in any manner that would violate any Environmental Law or bring such Real Estate in violation of any Environmental Law. Section 9.8. INDENTURE. The Borrower will not, and will not permit any of its Subsidiaries to, amend, supplement or otherwise modify the terms of any of the Indenture, any of the Debentures, or make any payments on or prepay, redeem or repurchase any of the Debentures; provided that the Borrower can make regularly scheduled interest payments on the Debentures so long as no Default or Event of Default has occurred and is continuing. Section 9.9. EMPLOYEE BENEFIT PLANS. Neither the Borrower nor any ERISA Affiliate will (a) engage in any "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Code which could result in a material liability for the Borrower or any of its Subsidiaries; or (b) permit any Guaranteed Pension Plan to incur an "accumulated funding deficiency", as such term is defined in Section 302 of ERISA, whether or not such deficiency is or may be waived; or (c) fail to contribute to any Guaranteed Pension Plan to an extent which, or terminate any Guaranteed Pension Plan in a manner which, could result in the 66 -59- imposition of a lien or encumbrance on the assets of the Borrower or any of its Subsidiaries pursuant to Section 302(f) or Section 4068 of ERISA; or (d) permit or take any action which would result in the aggregate benefit liabilities (with the meaning of Section 4001 of ERISA) of all Guaranteed Pension Plans exceeding the value of the aggregate assets of such Plans, disregarding for this purpose the benefit liabilities and assets of any such Plan with assets in excess of benefit liabilities. Section 9.10. BANK ACCOUNTS. The Borrower will not, and will not permit any of its Subsidiaries to, (a) establish any bank accounts other than those listed on Schedule 7.20 (as such shall be deemed amended from time to time to include those depository institutions acceptable to the Agent which have executed and delivered to the Agent Agency Account Agreements or Lock-Box Agreements) without the Agent's prior written consent or (b) violate directly or indirectly any Agency Account Agreement, bank agency or Lock-Box Agreement in favor of the Agent for the benefit of the Lenders and the Agent with respect to such account. Section 9.11. CONSIGNMENT TRANSACTIONS. The Borrower will not enter into any consignment transactions except arrangements for consignments of inventory from vendors in the ordinary course of business, consistent with past practices and the Borrower will not permit the aggregate amount of its inventory on consignment (valued at cost) to exceed $12,000,000. Section 9.12. TRANSACTION WITH AFFILIATES. Except as provided on Schedule 7.15, the Borrower will not directly or indirectly conduct any transactions with any Affiliate of the Borrower on terms that are less favorable to the Borrower than those that might be obtained at the time from unaffiliated third parties. Section 9.13. SUBSIDIARIES. The Borrower will not create any Subsidiaries. Section 9.14. AMENDMENTS TO CREDIT POLICY. The Borrower will not amend, supplement or otherwise modify in any material way the Credit Policy without the prior review and consent of the Majority Banks to such changes. The Borrower will furnish the Agent with copies of any material amendments, supplements and modifications to the Credit Policy. Section 10. FINANCIAL COVENANTS OF THE BORROWER. The Borrower covenants and agrees that, so long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit or Note is outstanding or any Lender has any obligation to make any Loans or the Agent has any obligation to issue, extend or renew any Letters of Credit: Section 10.1. MINIMUM EBITDA. As of each fiscal quarter ending on the date set forth in the table below under the caption "Quarter Ending", the Borrower will not permit either (a) Consolidated EBITDA for the two consecutive fiscal quarters ending on such date (treated as a single accounting period) to be less than the 67 -60- amount set forth opposite such date in the table below under the caption "Amount for 2 Quarters" or (b) Consolidated EBITDA for the fiscal quarter ending on such date to be less than the amount set forth opposite such date in the table below under the caption "Amount for 1 Quarter".
Quarter Ending Amount for 2 Quarters Amount for 1 Quarter -------------- --------------------- -------------------- 11/30/96 $ 1,400,000 $1,400,000 02/28/97 $10,300,000 $8,300,000 05/31/97 $10,000,000 $1,500,000 08/31/97 $ 2,700,000 $1,000,000 11/30/97 $ 3,100,000 $2,000,000 02/28/98 $11,000,000 $8,600,000 05/31/98 $10,500,000 $1,800,000 08/31/98 $ 3,000,000 $1,200,000 11/30/98 $ 3,400,000 $2,200,000 02/28/99 $12,000,000 $9,300,000 05/31/99 $11,500,000 $2,000,000
Section 10.2. DEBT SERVICE. The Borrower will not permit the ratio of (a) Consolidated EBITDA for the period of four consecutive fiscal quarters ending on the date set forth in the table below (or such lesser period as shall have elapsed since the Closing Date) to (b) Consolidated Total Debt Service for such period to be less than the ratio set forth opposite such date in such table:
Quarter Ending Ratio ------- ------ ----- 05/31/97 1.05:1.00 08/31/97 and thereafter 1.15:1.00
Section 10.3. TOTAL LIABILITIES TO SHAREHOLDERS' EQUITY. The Borrower will not permit the ratio of (a) Consolidated Total Liabilities as at the end of any fiscal quarter to (b) Shareholders' Equity as at the end of such fiscal quarter to exceed 5.00:1.00. Section 10.4. INVENTORY. The Borrower will not permit the net book value of inventory, valued at the lower of weighted average cost or market on a first-in first-out basis, as of the date described in the table set forth below to exceed the amount set forth opposite such date in the table below under the caption "Maximum Inventory Value": 68 -61-
Maximum Inventory ----------------- Date Value ---- ----- 11/30/96 $74,000,000 02/28/97 $66,000,000 05/31/97 $65,000,000 08/31/97 $71,000,000 11/30/97 $78,000,000 02/28/98 $65,000,000 05/31/98 $67,000,000 08/31/98 $73,000,000 11/30/98 $80,000,000 02/28/99 $68,000,000 05/31/99 $70,000,000
Section 10.5. CAPITAL EXPENDITURES. (a) In addition to the Additional Capital Expenditures permitted under Section 10.5(b)(ii), the Borrower will not make Capital Expenditures during any fiscal year ending on the date set forth in the chart below that exceed in the aggregate the amount set forth opposite such date:
Fiscal Year Ending Maximum Capital ------ ---- ------ ------- -------- Expenditures ------------ 05/31/97 $6,800,000 05/31/98 $4,250,000 05/31/99 $4,250,000
(b) The Borrower will not, and will not permit any of its Subsidiaries to, make any Capital Expenditures in connection with the development, opening or operation of new stores; provided, however, (i) during the 1997 fiscal year, the Borrower shall be permitted to make Capital Expenditures (up to the amount permitted under Section 10.5(a)) and to open new stores for which it has entered into committed lease arrangements described on Exhibit O prior to the Closing Date, excerpts from which lease arrangements have been delivered to the Agent on or prior to the Closing Date, and (ii) during any fiscal year thereafter, the Borrower shall be permitted to open an additional five (5) new stores (in excess of the number of stores opened as replacements for closed stores during such fiscal year as provided in paragraph (c) hereof) and to make Capital Expenditures and Additional Capital Expenditures in connection with such new stores if, immediately prior to the making of the initial expenditure for any such store, (A) no Default or Event of Default has occurred and is continuing under the Credit Agreement or would result from the making of such Capital Expenditures or Additional Capital Expenditures, (B) the ratio of Consolidated Operating Cash Flow to Consolidated Total Debt Service for the period of twelve consecutive calendar months most recently ended and for which the Lenders have received a Compliance Certificate, is not less than 1.00:1.00, and (C) the Borrower shall have delivered to the Agent a certificate of the 69 -62- principal financial officer of the Borrower certifying to the effect that no Default or Event of Default is continuing or would result from the making of such Capital Expenditures or Additional Capital Expenditures and containing calculations, on a pro forma basis, after giving effect to the proposed Capital Expenditures and Additional Capital Expenditures, illustrating that Capital Expenditures and Additional Capital Expenditures budgeted for such store will not exceed the respective limits imposed under paragraph (a) and in the definition of Additional Capital Expenditures and compliance with the ratio set forth in clause (B) of this paragraph (b). (c) Notwithstanding the provisions of paragraph (b) hereof, within the limitation set forth in paragraph (a), commencing with the 1998 fiscal year, the Borrower will be permitted to make Capital Expenditures in connection with the opening of new stores opened as replacements for stores closed as a result of a lease expiry in an amount equal to the lesser of (i) four (4) and (ii) the number of stores actually closed in any fiscal year in connection with the expiry of such store's lease. Section 11. CLOSING CONDITIONS. From and after the Closing Date, all of the obligations of the Borrower under or in respect of the Prior Credit Agreement shall be evidenced solely by the terms of this Credit Agreement and the other Loan Documents. The obligation of the Lenders to convert their claims against the Borrower with respect to the Prior Credit Agreement into Obligations to the Lenders under this Credit Agreement and to amend and restate the Prior Credit Agreement and the Obligations of the Lenders to make the Loans and of the Agent to issue any Letters of Credit shall be subject to the satisfaction of the following conditions precedent on or prior to September 29, 1996. Section 11.1. LOAN DOCUMENTS. Each of the Loan Documents shall have been duly executed and delivered by the respective parties thereto, shall be in full force and effect and shall be in form and substance satisfactory to each of the Lenders. Each of the Lenders shall have received a fully executed copy of each such document and the original Note payable to such Lender. Section 11.2. CERTIFIED COPIES OF CHARTER DOCUMENTS. Each of the Lenders shall have received from the Borrower a copy, certified by a duly authorized officer of such Person to be true and complete on the Closing Date, of each of (a) its charter or other incorporation documents as in effect on such date of certification, and (b) its by-laws as in effect on such date. Section 11.3. CORPORATE ACTION. All corporate action necessary for the valid execution, delivery and performance by the Borrower of this Credit Agreement and the other Loan Documents to which it is or is to become a party shall have been duly and effectively taken, and evidence thereof satisfactory to the Lenders shall have been provided to each of the Lenders. Section 11.4. INCUMBENCY CERTIFICATE. Each of the Lenders shall have received from the Borrower an incumbency certificate, dated as of the Closing Date, signed 70 -63- by a duly authorized officer of the Borrower, and giving the name and bearing a specimen signature of each individual who shall be authorized: (a) to sign, in the name and on behalf of the Borrower each of the Loan Documents; (b) to make Loan Requests and Conversion Requests and to apply for Letters of Credit; and (c) to give notices and to take other action on its behalf under the Loan Documents. Section 11.5. VALIDITY OF LIENS. The Security Documents shall be effective to create in favor of the Collateral Agent a legal, valid and enforceable first (except for Permitted Liens entitled to priority under applicable law) security interest in and lien upon the Collateral. All filings, recordings, deliveries of instruments and other actions necessary or desirable in the opinion of the Collateral Agent and the Agent to protect and preserve such security interests shall have been duly effected. The Collateral Agent shall have received evidence thereof in form and substance satisfactory to the Collateral Agent, the Agent and the Lenders. Section 11.6. PERFECTION CERTIFICATES AND UCC SEARCH RESULTS. The Collateral Agent shall have received from the Borrower a completed and fully executed Perfection Certificate and the results of UCC searches with respect to the Collateral, indicating no liens other than Permitted Liens and liens for which releases have been obtained and otherwise in form and substance satisfactory to the Collateral Agent, the Agent and the Lenders. Section 11.7. TAXES. The Collateral Agent shall have received evidence of payment of real estate taxes and municipal charges on the Borrower's headquarters and distribution center not delinquent on or before the Closing Date. Section 11.8. TITLE INSURANCE. The Collateral Agent shall have received an endorsement on the Title Policy previously delivered to the Collateral Agent pursuant to the Original Credit Agreement, in form and substance satisfactory to the Collateral Agent and the Agent. Section 11.9. AMENDMENT TO MORTGAGE. The Borrower shall have delivered to the Collateral Agent an amendment to the Mortgage of the leasehold relating to the Borrower's headquarters and distribution center, in form and substance satisfactory to the Collateral Agent. Section 11.10. CERTIFICATES OF INSURANCE. The Agent shall have received (a) a certificate of insurance in form and substance satisfactory to the Agent from an independent insurance broker dated as of the Closing Date, identifying insurers, types of insurance, insurance limits, and policy terms, and otherwise describing the insurance obtained in accordance with the provisions of the Security Agreement and (b) certified copies of all policies evidencing such insurance (or certificates therefore signed by the insurer or an agent authorized to bind the insurer). Section 11.11. BANK ACCOUNTS; LOCK-BOX AGREEMENTS. The Borrower shall have established the FNBB Concentration Account and the Agent shall have received Lock-Box Agreements from each Lock-Box Bank concerning the Collateral 71 -64- Agent's interest for the benefit of the Lenders, the Agent, the holders of the Debentures and the Trustee in the Lock-Box Accounts which the Borrower maintains at each Lock-Box Bank. The Borrower shall have delivered to the Agent a list of all Agency Account Institutions, together with copies of all Agency Account Agreements and all bank account agreements entered into with CapMAC with respect to such Agency Account Institutions. Section 11.12. BORROWING BASE REPORT. The Agent shall have received from the Borrower the initial Borrowing Base Report dated as of July 31, 1996. Section 11.13. ACCOUNTS RECEIVABLE AGING REPORT. The Agent shall have received from the Borrower the most recent Accounts Receivable aging report of the Borrower dated as of July 31, 1996. Section 11.14. SOLVENCY CERTIFICATE. The Agent shall have received a certificate of the chief financial officer of the Borrower, in form and substance satisfactory to the Agent, attesting to the Solvency of the Borrower after giving effect to the transactions contemplated by the Loan Documents. As used herein, "Solvency" of any Person means (a) the fair value of the property of such Person exceeds its total liabilities (including contingent liabilities), (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay its probable liability on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond its ability to pay as such debts and liabilities mature, and (d) such Person is not engaged, and is not about to engage, in business or a transaction for which its property would constitute an unreasonably small capital. Section 11.15. OPINIONS OF COUNSEL. Each of the Lenders and the Agent shall have received a favorable legal opinion addressed to the Lenders and the Agent, dated as of the Closing Date, in form and substance satisfactory to the Lenders and the Agent, from: (a) Irell & Manella LLP, counsel to the Borrower; and (b) Martin H. Blank, Jr., real estate counsel to the Borrower. Section 11.16. PAYMENT OF FEES. The Borrower shall have paid to the Lenders or the Agent, as appropriate, the facility fee, the commitment fee, and the collateral administration fee pursuant to Section Section 2.2, 5.1 and 5.2 and fees of counsel, collateral examiners and appraisers to the Agent incurred through and including the Closing Date. Section 11.17. RECEIVABLES SECURITIZATION FACILITY. The Receivables Securitization Facility shall have been terminated, all obligations in respect thereof shall have been paid in full (except as otherwise expressly provided in the provisos of Section 3 of the Termination Agreement), all assets of BFC shall have been re-acquired by the Borrower, BFC shall have merged into the Borrower, all bank account 72 -65- agreements executed in connection therewith shall have either been assigned to the Collateral Agent or terminated and all liens in connection therewith shall have been released, in each case on terms, and pursuant to documentation, satisfactory to the Agent in all respects. Section 11.18. THE DEBENTURES. The Borrower shall have received all necessary consents from the Trustee and the holders of the Debentures to the Borrower entering into this Credit Agreement and the transactions contemplated hereby (including pre-approval of an increase, at the Lenders' discretion, of the Total Commitment to $100,000,000) and such consents shall be on terms and conditions satisfactory to the Agent. The Agent shall have received fully executed copies of the amendments to the Indenture and the Debentures and such amendments shall be in form and substance satisfactory to the Agent and shall be in full force and effect. Section 11.19. FINANCIAL STATEMENTS, ETC. Each of the Lenders shall have received and been satisfied with, in their sole discretion, (a) the Borrower's statement of income and statement of cash flow for the period ending May 31, 1996, with such statement of income and statement of cash flow audited by Deloitte & Touche LLP and the Borrower's unaudited statement of income and statement of cash flow for the period ending July 31, 1996, (b) the Borrower's and its Subsidiaries' pro forma balance sheet as at the last day of the month immediately prior to the Closing Date and statements of income and cash flow of the Borrower for the current fiscal year through the last day of the month immediately prior to the Closing Date as adjusted on a pro forma basis to reflect the transactions contemplated by the Loan Documents and the termination of the Receivables Securitization Facility, and (c) such other financial and other information as may be reasonably requested by the Agent. The Lenders shall have discussed with Deloitte & Touche LLP and the Borrower's special forensic accountant, Simpson & Co., the scope and the results of their audits of the Borrower and its Subsidiaries and shall have reviewed and been satisfied in all respects with such discussions and the results of such audits. Section 11.20. CASH MANAGEMENT SYSTEMS. The Agent and each of the Lenders shall be satisfied in its sole discretion with the operations, procedures and systems of the Borrower, including the cash management systems of the Borrower and other procedures for assuring and maintaining the Lenders' rights in the Collateral. Section 11.21. CREDIT POLICY. The Agent and each of the Lenders shall have received a copy of the most recent Credit Policy of the Borrower and its Subsidiaries and the Credit Policy shall be in form and substance satisfactory to the Agent and the Lenders. Section 11.22. INITIAL LOAN REQUEST. The Agent shall have received an initial Loan Request and disbursement instructions from the Borrower with respect to the proceeds of the Loans. 73 -66- Section 12. CONDITIONS TO ALL BORROWINGS. The obligations of the Lenders (i) to convert their claims against the Borrower with respect to the Prior Credit Agreement into Obligations to the Lenders under the Credit Agreement and (ii) to make any Loan and of the Agent to issue, extend or renew any Letter of Credit, in each case whether on or after the Closing Date, shall also be subject to the satisfaction of the following conditions precedent: Section 12.1. REPRESENTATIONS TRUE; NO EVENT OF DEFAULT. Each of the representations and warranties of any of the Borrower and its Subsidiaries contained in this Credit Agreement, the other Loan Documents or in any document or instrument delivered pursuant to or in connection with this Credit Agreement shall be true as of the date as of which they were made and shall also be true at and as of the time of the making of such Loan or the issuance, extension or renewal of such Letter of Credit, with the same effect as if made at and as of that time (except to the extent of changes resulting from transactions contemplated or permitted by this Credit Agreement and the other Loan Documents and changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse, and to the extent that such representations and warranties relate expressly to an earlier date) and no Default or Event of Default shall have occurred and be continuing. Section 12.2. NO LEGAL IMPEDIMENT. No change shall have occurred in any law or regulations thereunder or interpretations thereof that in the reasonable opinion of any Lender would make it illegal for such Lender to make such Loan or to participate in the issuance, extension or renewal of such Letter of Credit or in the reasonable opinion of the Agent would make it illegal for the Agent to issue, extend or renew such Letter of Credit. Section 12.3. GOVERNMENTAL REGULATION. Each Lender shall have received such statements in substance and form reasonably satisfactory to such Lender as such Lender shall require for the purpose of compliance with any applicable regulations of the Comptroller of the Currency or the Board of Governors of the Federal Reserve System. Section 12.4. PROCEEDINGS AND DOCUMENTS. All proceedings in connection with the transactions contemplated by this Credit Agreement, the other Loan Documents and all other documents incident thereto shall be satisfactory in substance and in form to the Lenders and to the Agent and the Agent's Special Counsel, and the Lenders, the Agent and such counsel shall have received all information and such counterpart originals or certified or other copies of such documents as the Agent may reasonably request. Section 12.5. BORROWING BASE REPORT. The Agent shall have received the most recent Borrowing Base Report required to be delivered to the Agent in accordance with Section 8.4(f). 74 -67- Section 12.6. PAYMENT OF FEES. The Borrower shall have paid all fees then due and payable by it under this Credit Agreement or any other Loan Document including the facility fee, the collateral administration fee, the Letter of Credit Fee, and the commitment fee. Section 13. EVENTS OF DEFAULT; ACCELERATION; ETC. Section 13.1. EVENTS OF DEFAULT AND ACCELERATION. If any of the following events ("Events of Default" or, if the giving of notice or the lapse of time or both is required, then, prior to such notice or lapse of time, "Defaults") shall occur: (a) the Borrower shall fail to pay any principal of the Loans or any Reimbursement Obligation when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment; (b) the Borrower or any of its Subsidiaries shall fail to pay any interest on the Loans, the commitment fee, any Letter of Credit Fee, the collateral administration fee, or other sums due hereunder or under any of the other Loan Documents, when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment; (c) the Borrower shall fail to comply with any of its covenants contained in Sections 8, 9 or 10 or any of the covenants contained in any of the Mortgages; (d) the Borrower or any of its Subsidiaries shall fail to perform any term, covenant or agreement contained herein or in any of the other Loan Documents (other than those specified elsewhere in this Section 13.1) for fifteen (15) days after written notice of such failure has been given to the Borrower by the Agent; (e) any representation or warranty of the Borrower or any of its Subsidiaries in this Credit Agreement or any of the other Loan Documents or in any other document or instrument delivered pursuant to or in connection with this Credit Agreement shall prove to have been false in any material respect upon the date when made or deemed to have been made or repeated; (f) the Borrower or any of its Subsidiaries shall fail to pay at maturity, or within any applicable period of grace, the Indenture, Debentures, or any other obligation for borrowed money or credit received exceeding $500,000 in the aggregate, including, without limitation, in respect of any Capitalized Leases, or fail to observe or perform any material term, covenant or agreement contained in the Indenture, Debentures, or any other agreement by which it is bound, evidencing or securing borrowed money or credit received in excess of $500,000 in the aggregate, including, without limitation, in respect of any Capitalized Leases, for such period of time as would permit (assuming the giving of appropriate notice if required) the 75 -68- holder or holders thereof or of any obligations issued thereunder to accelerate the maturity thereof; (g) the Borrower or any of its Subsidiaries shall make an assignment for the benefit of creditors, or admit in writing its inability to pay or generally fail to pay its debts as they mature or become due, or shall petition or apply for the appointment of a trustee or other custodian, liquidator or receiver of the Borrower or any of its Subsidiaries or of any substantial part of the assets of the Borrower or any of its Subsidiaries or shall commence any case or other proceeding relating to the Borrower or any of its Subsidiaries under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or shall take any action to authorize or in furtherance of any of the foregoing, or if any such petition or application shall be filed or any such case or other proceeding shall be commenced against the Borrower or any of its Subsidiaries and the Borrower or any of its Subsidiaries shall indicate its approval thereof, consent thereto or acquiescence therein; (h) a decree or order is entered appointing any such trustee, custodian, liquidator or receiver or adjudicating the Borrower or any of its Subsidiaries bankrupt or insolvent, or approving a petition in any such case or other proceeding, or a decree or order for relief is entered in respect of the Borrower or any Subsidiary of the Borrower in an involuntary case under federal bankruptcy laws as now or hereafter constituted or, if earlier, sixty (60) days shall pass from the date of filing such involuntary case without dismissal thereof; (i) there shall remain in force, undischarged, unsatisfied and unstayed, for more than thirty days, whether or not consecutive, any final judgment against the Borrower or any of its Subsidiaries that, with other outstanding final judgments, undischarged, against the Borrower or any of its Subsidiaries exceeds in the aggregate $500,000; (j) if any of the Loan Documents shall be canceled, terminated, revoked or rescinded otherwise than in accordance with the terms thereof or with the express prior written agreement, consent or approval of the Lenders, or any action at law, suit or in equity or other legal proceeding to cancel, revoke or rescind any of the Loan Documents shall be commenced by or on behalf of the Trustee, the Borrower or any of its Subsidiaries party thereto, or any court or any other governmental or regulatory authority or agency of competent jurisdiction shall make a determination that, or issue a judgment, order, decree or ruling to the effect that, any one or more of the Loan Documents is illegal, invalid or unenforceable in accordance with the terms thereof; (k) the Borrower or any of its Subsidiaries shall be enjoined, restrained or in any way prevented by the order of any court or any administrative or regulatory agency from conducting any material part of its business and such order shall continue in effect for more than thirty (30) days; 76 -69- (l) there shall occur any damage to, or loss, theft or destruction of, any material portion of the Collateral, whether or not insured, or any strike, lockout, labor dispute, embargo, condemnation, act of God or public enemy, or other casualty, which in any such case causes, for more than fifteen (15) consecutive days, the cessation or substantial curtailment of revenue producing activities at any facility of the Borrower or any of its Subsidiaries if such event or circumstance is not covered by business interruption insurance and would have a material adverse effect on the business or financial condition of the Borrower or such Subsidiary; (m) there shall occur the loss, suspension or revocation of, or failure to renew, any license or permit now held or hereafter acquired by the Borrower or any of its Subsidiaries if such loss, suspension, revocation or failure to renew would have a material adverse effect on the business or financial condition of the Borrower or such Subsidiary; or (n) a Change in Control shall have occurred; then, and in any such event, so long as the same may be continuing, the Agent may, and upon the request of the Majority Lenders shall, by notice in writing to the Borrower declare all amounts owing with respect to this Credit Agreement, the Notes and the other Loan Documents and all Reimbursement Obligations to be, and they shall thereupon forthwith become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower; provided that in the event of any Event of Default specified in Sections 13.1(g) or 13.1(h), all such amounts shall become immediately due and payable automatically and without any requirement of notice from the Agent or any Lender (any such requirement for payment pursuant to this Section 13.1 being an "Acceleration"). Upon the occurrence and during the continuance of any Event of Default, the Agent may, and upon the request of the Majority Lenders, shall instruct the Collateral Agent to act pursuant to the Collateral Agency Agreement. Section 13.2. TERMINATION OF COMMITMENTS. If any one or more of the Events of Default specified in Section 13.1(g) or Section 13.1(h) shall occur, any unused portion of the credit hereunder shall forthwith terminate and each of the Lenders shall be relieved of all further obligations to make Loans to the Borrower and the Agent shall be relieved of all further obligations to issue, extend or renew Letters of Credit. If any other Event of Default shall have occurred and be continuing, or if on any Drawdown Date or other date for issuing, extending or renewing any Letter of Credit the conditions precedent to the making of the Loans to be made on such Drawdown Date or (as the case may be) to issuing, extending or renewing such Letter of Credit on such other date are not satisfied, the Agent may and, upon the request of the Majority Lenders, shall, by notice to the Borrower, terminate the unused portion of the credit hereunder, and upon such notice being given such unused portion of the credit hereunder shall terminate immediately and each of the Lenders shall be relieved of all further 77 -70- obligations to make Loans and the Agent shall be relieved of all further obligations to issue, extend or renew Letters of Credit. No termination of the credit hereunder shall relieve the Borrower or any of its Subsidiaries of any of the Obligations. Section 13.3. REMEDIES. In case any one or more of the Events of Default shall have occurred and be continuing, and whether or not the Lenders shall have accelerated the maturity of the Loans pursuant to Section 13.1, each Lender, if owed any amount with respect to the Loans or the Reimbursement Obligations, may, with the consent of the Majority Lenders but not otherwise, and subject to the terms of the Collateral Agency Agreement, proceed to protect and enforce its rights by suit in equity, action at law or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Credit Agreement and the other Loan Documents or any instrument pursuant to which the Obligations to such Lender are evidenced, including as permitted by applicable law the obtaining of the ex parte appointment of a receiver, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right of such Lender. No remedy herein conferred upon any Lender or the Agent or the holder of any Note or purchaser of any Letter of Credit Participation is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or any other provision of law. Section 13.4. CASH COLLATERAL TO SECURE OUTSTANDING LETTERS OF CREDIT. In case any one or more Events of Default shall have occurred and be continuing, and whether or not the Lenders shall have accelerated the maturity of the Loans, the Agent may, or at the request of the Majority Lenders shall, require the Borrower to furnish upon one day's notice cash collateral to secure the Borrower's Obligations with respect to any Letters of Credit at the time outstanding in an amount equal to one hundred and five percent (105%) of the Maximum Drawing Amount of each such Letter of Credit as of such date and according to the Cash Collateral Agreement and such other terms as the Agent shall reasonably require. Section 14. SETOFF. Regardless of the adequacy of any collateral, during the continuance of any Event of Default, any deposits or other sums credited by or due from any of the Lenders to the Borrower and any securities or other property of the Borrower in the possession of such Lender may be applied to or set off by such Lender against the payment of Obligations and any and all other liabilities, direct, or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, of the Borrower to such Lender. Each of the Lenders agrees with each other Lender that (a) if an amount to be set off is to be applied to Indebtedness of the Borrower to such Lender, other than Indebtedness evidenced by the Notes held by such Lender or constituting Reimbursement Obligations owed to such Lender, such amount shall be applied ratably to such other Indebtedness and to the Indebtedness evidenced by all such Notes held by such Lender or constituting Reimbursement Obligations owed to such Lender, and (b) if such Lender shall receive from the Borrower, whether by voluntary payment, exercise of the right of setoff, 78 -71- counterclaim, cross action, enforcement of the claim evidenced by the Notes held by, or constituting Reimbursement Obligations owed to, such Lender by proceedings against the Borrower at law or in equity or by proof thereof in bankruptcy, reorganization, liquidation, receivership or similar proceedings, or otherwise, and shall retain and apply to the payment of the Note or Notes held by, or Reimbursement Obligations owed to, such Lender any amount in excess of its ratable portion of the payments received by all of the Lenders with respect to the Notes held by, and Reimbursement Obligations owed to, all of the Lenders, such Lender will make such disposition and arrangements with the other Lenders with respect to such excess, either by way of distribution, pro tanto assignment of claims, subrogation or otherwise as shall result in each Lender receiving in respect of the Notes held by it or Reimbursement Obligations owed it, its proportionate payment as contemplated by this Credit Agreement; provided that if all or any part of such excess payment is thereafter recovered from such Lender, such disposition and arrangements shall be rescinded and the amount restored to the extent of such recovery, but without interest. Notwithstanding the foregoing, no Lender shall at any time exercise its rights of setoff without the consent of the Agent. Section 15. THE AGENT. Section 15.1. AUTHORIZATION. (a) The Agent is authorized to take such action on behalf of each of the Lenders and to exercise all such powers as are hereunder and under any of the other Loan Documents and any related documents delegated to the Agent, together with such powers as are reasonably incident thereto, provided that no duties or responsibilities not expressly assumed herein or therein shall be implied to have been assumed by the Agent. (b) The relationship between the Agent and each of the Lenders is that of an independent contractor. The use of the term "Agent" is for convenience only and is used to describe, as a form of convention, the independent contractual relationship between the Agent and each of the Lenders. Nothing contained in this Credit Agreement nor the other Loan Documents shall be construed to create an agency, trust or other fiduciary relationship between the Agent and any of the Lenders. (c) As an independent contractor empowered by the Lenders to exercise certain rights and perform certain duties and responsibilities hereunder and under the other Loan Documents, the Agent is nevertheless a "representative" of the Lenders, as that term is defined in Article 1 of the Uniform Commercial Code, for purposes of actions for the benefit of the Lenders and the Agent with respect to all collateral security and guaranties contemplated by the Loan Documents. Such actions include the designation of the Agent as "secured party", "mortgagee" or the like on all financing statements and other documents and instruments, whether recorded or otherwise, relating to the attachment, perfection, priority or enforcement of any security interests, mortgages or deeds of trust in collateral 79 -72- security intended to secure the payment or performance of any of the Obligations, all for the benefit of the Lenders and the Agent. Section 15.2. EMPLOYEES AND AGENTS. The Agent may exercise its powers and execute its duties by or through employees or agents and shall be entitled to take, and to rely on, advice of counsel concerning all matters pertaining to its rights and duties under this Credit Agreement and the other Loan Documents. The Agent may utilize the services of such Persons as the Agent in its sole discretion may reasonably determine, and all reasonable fees and expenses of any such Persons shall be paid by the Borrower. Section 15.3. NO LIABILITY. Neither the Agent nor any of its shareholders, directors, officers or employees nor any other Person assisting them in their duties nor any agent or employee thereof, shall be liable for any waiver, consent or approval given or any action taken, or omitted to be taken, in good faith by it or them hereunder or under any of the other Loan Documents, or in connection herewith or therewith, or be responsible for the consequences of any oversight or error of judgment whatsoever, except that the Agent or such other Person, as the case may be, may be liable for losses due to its willful misconduct or gross negligence. Section 15.4. NO REPRESENTATIONS. The Agent shall not be responsible for the execution or validity or enforceability of this Credit Agreement, the Notes, the Letters of Credit, any of the other Loan Documents or any instrument at any time constituting, or intended to constitute, collateral security for the Notes, or for the value of any such collateral security or for the validity, enforceability or collectability of any such amounts owing with respect to the Notes, or for any recitals or statements, warranties or representations made herein or in any of the other Loan Documents or in any certificate or instrument hereafter furnished to it by or on behalf of the Borrower or any of its Subsidiaries, or be bound to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements herein or in any instrument at any time constituting, or intended to constitute, collateral security for the Notes or to inspect any of the properties, books or records of the Borrower or any of its Subsidiaries. The Agent shall not be bound to ascertain whether any notice, consent, waiver or request delivered to it by the Borrower or any holder of any of the Notes shall have been duly authorized or is true, accurate and complete. The Agent has not made nor does it now make any representations or warranties, express or implied, nor does it assume any liability to the Lenders, with respect to the credit worthiness or financial conditions of the Borrower or any of its Subsidiaries. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender, and based upon such information and documents as it has deemed appropriate, made its own credit analysis and decision to enter into this Credit Agreement. 80 -73- Section 15.5. PAYMENTS. (a) Payments to Agent. A payment by the Borrower to the Agent hereunder or any of the other Loan Documents for the account of any Lender shall constitute a payment to such Lender. The Agent agrees promptly to distribute to each Lender such Lender's pro rata share of payments received by the Agent for the account of the Lenders except as otherwise expressly provided herein or in any of the other Loan Documents. (b) Distribution by Agent. If in the opinion of the Agent the distribution of any amount received by it in such capacity hereunder, under the Notes or under any of the other Loan Documents might involve it in liability, it may refrain from making distribution until its right to make distribution shall have been adjudicated by a court of competent jurisdiction. If a court of competent jurisdiction shall adjudge that any amount received and distributed by the Agent is to be repaid, each Person to whom any such distribution shall have been made shall either repay to the Agent its proportionate share of the amount so adjudged to be repaid or shall pay over the same in such manner and to such Persons as shall be determined by such court. (c) Delinquent Lenders. Notwithstanding anything to the contrary contained in this Credit Agreement or any of the other Loan Documents, any Lender that fails (a) to make available to the Agent its pro rata share of any Loan or to purchase any Letter of Credit Participation or (b) to comply with the provisions of Section 14 with respect to making dispositions and arrangements with the other Lenders, where such Lender's share of any payment received, whether by setoff or otherwise, is in excess of its pro rata share of such payments due and payable to all of the Lenders, in each case as, when and to the full extent required by the provisions of this Credit Agreement, shall be deemed delinquent (a "Delinquent Lender") and shall be deemed a Delinquent Lender until such time as such delinquency is satisfied. A Delinquent Lender shall be deemed to have assigned any and all payments due to it from the Borrower, whether on account of outstanding Loans, Unpaid Reimbursement Obligations, interest, fees or otherwise, to the remaining nondelinquent Lenders for application to, and reduction of, their respective pro rata shares of all outstanding Loans and Unpaid Reimbursement Obligations. The Delinquent Lender hereby authorizes the Agent to distribute such payments to the nondelinquent Lenders in proportion to their respective pro rata shares of all outstanding Loans and Unpaid Reimbursement Obligations. A Delinquent Lender shall be deemed to have satisfied in full a delinquency when and if, as a result of application of the assigned payments to all outstanding Loans and Unpaid Reimbursement Obligations of the nondelinquent Lenders, the Lenders' respective pro rata shares of all outstanding Loans and Unpaid Reimbursement Obligations have returned to those in effect immediately prior to such delinquency and without giving effect to the nonpayment causing such delinquency. Section 15.6. HOLDERS OF NOTES. The Agent may deem and treat the payee of any Note or the purchaser of any Letter of Credit Participation as the absolute owner or 81 -74- purchaser thereof for all purposes hereof until it shall have been furnished in writing with a different name by such payee or by a subsequent holder, assignee or transferee. Section 15.7. INDEMNITY. The Lenders ratably agree hereby to indemnify and hold harmless the Agent from and against any and all claims, actions and suits (whether groundless or otherwise), losses, damages, costs, expenses (including any expenses for which the Agent has not been reimbursed by the Borrower as required by Section 16), and liabilities of every nature and character arising out of or related to this Credit Agreement, the Notes, or any of the other Loan Documents or the transactions contemplated or evidenced hereby or thereby, or the Agent's actions taken hereunder or thereunder, except to the extent that any of the same shall be directly caused by the Agent's willful misconduct or gross negligence. Section 15.8. AGENT AS LENDER. In its individual capacity, FNBB shall have the same obligations and the same rights, powers and privileges in respect to its Commitment and the Loans made by it, and as the holder of any of the Notes and as the purchaser of any Letter of Credit Participations, as it would have were it not also the Agent. Section 15.9. RESIGNATION. The Agent may resign at any time by giving sixty (60) days' prior written notice thereof to the Lenders and the Borrower. Upon any such resignation, the Majority Lenders shall have the right to appoint a successor Agent. Unless a Default or Event of Default shall have occurred and be continuing, such successor Agent shall be reasonably acceptable to the Borrower. If no successor Agent shall have been so appointed by the Majority Lenders and shall have accepted such appointment within thirty (30) days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a financial institution having a rating of not less than A or its equivalent by Standard & Poor's Ratings Group. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation, the provisions of this Credit Agreement and the other Loan Documents shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. Section 15.10. NOTIFICATION OF DEFAULTS AND EVENTS OF DEFAULT. Each Lender hereby agrees that, upon learning of the existence of a Default or an Event of Default, it shall promptly notify the Agent thereof. The Agent hereby agrees that upon receipt of any notice under this Section 15.10 it shall promptly notify the other Lenders of the existence of such Default or Event of Default. Section 16. EXPENSES. The Borrower agrees to pay (a) the reasonable costs of producing and reproducing this Credit Agreement, the other Loan Documents and the other agreements and instruments mentioned herein, (b) any taxes (including 82 -75- any interest and penalties in respect thereto) payable by the Agent or any of the Lenders (other than taxes based upon the Agent's or any Lender's net income or profits) on or with respect to the transactions contemplated by this Credit Agreement (the Borrower hereby agreeing to indemnify the Agent and each Lender with respect thereto), (c) the reasonable fees, expenses and disbursements of the Agent's Special Counsel or any local counsel to the Agent incurred in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, each closing hereunder, and amendments, modifications, approvals, consents or waivers hereto or hereunder, (d) the fees, expenses and disbursements of the Agent incurred by the Agent in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, including all title insurance premiums and surveyor, engineering, collateral examination and appraisal charges, (e) any fees, costs, expenses and bank charges, including bank charges for returned checks, incurred by the Agent in establishing, maintaining or handling agency accounts, lock box accounts and other accounts for the collection of any of the Collateral; (f) all reasonable out-of-pocket expenses (including without limitation reasonable attorneys' fees and costs, which attorneys may be employees of any Lender or the Agent, and reasonable consulting, accounting, appraisal, investment banking and similar professional fees and charges) incurred by any Lender or the Agent in connection with (i) the enforcement of or preservation of rights under any of the Loan Documents against the Borrower or any of its Subsidiaries or the administration thereof after the occurrence of a Default or Event of Default and (ii) any litigation, proceeding or dispute whether arising hereunder or otherwise, in any way related to any Lender's or the Agent's relationship with the Borrower or any of its Subsidiaries and (g) all reasonable fees, expenses and disbursements of the Agent incurred in connection with UCC searches, UCC filings or mortgage recordings. The covenants of this Section 16 shall survive payment or satisfaction of all other Obligations. Section 17. INDEMNIFICATION. The Borrower agrees to indemnify and hold harmless the Agent and the Lenders from and against any and all claims, actions and suits whether groundless or otherwise, and from and against any and all liabilities, losses, damages and expenses of every nature and character arising out of this Credit Agreement or any of the other Loan Documents or the transactions contemplated hereby including, without limitation, (a) any actual or proposed use by the Borrower or any of its Subsidiaries of the proceeds of any of the Loans or Letters of Credit, (b) the reversal or withdrawal of any provisional credits granted by the Agent upon the transfer of funds from bank agency or lock box accounts or in connection with the provisional honoring of checks or other items, (c) any actual or alleged infringement of any patent, copyright, trademark, service mark or similar right of the Borrower or any of its Subsidiaries comprised in the Collateral, (d) the Borrower or any of its Subsidiaries entering into or performing this Credit Agreement or any of the other Loan Documents or (e) with respect to the Borrower and its Subsidiaries and their respective properties and assets, the violation of any Environmental Law, the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release or threatened release of any Hazardous Substances or 83 -76- any action, suit, proceeding or investigation brought or threatened with respect to any Hazardous Substances (including, but not limited to, claims with respect to wrongful death, personal injury or damage to property), in each case including, without limitation, the reasonable fees and disbursements of counsel and allocated costs of internal counsel incurred in connection with any such investigation, litigation or other proceeding; provided, however, that the Borrower shall have no obligation to any Lender hereunder with respect to any of the liabilities, losses, damages and expenses arising from (i) the bad faith, gross negligence or willful misconduct of such Lender or (ii) any matter which, although arising out of the making of the Loans and/or the Loan Documents, is solely a dispute between or among one or more of the Lenders which results in a judicial action or arbitration proceeding being brought to which the Borrower is not a party (except that the Borrower may be a necessary or nominal party or for purposes of jurisdiction or venue and except if the Borrower is dismissed as a party to such action). In litigation, or the preparation therefor, the Agent, on behalf of the Lenders and in its sole discretion, shall be entitled to select counsel for the Lenders and the Agent and, in addition to the foregoing indemnity, the Borrower agrees to pay promptly the reasonable fees and expenses of such counsel. If, and to the extent that the obligations of the Borrower under this Section 17 are unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment in satisfaction of such obligations which is permissible under applicable law. The covenants contained in this Section 17 shall survive payment or satisfaction in full of all other Obligations. Section 18. SURVIVAL OF COVENANTS, ETC. All covenants, agreements, representations and warranties made herein, in the Notes, in any of the other Loan Documents or in any documents or other papers delivered by or on behalf of the Borrower or any of its Subsidiaries pursuant hereto shall be deemed to have been relied upon by the Lenders and the Agent, notwithstanding any investigation heretofore or hereafter made by any of them, and shall survive the making by the Lenders of any of the Loans and the issuance, extension or renewal of any Letters of Credit, as herein contemplated, and shall continue in full force and effect so long as any Letter of Credit or any amount due under this Credit Agreement or the Notes or any of the other Loan Documents remains outstanding or any Lender has any obligation to make any Loans or the Agent has any obligation to issue, extend or renew any Letter of Credit, and for such further time as may be otherwise expressly specified in this Credit Agreement. All statements contained in any certificate or other paper delivered to any Lender or the Agent at any time by or on behalf of the Borrower or any of its Subsidiaries pursuant hereto or in connection with the transactions contemplated hereby shall constitute representations and warranties by the Borrower or such Subsidiary hereunder. Section 19. ASSIGNMENT AND PARTICIPATION. Section 19.1. CONDITIONS TO ASSIGNMENT BY LENDERS. Except as provided herein, each Lender may assign to one or more Eligible Assignees all or a portion of its interests, rights and obligations under this Credit Agreement (including all or a 84 -77- portion of its Commitment Percentage and Commitment and the same portion of the Loans at the time owing to it, the Notes held by it and its participating interest in the risk relating to any Letters of Credit); provided that (a) each of the Agent and the Borrower shall have given its prior written consent to such assignment, which consent, in the case of the Borrower, will not be unreasonably withheld, (b) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights and obligations under this Credit Agreement, (c) each assignment shall be in an amount that is not less than $5,000,000, and (d) the parties to such assignment shall execute and deliver to the Agent, for recording in the Register (as hereinafter defined), an Assignment and Acceptance, substantially in the form of Exhibit K hereto (an "Assignment and Acceptance"), together with any Notes subject to such assignment. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five (5) Business Days after the execution thereof, (i) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder, and (ii) the assigning Lender shall, to the extent provided in such assignment and upon payment to the Agent of the registration fee referred to in Section 19.3, be released from its obligations under this Credit Agreement. Section 19.2. CERTAIN REPRESENTATIONS AND WARRANTIES; LIMITATIONS; COVENANTS. By executing and delivering an Assignment and Acceptance, the parties to the assignment thereunder confirm to and agree with each other and the other parties hereto as follows: (a) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, the assigning Lender makes no representation or warranty, express or implied, and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Credit Agreement, the other Loan Documents or any other instrument or document furnished pursuant hereto or the attachment, perfection or priority of any security interest or mortgage; (b) the assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower and its Subsidiaries or any other Person primarily or secondarily liable in respect of any of the Obligations, or the performance or observance by the Borrower and its Subsidiaries or any other Person primarily or secondarily liable in respect of any of the Obligations of any of their obligations under this Credit Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; (c) such assignee confirms that it has received a copy of this Credit Agreement, together with copies of the most recent financial statements referred to in Section 7.4 and Section 8.4 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (d) such assignee will, independently and without reliance upon the assigning Lender, the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Credit Agreement; (e) such assignee 85 -78- represents and warrants that it is an Eligible Assignee; (f) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Credit Agreement and the other Loan Documents as are delegated to the Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto; (g) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Credit Agreement are required to be performed by it as a Lender; (h) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; and (i) such assignee acknowledges that it has made arrangements with the assigning Lender satisfactory to such assignee with respect to its pro rata share of Letter of Credit Fees in respect of outstanding Letters of Credit. Section 19.3. REGISTER. The Agent shall maintain a copy of each Assignment and Acceptance delivered to it and a register or similar list (the "Register") for the recordation of the names and addresses of the Lenders and the Commitment Percentage of, and principal amount of the Loans owing to and Letter of Credit Participations purchased by, the Lenders from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Credit Agreement. The Register shall be available for inspection by the Borrower and the Lenders at any reasonable time and from time to time upon reasonable prior notice. Upon each such recordation, the assigning Lender agrees to pay to the Agent a registration fee in the sum of $3,000. Section 19.4. NEW NOTES. Upon its receipt of an Assignment and Acceptance executed by the parties to such assignment, together with each Note subject to such assignment, the Agent shall (a) record the information contained therein in the Register, and (b) give prompt notice thereof to the Borrower and the Lenders (other than the assigning Lender). Within five (5) Business Days after receipt of such notice and a form of new Note in favor of the Assignee, the Borrower, at its own expense, shall execute and deliver to the Agent, in exchange for each surrendered Note, such new Note to the order of such Eligible Assignee in an amount equal to the amount assumed by such Eligible Assignee pursuant to such Assignment and Acceptance and, if the assigning Lender has retained some portion of its obligations hereunder, a new Note to the order of the assigning Lender in an amount equal to the amount retained by it hereunder. Such new Notes shall provide that they are replacements for the surrendered Notes, shall be in an aggregate principal amount equal to the aggregate principal amount of the surrendered Notes, shall be dated the effective date of such in Assignment and Acceptance and shall otherwise be substantially in the form of the assigned Notes. Within five (5) days of issuance of any new Notes pursuant to this Section 19.4, the Borrower shall deliver an opinion of counsel, addressed to the Lenders and the Agent, relating to the due authorization, execution and delivery of such new Notes and the legality, validity and binding effect thereof, in form and substance satisfactory to the Lenders. The surrendered Notes shall be canceled and returned to the Borrower. 86 -79- Section 19.5. PARTICIPATIONS. Each Lender may sell participations to one or more Lenders or other entities in all or a portion of such Lender's rights and obligations under this Credit Agreement and the other Loan Documents; provided that (a) each such participation shall be in an amount of not less than $5,000,000, (b) any such sale or participation shall not affect the rights and duties of the selling Lender hereunder to the Borrower and (c) the only rights granted to the participant pursuant to such participation arrangements with respect to waivers, amendments or modifications of the Loan Documents shall be the rights to approve waivers, amendments or modifications that would reduce the principal of or the interest rate on any Loans, extend the term or increase the amount of the Commitment of such Lender as it relates to such participant, reduce the amount of any commitment fees or Letter of Credit Fees to which such participant is entitled or extend any regularly scheduled payment date for principal or interest. Section 19.6. DISCLOSURE. The Borrower agrees that in addition to disclosures made in accordance with standard and customary banking practices any Lender may disclose information obtained by such Lender pursuant to this Credit Agreement to assignees or participants and potential assignees or participants hereunder; provided that such assignees or participants or potential assignees or participants shall agree (a) to treat in confidence such information unless such information otherwise becomes public knowledge, (b) not to disclose such information to a third party, except as required by law or legal process and (c) not to make use of such information for purposes of transactions unrelated to such contemplated assignment or participation. Section 19.7. ASSIGNEE OR PARTICIPANT AFFILIATED WITH THE BORROWER. If any assignee Lender is an Affiliate of the Borrower, then any such assignee Lender shall have no right to vote as a Lender hereunder or under any of the other Loan Documents for purposes of granting consents or waivers or for purposes of agreeing to amendments or other modifications to any of the Loan Documents or for purposes of making requests to the Agent pursuant to Section 13.1 or Section 13.2, and the determination of the Majority Lenders shall for all purposes of this Agreement and the other Loan Documents be made without regard to such assignee Lender's interest in any of the Loans. If any Lender sells a participating interest in any of the Loans or Reimbursement Obligations to a participant, and such participant is the Borrower or an Affiliate of the Borrower, then such transferor Lender shall promptly notify the Agent of the sale of such participation. A transferor Lender shall have no right to vote as a Lender hereunder or under any of the other Loan Documents for purposes of granting consents or waivers or for purposes of agreeing to amendments or modifications to any of the Loan Documents or for purposes of making requests to the Agent pursuant to Section 13.1 or Section 13.2 to the extent that such participation is beneficially owned by the Borrower or any Affiliate of the Borrower, and the determination of the Majority Lenders shall for all purposes of this Agreement and the other Loan Documents be made without regard to the interest of such transferor Lender in the Loans to the extent of such participation. 87 -80- Section 19.8. MISCELLANEOUS ASSIGNMENT PROVISIONS. Any assigning Lender shall retain its rights to be indemnified pursuant to Section 16 with respect to any claims or actions arising prior to the date of such assignment. If any assignee Lender is not incorporated under the laws of the United States of America or any state thereof, it shall, prior to the date on which any interest or fees are payable hereunder or under any of the other Loan Documents for its account, deliver to the Borrower and the Agent certification as to its exemption from deduction or withholding of any United States federal income taxes. Anything contained in this Section 19 to the contrary notwithstanding, any Lender may at any time pledge all or any portion of its interest and rights under this Credit Agreement (including all or any portion of its Notes) to any of the twelve Federal Reserve Lenders organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge or the enforcement thereof shall release the pledgor Lender from its obligations hereunder or under any of the other Loan Documents. Section 19.9. ASSIGNMENT BY BORROWER. The Borrower shall not assign or transfer any of its rights or obligations under any of the Loan Documents without the prior written consent of each of the Lenders. Section 20. NOTICES, ETC. Except as otherwise expressly provided in this Credit Agreement, all notices and other communications made or required to be given pursuant to this Credit Agreement or the Notes or any Letter of Credit Applications shall be in writing and shall be delivered in hand, mailed by United States registered or certified first class mail, postage prepaid, sent by overnight courier, or sent by telegraph, telecopy, facsimile or telex and confirmed by delivery via courier or postal service, addressed as follows: (a) if to the Borrower, at 111 West Lemon Avenue, Monrovia, California, 91016, Attention: President, with a copy to the Chief Financial Officer at the same address, or at such other address for notice as the Borrower shall last have furnished in writing to the Person giving the notice; (b) if to the Agent, at 100 Federal Street, Boston, Massachusetts 02110, USA, Attention: Maureen H. Forrester, Vice President, Asset Based Lending, or such other address for notice as the Agent shall last have furnished in writing to the Person giving the notice; and (c) if to any Lender, at such Lender's address set forth on Schedule 1 hereto, or such other address for notice as such Lender shall have last furnished in writing to the Person giving the notice. Any such notice or demand shall be deemed to have been duly given or made and to have become effective (i) if delivered by hand, overnight courier or facsimile to a responsible officer of the party to which it is directed, at the time of the receipt thereof by such officer or the sending of such facsimile and (ii) if sent by registered or certified first-class mail, postage prepaid, on the third Business Day following the mailing thereof. 88 -81- Section 21. GOVERNING LAW. THIS CREDIT AGREEMENT AND, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED THEREIN, EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID COMMONWEALTH (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS SPECIFIED IN Section 20. THE BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT. Section 22. HEADINGS. The captions in this Credit Agreement are for convenience of reference only and shall not define or limit the provisions hereof. Section 23. COUNTERPARTS. This Credit Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when executed and delivered shall be an original, and all of which together shall constitute one instrument. In proving this Credit Agreement it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. Section 24. ENTIRE AGREEMENT, ETC. The Loan Documents and any other documents executed in connection herewith or therewith express the entire understanding of the parties with respect to the transactions contemplated hereby. Neither this Credit Agreement nor any term hereof may be changed, waived, discharged or terminated, except as provided in Section 26. Section 25. WAIVER OF JURY TRIAL. The Borrower hereby waives its right to a jury trial with respect to any action or claim arising out of any dispute in connection with this Credit Agreement, the Notes or any of the other Loan Documents, any rights or obligations hereunder or thereunder or the performance of which rights and obligations. Except as prohibited by law, the Borrower hereby waives any right it may have to claim or recover in any litigation referred to in the preceding sentence any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages. The Borrower (a) certifies that no representative, agent or attorney of any Lender or the Agent has represented, expressly or otherwise, that such Lender or the Agent would not, in the event of litigation, seek to enforce the foregoing waivers and (b) acknowledges that 89 -82- the Agent and the Lenders have been induced to enter into this Credit Agreement, the other Loan Documents to which it is a party by, among other things, the waivers and certifications contained herein. Section 26. CONSENTS, AMENDMENTS, WAIVERS, ETC. Any consent or approval required or permitted by this Credit Agreement to be given by the Lenders may be given, and any term of this Credit Agreement, the other Loan Documents or any other instrument related hereto or mentioned herein may be amended, and the performance or observance by the Borrower or any of its Subsidiaries of any terms of this Credit Agreement, the other Loan Documents or such other instrument or the continuance of any Default or Event of Default may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Borrower and the written consent of the Majority Lenders. Notwithstanding the foregoing, (i) the rate of interest on the Notes (other than interest accruing pursuant to Section 5.11 following the effective date of any waiver by the Majority Lenders of the Default or Event of Default relating thereto), the term of the Notes, the amount of (and time period of) the Commitments and Commitment Percentages of the Lenders, the amount of commitment fee or Letter of Credit Fees, and the provisions of Section 13.3 and Section 16 hereof may not be changed without the written consent of the Borrower and the written consent of each Lender affected thereby; (ii) the definitions of Majority Lenders, the principal payment due date, any reimbursement obligation of the Borrower (or any Subsidiary) with respect to any Letters of Credit, the principal amount of the Notes and Loans (except in accordance with any assignment pursuant to Section 19 hereof), any interest payment due date, the Borrowing Base formula, including, without limitation, advance rates, and the component parts thereof, the lending provisions related to the Borrowing Base formula, and this Section 26 may not be amended (or otherwise changed) without the written consent of all of the Lenders and no change may be made with respect to the Collateral or any release thereof, including the release of any guaranties with respect to the Obligations hereunder, in an aggregate amount in excess of $1,000,000 without, in each case, the written consent of all of the Lenders; and (iii) the amount of the Agent's Fee or any Letter of Credit Fees payable for the Agent's account and Section 15 may not be amended without the written consent of the Agent. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission on the part of the Agent or any Lender in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon the Borrower shall entitle the Borrower to other or further notice or demand in similar or other circumstances. Section 27. SEVERABILITY. The provisions of this Credit Agreement are severable and if any one clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Credit Agreement in any jurisdiction. 90 -83- Section 28. TRANSITIONAL ARRANGEMENTS. Section 28.1. PRIOR CREDIT AGREEMENT SUPERSEDED. This Credit Agreement shall on the Closing Date supersede the Prior Credit Agreement in its entirety, except as provided in this Section 28. On the Closing Date, the rights and obligations of the parties evidenced by the Prior Credit Agreement shall be evidenced by the Credit Agreement and other Loan Documents, the "Loans" as defined in the Prior Credit Agreement shall be converted to Loans as defined herein and all outstanding letters of credit issued by the Agent for the account of the Borrower prior to the Closing Date shall, for the purposes of this Credit Agreement, be Letters of Credit. Section 28.2. RETURN AND CANCELLATION OF NOTES. As soon as reasonably practicable after its receipt of its Note hereunder on the Closing Date, the Lenders will promptly return to the Borrower, marked "Substituted" or "Cancelled", as the case may be, any notes of the Borrower held by the Lenders pursuant to the Prior Credit Agreement. Section 28.3. INTEREST AND FEES UNDER SUPERSEDED AGREEMENT. All interest and fees and expenses, if any, owing or accruing under or in respect of the Prior Credit Agreement through the Closing Date shall be calculated as of the Closing Date (pro rated in the case of any fractional periods), and shall be paid on the Closing Date. Commencing on the Closing Date, the commitment fees shall be payable by the Borrower to the Agent for the account of the Lenders in accordance with Section 2.2. Section 29. CONSENT TO AMENDMENT TO INDENTURE. The Borrower has notified the Lenders that in connection with the transactions contemplated herein, the Borrower has entered into the Amendment No. 4 to Indenture dated as of the Closing Date (the "Indenture Amendment") between the Borrower and the Trustee, in the form delivered to the Agent on or prior to the Closing Date. Each of the Lenders hereby consents to the Indenture Amendment. Such consent is limited strictly to its terms, shall apply only to the specific actions described herein, shall not extend to or affect any of the Borrower's other obligations contained herein or in any other Loan Document and shall not impair any rights consequent thereon. The Lenders shall not have any obligation to issue any further consent with respect to the subject matter of this consent or any other matter. 91 -84- IN WITNESS WHEREOF, the undersigned have duly executed this Credit Agreement as a sealed instrument as of the date first set forth above. BARRY'S JEWELERS, INC. By:_________________________________________ Thomas S. Liston, Chief Financial Officer THE FIRST NATIONAL BANK OF BOSTON, individually and as Agent By:________________________________________ Elizabeth A. Ratto, Vice President EX-4.6.(C) 4 AM AGT #2 (8/30/96) TO COLLATERAL AGENCY 1 EXHIBIT 4.6(c) AMENDMENT AGREEMENT NO. 2 to that certain COLLATERAL AGENCY AND INTERCREDITOR AGREEMENT This AMENDMENT AGREEMENT NO. 2 (the "Amendment"), dated as of August 30, 1996, among (i) The First National Bank of Boston, as collateral agent (in such capacity, the "Collateral Agent") for the Secured Parties (as defined in the Collateral Agency Agreement) and as agent (in such capacity, the "Agent") for the Lenders (as defined in the Collateral Agency Agreement), (ii) First Trust National Association, as Trustee (the "Trustee") on behalf of the holders of the Debentures (as defined below), and (iii) Barry's Jewelers, Inc. (the "Borrower"). WHEREAS, in connection with (i) an Amended and Restated Revolving Credit Agreement dated as of December 21, 1995 (as amended and in effect from time to time the "Prior Credit Agreement"), among the Borrower, the financial institutions party thereto (the "Prior Lenders"), and The First National Bank of Boston as agent for the Prior Lenders (the "Agent"), which amended and restated in its entirety a Revolving Credit Agreement dated as of December 22, 1993 (as amended and in effect from time to time, the "Original Credit Agreement") and (ii) an Indenture dated as of December 22, 1993 (as amended and in effect from time to time, the "Indenture") among the Borrower and First Trust National Association, as trustee (the "Trustee"), the Borrower, the Trustee and The First National Bank of Boston in its capacity as Collateral Agent and as Agent previously executed and delivered an Amendment Agreement No. 1 to Collateral Agency and Intercreditor Agreement which amended that certain Collateral Agency and Intercreditor Agreement delivered in connection with the Original Credit Agreement (as so amended, as amended hereby and as otherwise amended and in effect from time to time, the "Collateral Agency Agreement") dated as of December 22, 1993, which sets forth the rights and obligations of the Collateral Agent and the Secured Parties with respect to the Collateral (as defined therein); WHEREAS, the Prior Credit Agreement has been amended and restated in its entirety pursuant to a Second Amended and Restated Revolving Credit Agreement dated as of the date hereof (as amended and in effect from time to time, the "Restated Credit Agreement") among the Borrower, the financial institutions party thereto (each, a "New Lender", and collectively, the "New Lenders") and The First National Bank of Boston as agent for the New Lenders (in such capacity, the "New Agent"); WHEREAS, the Trustee and the Borrower have made certain modifications and amendments to the Indenture and the Debentures; 2 -2- WHEREAS, it is a condition precedent to (i) the New Lenders' entering into the Restated Credit Agreement and making any loans or otherwise extending credit to the Borrower under the Restated Credit Agreement and (ii) the Trustee entering into the amendments to the Indenture and the Debentures that the Borrower execute and deliver to the Collateral Agent, for the benefit of the Secured Parties, this Amendment; and WHEREAS, the parties hereto wish to amend certain provisions of the Collateral Agency Agreement in order to confirm and ratify their relative rights and priorities with respect to the Collateral, as herein provided. NOW, THEREFORE, the parties hereto hereby agree as follows: Section 1. DEFINED TERMS. Capitalized terms which are used herein without definition and which are defined in the Collateral Agency Agreement shall have the same meanings herein as in the Collateral Agency Agreement. Section 2. AMENDMENT OF DEFINITIONS. The definition of "Bank Debt" set forth in Section 1.2 of the Collateral Agency Agreement is hereby amended and restated in its entirety to read as follows: Bank Debt. The "Obligations" as defined in the Credit Agreement, or any like term of the same meaning contained in any replacement of the Credit Agreement. Bank Debt shall include, without limitation, any interest and collection costs to the extent allowable under applicable bankruptcy laws and any such amounts that would have been allowable to the extent that the Liens on Collateral secured only the Bank Debt. Notwithstanding the foregoing, Bank Debt shall not include (i) principal amounts under the Credit Agreement, or any replacement of the Credit Agreement, to the extent, and only to the extent, that such principal amounts at any one time outstanding exceed the Maximum Bank Debt Principal (such excess, the "Excess Bank Debt") and (ii) any interest, fees, collection costs and other amounts to the extent that they relate solely to, or are allocable solely to, any Excess Bank Debt. As used herein, "Maximum Bank Debt Principal" shall mean $100,000,000. At no time shall Bank Debt exceed $100,000,000 in principal amount. Section 3. AMENDMENT OF COLLATERAL AGENCY FEE. Section 5.7 of the Collateral Agency Agreement is hereby amended by deleting the amount "$30,000" in such section and substituting the amount "$50,000" in lieu thereof. Section 4. NOTIFICATION AND ACKNOWLEDGMENT OF REPLACEMENT OF CREDIT AGREEMENT. Pursuant to the definition of "Credit Agreement" contained in the Collateral Agency Agreement, the Borrower hereby notifies the Collateral Agent that the Original Credit Agreement, previously replaced by the Prior Credit Agreement, is being replaced as of the date hereof by the Restated Credit Agreement. The Borrower hereby further notifies the Collateral Agent that (a) the Restated Credit Agreement and the Loan Documents (as defined in the Restated Credit Agreement) shall hereafter collectively constitute the "Credit Agreement" for all purposes under the Collateral Agency Agreement and the Credit Documents, (b) the New Lenders shall hereafter collectively constitute the "Lenders" for all 3 -3- purposes under the Collateral Agency Agreement and the Credit Documents, (c) the New Agent shall hereafter constitute the "Agent" and the "Agents" for all purposes under the Collateral Agency Agreement and the Credit Documents, and (d) the Loan Documents (as defined in the Restated Credit Agreement) shall hereafter collectively constitute the "Bank Loan Documents" for all purposes under the Collateral Agency Agreement and the Credit Documents. Section 5. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective as of the date hereof upon satisfaction of each of the conditions precedent set forth in this Section 5: (a) Delivery. The Borrower, the Trustee, and The First National Bank of Boston, in its capacity as Agent and as Collateral Agent, shall have executed and delivered this Amendment. (d) Proceedings and Documents. All proceedings in connection with the transactions contemplated by this Amendment and all documents incident thereto shall be reasonably satisfactory in substance and form to each of the Trustee, the Agent and the Collateral Agent, and each of the Trustee, the Agent and the Collateral Agent shall have received all information and such counterpart originals or certified or other copies of such documents as each of the Trustee, the Agent and the Collateral Agent may reasonably request. Section 6. MISCELLANEOUS PROVISIONS. (a) Except as otherwise expressly provided by this Amendment, all of the terms, conditions and provisions of the Collateral Agency Agreement shall remain the same. It is declared and agreed by each of the parties hereto that the Collateral Agency Agreement, as amended hereby, shall continue in full force and effect, and that this Amendment and the Collateral Agency Agreement shall be read and construed as one instrument. (b) This Amendment is intended to take effect as an agreement under seal and shall be construed according to and governed by the laws of the Commonwealth of Massachusetts. (c) This Amendment may be executed in any number of counterparts, but all such counterparts shall together constitute but one instrument. In making proof of this Amendment it shall not be necessary to produce or account for more than one counterpart signed by each party hereto by and against which enforcement hereof is sought. (d) The Borrower hereby agrees to pay to The First National Bank of Boston, in its capacity as Agent and as Collateral Agent, on demand by the Agent and the Collateral Agent, all reasonable out-of-pocket costs and expenses incurred or sustained by the Agent and the Collateral Agent in connection with the preparation of this Amendment (including reasonable legal fees and expenses). 4 -4- IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. THE FIRST NATIONAL BANK OF BOSTON, in its capacity as Agent and Collateral Agent By:__________________________________________ Elizabeth A. Ratto, Vice President FIRST TRUST NATIONAL ASSOCIATION, in its capacity as trustee for the holders of the Debentures By:__________________________________________ Title:_______________________________________ ACCEPTED AND AGREED TO: BARRY'S JEWELERS, INC. By:__________________________________________ Thomas S. Liston, Chief Financial Officer EX-4.7 5 SECOND AGT AND RESTATED SECURITY AGT 1 EXHIBIT 4.7 BOS-BUS:298633 SECOND AMENDED AND RESTATED SECURITY AGREEMENT SECOND AMENDED AND RESTATED SECURITY AGREEMENT (this "Agreement"), dated as of August 30, 1996, among (a) BARRY'S JEWELERS, INC. a California corporation (the "Company"), and (b) THE FIRST NATIONAL BANK OF BOSTON, a national banking association, as Collateral Agent under the Collateral Agency Agreement (as defined in the Restated Credit Agreement, as hereinafter defined) (hereinafter, in such capacity, the "Secured Party"), for the benefit of the Creditors (as hereinafter defined). WHEREAS, in connection with (i) an Amended and Restated Revolving Credit Agreement dated as of December 21, 1995 (as amended and in effect from time to time, the "Prior Credit Agreement"), among the Company, the financial institutions party thereto (the "Lenders"), and The First National Bank of Boston as agent for the Lenders, which amended and restated in its entirety a Revolving Credit Agreement dated as of December 22, 1993 (as amended and in effect from time to time, the "Original Credit Agreement) and (ii) an Indenture dated as of December 22, 1993 (as amended and in effect from time to time, the "Indenture"), among the Company and First Trust National Association, as trustee (the "Trustee"), the Company and the Secured Party previously executed and delivered an Amended and Restated Security Agreement dated as of December 21, 1995 (the "Prior Security Agreement") pursuant to which the Company confirmed and continued its grant to the Secured Party, for the benefit of the Creditors and the Secured Party, of a security interest in certain collateral; WHEREAS, the Prior Credit Agreement has been amended and restated in its entirety pursuant to a Second Amended and Restated Revolving Credit Agreement dated as of the date hereof (as amended and in effect from time to time, the "Restated Credit Agreement") among the Company, the Lenders and The First National Bank of Boston as agent for the Lenders (in such capacity, the "Agent"); WHEREAS, the Trustee and the Company have made certain modifications and amendments to the Indenture and the Debentures; WHEREAS, it is a condition precedent to (i) the Lenders' entering into the Restated Credit Agreement and making any loans or otherwise extending credit to the Company under the Restated Credit Agreement and (ii) the Trustee entering into the amendments to the Indenture and the Debentures that the Company execute and deliver to the Secured Party, for the benefit of the Creditors, a security agreement in substantially the form hereof; 2 WHEREAS, the rights and obligations of the Secured Party and the Creditors with respect to Collateral are further set forth in the Collateral Agency Agreement dated as of December 22, 1993, as amended by an amendment dated as of December 21, 1995 and as further amended by an amendment dated as of the date hereof (as so amended and as hereafter amended and in effect from time to time, the "Collateral Agency Agreement"), among the Secured Party, the Agent and the Trustee; WHEREAS, the Company wishes to amend and restate in its entirety the Prior Security Agreement in order to confirm and continue its grant of security interests in favor of the Secured Party in the Collateral (as defined herein), as herein provided; NOW, THEREFORE, in consideration of the promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. DEFINITIONS. All capitalized terms used herein without definitions shall have the respective meanings provided therefor in the Collateral Agency Agreement and, if not defined therein, shall have the respective meanings provided therefor in the Credit Agreement (as hereinafter defined). All terms defined in the Uniform Commercial Code of the Commonwealth of Massachusetts and used herein shall have the same definitions herein as specified therein. The following terms shall have the meanings set forth in this Section 1 or elsewhere referred to below: Agent. As defined in the preamble hereto and shall include any replacement or successor Agent under the Restated Credit Agreement or any like agent(s) (or replacement(s) thereof or successor(s) thereto) under any other Credit Agreement. Credit Agreement. The Restated Credit Agreement and the Loan Documents (as defined therein), and any agreement or agreements designated as a "Credit Agreement" under the Collateral Agency Agreement by written notice by the Company to the Secured Party with the written consent of the Agent and governing Indebtedness all or part of which was incurred to refund, refinance or replace all or any portion of the Indebtedness under the Restated Credit Agreement, as the same may hereafter be amended, renewed, extended, restated, supplemented or otherwise modified (including by increasing the amount of Indebtedness thereunder) from time to time. Creditors. The "Secured Parties", as defined in the Collateral Agency Agreement. Event of Default. An "Actionable Default", as defined in the Collateral Agency Agreement. Obligations. Secured Obligations, as defined in the Collateral Agency Agreement. Requisite Party. As defined in the Collateral Agency Agreement. Secured Party. As defined in the preamble hereto and shall include any successor Collateral Agent under the Collateral Agency Agreement. 3 Section 2. GRANT OF SECURITY INTEREST. Section 2.1. COLLATERAL GRANTED. The Company hereby ratifies and affirms the pledge, assignment and grant to the Secured Party made pursuant to the Prior Security Agreement of, and further hereby grants to the Secured Party, for the benefit of the Creditors and the Secured Party, to secure the payment and performance in full of all of the Obligations, a continuing security interest in and so pledges and assigns to the Secured Party, for the benefit of the Creditors and the Secured Party, the following properties, assets and rights of the Company, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof (all of the same being hereinafter called the "Collateral"): All personal and fixture property of every kind and nature including without limitation all furniture, fixtures, equipment, raw materials, inventory, goods, accounts, contract rights, rights to the payment of money, insurance refund claims and all other insurance claims and proceeds, tort claims, chattel paper, documents, instruments (including certificated securities), deposit accounts and all general intangibles including, without limitation, all uncertificated securities, tax refund claims, license fees, patents, patent applications, trademarks, trademark applications, trade names, copyrights, copyright applications, rights to sue and recover for past infringement of patents, trademarks and copyrights, computer programs, computer software, engineering drawings, service marks, customer lists, goodwill, and all licenses, permits, agreements of any kind or nature pursuant to which the Company possesses, uses or has authority to possess or use property (whether tangible or intangible) of others or others possess, use or have authority to possess or use property (whether tangible or intangible) of the Company, and all recorded data of any kind or nature, regardless of the medium of recording including, without limitation, all software, writings, plans, specifications and schematics. The Company acknowledges and agrees that, in applying the law of any jurisdiction that has now enacted or hereafter enacts all or substantially all of the uniform revision of Article 8 of the Uniform Commercial Code, with new provisions added to Article 9 contemplated by such revision, all as approved in 1994 by the American Law Institute and the National Conference of Commissioners on Uniform State Laws, the foregoing description of Collateral shall be deemed to include "investment property" as defined in such new provisions of Article 9, it being the intention of the Company that such property be included in the foregoing description of Collateral, whether prior to or after the effectiveness of such revision in such jurisdiction. Section 2.2. DELIVERY OF INSTRUMENTS, ETC. Pursuant to the terms hereof, the Company has endorsed, assigned and delivered to the Secured Party all negotiable or non-negotiable instruments (including certificated securities) and chattel paper pledged by it hereunder, together with instruments of transfer or assignment duly executed in blank as the Secured Party may have specified. In the event that the Company shall, after the date of this Agreement, acquire any other negotiable or non-negotiable instruments (including certificated securities) or chattel paper to be pledged by it hereunder, the Company shall forthwith endorse, assign and deliver the same to the Secured Party, accompanied by such 4 instruments of transfer or assignment duly executed in blank as the Secured Party may from time to time specify. To the extent that any securities are uncertificated, appropriate book-entry transfers reflecting the pledge of such securities created hereby have been or, in the case of uncertificated securities hereafter acquired by the Company, will at the time of such acquisition be, duly made for the account of the Secured Party or one or more nominees of the Secured Party with the issuer of such securities or other appropriate book-entry facility or financial intermediary, with the Secured Party having at all times the right to obtain definitive certificates (in the Secured Party's name or in the name of one or more nominees of the Secured Party) where the issuer customarily or otherwise issues certificates, all to be held as Collateral hereunder. The Company hereby acknowledges that the Secured Party may, in its discretion, appoint one or more financial institutions to act as the Secured Party's agent in holding in custodial account instruments or other financial assets in which the Secured Party is granted a security interest hereunder, including, without limitation, certificates of deposit and other instruments evidencing short term obligations. Section 2.3. STOCK PLEDGE AGREEMENT. Concurrently herewith, the Company is executing and delivering to the Secured Party, for the benefit of the Creditors and the Secured Party, the Stock Pledge Agreement pursuant to which the Company is pledging to the Secured Party, for the benefit of the Creditors and the Secured Party, all of the issued and outstanding shares of the capital stock of its Subsidiaries. Such pledges shall be governed by the terms of the Stock Pledge Agreement and not by the terms of this Security Agreement. Section 2.4. TRADEMARK ASSIGNMENTS. Concurrently herewith, the Company is also executing and delivering to the Secured Party, for the benefit of the Creditors and the Secured Party, the Trademark Security Agreement pursuant to which the Company is assigning to the Secured Party, for the benefit of the Creditors and the Secured Party, certain Collateral consisting of trademarks, service marks and trademark and service mark rights, together with the goodwill appurtenant thereto. The provisions of the Trademark Security Agreement are supplemental to the provisions of this Agreement, and nothing contained in the Trademark Security Agreement shall derogate from any of the rights or remedies of the Secured Party or any of the Creditors hereunder. Nor shall anything contained in the Trademark Security Agreement be deemed to prevent or extend the time of attachment or perfection of any security interest in such Collateral created hereby. Section 3. TITLE TO COLLATERAL, ETC. The Company is the owner of the Collateral free from any adverse lien, security interest or other encumbrance, except for the security interest created by this Agreement and other liens permitted by the Credit Agreement and the Indenture. None of the Collateral constitutes, or is the proceeds of, "farm products" as defined in Section 9-109(3) of the Uniform Commercial Code of the Commonwealth of Massachusetts. None of the account debtors in respect of any accounts, chattel paper or general intangibles and none of the obligors in respect of any instruments included in the Collateral is a governmental authority subject to the Federal Assignment of Claims Act. The Company hereby represents and warrants to the Secured Party that it does not own and currently use any copyrights registered with the United States Copyright Office or any patents, patent applications or other patent rights. 5 Section 4. CONTINUOUS PERFECTION. The Company's place of business or, if more than one, its chief executive office, is indicated on the Perfection Certificate delivered to the Secured Party herewith (the "Perfection Certificate"). The Company will not change the same, or the name, identity or corporate structure of the Company in any manner, without providing at least thirty (30) days' prior written notice to the Secured Party. The Collateral, to the extent not delivered to the Secured Party pursuant to Section 2.2, will be kept at those locations listed on the Perfection Certificate and the Company will not remove the Collateral from such locations (except for movement from one Permitted Inventory Location to another Permitted Inventory Location), without providing at least thirty (30) days' prior written notice to the Secured Party. Section 5. NO LIENS. Except for the security interest herein granted and liens permitted by the Credit Agreement and the Indenture, the Company shall be the owner of the Collateral free from any lien, security interest or other encumbrance, and the Company shall defend the same against all claims and demands of all persons at any time claiming the same or any interests therein adverse to the Secured Party or any of the Creditors. The Company shall not pledge, mortgage or create, or suffer to exist a security interest (other than liens permitted by the Credit Agreement and the Indenture) in the Collateral in favor of any person other than the Secured Party. Section 6. NO TRANSFERS. The Company will not sell or offer to sell or otherwise transfer the Collateral or any interest therein except for sales permitted by Section 9.5(b) of the Credit Agreement. Section 7. INSURANCE. Section 7.1. MAINTENANCE OF INSURANCE. The Company will maintain with financially sound and reputable insurers insurance with respect to its properties and business against such casualties and contingencies as shall be in accordance with general practices of businesses engaged in similar activities in similar geographic areas. Such insurance shall be in such minimum amounts that the Company will not be deemed a co-insurer under applicable insurance laws, regulations and policies and otherwise shall be in such amounts, contain such terms, be in such forms and be for such periods as may be reasonably satisfactory to the Secured Party to the extent provided in the Credit Agreement. In addition, all such insurance (excluding worker's compensation insurance) shall be payable to the Secured Party as loss payee or additional insured under a "standard" or "New York" loss payee clause for the benefit of the Creditors and the Secured Party. Without limiting the foregoing, the Company will (a) keep all of its physical property insured with casualty or physical hazard insurance on an "all risks" basis, with broad form electronic data processing coverage, with a full replacement cost endorsement and an "agreed amount" clause in an amount equal to 100% of the full replacement cost of such property, (b) maintain all such workers' compensation or similar insurance as may be required by law and (c) maintain, in amounts and with deductibles equal to those generally maintained by businesses engaged in similar activities in similar geographic areas, general public liability insurance against claims of bodily injury, death or property damage occurring, on, in or about the properties of the Company and product liability insurance. 6 Section 7.2. INSURANCE PROCEEDS. The proceeds of any casualty insurance in respect of any casualty loss of any of the Collateral shall, subject to the rights, if any, of other parties with a prior interest in the property covered thereby, (a) so long as no Default or Event of Default has occurred and is continuing (i) to the extent that the amount of such proceeds is less than $250,000, be disbursed to the Company for direct application by the Company solely to the repair or replacement of the Company's property so damaged or destroyed and (ii) to the extent that the amount of such proceeds is greater than $250,000 and less than $5,000,000, be disbursed to the Secured Party to be applied against the Bank Debt (as defined in the Collateral Agency Agreement), and (b) in all other circumstances, be held by the Secured Party as cash collateral for the Obligations. The Secured Party may, at its sole option, disburse from time to time all or any part of such proceeds so held as cash collateral, upon such terms and conditions as the Secured Party may reasonably prescribe, for direct application by the Company solely to the repair or replacement of the Company's property so damaged or destroyed, or the Secured Party may apply all or any part of such proceeds to the Obligations with the Total Commitment (if not then terminated) being reduced by the amount so applied to the Obligations in accordance with the terms of the Collateral Agency Agreement; provided, however, that until the occurrence of an Event of Default under and as defined in the Indenture, such proceeds shall not be applied to the Debenture Debt. Section 7.3. NOTICE OF CANCELLATION, ETC. All policies of insurance shall provide for at least ten (10) days' prior written cancellation notice to the Secured Party. In the event of failure by the Company to provide and maintain insurance as herein provided, the Secured Party may, at its option, provide such insurance and charge the amount thereof to the Company. The Company shall furnish the Secured Party with certificates of insurance and policies evidencing compliance with the foregoing insurance provision. Section 8. MAINTENANCE OF COLLATERAL; COMPLIANCE WITH LAW. The Company will keep the Collateral in good order and repair and will not use the same in violation of law or any policy of insurance thereon. The Secured Party, or its designee, may inspect the Collateral at any reasonable time, wherever located. The Company will pay promptly when due all taxes, assessments, governmental charges and levies upon the Collateral or incurred in connection with the use or operation of such Collateral or incurred in connection with this Agreement. The Company has at all times operated, and the Company will continue to operate, its business in compliance with all applicable provisions of the federal Fair Labor Standards Act, as amended, and with all applicable provisions of federal, state and local statutes and ordinances dealing with the control, shipment, storage or disposal of hazardous materials or substances. Section 9. COLLATERAL PROTECTION EXPENSES; PRESERVATION OF COLLATERAL. Section 9.1. EXPENSES INCURRED BY SECURED PARTY. In its discretion, the Secured Party may discharge taxes and other encumbrances at any time levied or placed on any of the Collateral, make repairs thereto and pay any necessary filing fees. The Company agrees to reimburse the Secured Party on demand for any and all reasonable expenditures so made. The Secured Party shall have no obligation to the Company to make any such expenditures, nor shall the making thereof relieve the Company of any default. 7 Section 9.2. SECURED PARTY'S OBLIGATIONS AND DUTIES. Anything herein to the contrary notwithstanding, the Company shall remain liable under each contract or agreement comprised in the Collateral to be observed or performed by the Company thereunder. Neither the Secured Party nor any Creditor shall have any obligation or liability under any such contract or agreement by reason of or arising out of this Agreement or the receipt by the Secured Party or any Creditor of any payment relating to any of the Collateral, nor shall the Secured Party or any Creditor be obligated in any manner to perform any of the obligations of the Company under or pursuant to any such contract or agreement, to make inquiry as to the nature or sufficiency of any payment received by the Secured Party or any Creditor in respect of the Collateral or as to the sufficiency of any performance by any party under any such contract or agreement, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to the Secured Party or to which the Secured Party or any Creditor may be entitled at any time or times. The Secured Party's sole duty with respect to the custody, safe keeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Uniform Commercial Code of the Commonwealth of Massachusetts or otherwise, shall be to deal with such Collateral in the same manner as the Secured Party deals with similar property for its own account. Section 10. SECURITIES AND DEPOSITS. The Secured Party may at any time, at its option, transfer to itself or any nominee any securities constituting Collateral, receive any income thereon and hold such income as additional Collateral or apply it to the Obligations. Whether or not any Obligations are due, the Secured Party may demand, sue for, collect, or make any settlement or compromise which it deems desirable with respect to such securities constituting Collateral. Regardless of the adequacy of Collateral or any other security for the Obligations, any deposits or other sums at any time credited by or due from the Secured Party or any Creditor to the Company may at any time be applied to or set off against any of the Obligations. Section 11. NOTIFICATION TO ACCOUNT DEBTORS AND OTHER OBLIGORS. If an Event of Default shall have occurred and be continuing, the Company shall, at the request of the Secured Party, notify account debtors on accounts, chattel paper and general intangibles of the Company and obligors on instruments for which the Company is an obligee of the security interest of the Secured Party in any account, chattel paper, general intangible or instrument and that payment thereof is to be made directly to the Secured Party, to the FNBB Concentration Account or to any financial institution designated by the Secured Party as the Secured Party's agent therefor, and the Secured Party may itself, if an Event of Default shall have occurred and be continuing, without notice to or demand upon the Company, so notify account debtors and obligors. After the making of such a request or the giving of any such notification, the Company shall hold any proceeds of collection of accounts, chattel paper, general intangibles and instruments received by the Company as trustee for the Secured Party, for the benefit of the Creditors and the Secured Party, without commingling the same with other funds of the Company and shall turn the same over to the Secured Party in the identical form received, together with any necessary endorsements or assignments. The Secured Party shall apply the proceeds of collection of accounts, chattel paper, general intangibles and instruments received by the Secured Party to the Obligations in accordance with the provisions of the Collateral Agency Agreement, 8 such proceeds to be immediately entered after final payment in cash or solvent credits of the items giving rise to them. Section 12. FURTHER ASSURANCES. The Company, at its own expense, shall do, make, execute and deliver all such additional and further acts, things, deeds, assurances and instruments as the Secured Party may require more completely to vest in and assure to the Secured Party and the Creditors their respective rights hereunder or in any of the Collateral, including, without limitation, (a) executing, delivering and, where appropriate, filing financing statements and continuation statements under the Uniform Commercial Code (including any fixture financing statements which the Party may in the future choose to file), (b) obtaining governmental and other third party consents and approvals, (c) obtaining waivers from mortgagees and landlords and (d) taking all actions required by Sections 8-313 and 8-321 of the Uniform Commercial Code, as applicable in each relevant jurisdiction, with respect to certificated and uncertificated securities. Section 13. POWER OF ATTORNEY. Section 13.1. APPOINTMENT AND POWERS OF SECURED PARTY. The Company hereby irrevocably constitutes and appoints the Secured Party and any officer of Secured Party thereof, with full power of substitution, as its true and lawful attorneys-in-fact with full irrevocable power and authority in the place and stead of the Company or in the Secured Party's own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments that may be necessary or desirable to accomplish the purposes of this Agreement (except that actions that this Agreement expressly authorize to be taken by the Secured Party following and during the continuation of a Default or Event of Default shall be taken by the Secured Party only during such periods) and, without limiting the generality of the foregoing, hereby gives said attorneys the power and right, on behalf of the Company, without prior notice to or assent by the Company (except that the Secured Party shall notify the Company within a reasonable time thereafter of its utilization of this power of attorney), to do the following: (a) upon the occurrence and during the continuance of an Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral in such manner as is consistent with the Uniform Commercial Code of the Commonwealth of Massachusetts and as fully and completely as though the Secured Party were the absolute owner thereof for all purposes, and to do at the Company' expense, at any time, or from time to time, all acts and things which the Secured Party deems necessary to protect, preserve or realize upon the Collateral and the Secured Party's security interest therein, in order to effect the intent of this Agreement, all as fully and effectively as the Company might do, including, without limitation, (i) the filing and prosecuting of registration and transfer applications with the appropriate federal or local agencies or authorities with respect to trademarks, copyrights and patentable inventions and processes, (ii) upon written notice to the Company, the exercise of voting rights with respect to voting securities, which rights may be exercised, if the Secured Party so elects, with a view to causing the liquidation in a commercially reasonable manner of assets of the issuer of any such securities and (iii) the execution, delivery and 9 recording, in connection with any sale or other disposition of any Collateral, of the endorsements, assignments or other instruments of conveyance or transfer with respect to such Collateral; and (b) to file such financing statements with respect hereto, with or without the Company's signature, or a photocopy of this Agreement in substitution for a financing statement, as the Secured Party may deem appropriate and to execute in the Company's name such financing statements and amendments thereto and continuation statements which may require the Company's signature. Section 13.2. RATIFICATION BY COMPANY. To the extent permitted by law, the Company hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. Section 13.3. NO DUTY ON SECURED PARTY. The powers conferred on the Secured Party hereunder are solely to protect the interests of the Secured Party and the Creditors in the Collateral and shall not impose any duty upon the Secured Party to exercise any such powers. The Secured Party shall be accountable only for the amounts that it actually receives as a result of the exercise of such powers and neither it nor any of its officers, directors, employees or agents shall be responsible to the Company for any act or failure to act, except for the Secured Party's own bad faith, gross negligence or willful misconduct. Section 14. REMEDIES. If an Event of Default shall have occurred and be continuing, the Secured Party may, without notice to or demand upon the Company, declare this Agreement to be in default, and the Secured Party shall thereafter have in any jurisdiction in which enforcement hereof is sought, in addition to all other rights and remedies, the rights and remedies of a secured party under the Uniform Commercial Code, including, without limitation, the right to take possession of the Collateral, and for that purpose the Secured Party may, so far as the Company can give authority therefor, enter upon any premises on which the Collateral may be situated and remove the same therefrom. The Secured Party may in its discretion require the Company to assemble all or any part of the Collateral at such location or locations within the state(s) of the Company's principal office(s) or at such other locations as the Secured Party may designate. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Secured Party shall give to the Company at least five (5) Business Days' prior written notice of the time and place of any public sale of Collateral or of the time after which any private sale or any other intended disposition is to be made. The Company hereby acknowledges that five (5) Business Days' prior written notice of such sale or sales shall be reasonable notice. In addition, the Company waives any and all rights that it may have to a judicial hearing in advance of the enforcement of any of the Secured Party's rights hereunder, including, without limitation, its right following an Event of Default to take immediate possession of the Collateral and to exercise its rights with respect thereto. To the extent that any of the Obligations are to be paid or performed by a person other than the Company, the Company waives and agrees not to assert any rights or privileges which it may have under Section 9-112 of the Uniform Commercial Code of the Commonwealth of Massachusetts. 10 Section 15. NO WAIVER, ETC. The Company waives demand, notice, protest, notice of acceptance of this Agreement, notice of loans made, credit extended, Collateral received or delivered or other action taken in reliance hereon and all other demands and notices of any description. With respect to both the Obligations and the Collateral, the Company assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of or failure to perfect any security interest in any Collateral, to the addition or release of any party or person primarily or secondarily liable, to the acceptance of partial payment thereon and the settlement, compromising or adjusting of any thereof, all in such manner and at such time or times as the Secured Party may deem advisable. The Secured Party shall have no duty as to the collection or protection of the Collateral or any income thereon, nor as to the preservation of rights against prior parties, nor as to the preservation of any rights pertaining thereto beyond the safe custody thereof as set forth in Section 9.2 hereof. The Secured Party shall not be deemed to have waived any of its rights upon or under the Obligations or the Collateral unless such waiver shall be in writing and signed by the Secured Party with the consent of the Requisite Party. No delay or omission on the part of the Secured Party in exercising any right shall operate as a waiver of such right or any other right. A waiver on any one occasion shall not be construed as a bar to or waiver of any right on any future occasion. All rights and remedies of the Secured Party with respect to the Obligations or the Collateral, whether evidenced hereby or by any other instrument or papers, shall be cumulative and may be exercised singularly, alternatively, successively or concurrently at such time or at such times as the Secured Party deems expedient. Section 16. MARSHALLING. Neither the Secured Party nor any Creditor shall be required to marshal any present or future collateral security (including but not limited to this Agreement and the Collateral) for, or other assurances of payment of, the Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order, and all of the rights of the Secured Party hereunder and of the Secured Party or any Creditor in respect of such collateral security and other assurances of payment shall be cumulative and in addition to all other rights, however existing or arising. To the extent that it lawfully may, the Company hereby agrees that it will not invoke any law relating to the marshalling of collateral which might cause delay in or impede the enforcement of the Secured Party's rights under this Agreement or under any other instrument creating or evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, the Company hereby irrevocably waives the benefits of all such laws. Section 17. PROCEEDS OF DISPOSITIONS; EXPENSES. The Company shall pay to the Secured Party on demand any and all expenses, including reasonable attorneys' fees and disbursements, incurred or paid by the Secured Party in protecting, preserving or enforcing the Secured Party's rights under or in respect of any of the Obligations or any of the Collateral. After deducting all of said expenses, the residue of any proceeds of collection or sale of the Obligations or Collateral shall, to the extent actually received in cash, be applied to the payment of the Obligations in such order or preference as is provided in the Collateral Agency Agreement, proper allowance and provision being made for any Obligations not then due. Upon the final payment and satisfaction in full of all of the Obligations and after making any payments required by Section 9-504(1)(c) of the Uniform 11 Commercial Code of the Commonwealth of Massachusetts, any excess shall be returned to the Company, and the Company shall remain liable for any deficiency in the payment of the Obligations. A statement by the Secured Party that is submitted to the Company with respect to the amount of such expenses and containing a basic description thereof shall be prima facie evidence of the amount thereof owing to the Secured Party. Section 18. TERMINATION. This Agreement shall terminate in accordance with the requirements of Section 12.5 of the Collateral Agency Agreement, and the Secured Party shall, at the Company's request and expense, execute and deliver to the Company a proper instrument or instruments acknowledging the satisfaction and termination of the Liens created hereby and will duly assign, transfer and deliver to the Company, without recourse and without any representation or warranty (except that such Collateral shall be free and clear of all Liens created by the Secured Party), such of the Collateral as may be in the possession of the Secured Party and has not theretofore been sold or otherwise applied pursuant to this Agreement. Section 19. OVERDUE AMOUNTS. Until paid, all amounts due and payable by the Company hereunder shall be a debt secured by the Collateral and shall bear, whether before or after judgment, interest at the rate of interest for overdue principal set forth in the Credit Agreement. Section 20. GOVERNING LAW; CONSENT TO JURISDICTION. THIS AGREEMENT IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. The Company agrees that any suit for the enforcement of this Agreement may be brought in the courts of the Commonwealth of Massachusetts or any federal court sitting therein and consents to the non-exclusive jurisdiction of such court and to service of process in any such suit being made upon the Company by mail at the address specified in Section 20 of the Credit Agreement. The Company hereby waives any objection that it may now or hereafter have to the venue of any such suit or any such court or that such suit is brought in an inconvenient court. Section 21. WAIVER OF JURY TRIAL. THE COMPANY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF ANY SUCH RIGHTS OR OBLIGATIONS. Except as prohibited by law, the Company waives any right which it may have to claim or recover in any litigation referred to in the preceding sentence any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages. The Company (a) certifies that neither the Secured Party or any Creditor nor any representative, agent or attorney of the Secured Party or any Lender has represented, expressly or otherwise, that the Secured Party or any Creditor would not, in the event of litigation, seek to enforce the foregoing waivers and (b) acknowledges that, in entering into the Credit Agreement, the Indenture the other Loan Documents to which the Secured Party or any of the Creditors is a party, the Secured Party and the Creditors are relying upon, among other things, the waivers and certifications contained in this Section 21. 12 Section 22. MISCELLANEOUS. The headings of each section of this Agreement are for convenience only and shall not define or limit the provisions thereof. This Agreement and all rights and obligations hereunder shall be binding upon the Company and its respective successors and assigns, and shall inure to the benefit of the Secured Party, the Creditors and their respective successors and assigns. If any term of this Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be affected thereby, and this Agreement shall be construed and be enforceable as if such invalid, illegal or unenforceable term had not been included herein. The Company acknowledges receipt of a copy of this Agreement. Notwithstanding any provision of this Agreement to the contrary, the Secured Party shall be authorized (and, with respect to dispositions of Collateral under Section 9.5(b) of the Credit Agreement, required) to release any of the Collateral or to provide any releases, financing statements or instruments of subordination in connection therewith solely in compliance with Section 8 of the Collateral Agency Agreement. This Agreement may not be amended or supplemented except by a writing signed by the Company and the Secured Party; provided, however, that any such amendment or supplementation shall comply with the provisions of Section 9(a) of the Collateral Agency Agreement. Notwithstanding any provision in this Agreement to the contrary, to the extent any provision of this Agreement conflicts with the Credit Agreement, the Collateral Agency Agreement or the Indenture, the provisions of the Credit Agreement and the Collateral Agency Agreement shall be controlling. 13 IN WITNESS WHEREOF, intending to be legally bound, the Company has caused this Security Agreement to be duly executed as of the date first above written. BARRY'S JEWELERS, INC. By:_________________________ Thomas S. Liston, Chief Financial Officer Accepted: THE FIRST NATIONAL BANK OF BOSTON, in its capacity as Collateral Agent By:__________________________________ Elizabeth A. Ratto, Vice President 14 CERTIFICATE OF ACKNOWLEDGMENT STATE OF __________ ) ) ss COUNTY OF _________________________________ ) Before me, the undersigned, a Notary Public in and for the county aforesaid, on this ______ day of August, 1996, personally appeared Thomas S. Liston to me known personally, and who, being by me duly sworn, deposes and says that he is the Chief Financial Officer of Barry's Jewelers, Inc., and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said Chief Financial Officer acknowledged said instrument to be the free act and deed of said corporation. ______________________________ Notary Public My Commission Expires: EX-4.8 6 SECOND AM AND RESTATED TRADEMARK COLLATERAL AGT 1 EXHIBIT 4.8 BOS-BUS:298647 SECOND AMENDED AND RESTATED TRADEMARK COLLATERAL SECURITY AND PLEDGE AGREEMENT SECOND AMENDED AND RESTATED TRADEMARK COLLATERAL SECURITY AND PLEDGE AGREEMENT dated as of August 30, 1996, among (a) BARRY'S JEWELERS, INC., a California corporation (the "Assignor"), and (b) THE FIRST NATIONAL BANK OF BOSTON, a national banking association, as Collateral Agent under the Collateral Agency Agreement (as defined below) (hereinafter, in such capacity, the "Secured Party"), for the benefit of the Creditors (as hereinafter defined). WHEREAS, in connection with (i) an Amended and Restated Revolving Credit Agreement dated as of December 21, 1995 (as amended and in effect from time to time, the "Prior Credit Agreement"), among the Company, the financial institutions party thereto (the "Lenders"), and The First National Bank of Boston as agent for the Lenders, which amended and restated in its entirety a Revolving Credit Agreement dated as of December 23, 1993 (as amended and in effect from time to time, the "Original Credit Agreement"), and (ii) an Indenture dated as of December 22, 1993 (as amended and in effect from time to time, the "Indenture"), among the Company and First Trust National Association, as trustee (the "Trustee"), the Company and the Secured Party previously executed and delivered an Amended and Restated Security Agreement dated as of December 21, 1995 (the "Prior Security Agreement"), pursuant to which the Company confirmed and continued its grant to the Secured Party, for the benefit of the Creditors and the Secured Party, of a security interest in certain of the Assignor's personal property and fixture assets (as more fully defined in the Security Agreement, the "Collateral"); WHEREAS, pursuant to the Prior Security Agreement, the Company and the Secured Party previously executed and delivered an Amended and Restated Trademark Collateral Security and Pledge Agreement dated as of December 21, 1995 (the "Prior Trademark Agreement"), pursuant to which the Company confirmed and continued its grant to the Secured Party, for the benefit of the Creditors and the Secured Party, of a security interest in certain trademark collateral, including but not limited to the trademarks, service marks, trademark and service mark registrations, and trademark and service mark registration applications listed on Schedule A to the Prior Trademark Security Agreement, all to secure the payment and performance of the Obligations (as hereinafter defined); WHEREAS, the Prior Credit Agreement has been amended and restated in its entirety pursuant to a Second Amended and Restated Revolving Credit Agreement dated 2 -2- as of the date hereof (as amended and in effect from time to time, the "Restated Credit Agreement") among the Company, the Lenders and The First National Bank of Boston as agent for the Lenders (in such capacity, the "Agent"); WHEREAS, the Trustee and the Company have made certain modifications and amendments to the Indenture and the Debentures; WHEREAS, the Prior Security Agreement has been amended and restated in its entirety pursuant to a Second Amended and Restated Security Agreement dated as of the date hereof (as amended and in effect from time to time, the "Security Agreement") between the Company and the Secured Party, for the benefit of the Creditors and the Secured Party; WHEREAS, the rights and obligations of the Secured Party and the Creditors with respect to the Collateral are further set forth in the Collateral Agency Agreement dated as of December 22, 1993, as amended by an amendment dated as of December 21, 1995 and as further amended by an amendment dated as of the date hereof (as so amended and as hereafter amended and in effect from time to time, the "Collateral Agency Agreement"), among the Secured Party, the Agent and the Trustee; WHEREAS, it is a condition precedent to (i) the Lenders' entering into the Restated Credit Agreement and making any loans or otherwise extending credit to the Company under the Restated Credit Agreement and (ii) the Trustee entering into the amendments to the Indenture and the Debentures that the Company execute and deliver to the Secured Party for the benefit of the Creditors and the Secured Party, a Trademark Agreement in substantially the form hereof; WHEREAS, the Assignor wishes to amend and restate in its entirety the Prior Trademark Agreement in order to confirm and continue its grant of security interests in favor of the Secured Party in the Pledged Trademarks (as defined herein), as herein provided; and WHEREAS, this Trademark Agreement is supplemental to the provisions contained in the Security Agreement. NOW, THEREFORE, in consideration of the premises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings provided therefor in the Collateral Agency Agreement, and if not defined therein, shall have the respective meanings provided therefor in the Credit Agreement and the Security Agreement. In addition, the following terms shall have the meanings set forth in this Section 1 or elsewhere in this Trademark Agreement referred to below: 3 -3- Agent. As defined in the preamble hereto and shall include any replacement or successor Agent under the Restated Credit Agreement or any like agent (or replacement thereof or successor thereto) under any other Credit Agreement. Assignment of Marks. See Section 2(a) hereof. Associated Goodwill. All goodwill of the Assignor and its business, products and services appurtenant to, associated with or symbolized by the Trademarks and the use thereof. Credit Agreement. The Restated Credit Agreement and the Loan Documents (as defined therein), and any agreement or agreements designated as a "Credit Agreement" under the Collateral Agency Agreement by written notice by the Assignor to the Secured Party with the written consent of the Agent and governing Indebtedness all or part of which was incurred to refund, refinance or replace all or any portion of the Indebtedness under the Restated Credit Agreement, as the same may hereafter be amended, renewed, extended, restated, supplemented or otherwise modified (including by increasing the amount of Indebtedness thereunder) from time to time. Creditors. The "Secured Parties", as defined in the Collateral Agency Agreement. Event of Default. An "Actionable Default", as defined in the Collateral Agency Agreement. Obligations. Secured Obligations, as defined in the Collateral Agency Agreement. Pledged Trademarks. All of the Assignor's right, title and interest in and to all of the Trademarks, the Trademark Registrations, the Trademark License Rights, the Trademark Rights, the Associated Goodwill, the Related Assets, and all accessions to, substitutions for, replacements of, and all products and proceeds of any and all of the foregoing. PTO. The United States Patent and Trademark Office. Related Assets. All assets, rights and interests of the Assignor that uniquely reflect or embody the Associated Goodwill, including the following: (a) all patents, inventions, copyrights, trade secrets, confidential information, formulae, methods or processes, compounds, recipes, know-how, methods and operating systems, drawings, descriptions, formulations, manufacturing and production and delivery procedures, quality control procedures, product and service specifications, catalogs, price lists, and advertising materials, relating to the manufacture, production, delivery, provision and sale of goods or services under or in association with any of the Trademarks; and (b) the following documents and things in the possession or under the control of the Assignor, or subject to its demand for possession or control, related to the production, delivery, provision and sale by the Assignor, or any affiliate, franchisee, licensee or 4 -4- contractor, of products or services sold by or under the authority of the Assignor in connection with the Trademarks or Trademark Rights, whether prior to, on or subsequent to the date hereof: (i) all lists, contracts, ancillary documents and other information that identify, describe or provide information with respect to any customers, dealers or distributors of the Assignor, its affiliates or franchisees or licensees or contractors, for products or services sold under or in connection with the Trademarks or Trademark Rights, including all lists and documents containing information regarding each customer's, dealer's or distributor's name and address, credit, payment, discount, delivery and other sale terms, and history, pattern and total of purchases by brand, product, style, size and quantity; (ii) all agreements (including franchise agreements), product and service specification documents and operating, production and quality control manuals relating to or used in the design, manufacture, production, delivery, provision and sale of products or services under or in connection with the Trademarks or Trademark Rights; (iii) all documents and agreements relating to the identity and locations of all sources of supply, all terms of purchase and delivery, for all materials, components, raw materials and other supplies and services used in the manufacture, production, provision, delivery and sale of products or services under or in connection with the Trademarks or Trademark Rights; and (iv) all agreements and documents constituting or concerning the present or future, current or proposed advertising and promotion by the Assignor (or any of its affiliates, franchisees, licensees or contractors) of products or services sold under or in connection with the Trademarks or Trademark Rights. Requisite Party. As defined in the Collateral Agency Agreement. Secured Party. As defined in the preamble hereto and shall include any successor Collateral Agent under the Collateral Agency Agreement. Security Agreement. The Second Amended and Restated Security Agreement entered into as of the date hereof between the Assignor and the Secured Party, as amended and in effect from time to time. Trademark Agreement. This Amended and Restated Trademark Collateral Security and Pledge Agreement, as amended and in effect from time to time. Trademark License Rights. Any and all past, present or future rights and interests of the Assignor pursuant to any and all past, present and future franchising or licensing agreements in favor of the Assignor, or to which the Assignor is a party, pertaining to any Trademarks, Trademark Registrations, or Trademark Rights owned or used by third parties in the past, present or future, including the right (but not the obligation) in the name of the Assignor or the Secured Party to enforce, and sue and recover for, any breach or violation of any such agreement to which the Assignor is a party. 5 -5- Trademark Registrations. All past, present or future federal, state, local and foreign registrations of the Trademarks, all past, present and future applications for any such registrations (and any such registrations thereof upon approval of such applications), together with the right (but not the obligation) to apply for such registrations (and prosecute such applications) in the name of the Assignor or the Secured Party, and to take any and all actions necessary or appropriate to maintain such registrations in effect and renew and extend such registrations. Trademark Rights. Any and all past, present or future rights in, to and associated with the Trademarks throughout the world, whether arising under federal law, state law, common law, foreign law or otherwise, including the following: all such rights arising out of or associated with the Trademark Registrations; the right (but not the obligation) to register claims under any state, federal or foreign trademark law or regulation; the right (but not the obligation) to sue or bring opposition or cancellation proceedings in the name of the Assignor or the Secured Party for any and all past, present and future infringements or dilution of or any other damages or injury to the Trademarks, the Trademark Rights, or the Associated Goodwill, and the rights to damages or profits due or accrued arising out of or in connection with any such past, present or future infringement, dilution, damage or injury; and the Trademark License Rights. Trademarks. All of the trademarks, service marks, designs, logos, indicia, trade names, corporate names, company names, business names, fictitious business names, trade styles, elements of package or trade dress, and other source and product or service identifiers, used or associated with or appurtenant to the products, services and businesses of the Assignor, that (a) are set forth on Schedule A hereto, or (b) have been adopted, acquired, owned, held or used by the Assignor or are now owned, held or used by the Assignor, in the Assignor's business, or with the Assignor's products and services, or in which the Assignor has any right, title or interest, or (c) are in the future adopted, acquired, owned, held and used by the Assignor in the Assignor's business or with the Assignor's products and services, or in which the Assignor in the future acquires any right, title or interest. use. With respect to any Trademark, all uses of such Trademark by, for or in connection with the Assignor or its business or for the direct or indirect benefit of the Assignor or its business, including all such uses by the Assignor itself, by any of the affiliates of the Assignor, or by any franchisee, licensee or contractor of the Assignor. Unless otherwise provided herein, the rules of interpretation set forth in Section 1.2 of the Credit Agreement shall be applicable to this Trademark Agreement. Section 2. GRANT OF SECURITY INTEREST. Section 2.1. SECURITY INTEREST; ASSIGNMENT OF MARKS. As collateral security for the payment and performance in full of all of the Obligations, the Assignor hereby ratifies the grant, pledge and mortgage to the Secured Party, for the benefit of the Creditors and the Secured Party, made pursuant to the Prior Trademark Agreement of, and further hereby unconditionally grants to the Secured Party, for the benefit of the Creditors and the 6 -6- Secured Party, a continuing security interest in and first priority lien on the Pledged Trademarks, and pledges and mortgages (but does not transfer title to) the Pledged Trademarks to the Secured Party for the benefit of the Creditors and the Secured Party. In addition, the Assignor has executed in blank and delivered to the Secured Party an assignment of federally registered trademarks in substantially the form of Exhibit 1 hereto (the "Assignment of Marks"). The Assignor hereby authorizes the Secured Party to complete as assignee and record with the PTO the Assignment of Marks upon the occurrence and during the continuance of an Event of Default and the proper exercise of the Secured Party's remedies under this Trademark Agreement and the Security Agreement. Section 2.2. CONDITIONAL ASSIGNMENT. In addition to, and not by way of limitation of, the grant, pledge and mortgage of the Pledged Trademarks provided in Section 2.1 hereof, the Assignor grants, assigns, transfers, conveys and sets over to the Secured Party, for the benefit of the Banks and the Secured Party, the Assignor's entire right, title and interest in and to the Pledged Trademarks; provided that such grant, assignment, transfer and conveyance shall be and become of force and effect only (a) upon or after the occurrence and during the continuance of an Event of Default and (b) either (i) upon the written demand of the Secured Party at any time during such continuance or (ii) immediately and automatically (without notice or action of any kind by the Secured Party) upon an Event of Default for which acceleration of the Loans is automatic under the Credit Agreement or upon the sale or other disposition of or foreclosure upon the Collateral pursuant to the Security Agreement and applicable law (including the transfer or other disposition of the Collateral by the Assignor to the Secured Party or its nominee in lieu of foreclosure). Section 2.3. SUPPLEMENTAL TO SECURITY AGREEMENT. Pursuant to the Security Agreement the Assignor has granted to the Secured Party, for the benefit of the Creditors and the Secured Party, a continuing security interest in and lien on the Collateral (including the Pledged Trademarks). The Security Agreement, and all rights and interests of the Secured Party in and to the Collateral (including the Pledged Trademarks) thereunder, are hereby ratified and confirmed in all respects. In no event shall this Trademark Agreement, the grant, assignment, transfer and conveyance of the Pledged Trademarks hereunder, or the recordation of this Trademark Agreement (or any document hereunder) with the PTO, adversely affect or impair, in any way or to any extent, the Security Agreement, the security interest of the Secured Party in the Collateral (including the Pledged Trademarks) pursuant to the Security Agreement and this Trademark Agreement, the attachment and perfection of such security interest under the Uniform Commercial Code (including the security interest in the Pledged Marks), or any present or future rights and interests of the Secured Party in and to the Collateral under or in connection with the Security Agreement, this Trademark Agreement or the Uniform Commercial Code. Any and all rights and interests of the Secured Party in and to the Pledged Trademarks (and any and all obligations of the Assignor with respect to the Pledged Trademarks) provided herein, or arising hereunder or in connection herewith, shall only supplement and be cumulative and in addition to the rights and interests of the Secured Party (and the obligations of the Assignor) in, to or with respect to the Collateral (including the Pledged Trademarks) provided in or arising under or in connection with the Security Agreement and shall not be in derogation thereof. 7 -7- Section 3. REPRESENTATIONS, WARRANTIES AND COVENANTS. The Assignor represents, warrants and covenants that: (a) Schedule A sets forth a true and complete list of all Trademarks and Trademark Registrations now owned, licensed, controlled or used by the Assignor; (b) the Trademarks and Trademark Registrations are subsisting and have not been adjudged invalid or unenforceable, in whole or in part, and there is no litigation or proceeding pending concerning the validity or enforceability of the Trademarks or Trademark Registrations; (c) to the best of the Assignor's knowledge, each of the Trademarks and Trademark Registrations is valid and enforceable; (d) to the best of the Assignor's knowledge, there is no infringement by others of the Trademarks, Trademark Registrations or Trademark Rights; (e) no claim has been made that the use of any of the Trademarks does or may violate the rights of any third person, and to the best of the Assignor's knowledge, there is no infringement by the Assignor of the trademark rights of others; (f) the Assignor is the sole and exclusive owner of the entire and unencumbered right, title and interest in and to each of the Pledged Trademarks listed on Schedule A attached hereto (other than ownership and other rights reserved by third party owners with respect to Trademarks that the Assignor is licensed to use), free and clear of any liens, charges, encumbrances and adverse claims, including pledges, assignments, licenses, registered user agreements and covenants by such Assignor not to sue third persons, other than the security interest and assignment created by the Security Agreement and this Trademark Agreement and other than liens granted under the Receivables Securitization Facility for which releases have been obtained and delivered to the Collateral Agent; (g) the Assignor has the unqualified right to enter into this Trademark Agreement and to perform its terms and will, at the request of the Collateral Agent, enter into written agreements with each of its present and future advertising and marketing agents and consultants, licensors and licensees that will enable them to comply with the covenants herein contained; (h) the Assignor has used, and will continue to use, proper statutory and other appropriate proprietary notices in connection with its use of the Trademarks; (i) the Assignor has used, and will continue to use for the duration of this Trademark Agreement, consistent standards of quality in its manufacture and provision of products and services sold or provided under the Trademarks; (j) this Trademark Agreement, together with the Security Agreement, will create in favor of the Secured Party a valid and perfected first priority security interest in the Pledged Trademarks upon making the filings referred to in clause (k) of this Section 3; and (k) except for the filing of financing statements in the filing office of the state of California under the Uniform Commercial Code and the recording of this Trademark Agreement with the PTO, no authorization, approval or other action by, and no notice to or filing with, any governmental or regulatory authority, agency or office is required either (i) for the grant by the Assignor or the effectiveness of the security interest and assignment granted hereby or for the execution, delivery and performance of this Trademark Agreement by the Assignor, or (ii) for the perfection of or the exercise by the Secured Party of any of its rights and remedies hereunder. Section 4. INSPECTION RIGHTS. The Assignor hereby grants to each of the Secured Party and the Creditors and its employees and agents the right to visit the Assignor's plants and facilities that manufacture, inspect or store products sold under any of the Trademarks, and to inspect the products and quality control records relating thereto at reasonable times during regular business hours. 8 -8- Section 5. NO TRANSFER OR INCONSISTENT AGREEMENTS. Without the Secured Party's prior written consent, and except for licenses of the Pledged Trademarks in the ordinary course of the Assignor's business consistent with past practices, the Assignor will not (a) mortgage, pledge, assign, encumber, grant a security interest in, transfer, license or alienate any of the Pledged Trademarks, or (b) enter into any agreement that is inconsistent with the Assignor's obligations under this Trademark Agreement or the Security Agreement. Section 6. AFTER-ACQUIRED TRADEMARKS, ETC. Section 6.1. AFTER-ACQUIRED TRADEMARKS. If, before the Obligations shall have been finally paid and satisfied in full, the Assignor shall obtain any right, title or interest in or to any other or new Trademarks, Trademark Registrations or Trademark Rights, the provisions of this Trademark Agreement shall automatically apply thereto and the Assignor shall promptly provide to the Secured Party notice thereof in writing and execute and deliver to the Secured Party such documents or instruments as the Secured Party may reasonably request further to implement, preserve or evidence the Secured Party's interest therein. Section 6.2. AMENDMENT TO SCHEDULE. The Assignor authorizes the Secured Party to modify this Trademark Agreement and the Assignment of Marks, without the necessity of the Assignor's further approval or signature, by amending Schedule A hereto and the Annex to the Assignment of Marks to include any future or other Trademarks, Trademark Registrations or Trademark Rights under Section 2 or Section 6 hereof. Section 7. TRADEMARK PROSECUTION. Section 7.1. ASSIGNOR RESPONSIBLE. The Assignor shall assume full and complete responsibility for the prosecution, defense, enforcement or any other necessary or desirable actions in connection with the Pledged Trademarks, and shall hold each of the Secured Party and the Creditors harmless from any and all costs, damages, liabilities and expenses that may be incurred by the Secured Party or any Creditor in connection with the Secured Party's interest in the Pledged Trademarks or any other action or failure to act in connection with this Trademark Agreement or the transactions contemplated hereby. In respect of such responsibility, the Assignor shall retain trademark counsel acceptable to the Secured Party. Section 7.2. ASSIGNOR'S DUTIES, ETC. The Assignor shall have the right and the duty, through trademark counsel acceptable to the Secured Party, to prosecute diligently any trademark registration applications of the Trademarks pending as of the date of this Trademark Agreement or thereafter, to preserve and maintain all rights in the Trademarks and Trademark Registrations, including the filing of appropriate renewal applications and other instruments to maintain in effect the Trademark Registrations and the payment when due of all registration renewal fees and other fees, taxes and other expenses that shall be incurred or that shall accrue with respect to any of the Trademarks or Trademark Registrations. Any expenses incurred in connection with such applications and actions shall be borne by the Assignor. The Assignor shall not abandon any filed 9 -9- trademark registration application, or any Trademark Registration or Trademark, without the consent of the Secured Party, which consent shall not be unreasonably withheld. Section 7.3. ASSIGNOR'S ENFORCEMENT RIGHTS. The Assignor shall have the right and the duty to bring suit or other action in the Assignor's own name to maintain and enforce the Trademarks, the Trademark Registrations and the Trademark Rights. The Assignor may require the Secured Party to join in such suit or action as necessary to assure the Assignor's ability to bring and maintain any such suit or action in any proper forum if (but only if) the Secured Party is completely satisfied that such joinder will not subject the Secured Party or any Creditor to any risk of liability. The Assignor shall promptly, upon demand, reimburse and indemnify the Secured Party for all damages, costs and expenses, including legal fees, incurred by the Secured Party pursuant to this Section 7.3. Section 7.4. PROTECTION OF TRADEMARKS, ETC. In general, the Assignor shall take any and all such actions (including institution and maintenance of suits, proceedings or actions) as may be necessary or appropriate to properly maintain, protect, preserve, care for and enforce the Pledged Trademarks. The Assignor shall not take or fail to take any action, nor permit any action to be taken or not taken by others under its control, that would adversely affect the validity, grant or enforcement of the Pledged Trademarks. Section 7.5. NOTIFICATION BY ASSIGNOR. Promptly upon obtaining knowledge thereof, the Assignor will notify the Secured Party in writing of the institution of, or any final adverse determination in, any proceeding in the PTO or any similar office or agency of the United States or any foreign country, or any court, regarding the validity of any of the Trademarks or Trademark Registrations or the Assignor's rights, title or interests in and to the Pledged Trademarks, and of any event that does or reasonably could materially adversely affect the value of any of the Pledged Trademarks, the ability of the Assignor or the Secured Party to dispose of any of the Pledged Trademarks or the rights and remedies of the Secured Party in relation thereto (including but not limited to the levy of any legal process against any of the Pledged Trademarks). Section 8. REMEDIES. Upon the occurrence and during the continuance of an Event of Default, the Secured Party shall have, in addition to all other rights and remedies given it by this Trademark Agreement (including, without limitation, those set forth in Section 2.2 hereof), the Credit Agreement, the Security Agreement and the other Loan Documents, those allowed by law and the rights and remedies of a secured party under the Uniform Commercial Code as enacted in the Commonwealth of Massachusetts, and, without limiting the generality of the foregoing, the Secured Party may immediately, without demand of performance and without other notice (except as set forth next below) or demand whatsoever to the Assignor, all of which are hereby expressly waived, sell or license at public or private sale or otherwise realize upon the whole or from time to time any part of the Pledged Trademarks, or any interest that the Assignor may have therein, and after deducting from the proceeds of sale or other disposition of the Pledged Trademarks all expenses incurred by the Secured Party in attempting to enforce this Trademark Agreement (including all reasonable expenses for broker's fees and legal services), shall apply the residue of such proceeds toward the payment of the Obligations as set forth in or by reference in the Security Agreement. Notice of any sale, license or other disposition of the Pledged Trademarks shall be given to the Assignor at least five (5) 10 -10- days before the time that any intended public sale or other public disposition of the Pledged Trademarks is to be made or after which any private sale or other private disposition of the Pledged Trademarks may be made, which the Assignor hereby agrees shall be reasonable notice of such public or private sale or other disposition. At any such sale or other disposition, the Secured Party may, to the extent permitted under applicable law, purchase or license the whole or any part of the Pledged Trademarks or interests therein sold, licensed or otherwise disposed of. Section 9. COLLATERAL PROTECTION. If the Assignor shall fail to do any act that it has covenanted to do hereunder, or if any representation or warranty of the Assignor shall be breached, the Secured Party, in its own name or that of the Assignor (in the sole discretion of the Secured Party), may (but shall not be obligated to) do such act or remedy such breach (or cause such act to be done or such breach to be remedied), and the Assignor agrees promptly to reimburse the Secured Party for any cost or expense incurred by the Secured Party in so doing. Section 10. POWER OF ATTORNEY. If any Event of Default shall have occurred and be continuing, the Assignor does hereby make, constitute and appoint the Secured Party (and any officer or Secured Party of the Secured Party as the Secured Party may select in its exclusive discretion) as the Assignor's true and lawful attorney-in-fact, with full power of substitution and with the power to endorse the Assignor's name on all applications, documents, papers and instruments necessary for the Secured Party to use the Pledged Trademarks, or to grant or issue any exclusive or nonexclusive license of any of the Pledged Trademarks to any third person, or to take any and all actions necessary for the Secured Party to assign, pledge, convey or otherwise transfer title in or dispose of any of the Pledged Trademarks or any interest of the Assignor therein to any third person, and, in general, to execute and deliver any instruments or documents and do all other acts that the Assignor is obligated to execute and do hereunder. The Assignor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof and releases each of the Secured Party and the Creditors from any claims, liabilities, causes of action or demands arising out of or in connection with any action taken or omitted to be taken by the Secured Party under this power of attorney (except for the Secured Party's gross negligence or willful misconduct). This power of attorney is coupled with an interest and shall be irrevocable for the duration of this Trademark Agreement. Section 11. FURTHER ASSURANCES. The Assignor shall, at any time and from time to time, and at its expense, make, execute, acknowledge and deliver, and file and record as necessary or appropriate with governmental or regulatory authorities, agencies or offices, such agreements, assignments, documents and instruments, and do such other and further acts and things (including, without limitation, obtaining consents of third parties), as the Secured Party may request or as may be necessary or appropriate in order to implement and effect fully the intentions, purposes and provisions of this Trademark Agreement, or to assure and confirm to the Secured Party the grant, perfection and priority of the Secured Party's security interest in the Pledged Trademarks. Section 12. TERMINATION. This Trademark Agreement shall terminate in accordance with the requirements of Section 12.6 of the Collateral Agency Agreement, and the Secured Party shall, upon the written request and at the expense of the Assignor, execute and deliver to 11 -11- the Assignor all deeds, assignments and other instruments as may be necessary or proper to reassign and reconvey to and re-vest in the Assignor the entire right, title and interest to the Pledged Trademarks previously granted, assigned, transferred and conveyed to the Secured Party by the Assignor pursuant to this Trademark Agreement, as fully as if this Trademark Agreement had not been made, subject to any disposition of all or any part thereof that may have been made by the Secured Party pursuant hereto or the Security Agreement. Section 13. COURSE OF DEALING. No course of dealing between the Assignor and the Secured Party, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder or under the Security Agreement or any other agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. Section 14. EXPENSES. Any and all fees, costs and expenses, of whatever kind or nature, including the reasonable attorneys' fees and expenses incurred by the Secured Party in connection with the preparation of this Trademark Agreement and all other documents relating hereto, the consummation of the transactions contemplated hereby or the enforcement hereof, the filing or recording of any documents (including all taxes in connection therewith) in public offices, the payment or discharge of any taxes, counsel fees, maintenance or renewal fees, encumbrances, or otherwise protecting, maintaining or preserving the Pledged Trademarks, or in defending or prosecuting any actions or proceedings arising out of or related to the Pledged Trademarks, shall be borne and paid by the Assignor. Section 15. OVERDUE AMOUNTS. Until paid, all amounts due and payable by the Assignor hereunder shall be a debt secured by the Pledged Trademarks and other Collateral and shall bear, whether before or after judgment, interest at the rate of interest for overdue principal set forth in the Credit Agreement. Section 16. NO ASSUMPTION OF LIABILITY; INDEMNIFICATION. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, NEITHER THE SECURED PARTY NOR ANY CREDITOR ASSUMES ANY LIABILITIES OF THE ASSIGNOR WITH RESPECT TO ANY CLAIM OR CLAIMS REGARDING THE ASSIGNOR'S OWNERSHIP OR PURPORTED OWNERSHIP OF, OR RIGHTS OR PURPORTED RIGHTS ARISING FROM, ANY OF THE PLEDGED TRADEMARKS OR ANY USE, LICENSE OR SUBLICENSE THEREOF, WHETHER ARISING OUT OF ANY PAST, CURRENT OR FUTURE EVENT, CIRCUMSTANCE, ACT OR OMISSION OR OTHERWISE. ALL OF SUCH LIABILITIES SHALL BE EXCLUSIVELY THE RESPONSIBILITY OF THE ASSIGNOR, AND THE ASSIGNOR SHALL INDEMNIFY THE SECURED PARTY AND THE CREDITORS FOR ANY AND ALL COSTS, EXPENSES, DAMAGES AND CLAIMS, INCLUDING LEGAL FEES, INCURRED BY THE SECURED PARTY OR ANY CREDITORS WITH RESPECT TO SUCH LIABILITIES. Section 17. NOTICES. All notices and other communications made or required to be given pursuant to this Trademark Agreement shall be in writing and shall be delivered in hand, 12 -12- mailed by United States registered or certified first-class mail, postage prepaid, or sent by telegraph, telecopy or telex and confirmed by delivery via courier or postal service, addressed as follows: (a) if to the Assignor, at 111 West Lemon Avenue, Monrovia, California, 91016 Attention: President, or at such other address for notice as the Assignor shall last have furnished in writing to the person giving the notice, with copies to the Chief Financial Officer; and (b) if to the Secured Party, at 100 Federal Street, Boston, Massachusetts, 02110, Asset Based Lending Division, Attention: Maureen H. Forrester, Vice President, or at such other address for notice as the Secured Party shall last have furnished in writing to the person giving the notice with copies to Bingham, Dana & Gould LLP, 150 Federal Street, Boston, Massachusetts 02110, Attention: Edwin E. Smith, Esquire. Any such notice or demand shall be deemed to have been duly given or made and to have become effective (i) if delivered by hand, overnight courier or facsimile to a responsible officer of the party to which it is directed, at the time of the receipt thereof by such officer or the sending of such facsimile, (ii) if sent by registered or certified first-class mail, postage prepaid, on the third Business Day following the mailing thereof. Section 18. AMENDMENT AND WAIVER. This Trademark Agreement is subject to modification only by a writing signed by the Secured Party (with the consent of the Requisite Party) and the Assignor, except as provided in Section 6.2 hereof. The Secured Party shall not be deemed to have waived any right hereunder unless such waiver shall be in writing and signed by the Secured Party and the Requisite Party. A waiver on any one occasion shall not be construed as a bar to or waiver of any right on any future occasion. Section 19. GOVERNING LAW; CONSENT TO JURISDICTION. THIS TRADEMARK AGREEMENT IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. The Assignor agrees that any suit for the enforcement of this Trademark Agreement may be brought in the courts of the Commonwealth of Massachusetts or any federal court sitting therein and consents to the non-exclusive jurisdiction of such court and to service of process in any such suit being made upon the Assignor by mail at the address specified in Section 17 hereof. The Assignor hereby waives any objection that it may now or hereafter have to the venue of any such suit or any such court or that such suit is brought in an inconvenient court. Section 20. WAIVER OF JURY TRIAL. THE ASSIGNOR WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS TRADEMARK AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF ANY SUCH RIGHTS OR OBLIGATIONS. Except as prohibited by law, the Assignor waives any right which it may have to claim or recover in any litigation referred to in the preceding sentence any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages. The Assignor (a) certifies that neither the Secured Party or any Creditor nor any representative, Secured Party or 13 -13- attorney of the Secured Party or any Creditor has represented, expressly or otherwise, that the Secured Party or any Creditor would not, in the event of litigation, seek to enforce the foregoing waivers, and (b) acknowledges that, in entering into the Credit Agreement and the other Loan Documents to which the Secured Party or any Creditor is a party, the Secured Party and the Creditors are relying upon, among other things, the waivers and certifications contained in this Section 20. Section 21. MISCELLANEOUS. The headings of each section of this Trademark Agreement are for convenience only and shall not define or limit the provisions thereof. This Trademark Agreement and all rights and obligations hereunder shall be binding upon the Assignor and its respective successors and assigns, and shall inure to the benefit of the Secured Party, the Creditors and their respective successors and assigns. In the event of any irreconcilable conflict between the provisions of this Trademark Agreement and the Credit Agreement, or between this Trademark Agreement and the Security Agreement, the provisions of the Credit Agreement or the Security Agreement, as the case may be, shall control. If any term of this Trademark Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be affected thereby, and this Trademark Agreement shall be construed and be enforceable as if such invalid, illegal or unenforceable term had not been included herein. The Assignor acknowledges receipt of a copy of this Trademark Agreement. This Trademark Agreement may not be amended or supplemented except by a writing signed by the Assignor and the Secured Party; provided, however, that any such amendment or supplementation must comply with the provisions of Section 9(a) of the Collateral Agency Agreement. Notwithstanding any provision of this Trademark Agreement, the Secured Party is not authorized to release any Pledged Trademarks or to provide any such release, termination statement or instrument of subordination in violation of Section 8 of the Collateral Agency Agreement. Notwithstanding any provision in this Agreement to the contrary, to the extent any provisions of this Agreement conflict with the Credit Agreement, the Collateral Agency Agreement or the Indenture, the provisions of the Credit Agreement and the Collateral Agency Agreement shall be controlling. 14 -14- IN WITNESS WHEREOF, this Trademark Agreement has been executed as of the day and year first above written. BARRY'S JEWELERS, INC. By:_________________________________________ Thomas S. Liston, Chief Financial Officer THE FIRST NATIONAL BANK OF BOSTON, as Secured Party By:_________________________________________ Elizabeth A. Ratto, Vice President 15 -15- CERTIFICATE OF ACKNOWLEDGMENT STATE OF __________________________________ ) ) ss. COUNTY OF ________________________________________________) Before me, the undersigned, a Notary Public in and for the county aforesaid, on this ___ day of August, 1996 personally appeared Thomas S. Liston to me known personally, and who, being by me duly sworn, deposes and says that he is the Chief Financial Officer of Barry's Jewelers, Inc. and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said Chief Financial Officer acknowledged said instrument to be the free act and deed of said corporation. ______________________________________ Notary Public My commission expires: 16 Exhibit 1 ASSIGNMENT OF TRADEMARKS AND SERVICE MARKS (U.S.) WHEREAS, BARRY'S JEWELERS, INC., a corporation organized and existing under the laws of the State of California, having a place of business at 111 West Lemon Avenue, Monrovia, California 91016 (the "Assignor"), has adopted and used and is using the trademarks and service marks (the "Marks") identified on the Annex hereto, and is the owner of the registrations of and pending registration applications for such Marks in the United States Patent and Trademark Office identified on such Annex; and WHEREAS, _________________________________, a ______________________________ organized and existing under the laws of the State of , having a place of business at _____________________ (the "Assignee"), is desirous of acquiring the Marks and the registrations thereof and registration applications therefor; NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, the Assignor does hereby assign, sell and transfer unto the Assignee all right, title and interest in and to the Marks, together with (a) the registrations of and registration applications for the Marks, (b) the goodwill of the business symbolized by and associated with the Marks and the registrations thereof, and (c) the right to sue and recover for, and the right to profits or damages due or accrued arising out of or in connection with, any and all past, present or future infringements or dilution of or damage or injury to the Marks or the registrations thereof or such associated goodwill. This Assignment of Trademarks and Service Marks (U.S.) is intended to and shall take effect as a sealed instrument at such time as the Assignee shall complete this instrument by inserting its name in the second paragraph above and signing its acceptance of this Assignment of Trademarks and Service Marks (U.S.) below. 17 IN WITNESS WHEREOF, the Assignor, by its duly authorized officer, has executed this assignment, as an instrument under seal, on this __ _ day of _________, 199__. BARRY'S JEWELERS, INC. By:_____________________________________ Title: The foregoing assignment of the Marks and the registrations thereof and registration applications therefor by the Assignor to the Assignee is hereby accepted as of the _____________ day of ___________________________________, 199___. By:_____________________________________ Title:__________________________________ STATE OF NEW YORK ) ) ss. COUNTY OF ______________________________________) On this the _____________ day of August, 1996, before me appeared _________________________ the person who signed this instrument, who acknowledged that he is the ____________________ of Barry's Jewelers, Inc. and that being duly authorized he signed such instrument as a free act on behalf of Barry's Jewelers, Inc. ______________________________________ Notary Public [Seal] My commission expires: 18 Annex to Assignment of Trademarks and Service Marks Registrations -- United States Patent and Trademark Office Trademark or Service Mark Registration No. Registration Date [List chronologically in ascending numerical order] Pending Applications -- United States Patent and Trademark Office Trademark or Service Mark Serial No. Filing Date EX-10.10 7 EMPLOYMENT AGT - LISTON 1 Exhibit 10.10 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of April 8, 1996, by and between BARRY'S JEWELERS, INC., a California corporation (hereinafter referred to as the "Company" or "Employer"), and Thomas S. Liston (hereinafter referred to as "Employee"). R E C I T A L S WHEREAS, Employee has served and is currently serving as a senior executive officer of the Company; and WHEREAS, the Company and Employee desire to set forth the terms, conditions and provisions of Employee's rendition of services to the Company, which shall be effective with respect to the period from and after the date hereof; NOW, THEREFORE, in consideration of the mutual covenants, agreements and warranties contained in this Agreement, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Term; Position. Employer hereby employs Employee for the term of two (2) years commencing on the date of this Agreement and ending on April 8, 1998 (the "Expiration Date"); provided, however, that commencing on the Expiration Date, and on each anniversary of the Expiration Date (the Expiration Date and the date of each anniversary thereof being a "Renewal Date"), the term shall be automatically extended so as to terminate one (1) year from such Renewal Date, unless at least 90 days prior to such Renewal Date either party hereto gives notice to the other that the term shall not be so extended. The term of this Agreement, as extended in the manner described in the preceding sentence, is hereinafter sometimes referred to as the "Employment Period." Employee will be employed in the positions of Vice Chairman of the Board and Chief Financial Officer of Employer, and shall have general responsibility for supervision and direction of the financial affairs of Employer, and shall also have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws of Employer. Employee shall render his services at such places in the Los angeles vicinity as Employer shall designate from time to time; provided, however, that Employer acknowledges that Employee's functions shall include travel undertaken at the request of Employer, and that his duties hereunder may be performed at locations other than the offices of Employer while Employee is in the course of such travel. 2 2. Employee's Duties. 2.1 Exclusive Services. Employee hereby accepts said employment and agrees to devote his entire working time and attention and best talents and abilities exclusively to the service of Employer as Employer may direct during the term hereof; provided, however, that Employee may continue to engage in and devote time to other pursuits, activities and responsibilities to the extent that such time spent is immaterial and does not interfere with Employee's obligations hereunder. 2.2 Control By Board of Directors. Employee shall at all times be subject to the control and direction of the Board of Directors of Employer. 3. Salary; Stock Option Grant; Other Benefits. 3.1 Salary. In consideration for the services to be rendered by Employee pursuant hereto and in complete discharge of Employer's salary obligations hereunder, Employer will pay to Employee and Employee will accept a fixed annual salary at the rate of Three Hundred Thousand Dollars ($300,000), effective as of the date of this Agreement. Such salary shall be subject to any deductions and withholdings required by applicable law and be payable in equal installments no less frequently than monthly; provided, however, that if this Agreement commences on any date other than the first day of a pay period or terminates on any date other than the last day of a pay period, then the compensation payable for such pay period shall be prorated on a daily basis. 3.2 Stock Option and Restricted Stock Grants. Contemporaneously with the execution of this Agreement, the Company will grant Employee (i) stock options covering 25,000 shares of the Company's Common Stock, such options to be granted pursuant to the Company's existing stock option plan and to be subject to the same terms and conditions as customarily utilized for other option grants under the plan (except that vesting shall occur one-half (1/2) on the first anniversary of the date of this Agreement and one-half (1/2) on the second anniversary of the date of this Agreement) and (ii) 10,000 shares of restricted Common Stock. Such shares of restricted Common Stock shall vest and become nonforfeitable as follows: 5,000 of such shares shall vest and become nonforfeitable on April 8, 1997, provided that the Employee remains in the employment of the Company as of that date; and 5,000 of such shares shall vest and become nonforfeitable on April 8, 1998, provided that the Employee remains in the employment of the Company as of that date. Notwithstanding the foregoing, in the event that Employee's employment with the Company terminates pursuant to an event described in Section 4.3 of this Agreement or there occurs a Change of -2- 3 Control Event (as hereinafter defined), then the entire restricted Common Stock award shall become immediately vested and nonforfeitable. With respect to the first one-half of the restricted Common Stock award to vest, the Company agrees to pay a special bonus to Employee in an amount equal to (a) the federal, state and local taxable income of Employee related to such vesting multiplied by (b) the maximum marginal federal, state and local tax rates applicable to such taxable income, plus a further bonus amount in respect of such bonus computed in the same manner, and so on, so that the bonus amount payable pursuant to this sentence is fully "grossed up". The parties acknowledge that the existing plan does not contain a sufficient number of available shares to make the foregoing grant in full; consequently, the Company agrees to seek shareholder approval of an amendment to the plan to provide for an increase in the available shares at its 1996 annual meeting of shareholders. Employee acknowledges that the foregoing option grant is subject to receipt of shareholder approval of the amendment at such meeting. 3.3 Expenses. Employer hereby recognizes that in connection with Employee's performance of his duties and obligations hereunder, he will incur certain ordinary and necessary expenses of a business character. Employer therefore agrees to repay or reimburse Employee for such ordinary and necessary business expenses upon the presentation of itemized statements of such business expenses on Employer's regular forms used for such purposes. It is expressly understood and agreed that the extent and nature of such business expenses shall be subject to the approval of such officers of Employer as may be designated for such purposes by the Board of Directors of Employer, but that such approval shall at all times during the term hereof be consistent with the policy of Employer applicable to like situations. Employee agrees from time to time to report to the Audit and Compensation Committee of the Board concerning the level and nature of his expense reimbursement. 3.4 Additional Discretionary Compensation. Nothing in this Agreement shall prevent Employer from (i) paying such additional monies during the Employment Period as may be recommended by the Audit and Compensation Committee of the Board of Directors of Employer or (ii) at any time increasing prospectively the compensation to be paid to Employee for his active services in the event that said committee deem it advisable to do so, but nothing herein shall obligate Employer to make such additional payments or any such increases. 3.5 Other Benefits. Employer agrees that it will include Employee in each employee benefit plan (a "Plan") now existing or hereafter adopted by Employer (or existing at or adopted by any successor, including a successor by merger to, or any assignee or transferee of the assets of, Employer), including, without limitation, pension, medical, health, -3- 4 insurance, retirement, stock option and executive bonus plans; provided, however, that except as set forth in this paragraph 3, nothing contained herein shall obligate Employer to formulate any such Plan or Plans, and Employee's eligibility to participate in such Plan or Plans shall be governed by the rules applicable to all employees. Employer further agrees that Employee will be entitled to participate in such Plan or Plans of Employer (or existing at or adopted by any successor, including a successor by merger to, or any assignee or transferee of the assets of, Employer) at a level no less than the level at which other senior executives of Employer are entitled to participate. Employee shall also be entitled to such other benefits and practices of Employer (or existing at or adopted by any successor, including a successor by merger to, or any assignee or transferee of the assets of, Employer) as are regularly granted to comparable executives of Employer. 3.6 Automobile. Employer shall provide an automobile for the business use of Employee, and Employer shall bear all costs and expenses relating to such automobile. Employee shall inform the Compensation Committee of the Board prior to the acquisition of any automobile for his use and the proposed manner of financing such automobile. 3.7 Vacation. Employee shall be entitled to four (4) weeks vacation during each year. Employee will be entitled to such additional weeks of vacation as the Board of Directors may approve upon request to and approval by the Board of Directors. 3.8 Effect of Termination on Benefits. Any termination of this Agreement pursuant to paragraphs 4, 5 or 6 hereof shall not affect any benefits of the Employee under any Plan or Plans described in subparagraph 3.5 above except as provided in said paragraphs 4, 5 and 6 or in the Plan or Plans themselves. 4. Termination. 4.1 Cause. Should Employee (i) engage in gross negligence or willful misconduct which has a substantial adverse effect on the Company; (ii) fail, neglect or refuse (other than by reason of a mental or physical disability as described in paragraph 5 hereof) to perform or observe any of all of his obligations hereunder at the times and in the manner provided herein, which failure, neglect or refusal has or may result in a substantial adverse affect on the Company; (iii) commit a theft or defalcation against Employer or knowingly participate in a material misrepresentation to the Board of Directors; (iv) or be convicted of any felony or other crime (excluding traffic violations) involving moral turpitude or dishonesty which has a substantial adverse affect on the Company (all of which foregoing acts shall be referred -4- 5 to herein as "cause"), after written notice from the Company to Employee describing the particular cause, the operation of this Agreement (x) in the case of any cause described in clause (i) or (ii) above, shall be suspended both as to the services and as to salary for and during the continuance of Employee's period of misconduct, failure, neglect or refusal, measured rom the date of said notice, and Employer may, by delivery of further written notice to Employee, terminate this Agreement after a reasonable period within which said misconduct, failure, neglect or refusal has not been cured; and (y) in the case of any cause described in clause (iii) or (iv) above, shall terminate immediately and Employer shall thereupon be released and discharged of and from all further obligations hereunder, except for any accrued salary and benefits due and owing to Employee and then unpaid. 4.2 Voluntary Resignation. Except as otherwise provided in this Agreement, in the event the Employee voluntarily resigns, this Agreement shall terminate immediately and Employer shall thereupon be released and discharged of and from all further obligations hereunder, except for any accrued salary and benefits due and owing to Employee and then unpaid. 4.3 No Cause. In the event that either (a) the Employee elects to resign following a Constructive Termination (as hereinafter defined) with respect to his employment with the Company, or (b) the operation of this Agreement is terminated by the Company for any reason other than for cause, voluntary resignation, disability or death (pursuant to subparagraph 4.1, subparagraph 4.2, paragraph 5 or paragraph 6 hereof, respectively), Employer shall be obligated to continue to provide to Employee any and all benefits pursuant to this Agreement for the entire remaining term of the Employment Period and to pay Employee the greater of (x) all salary due to Employee pursuant to this Agreement for the entire remaining term of the Employment Period, and (y) a lump sum cash payment upon termination of this Agreement equal to 12 months of Employee's salary at the time of termination (such lump sum payment being the "Severance Payment"). Employee shall be under no duty or obligation to mitigate his damages in the event of such a termination, and Employee's receipt of compensation pursuant to other employment obtained by Employee shall not reduce the amount of Employer's obligation hereunder. Furthermore, pursuant to subparagraph 3.2.2, upon termination of employment as described in clause (a) or (b) of this subparagraph, the Company shall take steps to cause the stock options described in Section 3.2 hereof as well as all other stock options previously granted to the Employee (collectively, "Stock Options") to accelerate so as to become immediately exercisable in full. "Constructive Termination" means (a) a substantial diminution in the duties and responsibilities assigned to the Employee by the Board of Directors of the Company relative to such duties and -5- 6 responsibilities as of the date of this Agreement, or (b) reassignment of the Employee's principal office such that the Employee is required to spend in excess of 20% of his working hours at an office of the Company or one of its subsidiaries that is more than 50 miles from the Company's principal office as of the date of this Agreement (provided, however, that nothing herein shall apply to required travel by the Employee to locations other than offices of the Company and its subsidiaries that is consistent with such Employee's duties and responsibilities at the Company). 4.4 Company's Election Not to Renew. In addition to the other rights to which he may be entitled pursuant to this Agreement, if the Company elects, pursuant to paragraph 1, not to renew this Agreement by providing the notice to Employee specified in such paragraph, upon termination of this Agreement, the Company shall pay Employee a lump sum cash payment equal to six (6) months of Employee's salary at the time of termination. 4.5 Termination due to Change of Control. In addition to the other rights to which he may be entitled pursuant to this Agreement, if Employee's employment with the Company is terminated as described in clause (a) or (b) of subparagraph 4.3 in connection with or within 12 months following any Change of Control Event, then the Employer shall be obligated to pay Employee an additional amount equal to up to 36 months of Employee's salary at the time of termination (the "Change of Control Payment"), such amount payable such that the aggregate cash amount paid to Employee pursuant to the first sentence of Section 4.3 and this Section 4.5 shall equal 36 months of Employee's salary effective as of the date of termination of this Agreement. For the purposes of this agreement, a "Change of Control Event" means (i) the dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation or as a result of which it is the surviving corporation and its outstanding voting securities are converted to or reclassified as cash, securities of another corporation or other property, (iii) a sale of assets of the Company or its subsidiaries having a fair market value equal to more than fifty percent (50%) of the total fair market value of the Company's assets to an entity which is not controlling, controlled by or under common control with the Company, or (iv) the acquisition of a record or beneficial interest in more than twenty-five percent (25%) of the then outstanding voting securities of the Company, either in a single transaction or a series of transactions, by an entity or "group" within the meaning of Section 13(d) of the Securities Act of 1934, as amended, and the rules and regulations promulgated thereunder, which is not an affiliate of the Company. -6- 7 4.6 Survival. Notwithstanding anything to the contrary in this Agreement, paragraph 9 regarding confidentiality and equitable relief shall survive the termination of this Agreement for any reason. 5. Disability. In the event of Employee's physical or mental disability (so that Employee is not reasonably able to render full services as contemplated hereby) for any consecutive period exceeding eight (8) months, or for shorter periods aggregating more than eight (8) months during any twelve (12) month period, Employer shall nevertheless continue to pay full salary up to and including the last date of the eighth consecutive month of disability, or the day on which the shorter periods of disability shall have equalled to a total of eight (8) months during such twelve (12) month period, but Employer may, at any time within six (6) weeks thereafter, at its election terminate this Agreement by delivery of written notice thereof to Employee. In the event of any termination pursuant to the foregoing provisions of this paragraph 5, both Employee and Employer shall thereupon be released and discharged of and from all further obligations hereunder except (i) for any accrued salary and benefits due and owing to Employee and then unpaid, and (ii) upon such termination by the Company, all Stock Options shall automatically and immediately become vested. If Employer does not so elect, this Agreement shall remain in full force and effect. 6. Death. In the event of Employee's death at any time during the term hereof, this Agreement shall terminate, in which event Employer shall, except as provided in the next sentence, thereupon be released and discharged of and from all further obligations hereunder except for any accrued salary and benefits due and owing to Employee and then unpaid, and, Upon Employee's death, all Stock Options shall automatically and immediately become vested. In addition, in the event of Employee's death at any time during the term hereof, Employer shall pay to Employee's legal successors an amount equal to six (6) months of Employee's salary at the time of death, such payment to be made within 60 days of the date of death. 7. Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, personal representatives, successors and permitted assigns; provided, however, that neither of the parties may assign any of his or its rights or obligations under this Agreement, subject to the provisions of the next sentence. Employee agrees that Employer may assign this Agreement and grant its rights hereunder in whole or in part to its successor or successors, or to a corporation with which it may be merged, consolidated or combined, or to a corporation which may acquire all or a major portion of Employer's assets, provided that no such assignment shall be effective unless and until (i) any such assignee shall expressly assume all of -7- 8 Employer's executory obligations hereunder, and (ii) Employee shall consent to the assignment. 8. Warranties. Employee hereby warrants that he is free to enter into this Agreement and to render his services pursuant hereto. Employer hereby warrants that this Agreement has been duly authorized by its Board of Directors. 9. Confidentiality. In view of the fact that Employee's work as an employee of Employer will bring Employee into close contact with many confidential affairs of Employer, including matters of a business nature, such as information about costs, profits, markets, sales and any other information not readily available to the public and plans for future development, Employee hereby agrees: 9.1 To keep secret all confidential matters of Employer (including without limitation such matters which Employer notifies Employee are confidential) learned prior to the date of this Agreement and in the course of Employee's employment hereunder, and not to disclose them to anyone outside of Employer, either during or after Employee's employment with Employer, or both, until such time as Employer gives its written consent to such disclosure; 9.2 To deliver promptly to Employer on termination of Employee's employment by Employer, or at any other time Employer may so request, all memoranda, notes, records, reports and other documents (and all copies thereof) relating to Employer's business which Employee may then possess or have under Employee's control; and 9.3 That violation of paragraph 9 would cause the Company irreparable damage for which the Company cannot be reasonably compensated in damages in an action at law, and therefore in the event of any breach or threatened breach by Employee of paragraph 9, the Company shall be entitled to make application to a court of competent jurisdiction for equitable relief by way of injunction or otherwise (without being required to post a bond). This provision shall not, however, be construed as a waiver of any of the rights which the Company may have for damages under this Agreement or otherwise, and all of the Company's rights and remedies shall be unrestricted and cumulative. 10. Compliance with Law. Nothing contained in this Agreement shall be construed so as to require the commission of any act contrary to law, and wherever there is any conflict between any provision of this Agreement and any statute, law, ordinance, order or regulation contrary to which the parties have no right to contract, the latter shall prevail, but in such event any provision of this Agreement so affected shall be curtailed and limited only to the extent necessary to bring it within the legal requirements. -8- 9 11. Notices. All notices under this Agreement will be in writing and will be delivered by personal service or telegram, telecopy or certified mail (if such service is not available, then by first class mail), postage prepaid, to such address as may be designated from time to time by the relevant party, and which will initially be as set forth below. Any notice sent by certified mail will be deemed to have been given three (3) days after the date on which it is mailed. All other notices will be deemed given when received. No objection may be made to the manner of delivery of any notice actually received in writing by an authorized agent of a party. Notices will be addressed as follows or to such other address as the party to whom the same is directed will have specified in conformity with the foregoing: (i) If to Employer: Barry's Jewelers, Inc. 111 West Lemon Avenue Monrovia, California 91016 Attention: Chairman of the Board Telecopy No.: (818) 357-7596 (i) If to Employee: ----------------------------------------- ----------------------------------------- ----------------------------------------- ----------------------------------------- 12. Entire Agreement; Amendments. This Agreement sets forth the entire understanding of the parties relating to the employment of Employee by Employer effective with respect to the period from and after the date hereof. Without limiting the generality of the foregoing, that certain letter agreement between the Company and the Employee dated November 17, 1995 is hereby terminated effective as of the date of this Agreement. None of the terms or provisions hereof shall be modified or waived, and this Agreement may not be amended or terminated, except by a written instrument signed by the party against which modifications or waiver or amendment or termination is to be enforced. No waiver of any one provision shall be considered a waiver of any other provision, and the fact that an obligation is waived for a period of time shall not be considered to be a continuing waiver. 13. Governing Law. This Agreement shall be construed under and governed by the laws of the State of California, without giving effect to principles of conflicts of laws. 14. Attorney's Fees. If any action or proceeding is brought to enforce or interpret any provision of this Agreement, the prevailing party shall be entitled to recover as an element of its costs, and not its damages, reasonable -9- 10 attorneys' fees and costs incurred in connection with such action or proceeding. 15. Headings. The Article and Section headings in this Agreement are inserted only as a matter of convenience, and in no way define, limit, or extend or interpret the scope of this Agreement or of any particular Article or Section. 16. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have duly executed these presents the day and year first above written. BARRY'S JEWELERS, INC. a California corporation By:_____________________________ Its:__________________________ EMPLOYEE ________________________________ Thomas S. Liston -10- EX-10.11 8 EMPLOYMENT AGT - BRIDEL 1 Exhibit 10.11 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of April 8, 1996, by and between BARRY'S JEWELERS, INC., a California corporation (hereinafter referred to as the "Company" or "Employer"), and Robert Bridel (hereinafter referred to as "Employee"). R E C I T A L S WHEREAS, Employee has served and is currently serving as a senior executive officer of the Company; and WHEREAS, the Company and Employee desire to set forth the terms, conditions and provisions of Employee's rendition of services to the Company, which shall be effective with respect to the period from and after the date hereof; NOW, THEREFORE, in consideration of the mutual covenants, agreements and warranties contained in this Agreement, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Term; Position. Employer hereby employs Employee for the term of two (2) years commencing on the date of this Agreement and ending on April 8, 1998 (the "Expiration Date"); provided, however, that commencing on the Expiration Date, and on each anniversary of the Expiration Date (the Expiration Date and the date of each anniversary thereof being a "Renewal Date"), the term shall be automatically extended so as to terminate one (1) year from such Renewal Date, unless at least 90 days prior to such Renewal Date either party hereto gives notice to the other that the term shall not be so extended. The term of this Agreement, as extended in the manner described in the preceding sentence, is hereinafter sometimes referred to as the "Employment Period." Employee will be employed in the positions of President and Chief Executive Officer of Employer, and shall have general responsibility for supervision and direction of the operations of Employer, and shall also have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws of Employer. Employee shall render his services at such places in the Los angeles vicinity as Employer shall designate from time to time; provided, however, that Employer acknowledges that Employee's functions shall include travel undertaken at the request of Employer, and that his duties hereunder may be performed at locations other than the offices of Employer while Employee is in the course of such travel. 2. Employee's Duties. 2.1 Exclusive Services. Employee hereby accepts said employment and agrees to devote his entire working time 2 and attention and best talents and abilities exclusively to the service of Employer as Employer may direct during the term hereof; provided, however, that Employee may continue to engage in and devote time to other pursuits, activities and responsibilities to the extent that such time spent is immaterial and does not interfere with Employee's obligations hereunder. 2.2 Control By Board of Directors. Employee shall at all times be subject to the control and direction of the Board of Directors of Employer. 3. Salary; Stock Option Grant; Other Benefits. 3.1 Salary. In consideration for the services to be rendered by Employee pursuant hereto and in complete discharge of Employer's salary obligations hereunder, Employer will pay to Employee and Employee will accept a fixed annual salary at the rate of Three Hundred Twenty-Five Thousand Dollars ($325,000), effective as of the date of this Agreement. Such salary shall be subject to any deductions and withholdings required by applicable law and be payable in equal installments no less frequently than monthly; provided, however, that if this Agreement commences on any date other than the first day of a pay period or terminates on any date other than the last day of a pay period, then the compensation payable for such pay period shall be prorated on a daily basis. 3.2 Stock and Restricted Stock Option Grants. Contemporaneously with the execution of this Agreement, the Company will grant Employee (i) stock options covering 35,000 shares of the Company's Common Stock, such options to be granted pursuant to the Company's existing stock option plan and to be subject to the same terms and conditions as customarily utilized for other option grants under the plan (except that vesting shall occur one-half (1/2) on the first anniversary of the date of this Agreement and one-half (1/2) on the second anniversary of the date of this Agreement) and (ii) 10,000 shares of restricted Common Stock. Such shares of restricted Common Stock shall vest and become nonforfeitable as follows: 5,000 of such shares shall vest and become nonforfeitable on April 8, 1997, provided that the Employee remains in the employment of the Company as of that date; and 5,000 of such shares shall vest and become nonforfeitable on April 8, 1998, provided that the Employee remains in the employment of the Company as of that date. Notwithstanding the foregoing, in the event that Employee's employment with the Company terminates pursuant to an event described in Section 4.3 of this Agreement or there occurs a Change of Control Event (as hereinafter defined), then the entire restricted Common Stock award shall become immediately vested and nonforfeitable. With respect to the first one-half of the restricted Common Stock award to vest, the Company agrees to 3 pay a special bonus to Employee in an amount equal to (a) the federal, state and local taxable income of Employee related to such vesting multiplied by (b) the maximum marginal federal, state and local tax rates applicable to such taxable income, plus a further bonus amount in respect of such bonus computed in the same manner, and so on, so that the bonus amount payable pursuant to this sentence is fully "grossed up". The parties acknowledge that the existing plan does not contain a sufficient number of available shares to make the foregoing grant in full; consequently, the Company agrees to seek shareholder approval of an amendment to the plan to provide for an increase in the available shares at its 1996 annual meeting of shareholders. Employee acknowledges that the foregoing option grant is subject to receipt of shareholder approval of the amendment at such meeting. 3.3 Expenses. Employer hereby recognizes that in connection with Employee's performance of his duties and obligations hereunder, he will incur certain ordinary and necessary expenses of a business character. Employer therefore agrees to repay or reimburse Employee for such ordinary and necessary business expenses upon the presentation of itemized statements of such business expenses on Employer's regular forms used for such purposes. It is expressly understood and agreed that the extent and nature of such business expenses shall be subject to the approval of such officers of Employer as may be designated for such purposes by the Board of Directors of Employer, but that such approval shall at all times during the term hereof be consistent with the policy of Employer applicable to like situations. Employee agrees from time to time to report to the Audit and Compensation Committee of the Board concerning the level and nature of his expense reimbursement. 3.4 Additional Discretionary Compensation. Nothing in this Agreement shall prevent Employer from (i) paying such additional monies during the Employment Period as may be recommended by the Audit and Compensation Committee of the Board of Directors of Employer or (ii) at any time increasing prospectively the compensation to be paid to Employee for his active services in the event that said committee deem it advisable to do so, but nothing herein shall obligate Employer to make such additional payments or any such increases. The Company and Employee acknowledge their mutual intention to agree, not later than May 31, 1996, upon a bonus plan for Employee relating to the Company's 1997 fiscal year. 3.5 Other Benefits. Employer agrees that it will include Employee in each employee benefit plan (a "Plan") now existing or hereafter adopted by Employer (or existing at or adopted by any successor, including a successor by merger to, or any assignee or transferee of the assets of, Employer), including, without limitation, pension, medical, health, insurance, retirement, stock option and executive bonus plans; -3- 4 provided, however, that except as set forth in this paragraph 3, nothing contained herein shall obligate Employer to formulate any such Plan or Plans, and Employee's eligibility to participate in such Plan or Plans shall be governed by the rules applicable to all employees. Employer further agrees that Employee will be entitled to participate in such Plan or Plans of Employer (or existing at or adopted by any successor, including a successor by merger to, or any assignee or transferee of the assets of, Employer) at a level no less than the level at which other senior executives of Employer are entitled to participate. Employee shall also be entitled to such other benefits and practices of Employer (or existing at or adopted by any successor, including a successor by merger to, or any assignee or transferee of the assets of, Employer) as are regularly granted to comparable executives of Employer. 3.6 Automobile. Employer shall provide an automobile for the business use of Employee, and Employer shall bear all costs and expenses relating to such automobile. Employee shall inform the Compensation Committee of the Board prior to the acquisition of any automobile for his use and the proposed manner of financing such automobile. 3.7 Vacation. Employee shall be entitled to four (4) weeks vacation during each year. Employee will be entitled to such additional weeks of vacation as the Board of Directors may approve upon request to and approval by the Board of Directors. 3.8 Effect of Termination on Benefits. Any termination of this Agreement pursuant to paragraphs 4, 5 or 6 hereof shall not affect any benefits of the Employee under any Plan or Plans described in subparagraph 3.5 above except as provided in said paragraphs 4, 5 and 6 or in the Plan or Plans themselves. 4. Termination. 4.1 Cause. Should Employee (i) engage in gross negligence or willful misconduct which has a substantial adverse effect on the Company; (ii) fail, neglect or refuse (other than by reason of a mental or physical disability as described in paragraph 5 hereof) to perform or observe any of all of his obligations hereunder at the times and in the manner provided herein, which failure, neglect or refusal has or may result in a substantial adverse affect on the Company; (iii) commit a theft or defalcation against Employer or knowingly participate in a material misrepresentation to the Board of Directors; (iv) or be convicted of any felony or other crime (excluding traffic violations) involving moral turpitude or dishonesty which has a substantial adverse affect on the Company (all of which foregoing acts shall be referred to herein as "cause"), after written notice from the Company -4- 5 to Employee describing the particular cause, the operation of this Agreement (x) in the case of any cause described in clause (i) or (ii) above, shall be suspended both as to the services and as to salary for and during the continuance of Employee's period of misconduct, failure, neglect or refusal, measured rom the date of said notice, and Employer may, by delivery of further written notice to Employee, terminate this Agreement after a reasonable period within which said misconduct, failure, neglect or refusal has not been cured; and (y) in the case of any cause described in clause (iii) or (iv) above, shall terminate immediately and Employer shall thereupon be released and discharged of and from all further obligations hereunder, except for any accrued salary and benefits due and owing to Employee and then unpaid. 4.2 Voluntary Resignation. Except as otherwise provided in this Agreement, in the event the Employee voluntarily resigns, this Agreement shall terminate immediately and Employer shall thereupon be released and discharged of and from all further obligations hereunder, except for any accrued salary and benefits due and owing to Employee and then unpaid. 4.3 No Cause. In the event that either (a) the Employee elects to resign following a Constructive Termination (as hereinafter defined) with respect to his employment with the Company, or (b) the operation of this Agreement is terminated by the Company for any reason other than for cause, voluntary resignation, disability or death (pursuant to subparagraph 4.1, subparagraph 4.2, paragraph 5 or paragraph 6 hereof, respectively), Employer shall be obligated to continue to provide to Employee any and all benefits pursuant to this Agreement for the entire remaining term of the Employment Period and to pay Employee the greater of (x) all salary due to Employee pursuant to this Agreement for the entire remaining term of the Employment Period, and (y) a lump sum cash payment upon termination of this Agreement equal to 12 months of Employee's salary at the time of termination (such lump sum payment being the "Severance Payment"). Employee shall be under no duty or obligation to mitigate his damages in the event of such a termination, and Employee's receipt of compensation pursuant to other employment obtained by Employee shall not reduce the amount of Employer's obligation hereunder. Furthermore, pursuant to subparagraph 3.2.2, upon termination of employment as described in clause (a) or (b) of this subparagraph, the Company shall take steps to cause the stock options described in Section 3.2 hereof as well as all other stock options previously granted to the Employee (collectively, "Stock Options") to accelerate so as to become immediately exercisable in full. "Constructive Termination" means (a) a substantial diminution in the duties and responsibilities assigned to the Employee by the Board of Directors of the Company relative to such duties and responsibilities as of the date of this Agreement, or (b) -5- 6 reassignment of the Employee's principal office such that the Employee is required to spend in excess of 20% of his working hours at an office of the Company or one of its subsidiaries that is more than 50 miles from the Company's principal office as of the date of this Agreement (provided, however, that nothing herein shall apply to required travel by the Employee to locations other than offices of the Company and its subsidiaries that is consistent with such Employee's duties and responsibilities at the Company). 4.4 Company's Election Not to Renew. In addition to the other rights to which he may be entitled pursuant to this Agreement, if the Company elects, pursuant to paragraph 1, not to renew this Agreement by providing the notice to Employee specified in such paragraph, upon termination of this Agreement, the Company shall pay Employee a lump sum cash payment equal to six (6) months of Employee's salary at the time of termination. 4.5 Termination due to Change of Control. In addition to the other rights to which he may be entitled pursuant to this Agreement, if Employee's employment with the Company is terminated as described in clause (a) or (b) of subparagraph 4.3 in connection with or within 12 months following any Change of Control Event, then the Employer shall be obligated to pay Employee an additional amount equal to up to 36 months of Employee's salary at the time of termination (the "Change of Control Payment"), such amount payable such that the aggregate cash amount paid to Employee pursuant to the first sentence of Section 4.3 and this Section 4.5 shall equal 36 months of Employee's salary effective as of the date of termination of this Agreement. For the purposes of this agreement, a "Change of Control Event" means (i) the dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation or as a result of which it is the surviving corporation and its outstanding voting securities are converted to or reclassified as cash, securities of another corporation or other property, (iii) a sale of assets of the Company or its subsidiaries having a fair market value equal to more than fifty percent (50%) of the total fair market value of the Company's assets to an entity which is not controlling, controlled by or under common control with the Company, or (iv) the acquisition of a record or beneficial interest in more than twenty-five percent (25%) of the then outstanding voting securities of the Company, either in a single transaction or a series of transactions, by an entity or "group" within the meaning of Section 13(d) of the Securities Act of 1934, as amended, and the rules and regulations promulgated thereunder, which is not an affiliate of the Company. -6- 7 4.6 Survival. Notwithstanding anything to the contrary in this Agreement, paragraph 9 regarding confidentiality and equitable relief shall survive the termination of this Agreement for any reason. 5. Disability. In the event of Employee's physical or mental disability (so that Employee is not reasonably able to render full services as contemplated hereby) for any consecutive period exceeding eight (8) months, or for shorter periods aggregating more than eight (8) months during any twelve (12) month period, Employer shall nevertheless continue to pay full salary up to and including the last date of the eighth consecutive month of disability, or the day on which the shorter periods of disability shall have equalled to a total of eight (8) months during such twelve (12) month period, but Employer may, at any time within six (6) weeks thereafter, at its election terminate this Agreement by delivery of written notice thereof to Employee. In the event of any termination pursuant to the foregoing provisions of this paragraph 5, both Employee and Employer shall thereupon be released and discharged of and from all further obligations hereunder except (i) for any accrued salary and benefits due and owing to Employee and then unpaid, and (ii) upon such termination by the Company, all Stock Options shall automatically and immediately become vested. If Employer does not so elect, this Agreement shall remain in full force and effect. 6. Death. In the event of Employee's death at any time during the term hereof, this Agreement shall terminate, in which event Employer shall, except as provided in the next sentence, thereupon be released and discharged of and from all further obligations hereunder except for any accrued salary and benefits due and owing to Employee and then unpaid, and, Upon Employee's death, all Stock Options shall automatically and immediately become vested. In addition, in the event of Employee's death at any time during the term hereof, Employer shall pay to Employee's legal successors an amount equal to six (6) months of Employee's salary at the time of death, such payment to be made within 60 days of the date of death. 7. Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, personal representatives, successors and permitted assigns; provided, however, that neither of the parties may assign any of his or its rights or obligations under this Agreement, subject to the provisions of the next sentence. Employee agrees that Employer may assign this Agreement and grant its rights hereunder in whole or in part to its successor or successors, or to a corporation with which it may be merged, consolidated or combined, or to a corporation which may acquire all or a major portion of Employer's assets, provided that no such assignment shall be effective unless and until (i) any such assignee shall expressly assume all of -7- 8 Employer's executory obligations hereunder, and (ii) Employee shall consent to the assignment. 8. Warranties. Employee hereby warrants that he is free to enter into this Agreement and to render his services pursuant hereto. Employer hereby warrants that this Agreement has been duly authorized by its Board of Directors. 9. Confidentiality. In view of the fact that Employee's work as an employee of Employer will bring Employee into close contact with many confidential affairs of Employer, including matters of a business nature, such as information about costs, profits, markets, sales and any other information not readily available to the public and plans for future development, Employee hereby agrees: 9.1 To keep secret all confidential matters of Employer (including without limitation such matters which Employer notifies Employee are confidential) learned prior to the date of this Agreement and in the course of Employee's employment hereunder, and not to disclose them to anyone outside of Employer, either during or after Employee's employment with Employer, or both, until such time as Employer gives its written consent to such disclosure; and 9.2 To deliver promptly to Employer on termination of Employee's employment by Employer, or at any other time Employer may so request, all memoranda, notes, records, reports and other documents (and all copies thereof) relating to Employer's business which Employee may then possess or have under Employee's control; and 9.3 That violation of paragraph 9 would cause the Company irreparable damage for which the Company cannot be reasonably compensated in damages in an action at law, and therefore in the event of any breach or threatened breach by Employee of paragraph 9, the Company shall be entitled to make application to a court of competent jurisdiction for equitable relief by way of injunction or otherwise (without being required to post a bond). This provision shall not, however, be construed as a waiver of any of the rights which the Company may have for damages under this Agreement or otherwise, and all of the Company's rights and remedies shall be unrestricted and cumulative. 10. Compliance with Law. Nothing contained in this Agreement shall be construed so as to require the commission of any act contrary to law, and wherever there is any conflict between any provision of this Agreement and any statute, law, ordinance, order or regulation contrary to which the parties have no right to contract, the latter shall prevail, but in such event any provision of this Agreement so affected shall be curtailed and limited only to the extent necessary to bring it within the legal requirements. -8- 9 11. Notices. All notices under this Agreement will be in writing and will be delivered by personal service or telegram, telecopy or certified mail (if such service is not available, then by first class mail), postage prepaid, to such address as may be designated from time to time by the relevant party, and which will initially be as set forth below. Any notice sent by certified mail will be deemed to have been given three (3) days after the date on which it is mailed. All other notices will be deemed given when received. No objection may be made to the manner of delivery of any notice actually received in writing by an authorized agent of a party. Notices will be addressed as follows or to such other address as the party to whom the same is directed will have specified in conformity with the foregoing: (i) If to Employer: Barry's Jewelers, Inc. 111 West Lemon Avenue Monrovia, California 91016 Attention: Chairman of the Board Telecopy No.: (818) 357-7596 (i) If to Employee: ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ 12. Entire Agreement; Amendments. This Agreement sets forth the entire understanding of the parties relating to the employment of Employee by Employer effective with respect to the period from and after the date hereof. Without limiting the generality of the foregoing, that certain letter agreement between the Company and the Employee dated November 17, 1995 is hereby terminated effective as of the date of this Agreement. None of the terms or provisions hereof shall be modified or waived, and this Agreement may not be amended or terminated, except by a written instrument signed by the party against which modifications or waiver or amendment or termination is to be enforced. No waiver of any one provision shall be considered a waiver of any other provision, and the fact that an obligation is waived for a period of time shall not be considered to be a continuing waiver. 13. Governing Law. This Agreement shall be construed under and governed by the laws of the State of California, without giving effect to principles of conflicts of laws. 14. Attorney's Fees. If any action or proceeding is brought to enforce or interpret any provision of this Agreement, the prevailing party shall be entitled to recover as an element of its costs, and not its damages, reasonable -9- 10 attorneys' fees and costs incurred in connection with such action or proceeding. 15. Headings. The Article and Section headings in this Agreement are inserted only as a matter of convenience, and in no way define, limit, or extend or interpret the scope of this Agreement or of any particular Article or Section. 16. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have duly executed these presents the day and year first above written. BARRY'S JEWELERS, INC. a California corporation By:_____________________________ Its:__________________________ EMPLOYEE ________________________________ Robert Bridel -10- EX-23 9 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-67814 of Barry's Jewelers, Inc. on form S-8 of our report dated August 12, 1996, except for Note 2, paragraphs 6 and 7, as to which the date is August 30, 1996, appearing in this Annual Report on Form 10-K of Barry's Jewelers, Inc. for the years ended May 31, 1996 and 1995. /s/ DELOITTE & TOUCHE LLP - ------------------------------ Deloitte & Touche LLP Los Angeles, California September 11, 1996 2 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8) No. 33-67184 of our report dated August 8, 1994 with respect to the statements of operations, shareholders' equity, and cash flows of Barry's Jewelers, Inc. for the year ended May 31, 1994 and the related financial statement schedule, included in the Annual Report (Form 10-K) of Barry's Jewelers, Inc. for its fiscal year ended May 31, 1996. /s/ ERNST & YOUNG LLP ------------------------------ Ernst & Young LLP Los Angeles, California September 9, 1996 EX-27 10 FINANCIAL DATE SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES F-3, F-4 AND F-5 OF THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR MAY-31-1996 JUN-01-1995 MAY-31-1996 1,765,000 0 79,304,000 10,930,000 54,559,000 126,729,000 26,791,000 10,425,000 145,973,000 9,354,000 103,398,000 0 0 33,196,000 25,000 145,973,000 140,145,000 156,153,000 83,769,000 51,974,000 0 11,759,000 11,146,000 (2,495,000) 288,000 (2,783,000) 0 0 0 (2,783,000) (.70) (.70)
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