-----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, Dgx4mF6hnjywwrDNgsJLQX0QLqNpsik0jmCvrKJH/eqpNrA1ExSQf9ZeHtg6AF4V SZCC9TMiGIKAtTYzV+f/jQ== 0000950150-97-001440.txt : 19971015 0000950150-97-001440.hdr.sgml : 19971015 ACCESSION NUMBER: 0000950150-97-001440 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19971014 SROS: NONE 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: SEC FILE NUMBER: 000-15017 FILM NUMBER: 97695517 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, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT to SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 31, 1997. 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 (IRS Employer incorporation or organization) Identification No.) 111 West Lemon Avenue, Monrovia, California 91016 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (626) 303-4741 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Common Stock Warrants Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES. [X] NO. [ ] Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of September 17, 1997, the aggregate market value of the voting stock held by non-affiliates of the issuer based on the average bid and ask prices of $0.25 and $0.16, respectively, of such common stock was $512,734 based upon an average price of $0.20 multiplied by 2,563,672 shares of common stock outstanding on such date held by non-affiliates. As of September 17, 1997, the issuer had a total of 4,029,372 shares of common stock outstanding. APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution under a plan confirmed by a court. [X] Yes. [ ] No. 2 PART I ITEM 1. BUSINESS INTRODUCTION INTRODUCTORY NOTE. This Annual Report on Form 10-K contains certain forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. See "--Private Securities Litigation Reform Act." THE COMPANY. Barry's Jewelers, Inc. (the "Company," including the operations of its predecessor; see "Selected Financial Data") is a chain of specialty retail jewelry stores generally located in regional shopping malls. The Company's stores offer fine jewelry items in a wide range of styles and prices, with a principal emphasis on diamond and gemstone jewelry. As of May 31, 1997, the Company operated 130 retail jewelry stores, principally in California, Texas, Arizona, North Carolina, Utah, Indiana, Ohio, Colorado, Idaho, and Montana. As measured by the number of retail locations, the Company is one of the larger specialty retailers of fine jewelry in the country. The Company's corporate office is located at 111 West Lemon Avenue, Monrovia, California, 91016, and its telephone number is (626) 303-4741. EVENTS LEADING UP TO CHAPTER 11. Throughout fiscal 1997, the Company experienced significant operating losses that necessitated the Company's renegotiation of financial covenants and certain other terms contained in its Amended Revolving Credit Agreement (as hereinafter defined in "Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") -- Liquidity and Capital Resources") during the second quarter of fiscal 1997. In January 1997, management announced its intent to implement a Company-wide restructuring and other cost savings initiatives during the third and fourth quarters of fiscal 1997. Those initiatives included a plan not to renew leases on twelve stores and closing eighteen to twenty-four under-performing stores with concurrent reductions in overhead at the Company's remaining stores and reduction in corporate expenses. However, the management team of the Company was replaced in February 1997 prior to the full execution of the restructuring and cost savings initiatives. At the end of the third quarter, the Company recorded restructuring charges of approximately $1.3 million primarily related to severance and costs associated with eleven stores closed during the quarter, impairment losses of approximately $2.0 million related principally to impairment of leasehold improvements and fixtures at twenty-six under performing stores and a $1.1 million charge to cost of goods sold to hasten the liquidation of aged inventory in an effort to improve cash flow. At the end of the third quarter, due to continued operating losses, the Company was not in compliance with certain financial covenants contained in the Second Amended Revolving Credit Agreement. As a result, the Company was unable to make interest payments to the holders of the Company's 11% Senior Secured Notes due December 22, 2000 (the "Notes"). Additionally, most vendors were not extending terms, and substantially all new merchandise purchases were on a cash basis. Because of these restrictions on cash flow and an inability to renegotiate existing bank debt or raise additional capital through other sources, the Company decided to seek bankruptcy protection. PROCEEDINGS UNDER CHAPTER 11. On May 11, 1997 (the "Petition Date"), the Company commenced a reorganization case by filing a voluntary petition (the "Chapter 11 Petition") for relief under chapter 11 ("Chapter 11") of title 11 of the United States Code (as amended from time to time, the "Bankruptcy Code") in the United States Bankruptcy Court for the Central District of California, Los Angeles Division (the "Bankruptcy Court"), case number 97-27988-VZ. Management determined that filing of the Chapter 11 Petition would allow the needed time and flexibility to restructure the Company's operations, help assure the continued flow of merchandise to its stores, and provide the time and protection necessary to restructure the Company's funding sources. Since the Petition Date, the Company has continued in possession of its properties and, as debtor-in-possession, is authorized to operate and manage its businesses and enter into all transactions (including obtaining services, inventories, and supplies) in the ordinary course of business, or out of the ordinary course of business subject to approval of the Bankruptcy Court, after notice and hearing. A statutory Creditors' Committee and an official Bondholders' Committee have been appointed in the Chapter 11 case, and as of September 17, 1997, an unofficial equity committee was in the process of being formed. 1 3 Subsequent to the filing of the Chapter 11 Petition, the Company sought and obtained several orders from the Bankruptcy Court which were intended to stabilize its business. The most significant of these orders: (1) authorized and extended use of the Company's cash collateral through February 28, 1998 (see "MD&A -- Liquidity and Capital Resources -- Stipulation Authorizing Use of Cash Collateral" for a discussion of the Cash Stipulation (as therein defined)); (2) approved a trade debtor-in-possession ("DIP") financing agreement (the "Trade DIP Financing Agreement"), which allows the Company to obtain its expected merchandise orders of over $50 million on extended trade terms while providing the trade vendors with substantial support for the payment of their accounts receivable; (3) authorized the Company to return approximately $8 million of merchandise to vendors as credit against the vendors' prepetition claims in exchange for at least $11 million of new merchandise on extended trade terms (the "Vendor Return Program"); (4) authorized the Company to obtain merchandise on consignment (the "Consignment Agreement"); and (5) authorized payment of certain prepetition liabilities, principally prepetition wages and employee benefits, and payments for certain prepetition customer and related service claims. See "MD&A" for additional discussion of the Cash Stipulation, the Trade DIP Financing Agreement, the Vendor Return Program and Consignment Agreement. The Company's consolidated financial statements have been prepared on a going concern basis, which contemplates realization of assets and satisfaction of liabilities in the normal course of business. As a result of the Chapter 11 Petition filing and circumstances relating to this event, such realization of assets and satisfaction of liabilities is subject to uncertainty. A plan of reorganization could materially change the amounts reported in the accompanying consolidated financial statements, which do not give effect to adjustments to the carrying values of assets and liabilities, which may be necessary as a consequence of a plan of reorganization. The Company's ability to continue as a going concern is contingent upon, among other things, its ability to formulate a plan of reorganization that will be confirmed by the Bankruptcy Court, to achieve satisfactory levels of profitability and cash flow from operations, to maintain compliance with the debtor-in-possession Trade DIP Financing Agreement and terms of the Cash Stipulation, and the ability to obtain sufficient financing sources to meet future obligations. PRIOR RESTRUCTURING. 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 Bankruptcy Code and filed a pre-negotiated Plan of Reorganization in the United States Bankruptcy Court for the Central District of California (the "Court"). On June 19, 1992, the Court entered an order confirming the Company's Amended Plan of Reorganization (the "Prior Reorganization Plan"). The effective date of the Prior Reorganization Plan was June 30, 1992. STRATEGY. The Company's operating strategy is to provide quality fine jewelry displayed in attractive store locations at affordable prices. To enhance sales, the Company makes credit financing available to qualified customers through its own private label credit card and through various secondary credit sources. The Company's sales capabilities are supported by a trained and knowledgeable sales staff, an automated, centralized credit and collection system for the authorization of credit sales and collection of accounts, and a centralized distribution system to replenish merchandise to the stores. MERCHANDISE STRATEGY. Under the leadership of the Company's new management team, the Company's merchandising presentation is being expanded to include broader diamond fashion and gold assortments. Management believes that through its vendor partnerships that allow for a large amount of merchandise to be brought in under exclusive consignment arrangements, it should be able to expand these assortments and focus on key categories. As a result, the stores are expected to offer dominant assortments of quality jewelry in the fashion areas, thereby contributing to an enhancement of overall merchandise presentation and of the Company's ability to capture a larger market share. On July 22, 1997, the Company reached an agreement with its vendors and creditors regarding the terms of the Trade DIP Financing Agreement, Vendor Return Program, and Consignment Agreement. See "-- Proceedings Under Chapter 11." These vendor programs, along with an increase in available borrowing under the Company's Second Amended Revolving Credit Agreement pursuant to the terms of the Cash Stipulation (see "MD&A -- Liquidity and Capital Resources"), are expected to help management to implement its new merchandise strategy. MERCHANDISE MIX. The Company is repositioning its merchandising assortments to provide an emphasis in the diamond fashion and gold departments. This is being implemented in addition to the Company's prior focus on bridal product, which accounted for 44% of the Company's sales for the fiscal year ended May 31, 1997. 2 4 INVENTORY PURCHASING. Buyers located in the Company's corporate offices purchase most of the stores' merchandise. Each store's inventory is replenished weekly or more often during peak selling seasons. Management believes that centralized merchandise purchasing provides the Company with quality controls and price advantages. Three vendors have accounted for 25%, 21%, and 17% of the Company's merchandise purchases for fiscal 1997, 1996, and 1995, respectively. Management believes that the Company's relationship with these three vendors, as well as its other vendors, is good. These vendors, and all vendors key to the Company's new merchandising strategy, have agreed to participate in the Trade DIP Financing Agreement and the Vendor Return Program. 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. The Company predominantly operates under four trade names representing 124 of the 130 stores: Hatfield Jewelers, Mission Jewelers, Samuels Jewelers, and Schubach Jewelers. Two other trade names make up the remaining six stores: A. Hirsh & Son Jewelers and The Ringmaker. The Company believes that except for the Samuels Jewelers, Schubach Jewelers, and Mission Jewelers tradenames, the loss of any of the other tradenames would not have a material effect on its business. 3 5 STORE PERFORMANCE. The following table sets forth selected data with respect to the Company's operations for the five fiscal years ended May 31, 1997.
1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------ Number of stores at beginning of year 161 162 144 144 145 Acquired during the year -- -- 15 -- -- Opened during the year 17 7 8 1 -- Closed during the year(1) (48) (8) (5) (1) (1) ---- ---- ---- ---- ---- Total at year end 130 161 162 144 144 Percentage increase (decrease) in sales of comparable stores(2) (10.0)% 2.2% 11.0% 7.4% 9.1% Average sales per comparable store (in thousands)(2) $ 709 $ 905 $ 871 $ 792 $ 736
- ---------- (1) The 48 stores closed during fiscal 1997 are comprised of 33 stores closed on or about May 11, 1997, as part of the Company's Chapter 11 Petition filing; 11 stores closed in connection with the restructuring, announced in January 1997, and 4 other stores closed during the year. (2) Comparable stores are stores that were open for the same period in both the current and preceding years. CREDIT PROGRAM. The Company's credit policy is intended to complement its overall sales strategy. The principal objective is the extension of credit to those customers which will produce the most reasonable rate of return. The Company also offers credit insurance to its customers. This insurance program, underwritten by a major insurance company, generally provides coverage for life, disability, unemployment and loss of property. Sales under the Company's credit program accounted for approximately 56% of fiscal 1997 sales, net of down payments. Payment periods for the credit sales generally range from 24 to 36 months. Customers may also purchase jewelry for cash and by using major national credit cards. 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 25% of net sales and all or nearly all of annual earnings. For the Christmas selling season during fiscal 1997, net sales were $32.4 million. As previously discussed, the Company experienced significant operating losses during fiscal 1997, including an operating loss of $6.8 million for the third quarter ended February 28, 1997. Not since the Company's Prior Reorganization has it failed to report net income for the third quarter, which includes the Christmas selling season. COMPETITION. The retail jewelry industry is highly competitive. It is estimated that there are approximately 35,000 retail jewelry stores in the United States, most of which are independently operated and not part of a major chain. Numerous companies, including publicly and privately held independent stores and small chains, department stores, catalog showrooms, direct mail suppliers, and TV shopping networks, provide competition on a national and regional basis. The malls and shopping centers where many of the Company's stores are located typically contain several other national chain or independent jewelry stores as well as one or more jewelry departments located in the "anchor" department stores. Certain of the Company's competitors are substantially larger than the Company and have greater financial resources. 4 6 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 has been unable to compete successfully in recent years because of its failed merchandising programs, poor credit underwriting practices, cash flow constraints, excessive collection costs, poor inventory controls and below-average percentage of consignment inventory, executive turnover, restrictive financing arrangements, ineffective investment in technology and the resultant excessive administrative costs. In addition, the Company believes that, as the jewelry retailing industry consolidates, the ability to compete effectively may become increasingly dependent on volume purchasing capability, regional market focus, superior management information systems, and the ability to provide customer service through trained and knowledgeable sales staffs. 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. EMPLOYEES. At May 31, 1997, the Company had 1,171 full- and part-time employees. Unions represented 26 employees, or 2% of the Company's employees, at such date. Union contracts covering these employees expired on August 31, 1996; however, negotiations to renew the contract are continuing. The Company believes it provides working conditions and wages that compare favorably with those offered by other retailers in the industry and that its employee relations are good. The Company has never experienced any material labor unrest, disruption of operations or strikes. PRIVATE SECURITIES LITIGATION REFORM ACT. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included under the captions "Business -- Proceedings Under Chapter 11" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in other parts of this Form 10-K and other materials filed or to be filed by the Company with the Securities and Exchange Commission contain statements that are forward-looking, such as statements relating to the Company's Vendor Return Program, Consignment Merchandise Agreement, Trade DIP Financing Agreement, among others. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, the risk of continuing losses and cash flow constraints despite the Company's efforts to improve operations, including: the Vendor Return Program, the Consignment Merchandise Agreement, and Trade DIP Financing Agreement such that the Company will be able to purchase inventory for the 1997 holiday season and thereafter, and attain credit support from its creditors and vendors; failure to negotiate acceptable payment terms with creditors, vendors and landlords; and failure to have its plan for reorganization confirmed. ITEM 2. PROPERTIES The Company leases all its retail stores. Stores range in size from approximately 577 square feet to 3,690 square feet. Store leases generally have an initial term of five to fifteen years and will expire at various dates through 2007. Currently, leases at 11 stores have expired, the stores are occupied on a month-to-month basis. Some leases contain renewal options for periods ranging from five to ten years on substantially the same terms and conditions as the initial lease. Under most of the store leases, the Company is required to pay taxes, insurance, and its pro rata share of common area and maintenance expenses. Most of the leases also require the Company to pay the greater of a specified minimum rent or a contingent rent based on a percentage of sales as defined. The Company leases approximately 38,000 square feet for its headquarters location under a lease expiring in 2005. Certain shareholders and former officers of the Company hold an interest in the Company's headquarters property. Under section 365(d)(4) of the Bankruptcy Code, unless otherwise ordered by a bankruptcy court, a Chapter 11 debtor must assume all leases of non-residential property within 60 days of its Chapter 11 filing or such leases will be deemed rejected. By order of the Bankruptcy Court, the Company obtained an extension of time within which to assume or reject its non-residential real property leases through and including November 7, 1997, for the headquarters' lease and January 30, 1998, for the store leases, or such later date(s) as the Bankruptcy Court may order. 5 7 Consistent with its responsibility to its creditors, the Company intends to continue to evaluate on an ongoing basis the terms of its non-residential real estate leases to determine whether to take any further actions with respect to the leases, including assuming or rejecting leases in the Chapter 11 proceedings, terminating leases, allowing leases to expire, renegotiating existing leases and entering into new leases. The Company is continuing to focus on eliminating unproductive stores. See "MD&A." In connection with such ongoing evaluation, since the commencement of the Company's Chapter 11 case, the Company has rejected 36 retail store leases, including a lease for a store the Company never opened and one lease which had expired. Two of the 36 lease rejections occurred after May 31, 1997. As of September 17, 1997, the Company was operating 128 retail stores in the following states:
Number of State Stores ----- --------- California 33 Texas 32 Arizona 7 North Carolina 7 Utah 7 Indiana 6 Ohio 6 Colorado 5 Idaho 5 Montana 5 Others 15 -------- TOTAL 128 ========
ITEM 3. LEGAL PROCEEDINGS Pursuant to section 362 of the Bankruptcy Code, during the Chapter 11 case, creditors and other parties in interest may not, without court approval, (i) commence or continue a judicial, administrative or other proceeding against the Company which was or could have been commenced prior to the commencement of the Chapter 11 case, or recover a claim that arose prior to the commencement of the Chapter 11 case; (ii) enforce any pre-petition judgment against the Company; (iii) take any action to obtain possession of property of the Company or to exercise control over property of the Company or its estate; (iv) create, perfect or enforce any lien against property of the Company; (v) collect, assess, or recover claims against the Company that arose before the commencement of the Chapter 11 case; or (vi) offset any debt owing to the Company that arose prior to the commencement of the Chapter 11 case against a claim of such creditor or party in interest against the Company that arose before the commencement of the Chapter 11 case. As a result of the foregoing, all pre-petition claims asserted or assertable against the Company have been automatically stayed. The nature of a Chapter 11 case is to have all claims against and interest in the Company resolved. Accordingly, the Bankruptcy Court ordered that any entity desiring to participate in any distribution in the Chapter 11 case must either have been previously properly scheduled by the Company or file a proof of claim with the Bankruptcy Court on or before October 31, 1997. The Company will evaluate proofs of claims filed during the Chapter 11 case. The Company filed a motion requesting that the Bankruptcy Court extend the exclusive periods during which only the Company may file a plan of reorganization and solicit acceptances thereto on such plan to February 27, 1998 and April 27, 1998. On September 24, 1997, the Bankruptcy Court granted the Company's motion. In addition, the Company filed a motion with the Bankruptcy Court requesting that the Bankruptcy Court approve employment agreements entered into between the Company and its new management team. On September 24, 1997, the Bankruptcy Court granted the Company's motion. 6 8 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. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION. As a result of the Company's bankruptcy proceedings and its failure to maintain certain minimum listing requirements, the Company's Common Stock was delisted from NASDAQ on July 14, 1997 and is currently traded on the pink sheets. 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, 1997 and 1996, the high and low bid prices per share were:
FISCAL 1997 HIGH LOW ----------- -------- -------- First $ 4.875 $ 2.750 Second $ 3.875 $ 2.188 Third $ 2.625 $ 1.125 Fourth $ 2.188 $ 0.219 FISCAL 1996 ----------- First $ 4.625 $ 2.875 Second $ 5.875 $ 3.750 Third $ 4.125 $ 3.125 Fourth $ 4.875 $ 3.000
WARRANTS. Beginning in July 1992, the Company's warrants commenced trading in the over-the-counter market on 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, 1997 were $0.375 and $0.0625, respectively. The Company's warrants were also delisted from NASDAQ on July 14, 1997. HOLDERS. Management believes that there are approximately 200 beneficial owners of Common Stock as of September 17, 1997. DIVIDENDS. The Company has paid no cash dividends on its Common Stock during the past three fiscal years and management does not anticipate that it will do so in the foreseeable future. Currently, the Company is prohibited from paying any cash dividends under the terms of its Second Amended Revolving Credit Agreement and the indenture governing the Notes. 7 9 ITEM 6. SELECTED FINANCIAL DATA The following tables set forth selected financial data of the Company (through the effective date of the Prior Reorganization Plan, referred to as "Predecessor") as of and for the month ended June 30, 1992, and the Company (referred to as such following the effective date of the Prior Reorganization Plan) as of and for the years ended May 31, 1997, 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. SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except for per share data)
ELEVEN MONTHS PREDECESSOR(1) FOR THE YEARS ENDED MAY 31, ENDED -------------- -------------------------------------- MAY 31, MONTH ENDED 1997 1996 1995 1994 1993 JUNE 30, 1992 -------- -------- -------- -------- -------- -------------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net Sales $130,446 $140,145 $136,055 $114,023 $ 99,270 $ 7,070 Finance and credit insurance fees 13,900 16,008 15,681 14,487 13,037 1,229 -------- -------- -------- -------- -------- ------- 144,346 156,153 151,736 128,510 112,307 8,299 -------- -------- -------- -------- -------- ------- Operating (loss) income(2)(3) (29,741) 8,651 11,670 10,294 5,764 (541) -------- -------- -------- -------- -------- ------- Interest expense, net 12,745 11,146 9,764 7,746 6,401 644 Reorganization costs 2,322 -- -- -- -- -- Provision for income taxes 284 288 -- 1,009 -- -- -------- -------- -------- -------- -------- ------- (Loss) income before extraordinary item (45,092) (2,783) 1,906 1,539 (637) (1,185) -------- -------- -------- -------- -------- ------- Extraordinary items(4)(5) (876) -- -- -- -- 49,229 -------- -------- -------- -------- -------- ------- Net (loss) income $(45,968) $ (2,783) $ 1,906 $ 1,539 $ (637) $48,044 ======== ======== ======== ======== ======== ======= PER SHARE DATA:(6) (Loss) income before extraordinary item $ (11.25) $ (0.70) $ 0.48 $ 0.53 $ (0.32) $ (1.19) ======== ======== ======== ======== ======== ======= Extraordinary items(4)(5) $ (0.22) $ -- $ -- $ -- $ -- $ 49.21 ======== ======== ======== ======== ======== ======= Net (loss) income $ (11.47) $ (0.70) $ 0.48 $ 0.53 $ (0.32) $ 48.02 ======== ======== ======== ======== ======== ======= Weighted average number of common and common equivalent shares outstanding 4,007 3,978 3,969 2,902 2,008 1,000 ======== ======== ======== ======== ======== ======
MAY 31, ------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- CONSOLIDATED BALANCE SHEET DATA: Current assets $105,390 $127,075 $127,208 $107,876 $106,816 Working capital 99,482 117,819 109,873 94,660 89,470 Total assets 123,483 145,875 144,959 122,252 119,200 Total debt(7) 130,271 103,579 92,368 75,935 90,251
- ---------- (1) "Predecessor" includes the consolidated results of the Company and its subsidiaries for the month of June 1992, and reflects the settlement of liabilities in accordance with the Prior Reorganization Plan. (2) Operating (loss) income for the fiscal year ended May 31, 1997, eleven months ended May 31, 1993, and the month ended June 30, 1992, include $1,336, $100, and $450, respectively, of restructuring expenses. (3) Operating (loss) income for the fiscal year ended May 31, 1997, includes $3,947 for impairment loss, and $3,033 for inventory valuation. (4) The year ended May 31, 1997, includes an extraordinary loss of $876 or $0.22 per share, incurred in connection with the early extinguishment of the Company's Securitization Facility. See "MD&A -- Liquidity and Capital Resources." (5) The month ended June 30, 1992, includes an extraordinary gain of $49,229 ($49.21 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 Prior Reorganization Plan. (6) 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. (7) As of May 31, 1997, total debt includes liabilities subject to compromise under reorganization proceedings. 8 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PRIVATE SECURITIES LITIGATION REFORM ACT. This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. See "Business -- Private Securities Litigation Reform Act." OVERVIEW. The following discussion presents information about the financial condition, liquidity and capital resources, and results of operations of the Company as of and for the fiscal years ended May 31, 1997, 1996, and 1995. This information should be read in conjunction with the audited consolidated financial statements of the Company and the notes thereto. Throughout fiscal 1997, the Company experienced significant operating losses that necessitated the Company's renegotiation of financial covenants and certain other terms contained in its Amended Revolving Credit Agreement (see "--Liquidity and Capital Resources") during the second quarter of fiscal 1997. In January 1997, management announced its intent to implement a Company-wide restructuring and other cost savings initiatives during the third and fourth quarters of fiscal 1997. Those initiatives included a plan not to renew leases on twelve stores and closing eighteen to twenty-four under-performing stores with concurrent reductions in overhead at the Company's remaining stores and reduction in corporate expenses. However, the management team of the Company was replaced in February 1997 prior to the full execution of the restructuring and cost savings initiatives. At the end of the third quarter, the Company recorded restructuring charges of approximately $1.3 million primarily related to severance and costs associated with eleven stores closed during the quarter, impairment losses of approximately $2.0 million related principally to impairment of leasehold improvements and fixtures at twenty-six under performing stores, and a $1.1 million cost of goods sold charge to hasten the liquidation of aged inventory in an effort to improve cash flow. At the end of the third quarter, due to continued operating losses, the Company was again not in compliance with certain financial covenants contained in the Second Amended Revolving Credit Agreement (see "-- Liquidity and Capital Resources"). As a result, the Company was unable to make interest payments to the holders of the Notes. Additionally, most vendors were not extending terms and substantially all new merchandise purchases were on a cash basis. Because of these restrictions on cash flow and an inability to renegotiate existing bank debt or raise additional capital through other sources, the Company decided to seek bankruptcy protection. See "Business -- Proceedings Under Chapter 11." FISCAL YEAR ENDED MAY 31, 1997 ("FISCAL 1997") COMPARED WITH FISCAL YEAR ENDED MAY 31, 1996 ("FISCAL 1996") Net sales in fiscal 1997 were $130.4 million, a decrease of $9.7 million, or 7%, from net sales of $140.1 million in fiscal 1996. The decrease was the combined result of the closure of the 48 stores and a decrease of 10% in sales of comparable stores (those open for the same period in both the current and preceding years) versus the prior year. The comparable store sales decrease was due in part to implementation of a value-pricing strategy commenced earlier in the fiscal year. Additionally, net sales were adversely impacted by late receipt of merchandise in the stores for the Christmas selling season, which resulted in excessive stock outs as well as an increase in the sales mix of promotionally priced merchandise and competitive discounts. Finance and credit insurance charges on credit sales in fiscal 1997 were $13.9 million, a decrease of $2.1 million, or 13%, from the prior year primarily due to a decrease in the average total outstanding customer receivables. Cost of goods sold, buying and occupancy expenses were 71% of net sales for fiscal 1997 compared to 60% for the prior year. The gross margin percentage declined in fiscal 1997 primarily as a result of the Company's value-pricing strategy, and the sales mix of promotionally priced merchandise and competitive discounts. In connection with the change in merchandising strategy as developed by the Company's new management team, an inventory valuation allowance of approximately $3.0 million was established as of May 31, 1997. The allowance reduces the carrying value of ending inventory to its estimated net realizable value. Selling, general and administrative expenses were $57.0 million, an increase of $5.1 million, or 10%, from the prior year, primarily due to increases in the costs of advertising, professional services, and shipping. Selling, general and administrative expenses increased as a percentage of net sales to 44% in fiscal 1997 from 37% for the fiscal 1996. The increase as a percentage of net sales is attributable to a combination of the decline in net sales and the increase in total expense. 9 11 The provision for doubtful accounts was $18.8 million, an increase of $7.0 million from the prior year. The provision was approximately 14% and 8% of net sales for fiscal 1997 and 1996, respectively. The increase of such provision was primarily due to an additional provision for customer receivables from closed stores, and a general provision increase as a result of an overall analysis of portfolio performance. The Company recorded approximately $1.3 million of restructuring expenses during fiscal 1997. The restructuring expenses consist primarily of severance and store closing costs at 11 stores. The Company recognized an impairment loss of approximately $3.9 million as a result of impaired leasehold improvements and fixtures at 37 closed stores, as well as impaired computer equipment and software related to the Company's merchandise management and point-of-sale systems. Interest expense was $12.7 million, an increase of $1.6 million from the prior year. Such increase was a result of higher average interest rates on the Company's long-term debt, and $325,000 of additional interest expense charged during the third quarter of fiscal 1997 in connection with obtaining an amendment to the Company's Amended Revolving Credit Agreement as discussed in "-- Liquidity and Capital Resources." The Company also recorded $876,000 of extraordinary charges due to the write-off deferred finance fees in connection with the early extinguishment of its Securitization Facility during the first quarter of fiscal 1997. FISCAL 1996 COMPARED WITH FISCAL YEAR ENDED MAY 31, 1995 ("FISCAL 1995") Net sales in fiscal 1996 were $140.1 million, an increase of $4.1 million, or 3%, from net sales of $136.1 million 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 $16.0 million, an increase of $327,000, or 2%, from the prior year primarily due to an increase in the average total outstanding customer receivables. 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 increased competitive pressure in the retail jewelry industry. Selling, general and administrative expenses were $52.0 million, an increase of $1.0 million, 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 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 fiscal 1995. The provision for doubtful accounts was $11.8 million, an increase of $1.6 million from the prior year. The provision was approximately 8% of net sales for fiscal 1996 and 1995. Interest expense was $11.1 million, an increase of $1.4 million, 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 "-- Liquidity and Capital Resources." The Company's provision for income taxes was $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. 10 12 FINANCIAL CONDITION CREDIT PROGRAM. The Company offers its merchandise sales on credit terms to qualified customers. The Company's policy is to attempt to obtain a cash down payment on all credit sales, with monthly payments established such that the payment of the credit balance will occur, generally, over a period ranging from 24 to 36 months. The Company's customer receivables are revolving charge accounts. The Company currently collects (and has historically collected) approximately 10% of its customer receivable balances each month. Sales under the Company's credit program accounted for approximately 56% of fiscal 1997 sales, net of down payments. As of May 31, 1997 and May 31, 1996, the aggregate customer receivables balances were $64.9 million and $79.7 million, respectively. Aggregate credit collections during the twelve months ended May 31, 1997 were $84.7 million. During the third quarter of fiscal 1997, the Company changed its customer receivable write-off policy. Previously, the Company would fully reserve for accounts that fell within certain aged parameters but would continue internal collection efforts until such time as a determination was made that the accounts should be written off against the allowance for doubtful accounts, generally when the account was more than 29 months contractually delinquent. With the change in policy, the internal collection efforts for these fully reserved accounts has been discontinued and the accounts are being sent to outside collection agencies, generally within 6 months of becoming delinquent, at which time the account balances are written off against the allowance for doubtful accounts. The Company adopted this change as a result of its cost savings initiatives in an effort to reduce internal collection and other expenses. Concurrent with this change, the Company accelerated the write-off of approximately $6.8 million of customer accounts against the allowance for doubtful accounts. INVENTORY. At May 31, 1997, inventory was approximately $44.4 million, gross of a valuation allowance of $3.0 million, a decrease of approximately $10.2 million from May 31, 1996. This decrease is primarily due to fewer stores at May 31, 1997 compared to last year together with the inability of the Company to obtain adequate levels of inventory as a result of cash flow constraints. LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS. As discussed previously, the Company filed a voluntary petition for relief under Chapter 11. Under Chapter 11, actions to enforce certain claims against the Company are stayed if the claims arose or are based on events that occurred on or before the Petition Date. The ultimate terms of settlement of these claims will be determined in accordance with a plan of reorganization that requires approval of the impaired prepetition creditors and shareholders and confirmation by the Bankruptcy Court. Until a plan of reorganization is confirmed by the Bankruptcy Court, only such payments on prepetition obligations that are approved or required by the Bankruptcy Court will be made. Pursuant to the Cash Stipulation, the Company is making contractual interest payments to its lenders. At May 31, 1997, $130.3 million was the amount established as liabilities subject to compromise under reorganization proceedings. Other liabilities may arise or be subject to settlement as a result of rejection of executory contracts and unexpired leases, or the Bankruptcy Court's resolution of claims for contingencies and other disputed amounts. LIQUIDITY AND CAPITAL RESOURCES GENERAL. The Company's operations require working capital to fund the purchase of inventory, lease payments, and the funding of normal operating expenses. The seasonality of the Company's business requires a significant build-up of inventory for the Christmas holiday selling period. These seasonal inventory needs generally must be funded during the late summer 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. The Company reported cash flow from operating activities of approximately $8.3 million for the fiscal year ended May 31, 1997, as compared to cash flows used by operating activities of approximately $6.0 million and $9.6 million for the fiscal years ended May 31, 1996 and 1995, respectively. The Company's positive cash flow for fiscal 1997 resulted primarily from several large non-cash charges recorded in connection with impaired assets, inventory valuation allowance, and additional provision for bad debts at the Company's closed stores. Additionally, the Company's inventory decreased by approximately $10.2 million, and accounts payable and accrued liabilities increased by approximately $6.7 million and $9.7 million, respectively, for the fiscal year ended May 31, 1997. 11 13 In addition, the Company requires working capital to fund capital expenditures. Capital expenditures for fiscal 1997, 1996 and 1995 were $7.2 million, $4.5 million, and $6.5 million, respectively. Such expenditures were made primarily in connection the opening of seventeen new stores and the remodeling of twelve stores during fiscal 1997, and the opening of seven new stores and remodeling of fourteen stores during fiscal 1996, and opening of eight new stores and the acquisition of fifteen stores during fiscal 1995. As of May 31, 1997, the Company had $7.3 million of cash and cash equivalents as a result of the Chapter 11 filing and the prohibition on payments of prepetition debt. Approximately $1.3 million of the Company's cash and cash equivalents at May 31, 1997 was restricted pursuant to the terms of the Cash Stipulation. Inherent in a successful plan of reorganization is a capital structure that permits the Company to generate sufficient cash flow after reorganization to meet its restructured obligations and to fund the current obligations of the reorganized Company. Under the Bankruptcy Code, the rights of and ultimate payment to prepetition creditors may be substantially altered and eliminated as to some classes of creditors. At this time, it is not possible to predict the outcome of the Chapter 11 filing or its effects on the business of the Company, or on the interests of the creditors or shareholders. FINANCING TRANSACTIONS. On December 21, 1995, the Company entered into an accounts receivable securitization facility (the "Securitization Facility"). In connection with the Securitization Facility, the Company also entered into an amended and restated revolving credit facility (the "Revolving Credit Agreement"), which amended the original December 1993 agreement. In addition, proceeds of the initial loan under the Securitization Facility were used in part to repay at par $20 million of the Company's $70 million in outstanding Notes. On July 26, 1996, the agent under the Securitization Facility advised the Company that it wished to terminate the commitment under the Securitization Facility. On August 30, 1996, the Company entered into an amended and restated revolving credit agreement with First National Bank of Boston ("FNBB", the "Amended Revolving Credit Agreement"), which 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 $41.2 million were used to refinance the Company's obligations under the Securitization Facility, following which the Securitization Facility was terminated. In addition, upon consummation of the Amended Revolving Credit Agreement, the Company paid fees of approximately $2.3 million, which were deferred and are being amortized. 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. On January 27, 1997, the Company's Amended Revolving Credit Agreement was amended again (the "Second Amended Revolving Credit Agreement"), and the bank waived the Company's non-compliance with certain financial covenants therein for the quarter ended November 30, 1996 and reduced its commitment to lend to the Company from $85 million to $70 million as of January 27, 1997. Outstanding borrowings bear interest at the agent bank's reference rate plus 1.5% unless an Event of Default (as defined in the Second Amended Revolving Credit Agreement) has occurred and is continuing, or is not waived, in which case such outstanding borrowings bear interest at 2.0% above the rate otherwise payable. The Second Amended Revolving Credit Agreement required the Company to comply with certain customary financial covenants and restrictions, some of which were adjusted in the January amendment to take into account the various charges incurred in connection with the Company's restructuring and cost savings initiatives implemented during the third and fourth quarters of fiscal 1997. The Company failed to meet certain financial covenants contained in the Second Amended Revolving Credit Agreement as of February 28, 1997, which constituted an Event of Default under the Second Amended Revolving Credit Agreement. The Event of Default prohibited the Company from paying the interest due on April 30, 1997 on the Notes. Commencement of the Chapter 11 case has automatically stayed any actions to enforce collection of amounts owed by the Company to the holders of the Second Amended Revolving Credit Agreement and Notes. Concurrent with the Chapter 11 proceedings, the commitment to lend under the Second Amended Revolving Credit Agreement was terminated. The Company had $57.9 million outstanding on the Petition Date and at May 31, 1997. 12 14 As of May 31, 1997, the Company had approximately $57.9 million of borrowings outstanding under its Second Amended Revolving Credit Agreement and $50 million outstanding on the Notes. The Company had $3.2 million of interest payable on the Notes. This amount represented the semi-annual interest payment that was due on April 30, 1997, but was not paid, plus accrued interest through May 31, 1997. The Company's average interest rates on its borrowings under the Second Amended Revolving Credit Agreement and Notes were 13.3% and 11.0%, respectively, for the fiscal year ended May 31, 1997. STIPULATION AUTHORIZING USE OF CASH COLLATERAL. On May 14, 1997, the Company received interim approval of the Bankruptcy Court of an Agreement to Use Cash Collateral. The Company operated under that agreement until July 22, 1997, at which time it received final court approval of an Amended and Restated Stipulation Pursuant to Sections 361 and 363 of the Bankruptcy Code Authorizing Debtor's Use of Cash Collateral and Granting Adequate Protection to Collateral Agent, Lenders and Bondholders (the "Cash Stipulation"). Pursuant to the terms of the Cash Stipulation, through February 28, 1998, the lenders agreed to allow the Company to utilize the cash collateral generated by operations rather than paying down any of the $57.9 million outstanding balance. This cash collateral agreement requires the Company to, among other things, comply with a modified borrowing base. The modified borrowing base increased the cash collateral availability under the Company's Second Amended Revolving Credit Agreement by increasing the advance rate to 82% of eligible accounts receivable, as defined, and to 45% of eligible inventory, as defined, subject to various reductions stipulated in the Cash Stipulation. DEBTOR-IN-POSSESSION TRADE FINANCING AGREEMENT AND VENDOR RETURN PROGRAM. On July 22, 1997, the Company reached an agreement with its vendors and creditors regarding the terms of the Trade DIP Financing Agreement. Pursuant to such agreement, the Company should be able to obtain its expected orders for over $50 million of new merchandise on extended trade terms, without having to pay the high fees and interest charges that normally accompany a DIP loan. The vendors are protected from credit exposure through a $2 million trade trust and a $4 million subordination provided by certain holders of the Company's Notes. In addition, the agreement allows the Company to exchange up to approximately $8 million of slow-moving merchandise for at least $11 million of fresh inventory on extended trade terms. CONSIGNEE AGREEMENT. As part of the Company's plan of reorganization, management has sought to increase the level of consigned merchandise. Toward this end, the Company received Bankruptcy Court approval of its Consignment Agreement on July 22, 1997. Pursuant to the terms of the Consignment Agreement, the Company's vendors will commit to maintain a specified minimum amount of consigned merchandise. The Company shall hold such merchandise for sale in the ordinary course of its business and is responsible for insuring the consignment merchandise for its full value and against all risks of loss. The Company is required to report all consignment merchandise sales on a weekly basis, and to pay all invoices within specified trade payment terms, generally 30 days from receipt of invoice, as set forth in the Consignment Agreement. TAX LOSS CARRYOVERS. At May 31, 1997, the Company had a net operating loss carryforward for federal income tax purposes of $61.7 million, which is scheduled to expire in the years May 31, 2006 through May 31, 2012. Of this $61.7 million, approximately $14 million is scheduled to expire in the years May 31, 2006 through May 31, 2008, and is subject to the limitations imposed under Section 382 of the Internal Revenue Code of 1986, as amended (the "IRC"). Section 382 of the IRC provides a limitation ("Section 382 limitation") on the use of net operating loss carryovers, net operating losses, and certain built-in losses and deduction items of a loss corporation that has an ownership change. For financial statement purposes, utilization of a net operating loss, under Section 382 of the IRC, is recorded as a credit to common stock. The balance of the net operating losses, approximately $47.7 million, is not subject to the limitations imposed under Section 382 of the IRC, and is scheduled to expire through May 31, 2012. At May 31, 1997 and 1996, the Company has recorded a noncurrent deferred tax asset of $72,000 and $122,000, respectively, representing alternative minimum tax ("AMT") credit carryforwards. Unlike net operating loss carryforwards, the AMT credit has an indefinite carryforward period, as it will be available to reduce the Company's regular tax liability in any future year. 13 15 QUARTERLY RESULTS OF OPERATIONS. The following is a summary of the unaudited quarterly results of operations for the years ended May 31, 1997 and 1996: QUARTERLY INFORMATION (Unaudited, in thousands, except per share data)
May 31, February 28, November 30, August 31, Quarter Ended 1997 1997 1996 1996 - ------------------------------------------------------------------------------------------------------------- 1997 Net sales, finance and credit insurance fees $ 28,886 $52,829 $32,797 $29,834 Cost of goods sold, buying and occupancy 24,237 32,022 19,349 17,394 Restructuring expense -- 1,336 -- -- Impairment loss 1,977 1,970 -- -- Loss before reorganization costs, income taxes and extraordinary loss (24,142) (6,818) (6,655) (4,871) Reorganization costs 2,322 -- -- -- Net loss before extraordinary item -- -- -- (4,871) Extraordinary item -- -- -- (876) Net loss $(26,748) $(6,818) $(6,655) $(5,747) - ------------------------------------------------------------------------------------------------------------- Loss per share before extraordinary item -- -- -- $ (1.22) Loss per share $ (6.64) $ (1.70) $ (1.66) $ (1.44) - ------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 4,029 4,001 3,999 3,999 - ------------------------------------------------------------------------------------------------------------- Common stock price per share: High $ 2.19 $ 2.63 $ 3.88 $ 4.88 Low $ 0.22 $ 1.13 $ 2.19 $ 2.75
May 31, February 29, November 30, August 31, 1996 1996 1995 1995 - ------------------------------------------------------------------------------------------------------------- 1996 Net sales, finance and credit insurance fees $ 33,370 $54,872 $36,995 $30,916 Cost of goods sold, buying and occupancy 20,210 27,865 19,305 16,389 Net (loss) income $ (4,489) $ 3,159 $ (447) $(1,006) - ------------------------------------------------------------------------------------------------------------- (Loss) income per share $ (1.12) $ 0.79 $ (0.11) $ (0.25) - ------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 3,999 3,974 3,969 3,969 - ------------------------------------------------------------------------------------------------------------- Common stock price per share: High $ 4.88 $ 4.13 $ 5.88 $ 4.63 Low $ 3.00 $ 3.13 $ 3.75 $ 2.88
INFLATION. The impact of inflation on the cost of merchandise (including gems and metals), labor, occupancy and other operating costs can affect the Company's results. For example, most of the Company's leases require the Company to pay rent, taxes, maintenance, insurance, repairs and utility costs, all of which are subject to inflationary pressures. To the extent permitted by competition, in general the Company passes increased costs to the customer by increasing sales prices over time. 14 16 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Not applicable. 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. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT BOARD OF DIRECTORS Set forth below is biographical information for each of the nominees to the Board of Directors of the Company. David W. Cochran, 51, has been a director of the Company since June 1992. From December 1978 to November 1994, Mr. Cochran was President, Chief Executive Officer and a Principal of R.F. Simmons Company, Inc., a jewelry manufacturer. From November 1994 to October 1995, Mr. Cochran was President and Chief Executive Officer of Simmons & Company, Inc., a jewelry manufacturer. Mr. Cochran is currently the President and Chief Executive Officer of Riverbank Associates, Inc., a real estate investment company, which position he has held since December 1995, and the Chairman of Page Walker & Co., a jewelry manufacturer, which position he has held since January 1993. Mr. Cochran is a consultant to G. Austin Young Co., dba Attleboro Jewelry Makers, a retail outlet representing 20 jewelry and gift manufacturers. William D. Eberle, 74, has been Chairman of the Company since August 1996. Mr. Eberle has been Chairman of Manchester Associates, Ltd., a venture capital and international consulting firm since 1977, and of counsel to the law firm of Kaye, Scholer, Fierman, Hays & Handler since 1993. From 1989 to 1993, Mr. Eberle was of counsel to the law firm of Donovan, Leisure, Newton & Irvine. Mr. Eberle is presently Chairman of America Service Group, Inc. and of Showscan Entertainment, Inc., Deputy Chairman of Mid-States Plc, and a director for Ampco Pittsburgh Corp., FAC Realty, Inc., Horace Small Apparel Company Plc, Mitchell Energy and Development Corp. and Sirrom Capital Corporation. John W. Gildea, 54, has been a director of the Company since August 1996. Since September 1990, Mr. Gildea has been an advisor to The Network Funds, a series of investment funds. From 1986 to 1990, Mr. Gildea was the manager of the Corporate Services Group of Donaldson, Lufkin & Jenrette Securities Corporation. Mr. Gildea is presently a Managing Director of Gildea Management Company, an investment management company, which position he has held since 1990, and a director of America Service Group, Inc., FAC Realty, Inc., UNC, Inc., and General Chemical. Carol R. Goldberg, 66, has been a director of the Company since November 1996. Ms. Goldberg is currently President of the Avcar Group, Ltd., an investment and management consulting firm, which position she has held since December 1989. Ms. Goldberg previously served as Chief Operating Officer of The Stop & Shop Companies, Inc., a retailing company, from 1982 to November 1989, as its President from October 1985 to November 1989, as its Executive Vice President from 1982 to 1985, and as its Senior Vice President -- Manufacturing from 1979 to 1982. Ms. Goldberg is currently a director of The Gillette Company, America Service Group, Inc., and SelfCare, Inc. and is Senior Advisor of New England for America International Group, Inc. Samuel J. Merksamer, 56, has been the Company's President and Chief Executive Officer, and a director, since February 1997. Before joining the Company, Mr. Merksamer was the President and Chief Executive Officer of Merksamer Jewelers, Inc. from 1992 to June 1996. Merksamer Jewelers, Inc. was previously involved as a debtor-in-possession in reorganization proceedings under Chapter 11 of the Bankruptcy Code, emerging from such proceedings in 1992. Cleaveland D. Miller, 58, has been a director of the Company since June 1992. Mr. Miller is presently a partner with the law firm of Semmes, Bowen & Semmes. Mr. Miller is a director of EA Engineering, Science, and Technology, Inc. Since 1988, Mr. Miller has been Chairman of Legal Mutual Liability Insurance Society of Maryland. Mr. Miller served as President of the Maryland State Bar Association from 1987 to 1988. William P. O'Donnell, 43, has been a director of the Company since August 1996. Since 1992, Mr. O'Donnell has been an advisor to The Network Funds, a series of investment funds. From 1990 to 1992, Mr. O'Donnell was a Vice President in the Corporate Finance Group of Chrysler Capital Corporation, a finance company. Mr. O'Donnell is presently a Managing Director of Gildea Management Company, a position he has held since 1992. EXECUTIVE OFFICERS The following individuals currently serve as the Company's executive officers. Samuel J. Merksamer, 56, has been the Company's President and Chief Executive Officer, and a director, since February 1997. Additional biographical information regarding Mr. Merksamer is set forth under the caption "Directors and Executive Officers of the Registrant -- Board of Directors." E. Peter Healey, 44, has been the Company's Executive Vice President, Chief Financial Officer and Secretary since February 1997. From 1994 to 1996, Mr. Healey was the Vice President, Chief Financial Officer, Secretary and Treasurer of MS Financial, Inc. From 1985 to 1993, Mr. Healey was Vice President and Treasurer of Zale Corporation. Zale Corporation was previously involved as a debtor-in-possession in reorganization proceedings under Chapter 11 of the Bankruptcy Code, emerging from such proceedings in 1993. Randy N. McCullough, 45, has been the Company's Senior Vice President - -- Merchandise since April 1997. Prior to joining the Company, Mr. McCullough served as President of Silverman's Factory Jewelers from 1991 to March 1997. Bill R. Edgel, 31, has been the Company's Vice President -- Marketing since February 1997. Prior to joining the Company, Mr. Edgel served as Director of Credit Marketing of Macy's West, a division of Federated Department Stores, from 1996 to 1997. From 1995 to 1996, Mr. Edgel served as Director of Marketing for Merksamer Jewelers, Inc. Merksamer Jewelers, Inc. was previously involved as a debtor-in-possession in reorganization proceedings under Chapter 11 of the Bankruptcy Code, emerging from such proceedings in 1992. From 1993 to 1995, Mr. Edgel served as Advertising Manager/Creative Director for Troutman's Emporium, Inc. From 1992 to 1993, Mr. Edgel served as Partner/Creative Director of Vaki Advertising, Inc. Daniel L. Felsenthal, 40, has been the Company's Vice President -- Finance since October 1996 and its Vice President -- Finance, Treasurer and Assistant Secretary since April 1997. Prior to joining the Company, Mr. Felsenthal served as the Controller for Quarterdeck Corporation during 1996. From 1990 to 1996, Mr. Felsenthal was employed by Mac Frugal's Bargains -- Close-outs Inc., serving as its Controller from 1991 to 1994, and as its Vice President -- Finance from 1994 to 1996. Chad C. Haggar, 34, has been the Company's Vice President -- Operations since February 1997. Prior to joining the Company, Mr. Haggar served as Director of Stores of Fred Meyer, Inc. from 1996 to 1997. From before 1992 to 1996, Mr. Haggar served as Regional Manager of Merksamer Jewelers, Inc. Merksamer Jewelers, Inc. was previously involved as a debtor-in-possession in reorganization proceedings under Chapter 11 of the Bankruptcy Code, emerging from such proceedings in 1992. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under Section 16(a) of the Exchange Act, the officers and directors of the Company and certain shareholders beneficially owning more than 10% of the Company's Common Stock ("Ten Percent Shareholders") are required to file with the Securities and Exchange Commission and the Company reports of ownership, and changes in ownership, of Company Common Stock. During fiscal 1997, Ms. Goldberg did not file, as of the required date, a report on Form 4 regarding her purchase of 10,000 shares of the Company's Common Stock in November 1996. Such report was subsequently filed in compliance with Section 16(a). Except for the foregoing, based solely on a review of the reports received by it, the Company believes that, during fiscal 1997, all of its offers and directors and Ten Percent Shareholders complied with all applicable filing requirements under Section 16(a). 15 17 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information concerning compensation for services during each of the Company's last three fiscal years to (i) those persons serving as chief executive officer of the Company during fiscal 1997 and (ii) two additional executive officers of the Company during fiscal 1997 who would have been among the four most highly compensated executive officers during fiscal 1997 but who were not serving as such at the end of fiscal 1997 (none of the Company's executive officers during fiscal 1997 serving as such at the end of fiscal 1997 earned an annual salary and bonus exceeding $100,000). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------------------- ----------------------------------- SECURITIES OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER NAME AND SALARY BONUS COMPENSATION STOCK OPTIONS/ COMPENSATION PRINCIPAL POSITION YEAR(1) ($) ($) ($)(2) AWARDS(S)($) SARS(#) ($) - ---------------------------- ------- ------- ------ ------------ ------------ ---------- ------------ Samuel J. Merksamer 1997(3) 98,462 -- -- -- -- President and Chief 1996 -- -- -- -- -- -- Executive Officer 1995 -- -- -- -- -- -- Robert W. Bridel 1997 231,250 8,231(4) -- -- -- 113,511(5) Former President 1996 261,126 31,386(6) -- 34,375(7) 110,000 2,795(8) and Chief Executive 1995 200,000 51,343(6) -- -- 15,000 -- Officer Thomas S. Liston 1997 213,462 8,231(4) -- -- -- 80,721(5) Former Chief Financial 1996 279,396 31,386(6) -- 34,375(7) 100,000 2,795(8) Officer, Secretary and 1995 225,000 62,513(6) -- -- 15,000 -- Treasurer Joseph M. Maisano 1997 124,308 -- -- -- -- 16,833(6) Former Senior Vice 1996 155,369 -- -- -- 15,000 -- President -- Operations 1995 -- -- -- -- 4,000 --
- --------------- (1) "1997," "1996," and "1995" represent fiscal years ended May 31, 1997, 1996 and 1995, respectively. (2) Excludes perquisites, other personal benefits, securities and property, which, in the aggregate, did not exceed in any year shown the lesser of $50,000 or 10% of the total annual salary and bonus reported for such individual for such year. (3) All compensation shown for Mr. Merksamer dates from February 13, 1997. (4) Represents bonus payments paid to Messrs. Bridel and Liston during fiscal 1997, in connection with their resignations from the Company, for payments made with respect to taxes due upon vesting of 5,000 of their respective 10,000 shares of restricted stock. See "-- Employment Agreements and Change-in-Control Arrangements." (5) Represents (i) with respect to Mr. Bridel, $60,580 in vacation pay, $50,000 in severance pay, auto lease payments of $1,155, and $1,776 of group insurance benefits, (ii) with respect to Mr. Liston, $32,463 in vacation pay, $46,154 in severance pay, auto lease payments of $595, and $1,509 of group insurance benefits, and (iii) with respect to Mr. Maisano, $16,338 in vacation pay and auto lease payments of $495. (6) Represents bonus payments pursuant to the Company's cash bonus plans for fiscal 1996 (the "1996 Plan") and fiscal 1995 (the "1995 Plan"). The 1996 Plan provided for the payment of bonuses to participants from a pool of up to 15% of the Company's pre-tax, pre-bonus earnings (the "Pre-Bonus Earnings") for the fiscal year ending May 31, 1996, except that no awards were to be made if the amount of Pre-Bonus Earnings was less than $3,000,000. The 1995 Plan provided for the payment of bonuses to participants from a pool of up to 15% of the Company's Pre-Bonus Earnings for the fiscal year ending May 31, 1995, except that no awards were to be made if the amount of Pre-Bonus Earnings was less than 16 18 $2,000,000. With respect to the 1996 Plan and the 1995 Plan, 90% of the pool amount was awarded based on the participation weight assigned in such plan to each participant and 10% was awarded to participants in the discretion of the Compensation Committee of the Board of Directors after consultation with the Chief Executive Officer. (7) Reflects the value of a 10,000 share restricted stock grant made as of April 8, 1996 to each of Messrs. Bridel and Liston based on the market value of such stock as of the date of issuance (without giving effect to the diminution in value attributed to restrictions on such shares). See "-- Employment Contracts and Change-in-Control Arrangements." (8) Represents Company contributions on behalf of Messrs. Bridel and Liston under the Company's Deferred Compensation Plan. OPTION/SAR GRANTS IN FISCAL 1997 None of those persons serving as chief executive officer of the Company during fiscal 1997 or any other executive officer of the Company named in the Summary Compensation Table under the caption "Executive Compensation" was issued any option to acquire the Company's Common Stock during fiscal 1997. AGGREGATED 1997 OPTION/SAR EXERCISES AND YEAR-END OPTION VALUES No stock options were exercised during or held at the end of fiscal 1997 by any of those persons serving as chief executive officers of the Company during fiscal 1997 or any other executive officer of the Company named in the Summary Compensation Table under the caption "Executive Compensation." EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS During fiscal 1997 until their resignations on February 13, 1997, Robert W. Bridel served as the Company's President and Chief Executive Officer and Thomas S. Liston served as the Company's Chief Financial Officer, Secretary and Treasurer. Both Messrs. Bridel and Liston served in such capacities under employment agreements with the Company (the "Agreements") dated April 8, 1996, the initial terms of which extended through April 8, 1998. The Agreements provided for annual salaries of $325,000 and $300,000 to Messrs. Bridel and Liston, respectively. Under the Agreements, Mr. Bridel and Mr. Liston received options to purchase 35,000 shares and 25,000 shares, respectively, of the Company's Common Stock, and restricted stock awards of 10,000 shares each, the vesting of such options and stock awards to occur one-half on each of the first and second anniversary dates of such Agreements (provided, with respect to the stock awards, that such executive officer remained employed by the Company on each such anniversary date). The Agreements contained certain severance provisions, and in connection with the resignations from the Company of Messrs. Bridel and Liston, the Company and each of Messrs. Bridel and Liston entered into severance agreements, under which the following benefits are payable to or on behalf of Messrs. Bridel and Liston: (i) $371,250.00 and $342,692.33, respectively, representing salary from February 17, 1997 through April 8, 1998, (ii) $8,230.63 to each representing bonuses in respect of tax obligations with respect to 5,000 shares of restricted stock that vested as to each on February 13, 1997 (the "Resignation Date"), (iii) $3,082.50 and $2,464.62, respectively, representing accrued vacation, (iv) reimbursement of the cost of their electing to continue to be included in the Company's medical insurance plan from the Resignation Date through April 8, 1998 (totaling $5,769.69 and $4,519.48, respectively), (v) payment of fees of an outplacement services firm up to $25,000 each, (vi) inclusion in the Company's life insurance and disability plans from the Resignation Date through April 8, 1998 and (vii) continuation of automobile-related benefits from the Resignation Date through April 8, 1998 (totaling $8,086.54 and $8,321.32, respectively). Simultaneously with the resignation of Mr. Bridel as President and Chief Executive Officer of the Company, the Company retained Samuel J. Merksamer as its President and Chief Executive Officer. Effective February 13, 1997, the Company and Mr. Merksamer entered into a non-binding letter of intent 17 19 under which they agreed, among other things, to negotiate a definitive employment contract by May 15, 1997. The Bankruptcy Court has authorized the Company to enter into employment agreements with Mr. Merksamer and with certain other executive officers of the Company, a summary description of certain terms of which is set forth under the caption "-- Compensation Committee Report -- Implementation of Philosophy." COMPENSATION COMMITTEE REPORT COMPENSATION PHILOSOPHY The Compensation Committee of the Board of Directors (the "Compensation Committee") is responsible for developing and implementing the Company's executive compensation policies. The Compensation Committee's philosophy of executive compensation is to enhance the profitability of the Company, and thus shareholder value, by closely aligning the financial interests of the executive officers with those of the shareholders. IMPLEMENTATION OF PHILOSOPHY Generally, the Compensation Committee seeks to realize this objective by the use of short term incentives in the form of salary and cash bonuses, and long term incentives in the form of stock option and restricted stock grants. Salaries initially are set based on the executive officer's experience and competitive conditions. Thereafter, salaries may be adjusted based on various factors, including the executive's performance. In setting and making adjustments to salaries, the Compensation Committee also considers salaries paid to similarly situated executive officers in comparable companies. Consistent with the foregoing, in February 1997, after a nationwide search for a management team capable of analyzing the reasons for the Company's poor performance and developing and executing a plan to improve such performance, the Compensation Committee approved compensation terms for each of Messrs. Merksamer and Healey. Effective February 13, 1997, the Company entered into a non-binding letter of intent with each of Mr. Merksamer and Mr. Healey to employ Mr. Merksamer as President and Chief Executive Officer of the Company and Mr. Healey as Executive Vice President, Chief Financial Officer and Secretary of the Company. Prior to the Bankruptcy Filing, the Compensation Committee began to re-evaluate the Company's executive employment needs in the context of potential formal or informal reorganization proceedings. As a result of such reevaluation, and recognizing the decline in the value of non-cash compensation in the form of equity in the Company, the difficulties to be faced by its executives in an attempt to lead the Company out of any such proceedings and the importance of retaining key executives during such proceedings, the Compensation Committee determined that it was in the best interests of the Company to enter into employment agreements with such executives. At a hearing of the Bankruptcy Court held on September 24, 1997, the Bankruptcy Court authorized the Company to enter into employment agreements (the "Employment Agreements") with Mr. Merksamer and each of Messrs. Healey, McCullough, Haggar and Edgel (each an "Executive"). Upon entry of the related Bankruptcy Court order, the Company will enter into such Employment Agreements, which extend through confirmation of a plan of reorganization of the Company. Set forth below is a summary of certain other terms of such Employment Agreements. 18 20 CERTAIN TERMS OF EMPLOYMENT AGREEMENTS
PLAN OF REORGANIZATION CONFIRMATION BONUS (AS A PERCENTAGE OF ANNUAL BASE SALARY)(2) ------------------------------------------------- MAXIMUM ANNUAL IF CONFIRMA- IF CONFIRMA- CASH BONUS (AS TION OCCURS ON TION OCCURS ON A OR AFTER OR AFTER PERCENTAGE OF MAY 1, 1998 JULY 1, 1998 ANNUAL IF CONFIRMATION THROUGH AND AND PRIOR TO ANNUAL BASE BASE OCCURS PRIOR TO INCLUDING SEPTEMBER 30, EXECUTIVE/TITLE SALARY SALARY)(1) MAY 1, 1998 JUNE 30, 1998 1998 - -------------------------------- ----------- -------------- --------------- -------------- -------------- Samuel J. Merksamer............. $ 400,000 100% 125% 100% 75% President and Chief Executive Officer E. Peter Healey................. $ 275,000 75% 125% 100% 75% Executive Vice President, Chief Financial Officer and Secretary Randy N. McCullough............. $ 225,000 60% 125% 100% 75% Senior Vice President -- Merchandising Chad C. Haggar.................. $ 165,000 50% 125% 100% 75% Vice President -- Operations Bill R. Edgel................... $ 120,000 33% 125% 100% 75% Vice President -- Marketing
- --------------- (1) Such bonuses are payable as follows: (i) 50% thereof are payable if the Company achieves projected earnings before interest, taxes, depreciation and amortization for its 1998 fiscal year, (ii) 10% thereof are payable if the Company meets or exceeds its November 30, 1997 projected inventory levels, (iii) 10% thereof are payable if the Company meets or exceeds its December 31, 1997 projected cash deposit, receivable and inventory levels, (iv) 10% thereof are payable if the Company meets its December 31, 1997 projected general and administrative expenses, (v) 10% thereof are payable if, as of February 1998, there is total availability under the borrowing base in the Company's revolving credit facility (as modified by the Cash Stipulation filed with the Bankruptcy Court) plus total cash balances of at least $4.1 million, and payables are maintained within agreed upon vendor terms, and (vi) the remaining 10% are payable upon receipt from vendors of 1.4 times the amount of inventory returned by November 1997 and at the end of February 1998. (2) A condition to the payment of such bonus will require that the Company have an asset-based, working capital credit facility on market terms on the confirmation date of a plan of reorganization. Under the Employment Agreements, if an Executive's employment is terminated by the Company without cause, by the Executive with good reason (including a sale of the Company under the Bankruptcy Code), due to an Executive's death or disability, or as a result of the confirmation of a plan of reorganization, such Executive is entitled to receive (i) accrued annual base salary and vacation, (ii) his maximum annual cash bonus if (A) the fiscal year end 1998 performance targets have been achieved (provided that such target will be prospectively applicable with respect to termination resulting from confirmation of a plan prior to the end of such fiscal year) or (B) in the event of a Change-in-Control (as defined below) of the Company at a time when the Company is a going concern or the death or disability of an Executive if any applicable performance conditions have been met, and (iii) if such termination without cause or with good reason occurs prior to confirmation of a plan of reorganization of the Company, his confirmation bonus. If the Executive's employment is terminated by the Company for cause (i.e., malfeasance or misfeasance) or by the Executive without good reason, such Executive is entitled to receive accrued annual base salary and vacation, but no annual cash bonus or confirmation bonus (if such termination occurs prior to confirmation). Under the Employment Agreements, a "Change-in-Control" includes the dissolution or liquidation of the Company, a reorganization, merger or consolidation of the Company with one or more corporations in which the Company is not the surviving entity or as a result of which the Company's outstanding voting securities are converted to 19 21 or reclassified as cash, securities of another corporation or other property, a sale of assets of the Company or its subsidiaries having a fair market value equal to more than 50% of the total fair market value of the Company's assets to a nonaffiliate of the Company, or the acquisition of more than 30% of the then-outstanding voting securities of the Company by a nonaffiliate. 1997 COMPENSATION OF THE CHIEF EXECUTIVE OFFICER The base salary of the Company's Chief Executive Officer is established through negotiations between the Compensation Committee and such Chief Executive Officer. Until his resignation on February 13, 1997, Robert W. Bridel was the Company's Chief Executive Officer. In setting Mr. Bridel's annual salary and incentive compensation for Fiscal 1997, the Compensation Committee considered numerous factors, including Mr. Bridel's previous salary level, his experience and his overall performance. Samuel J. Merksamer succeeded Mr. Bridel as the Company's President and Chief Executive Officer. In setting Mr. Merksamer's annual salary and incentive compensation for Fiscal 1997, the Compensation Committee considered numerous factors, including Mr. Merksamer's extensive experience in the jewelry industry, his prior success in turning around troubled companies and the market rate for presidents and chief executive officers with knowledge and experience commensurate to that of Mr. Merksamer. Based on these factors, and after negotiations between the Compensation Committee and Mr. Merksamer, the Compensation Committee established Mr. Merksamer's compensation terms in the non-binding letter of intent referred to above. After the Compensation Committee's re-evaluation of the Company's executive employment needs in the context of potential formal or informal reorganization proceedings, and after additional negotiations between the Compensation Committee and Mr. Merksamer, the Compensation Committee established Mr. Merksamer's compensation terms as reflected in his Employment Agreement described above. THE COMPENSATION COMMITTEE Carol R. Goldberg, Chairman David W. Cochran John W. Gildea Cleaveland D. Miller William P. O'Donnell 20 22 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of October 3, 1997, information as to the beneficial ownership of the Company's Common Stock by (i) each person who is known by the Company to own beneficially more than 5% of its outstanding shares of Common Stock, (ii) each of the Company's directors and director nominees, (iii) each of the officers named in the Summary Compensation Table under the caption "Executive Compensation," and (iv) all executive officers and directors of the Company as a group. In each instance, information as to the number of shares owned and the nature of ownership has been provided by the person or entity identified or described and is not within the direct knowledge of the Company.
AMOUNT PERCENT BENEFICIALLY OF NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) CLASS --------------------------------------------------------- ------------ ------- Robert W. Bridel......................................... 22,000 ** 500 W. Harbor Drive, Apt. 124 San Diego, CA 92101 Thomas S. Liston......................................... -- ** 14518 Las Brizas Lane Sun City, AZ 85375 Samuel J. Merksamer*..................................... -- ** Joseph M. Maisano........................................ -- ** 14 Creekview Street Sanger, TX 76266 William D. Eberle*....................................... 82,600(3) 2.0% David W. Cochran*........................................ 3,600(2) ** Carol R. Goldberg*....................................... 400(2) ** Cleaveland D. Miller*.................................... 3,600(2) ** John W. Gildea........................................... 595,600(4) 14.8% 115 East Putnam Avenue Greenwich, CT 06830 William P. O'Donnell..................................... 535,600(5) 13.3% 115 East Putnam Avenue Greenwich, CT 06830 Network Fund III, Ltd.................................... 525,000(6) 13.0% P.O. Box 219, Butterfield House Grand Cayman, Cayman Islands, B.W.I. Gary Gelman.............................................. 456,700(7) 11.3% One Jerico Plaza Jerico, NY 11753 J. Ezra Merkin........................................... 325,000(8) 8.1% 450 Park Avenue New York, NY 10022 All executive officers and directors as a group (12 persons)............................................... 697,400 17.1%
- --------------- (1) To the Company's knowledge, except as otherwise set forth in this table, the persons and entities in this table have sole voting, investment and dispositive power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable. (2) All of such shares are issuable upon the exercise of currently-exercisable options outstanding under the Company's 1994 Stock Option Plan (the "1994 Stock Option Plan"), which is administered by the Compensation Committee of the Board of Directors. (3) 15,000 of such shares are issued and outstanding. 35,000 of such shares are issuable upon the exercise of currently-exercisable options. 32,000 of such shares are restricted shares, as to which Mr. Eberle has sole voting power. 600 of such shares are issuable upon the exercise of currently-exercisable options 21 23 outstanding under the Company's 1994 Stock Option Plan, which is administered by the Compensation Committee of the Board of Directors. See "Executive Compensation -- Directors." (4) 600 of such shares are issuable upon the exercise of currently-exercisable options outstanding under the Company's 1994 Stock Option Plan, which is administered by the Compensation Committee of the Board of Directors. With respect to the remaining 595,000 of such shares, pursuant to an amended Schedule 13D filed by Mr. Gildea under the Exchange Act, dated June 11, 1996, as of such date Mr. Gildea had sole voting and dispositive power as to 70,000 of such shares and shared dispositive power with Network Fund III, Ltd. as to 525,000 of such shares. (5) 600 of such shares are issuable upon the exercise of currently-exercisable options outstanding under the Company's 1994 Stock Option Plan, which is administered by the Compensation Committee of the Board of Directors. With respect to the remaining 535,000 of such shares, pursuant to a Form 3 filed by Mr. O'Donnell under the 1934 Act dated September 10, 1996, as of such date Mr. O'Donnell had sole voting and dispositive power as to 10,000 of such shares and shared dispositive power with Network Fund III, Ltd. as to 525,000 of such shares. (6) The Network Fund III, Ltd. has shared dispositive power with Mr. Gildea and Mr. O'Donnell as to such shares. See footnotes 4 and 5 above. (7) As set forth in an amended Schedule 13D filed by Mr. Gelman under the 1934 Act dated January 15, 1997, as of such date Mr. Gelman had sole voting and dispositive power with respect to all such shares. (8) As set forth in a Schedule 13D filed by Mr. Merkin under the 1934 Act dated May 22, 1996, as of such date Mr. Merkin had sole voting and dispositive power as to 20,475 of such shares, shared voting and dispositive power with Gabriel Capital, L.P. as to 126,425 of such shares, and shared voting and dispositive power with Ariel Management Corp. as to 178,100 of such shares. * Address is c/o Barry's Jewelers, Inc., 111 West Lemon Avenue, Monrovia, California 91016. ** Less than one percent. 22 24 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS David Blum and Gerson I. Fox, each a current shareholder and former officer and director of the Company, presently own and lease to the Company, through a partnership, the Company's headquarters building. In May 1990, the Company moved into the new headquarters office building that allowed the Company to consolidate all corporate credit, collection, merchandising and administrative functions into a single location for more efficient management and to allow future growth. The building is a special-purpose building built to the Company's specifications. The base annual rent for the first five years was $574,284. Currently, the base annual rent is $643,476. On the 121st month, the rent may be increased based on a cost-of-living index. The Company is responsible for leasehold improvements, insurance, property taxes, maintenance and repairs. The lease has a 15-year term, but the Company has the right to terminate the lease earlier (the "Early Termination Right"), provided that the Company gives six months' notice and pays $15,000 for each month remaining in the 15-year term after the effective date of such termination. In connection with certain consulting agreements between the Company and each of Messrs. Blum and Fox (each of which expired on May 31, 1995) and a financing secured by the leased premises, and at the request of the lessor, the Company agreed in 1995 to waive such Early Termination Right. The Company believes that the terms of the foregoing lease are presently above market, and is currently negotiating with the lessor so as to revise such terms to more closely reflect current market conditions (although no assurances can be given that the Company will be successful in such negotiations). William D. Eberle, the Company's Chairman, is of counsel to the law firm of Kaye, Scholer, Fierman, Hays & Handler LLP, which firm provided certain legal services to the Company during Fiscal 1997. 23 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements, Financial Statement Schedules and Exhibits 1. CONSOLIDATED FINANCIAL STATEMENTS The following are included herein under Item 8: Financial Statements, Financial Statement Schedules and Exhibits Independent Auditors' Report - Deloitte & Touche LLP Consolidated Balance Sheets as of May 31, 1997 and 1996 Consolidated Statements of Operations for the three years ended May 31, 1997. Consolidated Statements of Stockholders' (Deficiency) Equity for the three years ended May 31, 1997. Consolidated Statements of Cash Flows for the three years ended May 31, 1997. Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES: II. Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or notes thereto. 3. EXHIBITS 24 26 EXHIBIT NO. DESCRIPTION --- ----------- 3.1 Restated Articles of Incorporation filed November 16, 1994 in connection with the Reverse Stock Split (5). 3.2 Bylaws (10). 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 the form of Note certificate (4). 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 (6). 4.1(d) Amendment No. 3 to Indenture, dated as of December 21, 1995, between Barry's Jewelers, Inc. and the Trustee (6). 4.1(e) Amendment No. 4 to Indenture, dated as of August 30, 1996, between Barry's Jewelers, Inc. and the Trustee (9). 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 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 (5). 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).* 25 27 EXHIBIT NO. DESCRIPTION --- ----------- 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).* 10.12 Agreement dated March 19, 1997, between the Company and Thomas S. Liston (10).* 10.13 Agreement dated March 19, 1997, between the Company and Robert Bridel (10).* 10.14(a) Form of Employment Agreement to be entered into between the Company and each of Samuel J. Merksamer, as President and Chief Executive Officer, E. Peter Healey, as Executive Vice President, Chief Financial Officer and Secretary, Randy N. McCullough, as Senior Vice President - Merchandising, Chad C. Haggar, as Vice President - Operations, and Bill R. Edgel, as Vice President - Marketing (10).* 10.14(b) Term Sheet between the Company and certain of the Company's creditors evidencing their compromise regarding the terms of such employment agreements (10).* 10.14(c) Schedule of Certain Terms of such employment agreements (10).* 10.15(a) Form of Trade Financing Agreement Term Sheet (10). 10.15(b) Form of Trade Financing Agreement (10). 10.15(c) Exhibit B to Form of Trade Financing Agreement (10). 10.15(d) Form of Consignment Agreement (10). 23 Consent of Independent Auditors (10). 27 Financial Data Schedule (10). - ------------------------------------------------ (1) Incorporated herein by reference to the Company's Current Report on Form 8-K filed December 22, 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. (6) Incorporated herein by reference to the Company's 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) 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, 1996. (10) Filed herewith. * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K On May 20, 1997, the Company filed a Current Report on Form 8-K with respect to Item 3 under Form 8-K. 26 28 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. October 14, 1997 By: /s/ SAMUEL J. MERKSAMER ----------------------- Samuel J. Merksamer President and Chief Executive Officer October 14, 1997 By: /s/ E. PETER HEALEY ------------------- E. Peter Healey Executive Vice President and Chief Financial Officer (Principal Financial Officer) October 14, 1997 By: /s/ DANIEL L. FELSENTHAL ------------------------ Daniel L. Felsenthal Vice President Finance (Principal Accounting Officer) 27 29 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 October 14, 1997:
Signature Title Date --------- ----- ---- /s/ WILLIAM EBERLE Chairman of the Board October 14, 1997 --------------------- of Directors William Eberle /s/ SAMUEL J. MERKSAMER Chief Executive Officer October 14, 1997 ------------------------ and Director Samuel J. Merksamer /s/ DAVID COCHRAN Director October 14, 1997 ------------------------ David Cochran /s/ JOHN W. GILDEA Director October 14, 1997 ------------------------ John W. Gildea /s/ CAROL R. GOLDBERG Director October 14, 1997 ------------------------ Carol R. Goldberg /s/ CLEAVELAND D. MILLER Director October 14, 1997 ------------------------ Cleaveland D. Miller /s/ WILLIAM P. O'DONNELL Director October 14, 1997 ------------------------ William P. O'Donnell
28 30 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) SCHEDULE II--VALUATION & QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGE TO BALANCE AT BEGINNING COSTS AND DEDUCTIONS/ END OF OF PERIOD EXPENSES OTHER PERIOD ---------- --------- ----------- ----------- YEAR END 1997: Allowance for doubtful accounts $10,930 $18,766 $(19,396) $10,300 Inventory valuation allowance $ -- $ 3,033 $ -- $ 3,033 YEAR END 1996: Allowance for doubtful accounts $11,662 $11,839 $(12,571) $10,930 YEAR END 1995: Allowance for doubtful accounts $11,162 $10,501 $(10,001) $11,662
F-19 31 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. (Debtor-in-Possession) and Subsidiary (the "Company") as of May 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' (deficiency) equity, and cash flows for each of the three years in the period ended May 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of Barry's Jewelers, Inc. and Subsidiary as of May 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1997 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company has filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to shareholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company is currently operating its business as Debtor-in-Possession under the jurisdiction of the Bankruptcy Court, and continuation of the Company as a going concern is contingent upon, among other things, its ability to formulate a Plan of Reorganization which will be approved by its creditors and confirmed by the Bankruptcy Court, and its ability to generate sufficient cash flows from operations and financing sources. The uncertainties inherent in the bankruptcy process and the Company's recurring losses from operations and shareholders' capital deficiency raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are discussed in Note 1 to the consolidated financial statements. The consolidated financial statements do not include adjustments that might result from the outcome of this uncertainty. /s/ Deloitte & Touche LLP Los Angeles, California October 1, 1997 F-1 32 BARRY'S JEWELERS, INC. and SUBSIDIARY (Debtor-in-Possession) CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
May 31, 1997 May 31, 1996 ------------ ------------ ASSETS (Notes 1 and 6) Current assets: Cash and cash equivalents (Note 6) $ 7,322 $ 1,765 Customer receivables, net of allowances for doubtful accounts of $10,300 (1997) and $10,930 (1996) 54,552 68,720 Merchandise inventories (Note 3) 41,374 54,559 Prepaid expenses and other current assets 2,142 2,031 -------- -------- Total current assets 105,390 127,075 Property and equipment: (Note 1) Leasehold improvements, furniture and fixtures 20,726 23,013 Computers and equipment 4,110 3,778 -------- -------- 24,836 26,791 Less: accumulated depreciation and amortization 9,413 10,425 -------- -------- Net property and equipment 15,423 16,366 Deferred income taxes (Note 7) 72 122 Other assets, principally deferred debt issuance costs, net of accumulated amortization of $1,834 (1997) and $1,864 (1996) (Note 6) 2,598 2,312 -------- -------- Total assets $123,483 $145,875 ======== ======== LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY (Notes 1 and 6) Current liabilities: Accounts payable - trade $ 221 $ 3,837 Other accrued liabilities (Note 4) 5,687 5,238 Current portion of long-term debt (Note 6) - 181 -------- -------- Total current liabilities 5,908 9,256 Long-term debt, less current maturities (Note 6) - 103,398 Liabilities subject to compromise under reorganization proceedings (Notes 5 and 6) 130,271 - Commitments and contingencies (Notes 8 and 9) Shareholders' (deficiency) equity: (Note 9) Common stock, no par value; authorized 8,000,000 shares; issued and outstanding, 4,029,372 (1997) and 3,999,416 (1996) 33,247 33,196 (Accumulated deficit) Retained earnings (45,943) 25 -------- -------- Total shareholders' (deficiency) equity (12,696) 33,221 -------- -------- Total liabilities and shareholders' (deficiency) equity $123,483 $145,875 ======== ========
See Notes to Consolidated Financial Statements F-2 33 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED MAY 31, ---------------------------------------- 1997 1996 1995 -------- -------- -------- Net sales $130,446 $140,145 $136,055 Finance and credit insurance fees 13,900 16,008 15,681 -------- -------- -------- 144,346 156,153 151,736 -------- -------- -------- Costs and expenses: Cost of goods sold, buying and occupancy (Note 3) 93,002 83,769 78,907 Selling, general and administrative expenses 57,036 51,974 50,966 Provision for doubtful accounts 18,766 11,759 10,193 Impairment loss (Note 2) 3,947 -- -- Restructuring expenses (Note 1) 1,336 -- -- -------- -------- -------- 174,087 147,502 140,066 -------- -------- -------- Operating (loss) income (29,741) 8,651 11,670 Interest expense, net 12,745 11,146 9,764 -------- -------- -------- (Loss) income before reorganization costs, income taxes, and extraordinary item (42,486) (2,495) 1,906 Reorganization costs (Notes 2 and 8) 2,322 -- -- -------- -------- -------- (Loss) income before income taxes and extraordinary item (44,808) (2,495) 1,906 Income taxes (Note 7) 284 288 -- -------- -------- -------- (Loss) income before extraordinary item (45,092) (2,783) 1,906 Extraordinary item (Note 6) (876) -- -- -------- -------- -------- Net (loss) income $(45,968) $ (2,783) $ 1,906 ======== ======== ======== Per share data: (Loss) income before extraordinary item $ (11.25) $ (0.70) $ 0.48 ======== ======== ======== Extraordinary item (Note 6) $ (0.22) $ -- $ -- ======== ======== ======== (Loss) income $ (11.47) $ (0.70) $ 0.48 ======== ======== ======== Weighted average number of common shares outstanding 4,007 3,978 3,969 ======== ======== ========
See Notes to Consolidated Financial Statements F-3 34 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY (DOLLARS AND SHARES IN THOUSANDS)
COMMON STOCK RETAINED ------------------------ EARNINGS DEFERRED SHARES AMOUNT (DEFICIT) COMPENSATION TOTAL ------ ------ -------- ------------ --------- Balance at May 31, 1994 3,969 $32,715 $ 902 $(50) $ 33,567 Net income for the year 1,906 1,906 Utilization of pre-reorganization net operating loss carryovers (Note 7) 221 221 Amortization of deferred compensation 50 50 ------ ------- -------- ---- -------- Balance at May 31, 1995 3,969 32,936 2,808 -- 35,744 Net loss for the year (2,783) (2,783) Utilization of pre-reorganization net operating loss carryovers (Note 7) 173 173 Shares issued pursuant to employee stock purchase plan (Note 9) 30 87 87 ------ ------- -------- ---- -------- Balance at May 31, 1996 3,999 33,196 25 -- 33,221 Net loss for the year (45,968) (45,968) Shares issued pursuant to employment contracts (Note 9) 20 37 37 Shares issued pursuant to employee stock purchase plan (Note 9) 10 14 14 ------ ------- -------- ---- -------- Balance at May 31, 1997 4,029 $33,247 $(45,943) $ -- $(12,696) ====== ======= ======== ==== ========
See Notes to Consolidated Financial Statements F-4 35 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED MAY 31, -------------------------------------- 1997 1996 1995 ------ ------- ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $(45,968) $ (2,783) $ 1,906 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization 4,992 4,626 3,854 Impairment of long-lived assets 3,947 -- -- Extraordinary loss 876 -- -- Compensation on issuance of common stock (Note 9) 37 -- 50 Provision for doubtful accounts 18,766 11,759 10,193 Inventory valuation allowance 3,003 -- -- Loss on sale of abandonment of property and equipment 311 274 101 Deferred income taxes 50 878 (882) Changes in assets and liabilities: Customer receivables (4,598) (10,395) (16,151) Merchandise inventories 10,152 (724) (11,260) Prepaid expenses and other current assets (111) (4) (1,141) Other assets (2,385) (1,336) (351) Restructuring and reorganization costs 2,752 -- -- Accounts payable - trade 6,728 (6,296) 2,703 Other accrued liabilities 9,681 (1,995) 1,380 -------- -------- -------- Net cash provided by (used in) operating activities 8,263 (5,996) (9,598) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (7,158) (4,500) (6,516) Proceeds from sale of assets 74 9 24 -------- -------- -------- Net cash used in investing activities (7,084) (4,491) (6,492) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowing (repayments) under revolving credit facility 49,666 (13,435) 16,507 Net (repayments) borrowings under securitization facility (45,119) 45,119 -- Proceeds from employee stock purchase plan 14 87 -- Principal payments on long-term debt (183) (473) (561) Reduction of long-term debt from securitization transaction -- (20,000) -- -------- -------- -------- Net cash provided by financing activities 4,378 11,298 15,946 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 5,557 811 (144) Cash and cash equivalents at beginning of year 1,765 954 1,098 -------- -------- -------- Cash and cash equivalents at end of year $ 7,322 $ 1,765 $ 954 ======== ======== ========
See Notes to Consolidated Financial Statements F-5 36 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED MAY 31, -------------------------------------- 1997 1996 1995 ------ ------- ------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for Interest $8,364 $11,338 $9,105 Income taxes $ 30 $ 543 $ 976 Noncash investing and financing activities: Capital lease obligations $ -- $ 19 $ 487 Utilization of pre-reorganization net operating loss carryovers (increase to common stock and reduction of current income taxes payable) $ -- $ 173 $ 221
See Notes to Consolidated Financial Statements F-6 37 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) 1. REORGANIZATION AND BASIS OF PRESENTATION Barry's Jewelers, Inc. (Debtor-in-Possession) and subsidiary (the "Company") operates a chain of retail stores that sell fine jewelry and watches, utilizing credit financing to enhance sales. Since May 11, 1997, the Company has operated as "Debtor-in-Possession" under the protection of Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). It operated 130 stores on May 31, 1997, 161 stores on May 31, 1996, and 162 stores on May 31, 1995. Throughout fiscal 1997, the Company experienced significant operating losses that necessitated the Company's renegotiation of financial covenants and certain other terms contained in its Amended Revolving Credit Agreement during the second quarter of fiscal 1997 (Note 6). In January, 1997, management announced its intent to implement a Company-wide restructuring and other cost savings initiatives during the third and fourth quarters of fiscal 1997. Those initiatives included a plan not to renew leases on twelve stores and closing eighteen to twenty-four under-performing stores with concurrent reductions in overhead at the Company's remaining stores and reduction in corporate expenses. However, the management team of the Company was replaced in February 1997 prior to the full execution of the restructuring and cost savings initiatives. At the end of the third quarter, the Company recorded restructuring charges of approximately $1,336 primarily related to severance and costs associated with eleven stores closed during the quarter, impairment losses of approximately $1,970 related principally to impairment of leasehold improvements and fixtures at twenty-six under performing stores and a $1,095 cost of goods sold charge to hasten the liquidation of aged inventory in an effort to improve cash flow. At the end of the third quarter, due to continued operating losses the Company was again not in compliance with certain financial covenants contained in the Second Amended Revolving Credit Agreement. As a result, the Company was unable to make interest payments to the holders of the Senior Secured Notes (Note 6). Additionally, most vendors were not extending terms and substantially all new merchandise purchases were on a cash basis. Because of these restrictions on cash flow and an inability to renegotiate existing bank debt or raise additional capital through other sources, the Company decided to seek bankruptcy protection. On May 11, 1997, (the "Petition Date"), the Company filed a voluntary petition for reorganization under Chapter 11 in the United States Bankruptcy Court for the Central District of California, Los Angeles Division. Management determined that filing the Chapter 11 petition would allow the Company the needed time and flexibility to restructure its operations, help assure the continued flow of merchandise to its stores, and provide the time and protection necessary to restructure the Company's funding sources. Since the Petition Date, the Company has continued in possession of its properties and, as Debtor-in-Possession, is authorized to operate and manage its businesses and enter into all transactions (including obtaining services, inventories, and supplies) that it could have entered into in the ordinary course of business without approval of the Bankruptcy Court. A statutory Creditors' Committee and an official Bondholders' Committee have also been appointed. In a Chapter 11 filing, substantially all liabilities as of the Petition Date are subject to compromise or other treatment under a plan of reorganization. For financial reporting purposes, those liabilities and obligations whose disposition is dependent on the outcome of the Chapter 11 filing have been segregated and classified as liabilities subject to compromise under reorganization proceedings in the accompanying consolidated balance sheet (Note 5). Generally, actions to enforce or otherwise effect payment of all pre-Chapter 11 liabilities as well as all pending litigation against the Company are stayed while the Company continues its business operations as Debtor-in-Possession. Schedules have been filed by the Company with the Bankruptcy Court setting forth its assets and liabilities as of the Petition Date as reflected in the Company's accounting records. Differences between amounts reflected in such schedules and claims filed by creditors will be F-7 38 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) investigated and either amicably resolved or adjudicated before the Bankruptcy Court. The ultimate amount of and settlement terms for such liabilities are subject to a plan of reorganization and accordingly are not presently determinable. Under the Bankruptcy Code, the Company may elect to assume or reject real estate leases, employment contracts, personal property leases, service contracts and other prepetition executory contracts, subject to Bankruptcy Court approval. The liabilities subject to compromise under reorganization proceedings include a provision for the estimated amount that may be claimed by lessors and allowed in connection with the unexpired real estate leases. The Company will continue to analyze its executory contracts and may assume or reject additional contracts. The new management team has developed a business plan to (1) reposition the Company's merchandise selection; (2) establish vendor partnering programs to bring in new consignment inventory and return aged merchandise to vendors in exchange for new inventory; (3) establish a consistent store format and consolidate trade names; (4) adjust the Company's pricing and commission structure to improve sales and strengthen its competitive position; (5) pursue alternatives to an in-house credit and collection process; and (6) install modern merchandising and point-of-sale systems. The Company reached an agreement in July 1997 with its vendors and creditors regarding the terms of a trade debtor-in-possession financing agreement. Pursuant to the agreement, the participating vendors will allow the Company to return merchandise with a value equal to up to 75% of the vendor's prepetition claim. The value of the prepetition merchandise returned shall not exceed, in the aggregate, approximately $7,913. Additionally, participating vendors will also provide credit for merchandise purchases in an amount equal to two and one-half times the value of the prepetition merchandise returned. The revolving trade credit will be granted, generally, on 90-day terms for a period of one year from the date of the agreement. Additionally, the Company also reached an agreement in July 1997 with its vendors and creditors allowing the Company to increase the level of consigned merchandise. Pursuant to the terms of the agreement, certain Company vendors will commit to maintain a specified minimum amount of consigned merchandise with the Company for a specified period. The Company shall hold such merchandise for sale in the ordinary course of its business and is responsible for insuring the consignment merchandise for its full value and against all risks of loss. The accompanying consolidated financial statements have been prepared in conformity with principles of accounting applicable to a going concern, which contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. As a result of the Chapter 11 filing and circumstances relating to this event, such realization of assets and satisfaction of liabilities is subject to uncertainty. A plan of reorganization could materially change the amounts reported in the accompanying consolidated financial statements, which do not give effect to adjustments to the carrying values of assets and liabilities, which may be necessary as a consequence of a plan of reorganization. The Company's ability to continue as a going concern is contingent upon, among other things, its ability to formulate a plan of reorganization that will be confirmed by the Bankruptcy Court, to achieve satisfactory levels of profitability and cash flow from operations, to maintain compliance with the debtor-in-possession trade financing agreement and terms of the cash stipulation (Note 6), and the ability to obtain sufficient financing sources to meet future obligations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Barry's Jewelers Inc. and its wholly owned subsidiary for the fiscal years ended May 31, 1997 and 1996; intercompany transactions and balances have been eliminated. F-8 39 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) Prior Reorganization On February 26, 1992, the Company voluntarily initiated a case under Chapter 11 of the United States Bankruptcy Code and filed a 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 (the "Prior Reorganization Plan"). The effective date of the Prior Reorganization Plan was June 30, 1992. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Customer Receivables The Company offers its merchandise on credit terms to qualified customers. The Company's policy is to attempt to obtain a cash down payment on all credit sales, with remaining monthly payments established such that the payment of the credit balance will occur, generally, over a period ranging from 24 to 36 months. In accordance with industry practice, customer receivables are included in current assets in the Company's consolidated balance sheet. The Company routinely assesses the collectibility of its customer receivables. The Company's receivables are with customers residing principally in Texas and California, with approximately 40% and 33%, respectively, of all customer accounts. The Company does business in 18 states, primarily California, Texas, Arizona, North Carolina, Utah, Indiana, Ohio, Colorado, Idaho, and Montana. 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 Prior Reorganization Plan. Additions since June 30, 1992 are stated at cost. Depreciation and amortization of leasehold improvements, furniture and fixtures, and equipment are computed by the straight-line method over the lesser of related lease terms or the estimated useful lives of such assets as set forth in the following table:
Useful Lives in Years ----------- Leasehold improvements 10-15 Furniture and fixtures 5-10 Computers and equipment 5
Impairment of Long-lived Assets The Financial Accounting Standards Board ("FASB") 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," which is effective for fiscal years beginning after December 15, 1995. The standard requires an entity to review long-lived assets for impairment and recognize a loss if expected future cash flows are less than the carrying amount of the assets; such losses are measured as the difference between the carrying value and the estimated fair value of the assets. The estimated fair value is determined based on expected future cash flows. The Company adopted this standard in fiscal 1997 and recognized an impairment loss of approximately $3,947. This impairment loss is comprised of leasehold improvements and fixtures at 37 closed stores, as well as computer equipment and software related to the Company's plan to replace its merchandise management and point-of-sale systems. Deferred Debt Issuance Costs Deferred debt issuance costs are reported on the Company's consolidated balance sheet as other assets and are being amortized on a straight-line basis over the terms of the related financing agreements. F-9 40 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) Revenue Recognition The Company recognizes revenue upon delivery of merchandise to the customer and either the receipt of a cash payment or approval of a credit agreement. Reorganization Costs Professional fees and expenditures directly related to the Chapter 11 filing are classified as reorganization costs and are expensed as incurred. Reorganization costs for the year ended May 31, 1997, consisted primarily of estimated store lease rejection claims and professional fees. Cash paid for reorganization costs during the year ended May 31, 1997 amounted to $1,205, including amounts paid to professionals as retainers. The retainers are included in prepaid and other current assets in the accompanying consolidated balance sheet. Income Taxes Income taxes are computed using the liability method. The provision for income taxes includes income taxes payable for the current period and the deferred income tax consequences of transactions that have been recognized in the Company's financial statements or income tax returns. The carrying value of deferred income tax assets is determined based on an evaluation of whether the realization of such assets is more likely than not. Temporary differences result primarily from accrued liabilities, valuation allowances, depreciation and amortization, and state franchise taxes. Income (Loss) per Share Income (loss) per share is 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 million shares 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. Accounting for Stock-based Compensation In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based Compensation." SFAS No. 123 requires compensation expense equal to the fair value of the option grant to be estimated using accepted option policy formulas when the option is granted. The compensation may either be charged to the statement of operations or set forth as pro forma information in the footnotes to the financial statements, depending on the method elected by the Company upon adoption of the standard. During fiscal 1997, the Company adopted the disclosure requirements of SFAS No. 123 and elected to continue using the intrinsic value method prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," for stock option expense recognition. The Company omitted the pro forma information required to be disclosed due to immateriality. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates. Fair Market Value of Financial Instruments The carrying amounts of cash and cash equivalents, trade accounts payable and accrued liabilities approximate fair value because of the short maturity of these financial instruments. As a result of the Company's Chapter 11 filing, a limited market has developed for the trading of financial instruments included as liabilities subject to compromise. Since the market for claims against the Company under Chapter 11 is not well developed, no reliable source of market price is available. Reclassifications Certain reclassifications have been made to prior year amounts to conform to the current year presentation. F-10 41 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) Prospective Accounting Changes The FASB has issued SFAS No. 128, "Earnings Per Share". The Company will adopt SFAS No. 128 in fiscal 1998. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which will be effective for the Company beginning with fiscal 1998. SFAS No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about an enterprise's operating segments. The Company has not yet completed its analysis of which operating segments it will report, if any. 3. INVENTORY VALUATION In connection with the change in merchandising strategy developed by the Company's new management team, an inventory valuation reserve of $3,033 was established as of May 31, 1997 to adjust the carrying value of ending inventory to its estimated net realizable value. 4. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following:
May 31, 1997 1996 --------------------------- ------ ------ Accrued wages and benefits $2,277 $2,325 Other accrued expenses 1,707 1,392 Sales tax 633 581 Accrued interest 617 594 Layaway and customer refunds 453 346 ------ ------ $5,687 $5,238 ====== ======
F-11 42 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) 5. LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS Liabilities subject to compromise under reorganization proceedings consist of the following as of May 31, 1997: Secured liabilities: Borrowings outstanding under Revolving Credit Agreement (Note 6) $ 57,855 Senior Secured Notes (includes interest payable of $3,073 accrued through Petition Date) 53,073 Other notes payable and capital lease obligations 88 -------- 111,016 Unsecured liabilities: Trade accounts payable 10,344 Other accrued expenses (includes restructuring and reorganization expenses) 8,911 -------- 19,255 -------- $130,271 ========
Any plan of reorganization ultimately approved by the Company's impaired prepetition creditors and shareholders and confirmed by the Bankruptcy Court may materially change the amounts and terms of these prepetition liabilities. Such amounts are estimated as of May 31, 1997, and the Company anticipates that claims filed with the Bankruptcy Court by the Company's creditors will be reconciled to the Company's financial records. The additional liability arising from this reconciliation process, if any, is not subject to reasonable estimation, and accordingly, no provision has been recorded for these possible claims. The termination of other contractual obligations and the settlement of disputed claims may create additional prepetition liabilities. Such amounts, if any, will be recognized in the balance sheet as they are identified and become subject to reasonable estimation. 6. LONG-TERM DEBT Long-term debt consists of the following (amounts as of May 31, 1997 are included with Liabilities Subject to Compromise -- Note 5):
MAY 31, 1997 1996 ------------------------------------------------- -------- -------- Revolving Credit Agreement $ 57,855 $ 8,190 Senior Secured Notes 50,000 50,000 Other notes payable and capital lease obligations 88 270 Accounts Receivable Securitization Facility -- 45,119 -------- -------- 107,943 103,579 Less: current portion -- 181 -------- -------- $107,943 $103,398 ======== ========
F-12 43 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) On December 21, 1995, the Company completed an accounts receivable securitization (the "Securitization Facility"). In connection with the Securitization Facility, the Company also entered into an amended and restated revolving credit facility (the "Revolving Credit Agreement"), which amended the original December 22, 1993 credit agreement. 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. The Senior Secured Notes bear interest at 11% per annum, payable semiannually on April 30 and October 31, are due December 22, 2000, 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. Accrued interest payable on the Senior Secured Notes was $3,234 and $458 at May 31, 1997 and 1996, respectively. During the first quarter of fiscal 1997, the Company was notified that the Agent of the Securitization Facility desired to extinguish the commitment under the facility. On August 30, 1996, in conjunction with the termination of the Securitization Facility, the Company entered into an amended revolving credit agreement (the "Amended Revolving Credit Agreement") and paid fees of approximately $2,305, which it deferred and is amortizing over the term of the agreement. 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. The Company recorded an extraordinary charge of $876 in connection with the early extinguishment of the Securization Facility. On January 27, 1997, the Company's Amended Revolving Credit Agreement was amended again (the "Second Amended Revolving Credit Agreement") and the bank waived the Company's non-compliance with certain financial covenants therein for the quarter ended November 30, 1996 and reduced its commitment to lend to the Company from $85,000 to $70,000 as of January 27, 1997 through May 31, 1997, at which time the commitment would be further reduced to $65,000 from June 1, 1997 through the final maturity date of August 31, 1999. Outstanding borrowings bear interest at the agent bank's reference rate plus 1.5% unless an Event of Default (as defined in the Second Amended Revolving Credit Agreement) has occurred and is continuing, or is not waived, in which case such outstanding borrowings bear interest at 3.0% above the rate otherwise payable. The Company again failed to meet certain financial covenants contained in the Second Amended Revolving Credit Agreement at February 28, 1997, which constituted an Event of Default, and the bank did not waive the Company's non-compliance with these financial covenants. Additionally, the Event of Default prohibited the Company from paying the interest on the Senior Secured Notes due on April 30, 1997. Loans outstanding of $57,855 under the Second Amended Revolving Credit Agreement at May 31, 1997 bear a weighted average interest rate of 13.3%. All debt has been classified as liabilities subject to compromise in the accompanying consolidated balance sheet as a result of the Chapter 11 filing (Note 1). On May 14, 1997, the Company received interim approval of the Bankruptcy Court of an Agreement to Use Cash Collateral. At May 31, 1997, approximately $1,313 of the Company's consolidated cash balance was restricted from use in accordance with the terms of the agreement. The Company operated under this agreement until July 22, 1997, at which time it received final court approval of an Amended and Restated Stipulation Pursuant to Sections 361 and 363 of the Bankruptcy Code Authorizing Debtor's Use of Cash Collateral and Granting Adequate Protection to Collateral Agent, Lenders and Bondholders (the "Cash Stipulation"). Pursuant to the terms of the Cash Stipulation, the lenders agreed to increase the availability under the Company's Second Amended Revolving Credit Agreement to 82% of eligible accounts receivable, as defined, and to 45% of eligible inventory, as defined, subject to various reductions stipulated in the Cash Stipulation. As of the Petition Date, the Company had no availability under the Second Amended Revolving Credit Agreement. F-13 44 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) 7. INCOME TAXES At May 31, 1997, the Company had a net operating loss carryforward for federal income tax purposes of $61,700 which is scheduled to expire in the years May 31, 2006 through May 31, 2012. Of this $61,700, approximately $14,000 is scheduled to expire in the years May 31, 2006 through May 31, 2008, and is subject to the limitations imposed under Internal Revenue Code ("IRC") Section 382. Section 382 of the Code provides a limitation (Section 382 limitation) on the use of net operating loss carryovers, net operating losses, and certain built-in losses and deduction items of a loss corporation that has an ownership change. For financial statement purposes, utilization of a net operating loss, under Section 382 of the Code, is recorded as a credit to common stock. The balance of the net operating losses, approximately $47,700, is not subject to the limitations imposed under IRC Section 382 and is scheduled to expire through May 31, 2012. At May 31, 1997 and 1996, the Company has recorded a noncurrent deferred tax asset of $72 and $122, respectively, representing alternative minimum tax (AMT) credit carryforwards. Unlike net operating loss carryforwards, the AMT credit has an indefinite carryforward periods as it will be available to reduce the Company's regular tax liability in any future year. 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:
For the years ended May 31, 1997 1996 1995 --------------------------- ---- ----- ----- Current: Federal $204 $(630) $ 853 State 30 40 29 ---- ----- ----- 234 (590) 882 Deferred: Federal 50 285 (652) State - 593 (230) ---- ----- ----- 50 878 (882) ---- ----- ----- $284 $ 288 $ - ==== ===== ====
F-14 45 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) The Company's effective tax rate differs from the statutory federal income tax rate as follows: For the years ended May 31, 1997 1996 1995 - --------------------------- ------ ------ ------ Statutory rate -35.0% -35.0% 35.0% Surtax benefit 1.0 1.0 (1.0) State taxes (net of federal benefit) -- 1.1 3.6 Valuation allowance 35.4 41.7 (34.8) Alternative minimum tax credits -- -- (3.8) Other (0.8) 2.7 1.0 ---- ---- ---- 0.6% 11.5% 0.0% ==== ==== ==== Significant components of the Company's deferred income taxes are as follows: Current tax assets: May 31, 1997 May 31, 1996 ------------ ------------ Customer accounts receivable $ 4,460 $ 4,734 Merchandise inventories 896 1,225 Vacation accrual 211 283 State franchise taxes (741) (4) Other -- (64) -------- -------- 4,826 6,174 Noncurrent tax assets: State franchise taxes (1,039) (745) Property and equipment (36) (111) Inventory valuation allowance 1,313 -- Net operating loss carryforwards 22,492 6,053 Other 362 421 -------- -------- 23,092 5,618 -------- -------- Total deferred tax assets 27,918 11,792 Valuation allowance (27,846) (11,670) -------- -------- Net deferred tax assets $ 72 $ 122 ======== ======== F-15 46 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) 8. COMMITMENTS AND CONTINGENCIES The Company leases store and office facilities and certain equipment used in its regular operations under operating leases which expire at various dates through 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:
For the years ended May 31, 1997 1996 1995 - --------------------------- ------- ------- ------- Minimum rentals $11,616 $10,514 $ 9,914 Contingent rentals 2,706 2,829 2,816 ------- ------- ------- $14,322 $13,343 $12,730 ======= ======= =======
Included in the above table is rent expense paid to officers/ shareholders related to certain stores and the office facility of $649, $684, and $787, respectively for the fiscal years ended May 31, 1997, 1996, and 1995. Subject to the approval of the Bankruptcy Court, the Company can reject executory contracts, including leases, under the relevant provisions of the Bankruptcy Code. Rejection of a lease gives the lessor the right to assert a prepetition claim against the Company. However, the amount of the claim may be limited by the Bankruptcy Court. In connection with the closure of certain stores (Note 1), certain leases have been renegotiated, settled, or rejected. The expected costs of such lease terminations are included in reorganization expenses in the statement of operations. The analysis of minimum rental commitments has not been adjusted to reflect possible additional future lease rejections. Minimum rental commitments for all remaining noncancelable leases in effect as of May 31, 1997 are as follows:
For the years ending May 31, Shareholders Others Total - ---------------------------- ------------ ------- ------- 1998 $ 683 $ 7,896 $ 8,579 1999 683 7,374 8,057 2000 688 6,679 7,367 2001 786 5,941 6,727 2002 786 5,360 6,146 Thereafter 2,357 17,535 19,892 ------ ------- ------- $5,983 $50,785 $56,768 ====== ======= =======
The Company is from time to time involved in routine litigation incidental to the conduct of its business. Based upon discussions with legal counsel, management believes that its litigation currently pending, other than its Chapter 11 proceedings previously discussed, will not have a material adverse effect on the Company's financial position or results of operations. 9. SHAREHOLDERS' (DEFICIENCY) 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, 1997, there were options to purchase 16,080 shares of the Company's common stock outstanding under the 1992 Stock Option Plan. F-16 47 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) 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 420,000 shares of common stock may be issued under the 1994 Employee Stock Option Plan, amended. 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: Weighted Average Number Option Price Exercise Of Shares Per Share Price --------- ------------- -------- Outstanding at May 31, 1994 157,130 $4.13 - $4.13 $4.13 Granted 105,800 $4.13 - $4.13 $4.13 Terminated (5,830) $4.13 - $4.13 $4.13 --------- ------------- -------- Outstanding at May 31, 1995 257,100 $4.13 - $4.13 $4.13 Granted 254,600 $3.44 - $4.43 $4.05 Terminated (78,424) $4.13 - $4.13 $4.13 --------- ------------- -------- Outstanding at May 31, 1996 433,276 $3.44 - $4.43 $4.08 Granted 180,400 $1.69 - $3.88 $2.27 Terminated (395,296) $3.38 - $4.43 $4.08 --------- ------------- -------- Outstanding at May 31, 1997 218,380 $1.69 - $4.13 $2.58 ========= ============= ======== May 31, 1997 1996 1995 - ---------------------------------------------------------------------------- Shares exercisable 24,888 120,329 85,084 Shares available for grant at end of year 217,700 97,600 116,800 The Company omitted the pro forma information required to be disclosed by SFAS No. 123 due to its immateriality. Because options vest over several years and additional options are granted each year, the effects on pro forma net loss and related per share amounts in the current year are not representative of the effect for future years.
Weighted Weighted Weighted Average Average Average Range of Shares Remaining Exercise Shares Exercise Exercise Prices Outstanding Contractual Life Price Exercisable Price - ----------------- ------------- ---------------- ---------- ------------- ---------- $1.69 to $3.56 169,000 9.5 $2.17 1,160 $3.50 $3.56 to $4.13 49,380 7.3 $3.96 23,728 $4.07 -------- ------ ------- ------ 218,380 $2.58 24,888 $4.05
F-17 48 BARRY'S JEWELERS, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) Warrants In connection with the Prior 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 was initially reserved for issuance pursuant to the Employee Incentive Stock Plan. A total of 90,000 shares was 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. 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 was authorized for issuance under this plan; 9,956 and 30,441 shares of common stock were purchased under this plan during fiscal 1997 and 1996, respectively. Additionally, on February 13, 1997, the Company issued 20,000 shares of common stock to two former executives in accordance with their employment agreements. The Company recognized compensation expense of approximately $37 in connection with this stock issuance. 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 fiscal 1997 or 1996. Participants are partially vested in employer matching contributions after 2 years and fully vested after 5 years of employment with the Company. F-18 49 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION --- ----------- 3.1 Restated Articles of Incorporation filed November 16, 1994 in connection with the Reverse Stock Split (5). 3.2 Bylaws (10). 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 the form of Note certificate (4). 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 (6). 4.1(d) Amendment No. 3 to Indenture, dated as of December 21, 1995, between Barry's Jewelers, Inc. and the Trustee (6). 4.1(e) Amendment No. 4 to Indenture, dated as of August 30, 1996, between Barry's Jewelers, Inc. and the Trustee (9). 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 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 (5). 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).* 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, 2996, between the Company and Thomas S. Liston (9).* 10.11 Employment Agreement dated April 8, 1996, between the Company and Robert Bridel (9).* 10.12 Agreement dated March 19, 1997, between the Company and thomas S. Liston (10).* 10.13 Agreement dated March 19, 1997, between the Company and Robert Bridel (10).* 10.14(a) Form of Employment Agreement to be entered into between the Company and each of Samuel J. Merksamer, as President and Chief Executive Officer, E. Peter Healey, as Executive Vice President, Chief Financial Officer and Secretary, Randy N. McCullough, as Senior Vice President - Merchandising, Chad C. Haggar, as Vice President - Operations, and Bill R. Edgel, as Vice President - Marketing (10).* 10.14(b) Term Sheet between the Company and certain of the Company's creditors evidencing their compromise regarding the terms of such employment agreements (10).* 10.14(c) Schedule of Certain Terms of such employment agreements (10).* 10.15(a) Trade Financing Agreement Term Sheet (10). 10.15(b) Form of Trade Financing Agreement (10). 10.15(c) Exhibit B to Form of Trade Financing Agreement (10). 10.15(d) Form of Consignment Agreement (10). 23 Consent of Independent Auditors (10). 27 Financial Data Schedule (10). -------------------------------------------- (1) Incorporated herein by reference to the Company's Current Report on Form AK filed December 22, 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. (6) Incorporated herein by reference to the Company's 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) 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, 1996. (10) Filed herewith. Management contract or compensatory plan or arrangement. EX-3.2 2 BYLAWS 1 EXHIBIT 3.2 BYLAWS for the regulation, except as otherwise provided by statute or the Articles of Incorporation, as amended or restated, of BARRY'S JEWELERS, INC. a California corporation 2 TABLE OF CONTENTS
Section Title Page - ------- ----- ---- ARTICLE I. GENERAL PROVISIONS 1.01 Principal Executive Office 1 1.02 Number of Directors 1 ARTICLE II. SHARES AND SHAREHOLDERS 2.01 Meetings of Shareholders 1 (a) Place of Meetings 1 (b) Annual Meetings 1 (c) Special Meetings 2 (d) Notice of Meetings 2 (e) Manner of Bringing Business Before Meeting 3 (f) Adjourned Meeting and Notice Thereof 4 (g) Waiver of Notice 4 (h) Quorum 4 2.02 Organization and Conduct of Meeting 5 (a) Chairman of the Meeting 5 (b) Right to Attend 6 2.03 Voting of Shares 6 (a) In General 6 (b) Cumulative Voting 6 (c) Voting by Ballot 6 2.04 Proxies 6 2.05 Inspectors of Election 7 (a) Appointment 7 (b) Duties 7 2.06 Record Date 8 2.07 Informalities and Irregularities 8
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Section Title Page - ------- ----- ---- 2.08 Share Certificates 9 (a) In General 9 (b) Two or More Classes or Series 9 (c) Special Restrictions 9 2.09 Transfer of Certificates 10 2.10 Lost Certificates 10 ARTICLE III. DIRECTORS 3.01 Powers 10 3.02 Committees of the Board 11 3.03 Election and Term of Office 11 3.04 Vacancies 11 3.05 Removal 12 3.06 Resignation 12 3.07 Meetings of the Board of Directors and Committees 12 (a) Regular Meetings 12 (b) Organization Meeting 12 (c) Special Meetings 12 (d) Notices; Waivers 13 (e) Adjournment 13 (f) Place of Meeting 13 (g) Presence by Conference Telephone Call 13 (h) Quorum and Voting 13 3.08 Action Without Meeting 14 3.09 Committee Meetings 14 ARTICLE IV. OFFICERS 4.01 Officers 14 4.02 Elections 14 4.03 Other officers 14 4.04 Removal 14 4.05 Resignation 14 4.06 Vacancies 15 4.07 Chairman of the Board 15 4.08 President 15 4.09 Vice President 15 4.10 Secretary 16 4.11 Chief Financial officer 16
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Section Title Page - ------- ----- ---- 4.12 Treasurer 16 ARTICLE V. MISCELLANEOUS 5.01 Records and Reports 16 (a) Books of Account and Proceedings 16 (b) Annual Report 17 (c) Shareholders Requests for Financial Reports 17 5.02 Rights of Inspection 17 (a) By Shareholders 17 (1) Record of Shareholders 17 (2) Corporate Records 15 (3) Bylaws 18 (b) By Directors 18 5.03 Checks, Drafts, Etc 18 5.04 Representation of Shares of Other corporations 15 5.05 Indemnification and Insurance 19 (a) Right to Indemnification 19 (b) Right of Claimant to Bring Suit 19 (c) Non-Exclusivity of Rights 20 (d) Insurance 20 (e) Indemnification of Employees and Agents of the Corporation 21 5.06 Employee Stock Purchase Plans 21 5.07 Construction and Definitions 21 ARTICLE VI. AMENDMENTS 6.01 Power of Shareholders 21 6.02 Power of Directors 22
-iii- 5 BYLAWS for the regulation, except as otherwise provided by statute or the Articles of Incorporation, as amended or restated (the "Articles of Incorporation"), of BARRY'S JEWELERS, INC. ARTICLE I. GENERAL PROVISIONS Section 1.01 Principal Executive Office. The principal executive office of the corporation shall be located at 111 West Lemon Avenue, Monrovia, California 90160. The Board of Directors shall have the power to change the principal office to another location and may fix and locate one or more subsidiary offices within or without the State of California. Section 1.02 Number of Directors. The affairs of the corporation shall be managed by a Board of Directors consisting of seven (7) directors. ARTICLE II. SHARES AND SHAREHOLDERS Section 2.01 Meetings of Shareholders. (a) Place of Meetings. Meetings of shareholders shall be held at the principal executive office of the corporation or at any other location within or without the State of California designated by the Board of Directors. In the absence of a specific designation, shareholders' meetings shall be held at the principal executive office of the corporation. (b) Annual Meetings. An annual meeting of the shareholders of the corporation shall be held on the second Wednesday of each November commencing at 10:00 a.m. local time or on such other date and time as may be designated by the Board of Directors, in no case more than 15 months after (i) in the case of the first such meeting following the confirmation of the corporation's plan of reorganization in its case under chapter 11 of the United States Bankruptcy Code, the effective date of such plan, or (ii) in the case of each such meeting thereafter, the last preceding annual meeting, all in accordance with Section 600 of the California General Corporation Law. Should any day set for an annual meeting fall upon a legal holiday, the annual meeting of shareholders shall be held at the same time on the next day thereafter ensuing which is a full business day. At each annual meeting directors shall be elected and any other business properly brought before the meeting (as prescribed in subpart (e) of this Section 2.01) may be transacted. -1- 6 (c) Special Meetings. Special meetings of the shareholders may be held whenever and wherever (subject to subpart (a) of this Section 2.01) called by the Chairman of the Board, any two directors, the President of the corporation or upon the delivery of proper written request of the holders of shares entitled to cast not less than ten percent (10%) of the votes at such meeting. The business which may be conducted at any such special meeting will be confined to the purposes stated in the notice thereof provided by the corporation to the shareholders and to such additional matters as the Chairman of such meeting may rule to be germane to such purposes. For purposes of this section, proper request for the call of a special meeting shall be made by a written request (i) specifying the purposes for any special meeting requested and providing the information required by subpart (e) of this Section 2.01, (ii) delivered either in person or by registered or certified mail, return receipt requested, (iii) to the Chairman of the Board, or such other person as may be specifically authorized by law to receive such request. Within 20 days after receipt of proper written request, a special meeting shall be called by the corporation and notice given in the manner required by these Bylaws and the meeting shall be held at a time requested by the person or persons who requested the calling of the meeting, but not less than 35 days nor more than 60 days after receipt by the Chairman of the Board or such other person of such proper written request. (d) Notice of Meetings. Notice of any shareholders, meeting shall be given by the Board of Directors, on behalf of the corporation, not less than 10 nor more than 60 days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, or (ii) in the case of an annual meeting, those matters which the Board, at the time of the giving of the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by the Board for election. If action is proposed to be taken at any meeting, which action is within Sections 310, 902, 1201, 1900 or 2007 of the General Corporation Law of the State of California, the notice shall also state the general nature of that proposal. Notice of a shareholders' meeting shall be given either personally or by first-class mail, or other means of written communication, charges prepaid, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice; or if no such -2- 7 address appears or is given, at the place where the principal executive office of the corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any notice executed by the secretary, assistant secretary or any transfer agent, shall be prima facie evidence of the giving of the notice. (e) Manner of Bringing Business Before Meeting. At any annual or special meeting of shareholders only such business (including nomination as a director) shall be conducted as shall have been properly brought before the meeting. In order to be properly brought before the meeting, such business must have either been (1) specified in the written notice of the meeting (or any supplement thereto) given to shareholders who were such on the record date for such meeting by or at the direction of the Board of Directors pursuant to subpart (d) of this Section 2.01, (2) brought before the meeting at the direction of the Board of Directors or the Chairman of the meeting, selected as provided in Section 2.02(a) of this Article II, (3) specified in a written notice given by or on behalf of a shareholder who was such on the record date for such meeting and entitled to vote thereat or a duly authorized proxy for such shareholder, in accordance with all of the following requirements. A notice referred to in clause (3) hereof must be delivered personally to, or mailed to and received at, the principal executive office of the Company, addressed to the attention of the Secretary, not more than fifteen (15) days after the date of the initial notice referred to in clause (1) hereof, in the case of business to be brought before a special meeting of shareholders, and not less than thirty (30) days prior to the anniversary date of the initial notice referred to in clause (1) hereof with respect to the previous year's annual meeting, in the case of business to be brought before an annual meeting of shareholders. Such notice referred to in clause (3) hereof shall set forth (i) a full description of each such item of business proposed to be brought before the meeting and the reasons for conducting such business at such meeting, (ii) the name and address of the person proposing to bring such business before the meeting, (iii) the number of shares held of record, held beneficially, and represented by proxy by such person as of the record date for the meeting, if such date has been made available, or as of a date not later than thirty days prior to the anniversary date of the initial notice referred to in clause (1) hereof, if the record date has not been made available, (iv) if any item of such business involves a nomination for director, the name, age, address and business experience during the past five years of such nominee, (v) any material interest of such shareholder in the specified business, and (vi) whether or not such shareholder -3- 8 is a member of any group pursuant to any agreement, arrangement, relationship, understanding, or otherwise, whether or not in writing, formed in whole or in part for the purpose of acquiring, owning, or voting shares of the corporation. No business shall be brought before any meeting of the shareholders of the corporation otherwise than as provided in this Section. The Chairman of the meeting may, if the facts warrant, determine that any proposed item of business or nomination as director was not brought before the meeting in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the improper item of business or nomination shall be disregarded. (f) Adjourned Meeting and Notice Thereof. Any meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares represented either in person or by proxy whether or not a quorum is present. When a shareholders' meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. However, if the adjournment is for more than 45 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting (in accordance with subpart (d) of this Section 2.01) shall be given to each shareholder of record entitled to vote at the meeting. (g) Waiver of Notice. The transaction of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or within fifteen (15) days after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of subpart (d) of this Section 2.01, the waiver of notice or consent shall state the general nature of the proposal. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (h) Quorum. The presence in person or by proxy of the persons entitled to vote a majority of the shares entitled to vote at any meeting shall constitute a quorum for the transaction of business. If a quorum is present, the -4- 9 affirmative vote of the majority of the shares represented and voting at the meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by law, the Articles of Incorporation of the corporation or these Bylaws, as applicable. The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, provided that any action taken (other than adjournment) must be approved by at least a majority of the shares required to constitute a quorum. Section 2.02 Organization and Conduct of Meeting. (a) Chairman of the Meeting. Each shareholders' meeting will be called to order and thereafter chaired by the Chairman of the Board if there then is one; or, if not, or if the Chairman of the Board is absent or so requests, then by the President; or if both the Chairman of the Board and the President are unavailable, then by such other officer of the corporation or such shareholder as may be appointed by the Board of Directors. The Secretary (or in his or her absence an Assistant Secretary) of the corporation will act as secretary of each shareholders' meeting; if neither the Secretary nor an Assistant Secretary is in attendance, the Chairman of the meeting may appoint any person (whether a shareholder or not) to act as secretary thereat. After calling a meeting to order, the Chairman thereof may require the registration of all shareholders intending to vote in person, and the filing of all proxies, with the election inspector or inspectors, if one or more have been appointed (or, if not, with the secretary of the meeting). After the announced time for such filing of proxies has ended, no further proxies or changes, substitutions, or revocations of proxies will be accepted. Absent a showing of bad faith on his or her part, the Chairman of a meeting will, among other things, have absolute authority to determine the order of business to be conducted at such meeting and to establish rules for, and appoint personnel to assist in, preserving the orderly conduct of the business of the meeting (including any informal, or question and answer, portions thereof). Any informational or other informal session of shareholders conducted under the auspices of the corporation after the conclusion of or otherwise in conjunction with any formal business meeting of the shareholders will be chaired by the same person who chairs the formal meeting, and the foregoing authority on his or her part will extend to the conduct of such informal session. -5- 10 (b) Right to Attend. Except only to the extent of persons designated by the Board of Directors or the Chairman of the meeting to assist in the conduct of the meeting, and except as otherwise permitted by the Board or such Chairman, the persons entitled to attend any meeting of shareholders may be confined to (i) shareholders entitled to vote thereat and (ii) the persons upon whom proxies valid for purposes of the meeting have been conferred or their duly appointed substitutes (if the related proxies confer a power of substitution). A person otherwise entitled to attend any such meeting will cease to be so entitled if, in the judgment of the Chairman of the meeting, such person engages thereat in disorderly conduct impeding the proper conduct of the meeting in the interests of all shareholders as a group. Section 2.03 Voting of Shares. (a) In General. Except as otherwise provided in the Articles of Incorporation and subject to subpart (b) hereof, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders. (b) Cumulative Voting. At any election of directors, every shareholder complying with this subpart (b) and entitled to vote may cumulate his or her votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. No shareholder shall be entitled to cumulate votes (i.e., cast for any one or more candidates a number of votes greater than the number of votes which such shareholder normally is entitled to cast) unless such candidate or candidates names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting of the shareholder's intention to cumulate the shareholder's votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. In any election of directors, the candidates receiving the highest number of affirmative votes up to the number of directors to be elected by such shares will be elected; votes against a director and votes withheld shall have no legal effect. (c) Voting by Ballot. Voting will be by ballot on any matter as to which a ballot vote is demanded, prior to the time the voting begins, by any person entitled to vote on such matter; otherwise a voice vote will suffice. Section 2.04 Proxies. Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise -6- 11 provided in the proxy. Every proxy continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto, except as otherwise provided herein or in the California General Corporation Law. Such revocation may be effected by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or as to any meeting by attendance at such meeting and voting in person by the person executing the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. A proxy is not revoked by the death or incapacity of the maker unless, before the vote is counted, written notice of such death or incapacity is received by the corporation. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the California General Corporation Law. Section 2.05 Inspectors of Election. (a) Appointment. In advance of any meeting of shareholders the Board may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the Chairman of any meeting of shareholders may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse) at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. (b) Duties. The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies, receive votes, ballots or consents, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes or consents, determine when the polls shall close, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. -7- 12 Section 2.06 Record Date. In order that the corporation may determine the shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days prior to the date of such meeting nor more than 60 days prior to any other action. If no record date is fixed: (1) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (2) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board has been taken, shall be the day on which the first written consent is given. (3) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than 45 days from the date set for the original meeting. Shareholders at the close of business on the record date are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation or by agreement or in the California General Corporation Law. Section 2.07 Informalities and Irregularities. All informalities or irregularities in any call or notice of a meeting, or in the areas of credentials, proxies, quorums, voting, and similar matters, will be deemed waived if no objection is made at the meeting. Attendance of a person at a meeting shall also constitute a waiver of notice of such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that -8- 13 attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of such meeting if such objection is expressly made at the meeting. Section 2.08 Share Certificates. (a) In General. The corporation shall issue a certificate or certificates representing shares of its capital stock. Each certificate so issued shall be signed in the name of the corporation by the Chairman or Vice Chairman of the board or the President or a Vice President and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or any Assistant Secretary, shall state the name of the record owner thereof and shall certify the number of shares and the class or series of shares represented thereby. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. (b) Two or More Classes or Series. If the shares of the corporation are classified or if any class of shares has two or more series, there shall appear on the certificate one of the following: (1) A statement of the rights, preferences, privileges, and restrictions granted to or imposed upon the respective classes or series of shares authorized to be issued and upon the holders thereof; or (2) A summary of such rights, preferences, privileges and restrictions with reference to the provisions of the Articles of Incorporation and any certificates of determination establishing the same; or (3) A statement setting forth the office or agency of the corporation from which shareholders may obtain upon request and without charge, a copy of the statement referred to in subparagraph (1). (c) Special Restrictions. There shall also appear on the certificate (unless stated or summarized under subparagraph (1) or (2) of subpart (b) above) the statements required by all of the following clauses to the extent applicable: (1) The fact that the shares are subject to restrictions upon transfer. -9- 14 (2) If the shares are assessable, a statement that they are assessable. (3) If the shares are not fully paid, a statement of the total consideration to be paid therefor and the amount paid thereon. (4) The fact that the shares are subject to a voting agreement or an irrevocable proxy or restrictions upon voting rights contractually imposed by the corporation. (5) The fact that the shares are redeemable. (6) The fact that the shares are convertible and the period for conversion. Section 2.09 Transfer of Certificates. Where a certificate for shares is presented to the corporation or its transfer clerk or transfer agent with a request to register a transfer of shares, the corporation shall register the transfer, cancel the certificate presented, and issue a new certificate if: (a) the security is endorsed by the appropriate person or persons; (b) reasonable assurance is given that those endorsements are genuine and effective; (c) the corporation has no notice of adverse claims or has discharged any duty to inquire into such adverse claims; (d) any applicable law relating to the collection of taxes has been complied with; (e) the transfer is not in violation of any federal or state securities laws; and (f) the transfer is in compliance with any and all applicable agreements governing the transfer of the shares. Section 2.10 Lost Certificates. Where a certificate has been lost, destroyed or wrongfully taken, the corporation shall issue a new certificate in place of the original if the owner: (a) so requests before the corporation has notice that the certificate has been acquired by a bona fide purchaser; (b) files with the corporation a lost instrument affidavit and a sufficient indemnity bond, if so requested by the Board of Directors; and (c) satisfies any other reasonable requirements as may be imposed by the Board. Except as above provided, no new certificate for shares shall be issued in lieu of an old certificate unless the corporation is ordered to do so by a court in the judgment in an action brought under Section 419(b) of the California General Corporation Law. ARTICLE III. DIRECTORS Section 3.01 Powers. Subject to the provisions of the California General Corporation Law and the Articles of Incorporation, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board may delegate the management of the day-to-day operations -10- 15 of the business of the corporation to a management company or other person provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. Section 30.2 Committees of the Board. The Board may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the Board. Such committees may include, without limitation, an Audit Committee and a Compensation Committee. Except to the extent provided in the applicable resolution of the Board passed in accordance with subpart (h) of Section 3.07 of the Bylaws, no such committee shall have any of the authority of the Board but, rather, shall act in an advisory capacity only; and, in any event, no such committee shall possess the Board's authority with respect to: (1) The approval of any action which also requires, under the California General Corporation Law, shareholders' approval or approval of the outstanding shares; (2) The filling of vacancies on the Board or in any committee. (3) The fixing of compensation of the directors for serving on the Board or on any committee. (4) The amendment or repeal of bylaws or the adoption of bylaws. (5) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable. (6) A distribution (within the meaning of the California General Corporation Law) to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the Board. (7) The appointment of other committees of the Board or the members thereof. Section 3.03 Election and Term of Office. The directors shall be elected only at each annual meeting of shareholders but, if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. Section 3.04 Vacancies. Vacancies on the Board may be filled, except as otherwise provided in the Articles of -11- 16 Incorporation, by resolution of the Board (i) passed by unanimous written consent or at a Board meeting if the number of directors signing such consent would constitute a quorum at a meeting or a quorum is established at such meeting and the vote meets the requirements of subpart (h) of Section 3.07 of the Bylaws, or (ii) passed by unanimous written consent of the remaining directors, if the number of directors remaining is insufficient to constitute a quorum. The shareholders may elect a director or directors to fill any vacancy or vacancies not filled by the directors. The Board of Directors shall have the power to declare vacant the office of a director who has been declared of unsound mind by an order of court, or convicted of a felony. Section 3.05 Removal. Any or all of the directors may be removed without cause if such removal is approved by the vote of a majority of the outstanding shares entitled to vote, except that no director may be removed (unless the entire board is removed) when the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if the action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the director's most recent election were then being elected. Section 3.06 Resignation. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 3.07 Meetings of the Board of Directors and Committees. (a) Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place within or without the State as may be designated from time to time by resolution of the Board or by written consent of all members of the Board or in these bylaws. (b) Organization Meeting. Immediately following each annual meeting of shareholders the Board of Directors shall hold a regular meeting for the purpose of organization, election of officers, and the transaction of other business. Notice of such meetings is hereby dispensed with. (c) Special Meetings. Special meetings of the Board of Directors for any purpose or purposes may be called at any -12- 17 time by the Chairman of the Board, by the President, by any Vice President, by the Secretary, or by any two directors. (d) Notices; Waivers. Special meetings shall be held upon forty-eight hours' notice by mail or telegram or twenty four hours notice delivered personally or by telephone. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (e) Adjournment. One-half (1/2) of the authorized number of directors may adjourn any meeting to another time and place. If the meeting is adjourned for more than 24 hours, notice of such adjournment to another time and place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of adjournment. (f) Place of Meeting. Meetings of the Board may be held at any place within or without the State of California which has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, then such meeting shall be held at the principal executive office of the corporation. (g) Presence by Conference Telephone Call. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Such participation constitutes presence in person at such meeting. (h) Quorum and Voting. For the transaction of business and other actions by the Board, (i) a majority of the number of directors then specified pursuant to Section 1.02 hereof shall constitute a quorum, and (ii) except as otherwise expressly provided in these Bylaws, every act or decision done or made by greater than one-half (1/2) of the number of directors present at a meeting duly held at which a quorum is present shall be the act of the Board of Directors; except that if an alternate quorum or majority is required by law or by the Articles of Incorporation and such alternate provisions expressly permit no change in the numerical requirements, such alternate provisions shall apply. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. -13- 18 Section 3.08 Action Without Meeting. Any action required or permitted to be taken by the Board of Directors, may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action, provided that the number of such directors consenting meets the minimum quorum requirement of subpart (h) of Section 3.07 of the Bylaws. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. Section 3.09 Committee Meetings. The provisions of Sections 3.07 and 3.08 of these bylaws apply also to committees of the Board and action by such committees, mutatis mutandis. ARTICLE IV. OFFICERS Section 4.01 Officers. The officers of the corporation shall consist of a Chairman of the Board or a President, or both, a Secretary, a Chief Financial Officer, and such additional officers as may be elected or appointed in accordance with Section 4.03 of these bylaws and as may be necessary to enable the corporation to sign instruments and share certificates. Any number of offices may be held by the same person. Section 4.02 Elections. All officers of the corporation, except such officers as may be otherwise appointed in accordance with Section 4.03, shall be chosen by the Board of Directors, and shall serve at the pleasure of the Board of Directors, subject to the rights, if any, of an officer under any contract of employment. Section 4.03 Other Officers. The Board of Directors, the Chairman of the Board, or the President at their or his discretion, may appoint one or more Vice Presidents, one or more Assistant Secretaries, a Treasurer, one or more Assistant Treasurers, or such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as the Board of Directors, the Chairman of the Board, or the President, as the case may be, may from time to time determine. Section 4.04 Removal. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors, without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Section 4.05 Resignation. Any officer may resign at any time by giving written notice to the Board of Directors or to the -14- 19 President, or to the Secretary of the corporation without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.06 Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to such office. Section 4.07 Chairman of the Board. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors and of shareholders and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors. If there is no President, the Chairman of the Board shall in addition be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 4.08 below. Section 4.08 President. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be general manager and chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and affairs of the corporation. He may preside, in the absence of the Chairman of the Board, or if there be none, at meetings of the shareholders and of the Board of Directors. He shall be ex-officio a member of all the standing committees, including the executive committee, if any, and shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. Section 4.09 Vice President. In the absence of the President or in the event of the President's inability or refusal to act, the Senior Vice President or Vice President, or in the event there be more than one Senior Vice President or Vice President, the Senior Vice President or Vice President designated by the Board of Directors, or if no such designation is made, in order of their election, shall perform the duties of President and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Any Senior Vice President or Vice President shall perform such other duties as from time to time may be assigned to such Senior Vice President or Vice President by the President or the Board of Directors. -15- 20 Section 4.10 Secretary. The Secretary shall keep or cause to be kept the minutes of proceedings and record of shareholders, as provided for and in accordance with Section 5.01(a) of these Bylaws. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required by these Bylaws or by law to be given, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors. Section 4.11 Chief Financial Officer. The Chief Financial officer shall have general supervision, direction and control of the financial affairs of the corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. In the absence of a named treasurer, the Chief Financial Officer shall also have the powers and duties of the Treasurer as hereinafter set forth and shall be authorized and empowered to sign as Treasurer in any case where such officer's signature is required. Section 4.12 Treasurer. The Treasurer shall keep or cause to be kept the books and records of account as provided for and in accordance with Section 5.01(a) of these Bylaws. The books of account shall at all reasonable times be open to inspection by any director. The Treasurer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, an account of all of his transactions as Treasurer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these Bylaws. In the absence of a named Chief Financial Officer, the Treasurer shall be deemed to be the Chief Financial Officer and shall have the powers and duties of such office as hereinabove set forth. ARTICLE V. MISCELLANEOUS Section 5.01 Records and Reports. (a) Books of Account and Proceedings. The corporation shall keep adequate and correct books and records of account and shall keep minutes of the proceedings of its shareholders, Board and committees of the Board and shall keep at its principal executive office, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each. Such minutes shall be kept in written form. Such other books and records shall be kept -16- 21 either in written form or in any other form capable of being converted into written form. (b) Annual Report. An annual report to shareholders referred to in Section 1501 of the California General Corporation Law is expressly dispensed with, but nothing herein shall be interpreted as prohibiting the Board of Directors from issuing annual or other periodic reports to the shareholders of the corporation as they consider appropriate. (c) Shareholders' Requests for Financial Reports. If no annual report for the last fiscal year has been sent to shareholders, the corporation shall, upon the written request of any shareholder made more than 120 days after the close of that fiscal year, deliver or mail to the person making the request within 30 days thereafter the financial statements for that year required by Section 1501(a) of the California General Corporation Law. Any shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of this corporation may make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than 30 days prior to the date of the request and a balance sheet of the corporation as of the end of such period, and the corporation shall deliver or mail the statements to the person making the request within 30 days thereafter. A copy of the statements shall be kept on file in the principal office of the corporation for 12 months and they shall be exhibited at all reasonable times to any shareholder demanding an examination of them or a copy shall be mailed to such shareholder upon demand. Section 5.02 Rights of Inspection. (a) By Shareholders. (1) Record of Shareholders. Any shareholder or shareholders holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation shall have an absolute right to do either or both of the following: (i) inspect and copy the record of shareholders names and addresses and shareholdings during usual business hours upon five business days' prior written demand upon the corporation, or (ii) obtain from the transfer agent for the corporation, upon written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. The list shall be made available on or before the later of five business days after -17- 22 demand is received or the date specified therein as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interests as a shareholder or holder of a voting trust certificate. (2) Corporate Records. The accounting books and records and minutes of proceedings of the shareholders and the Board and committees of the Board shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of such voting trust certificate. This right of inspection shall also extend to the records of any subsidiary of the corporation. (3) Bylaws. The corporation shall keep at its principal executive office in this state, the original or a copy of its Bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. (b) By Directors. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation of which such person is a director and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. Section 5.03 Checks, Drafts, Etc. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. Section 5.04 Representation of Shares of other Corporations. The Chairman of the Board, if any, the President or any Vice President of this corporation, or any other person authorized to do so by the Chairman of the Board, the President or any Vice President, is authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted to said officers to vote or represent on behalf of this corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by -18- 23 such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers. Section 5.05 Indemnification and Insurance. (a) Right to Indemnification. Each person who was or is made a party to or is threatened to be made a party to or is involuntarily involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "Proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation or is or was serving (during such person's tenure as director or officer) at the request of the corporation, any other corporation, partnership, joint venture, trust or other enterprise in any capacity, whether the basis of such Proceeding is an alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the corporation to the fullest extent authorized by California General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all expenses, liability and loss (including, without limitation, attorneys fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such Proceeding in advance of its final disposition; provided, however, that, if California General Corporation Law requires, the payment of such expenses in advance of the final disposition of a Proceeding shall be made only upon receipt by the corporation of an undertaking by or on behalf of such director or officer to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. No amendment to or repeal of this Section 5.05 shall apply to or have any effect on any right to indemnification provided hereunder with respect to any acts or omissions occurring prior to such amendment or repeal. (b) Right of Claimant to Bring Suit. If a claim for indemnity, advance or other payment under paragraph (a) of this Section is not paid in full by the corporation within ninety (90) days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim, together with interest thereon, and, if successful in whole or in part, the claimant shall be entitled to be paid -19- 24 also the expense of prosecuting such claim including reasonable attorneys' fees incurred in connection therewith. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under California General Corporation Law for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in California General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (c) Non-Exclusivity of Rights. The rights conferred in this Section shall not be exclusive of any other right which any director, officer, employee or agent may have or hereafter acquire under any statute, provisions of the Articles of Incorporation, bylaw, agreement, vote of shareholders or disinterested directors or otherwise, to the extent such additional rights to indemnification are authorized in the Articles of Incorporation of the corporation. (d) Insurance. In furtherance and not in limitation of the powers conferred by statute: (1) the corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the California General Corporation Law; and (2) the corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and/or other similar arrangements), as well as enter into contracts providing indemnification to the full extent authorized or permitted by law and including as part thereof provisions with respect to any or all of the foregoing to ensure the payment -20- 25 of such amounts as may become necessary to effect indemnification as provided therein, or elsewhere. (e) Indemnification of Employees and Agents of the Corporation. The corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, including the right to be paid by the corporation the expenses incurred in defending any Proceeding in advance of its final disposition, to any employee or agent of the corporation to the fullest extent of the provisions of this Section or otherwise with respect to the indemnification and advancement of expenses of directors and officers of the corporation. Section 5.06 Employee Stock Purchase Plans. The corporation may adopt and carry out a stock purchase plan or agreement or stock option plan or agreement providing for the issue and sale for such consideration as may be fixed of its unissued shares, or of issued shares acquired or to be acquired, to one or more of the employees or directors of the corporation or of a subsidiary or to a trustee on their behalf and for the payment for such shares in installments or at one time, and may provide for aiding any such persons in paying for such shares by compensation for services rendered, promissory notes or otherwise. A stock purchase plan or agreement or stock option plan or agreement may include, among other features, the fixing of eligibility for participation therein, the class and price of shares to be issued or sold under the plan or agreement, the number of shares which may be subscribed for, the method of payment therefor, the reservation of title until full payment therefor, the effect of the termination of employment, an option or obligation on the part of the corporation to repurchase the shares upon termination of employment, subject to the provisions of the California General Corporation Law, restrictions upon transfer of the shares and the time limits of and termination of the plan. Section 5.07 Construction and Definitions. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the California General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term "person" includes a corporation as well as a natural person. ARTICLE VI. AMENDMENTS Section 6.01 Power of Shareholders. New Bylaws may be adopted or these Bylaws may be amended or repealed by the -21- 26 affirmative vote of a majority of the outstanding shares entitled to vote. Section 6.02 Power of Directors. Subject to the right of shareholders as provided Section 6.01 to adopt, amend or repeal any provision of these Bylaws, any such provision may be adopted, amended or repealed by the affirmative vote of the directors present at a meeting duly held at which a quorum is present or by the unanimous written consent of directors, provided that the number of directors signing such consent would constitute a quorum at a meeting. Notwithstanding the foregoing provision of this Section 6.02, no amendment or repeal of any provision of Section 2.01(c)-(e) (Special Meetings, Etc.), Section 2.02 (Organization and Conduct of Meeting), Section 3.07 (Meetings of the Board of Directors and Committees), Section 5.05 (Indemnification and Insurance), or this Section 6.02 shall be made by the Board of Directors unless the number of directors approving such amendment or repeal constitutes at least a majority of the number of directors then specified pursuant to Section 1.02 hereof. -22- 27 THIS IS TO CERTIFY: That I am the duly elected, qualified and acting Secretary of Barry's Jewelers, Inc. and that the foregoing Bylaws were adopted as the Bylaws of said corporation as of the 30th day of June, 1992 as a result of the order of the United States Bankruptcy Court confirming the corporation's Plan of Reorganization in its case under chapter 11 of the United States Bankruptcy Code, in accordance with Section 1400(b) of the California General Corporation Law. Dated as of June 30, 1992. /s/ GERSON I. FOX ---------------------------------- Gerson I. Fox Secretary -24- EX-10.12 3 AGREEMENT BETWEEN THE CO. & THOMAS S LISTON 1 EXHIBIT 10.12 AGREEMENT 1. This agreement ("Agreement") is entered into between Thomas S. Liston ("Liston") and Barry's Jewelers, Inc., a California corporation ("Barry's"), to set forth the severance arrangements Barry's has made for Liston and to resolve all other matters between Barry's and Liston. Specifically, the purpose of this Agreement is, among other things, to (i) set forth the parties' agreements concerning severance and other benefits to be provided to Liston pursuant to the Employment Agreement between the parties dated as of April 8, 1996 (the "Employment Agreement"), as well as other benefits described herein, and (ii) provide for mutual general releases. A copy of the Employment Agreement is attached hereto as Exhibit "A". 2. The parties agree and acknowledge that Liston resigned as an officer, director and employee of Barry's (and each of its subsidiary and affiliated entities, as applicable) effective as of February 13, 1997. 3A. Pursuant to the Employment Agreement (as modified herein), Barry's agrees to provide the following severance and other benefits to Liston: 3A.1 In accordance with Section 4.3(x) of the Employment Agreement, $342,692.33 (the "Severance Amount"), computed as the amount of salary at Liston's rate of salary in effect immediately prior to February 13, 1997, for the period from February 17, 1997 through April 8, 1998, payable in cash as follows (subject to the last paragraph of this Section 3A): Liston will receive monthly or biweekly payments from Barry's in the same amounts and with the same periodicity that salary was paid to Liston immediately prior to February 13, 1997, commencing with the next regular payroll after that date and through and including a final payment (on or about April 8, 1998) to fully satisfy the Severance Amount. The Severance Amount does not include Liston's salary for the period up through and including February 16, 1997, which he acknowledges has previously been paid in cash by Barry's. 3A.2 In accordance with Section 3.2 and Section 4.3 of the Employment Agreement, the 10,000 shares of restricted Common Stock of Barry's referred to therein is deemed immediately and fully vested as of February 13, 1997. Accordingly, Barry's has paid Liston $8,230.63 in cash, representing the special bonus in respect of certain tax obligations of Liston (fully "grossed up" for taxes) corresponding to one-half (1/2) of the restricted stock referred to in said Section 3.2. 3A.3 In accordance with Section 3.2 and Section 4.3 of the Employment Agreement, the stock options referred to therein are hereby deemed immediately and fully vested as of February 13, 1997. 3A.4 In accordance with Section 3.7 and Section 4.3 of the Employment Agreement and applicable law, Barry's will pay Liston $2,464.62 in cash promptly following the execution date hereof, representing Barry's obligation for accrued vacation benefits. 2 3A.5 In accordance with Section 3.5 and Section 4.3 of the Employment Agreement, for the period from February 13, 1997 through April 8, 1998, Liston shall continue to be included, at Barry's expense, in Barry's medical insurance plan. This benefit shall be effected by Liston's election of COBRA coverage; Barry's will then pay or reimburse Liston for the cost of the election of such coverage during the period specified in the preceding sentence. In addition to the foregoing items of severance and benefits, nothing in this Agreement shall be deemed to affect Liston's benefits and rights under Barry's 401(k) plan and deferred compensation plan for senior managers (the "Tophat Plan"); all rights and elections that may be available to Liston under the terms of those plans with respect to his account interests therein shall continue to be available to him. Among other things, in the event that Barry's elects to terminate the Tophat Plan, then Liston shall have all of the rights specified therein in connection with a termination. In addition, in the event of such a termination of the Tophat Plan, Barry's agrees that it will establish a separate "rabbi trust" for maintenance of funds previously elected to be deferred for tax purposes by Liston, to enable Liston to continue to achieve deferral to the maximum extent reasonably achievable under applicable tax law. All amounts payable to Liston and other benefits to be provided to Liston in accordance with this Section 3A and Section 3B below shall be subject to withholding in accordance with applicable law. 3B. In addition to the benefits provided for in the Employment Agreement, Barry's agrees to provide the following benefits to Liston: 3B.1 Barry's will pay the fees of an outplacement services firm for outplacement services to be provided to Liston, up to a maximum of $25,000, upon presentation of invoices and/or other appropriate supporting documentation evidencing such fees. 3B.2 For the period from February 13, 1997 through April 8, 1998, Liston shall continue to be included, at Barry's expense, in Barry's life insurance and disability insurance plans. 3B.3 For the period from February 13, 1997 through April 8, 1998, Barry's shall continue to provide the same automobile-related benefits to Liston as provided under the existing Employment Agreement (including lease payments and payment of maintenance, gas, oil, insurance and license as provided in the existing Employment Agreement). 3C. In the event of Liston's death prior to the full Severance Amount having been paid as provided in Section 3A above, Barry's shall be obligated to continue to provide such benefit to Liston's spouse, subject to the terms and elections available under the Tophat Plan, as applicable. 4. Liston agrees that he will comply with Section 9 of the Employment Agreement, notwithstanding the termination of his employment by Barry's. In this regard, Barry's acknowledges that Liston has made himself reasonably available to Barry's for the purpose of returning confidential information to Barry's as provided in said Section 9. -2- 3 Liston acknowledges, however, that Barry's has no means of independently verifying full compliance by Liston with said Section 9, and as a result Liston agrees that he will in the future fully comply with the document return and other provisions of said Section. 5. Liston agrees that any and all claims or obligations, including any claim for violation of any state or federal statute (such as statutes concerning discrimination based on disability or perceived disability, race, sex, or national origin), which he may have against Barry's are fully and completely settled by this Agreement, and all liability or potential liability on any such claim is hereby released. This release of claims includes claims against Barry's directors, officers, employees and representatives (collectively, "Representatives"), and against any and all present and future affiliated companies of Barry's and their respective Representatives. This release also includes all claims arising out of Liston's employment with Barry's and the termination of that employment, including all rights and benefits under the Employment Agreement. Liston does not, by signing this Agreement, release claims with respect to fulfillment of the promises contained in this Agreement. Barry's (on behalf of itself and its present and future affiliated companies and their respective Representatives) similarly agrees that any and all claims or obligations which it may have against Liston relating to Liston's service as an officer, director and employee of Barry's are fully and completely settled by this Agreement, and all liability or potential liability on any such claim is hereby released. Barry's does not, by signing this Agreement, release claims with respect to fulfillment of the promises contained in this Agreement. 6. Except as specifically noted in Section 5 above, each of Barry's and Liston waives any and all rights it/he may have to invoke, or in any other way to seek the benefits of, Section 1542 of the California Civil Code (or any other similar statute). Section 1542 provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. 7. Liston understands and acknowledges that (a) this Agreement constitutes a voluntary waiver of any and all claims he has against Barry's as of the date of his execution of this Agreement, including claims under the Age Discrimination in Employment Act of 1967, 29 U.S. C. Sec. 621 et seq.; (b) he has waived any and all such claims pursuant to this Agreement and in exchange for consideration, the value of which is substantial; (c) he has been, and is now, advised to consult with an attorney concerning this Agreement before signing it; (d) he has been, and is now, informed that he has a period of at least 21 days to consider the terms of this Agreement (though he need not take the full 21 days if he, in his sole discretion, does not wish to do so); and (e) he may revoke this Agreement at any time during the 7 days following the date of his signing of the Agreement, and this Agreement shall not become effective or enforceable until the eighth day after Liston's signing of the Agreement. If Liston so revokes this Agreement, Liston agrees and acknowledges that Barry's will likewise not be bound by the agreements set forth herein and will reserve the right, among others, to assert that Liston's termination is for "cause" under the Employment Agreement, seek a return of the Severance Amount and other benefits described in Section 3 above and seek other remedies available at law or in equity. -3- 4 8. Each party agrees that this Agreement is confidential and neither will voluntarily disclose its terms, except that Liston and the management of Barry's may discuss the Agreement with their spouses, their attorneys, and their tax advisers (including, in the case of Barry's management, Barry's attorneys and tax advisers). 9. In connection with Liston's separation from Barry's, Barry's is providing a reference letter, addressed to Liston, in the form attached hereto as Exhibit "B". 10. Liston promises that he will not in the future file a claim against Barry's with respect to a matter released herein. Barry's promises that it will not in the future file a claim against Liston with respect to a matter released herein. 11. If either Barry's or Liston files a claim to enforce this Agreement or a claim otherwise arising in any way out of this Agreement, the claim will be decided by binding and final arbitration. The procedures for conducting that arbitration will be decided by the parties. 12. Each party acknowledges that he or it has had an opportunity to negotiate with regard to the terms of this Agreement, to receive advice with regard to it, and carefully to read and consider the terms of the Agreement before signing it. 13. This Agreement contains the entire agreement of Barry's and Liston concerning the subjects covered in the Agreement. This Agreement supersedes any previous discussions or agreements about those subjects. Date: 3/19/97 /Thomas S. Liston/ - ------------------------------ ---------------------------------------- Thomas S. Liston Date: BARRY'S JEWELERS, INC. - ------------------------------ By:/William Eberle/ ---------------------------------------- Its: Chairman of the Board of Directors -4- EX-10.13 4 AGREEMENT BETWEEN THE CO. & ROBERT BRIDEL 1 EXHIBIT 10.13 AGREEMENT 1. This agreement ("Agreement") is entered into between Robert Bridel ("Bridel") and Barry's Jewelers, Inc., a California corporation ("Barry's"), to set forth the severance arrangements Barry's has made for Bridel and to resolve all other matters between Barry's and Bridel. Specifically, the purpose of this Agreement is, among other things, to (i) set forth the parties' agreements concerning severance and other benefits to be provided to Bridel pursuant to the Employment Agreement between the parties dated as of April 8, 1996 (the "Employment Agreement"), as well as other benefits described herein, and (ii) provide for mutual general releases. A copy of the Employment Agreement is attached hereto as Exhibit "A". 2. The parties agree and acknowledge that Bridel resigned as an officer, director and employee of Barry's (and each of its subsidiary and affiliated entities, as applicable) effective as of February 13, 1997. 3A. Pursuant to the Employment Agreement (as modified herein), Barry's agrees to provide the following severance and other benefits to Bridel: 3A.1 In accordance with Section 4.3(x) of the Employment Agreement, $371,250.00 (the "Severance Amount"), computed as the amount of salary at Bridel's rate of salary in effect immediately prior to February 13, 1997, for the period from February 17, 1997 through April 8, 1998, payable in cash as follows (subject to the last paragraph of this Section 3A): Bridel will receive monthly or biweekly payments from Barry's in the same amounts and with the same periodicity that salary was paid to Bridel immediately prior to February 13, 1997, commencing with the next regular payroll after that date and through and including a final payment (on or about April 8, 1998) to fully satisfy the Severance Amount. The Severance Amount does not include Bridel's salary for the period up through February 16, 1997, which he acknowledges has previously been paid in cash by Barry's. 3A.2 In accordance with Section 3.2 and Section 4.3 of the Employment Agreement, the 10,000 shares of restricted Common Stock of Barry's referred to therein is deemed immediately and fully vested as of February 13, 1997. Accordingly, Barry's has paid Bridel $8,230.63 in cash, representing the special bonus in respect of certain tax obligations of Bridel (fully "grossed up" for taxes) corresponding to one-half (1/2) of the restricted stock referred to in said Section 3.2. 3A.3 In accordance with Section 3.2 and Section 4.3 of the Employment Agreement, the stock options referred to therein are hereby deemed immediately and fully vested as of February 13, 1997. 3A.4 In accordance with Section 3.7 and Section 4.3 of the Employment Agreement and applicable law, Barry's will pay Bridel $3,082.50 in cash promptly following the execution date hereof, representing Barry's obligation for accrued vacation benefits. 2 3A.5 In accordance with Section 3.5 and Section 4.3 of the Employment Agreement, for the period from February 13, 1997 through April 8, 1998, Bridel shall continue to be included, at Barry's expense, in Barry's medical insurance plan. This benefit shall be effected by Bridel's election of COBRA coverage; Barry's will then pay or reimburse Bridel for the cost of the election of such coverage during the period specified in the preceding sentence. In addition to the foregoing items of severance and benefits, nothing in this Agreement shall be deemed to affect Bridel's benefits and rights under Barry's 401(k) plan and deferred compensation plan for senior managers (the "Tophat Plan"); all rights and elections that may be available to Bridel under the terms of those plans with respect to his account interests therein shall continue to be available to him. Among other things, in the event that Barry's elects to terminate the Tophat Plan, then Bridel shall have all of the rights specified therein in connection with a termination. All amounts payable to Bridel and other benefits to be provided to Bridel in accordance with this Section 3A and Section 3B below shall be subject to withholding in accordance with applicable law. 3B. In addition to the benefits provided for in the Employment Agreement, Barry's agrees to provide the following benefits to Bridel: 3B.1 Barry's will pay the fees of an outplacement services firm for outplacement services to be provided to Bridel, up to a maximum of $25,000, upon presentation of invoices and/or other appropriate supporting documentation evidencing such fees. 3B.2 For the period from February 13, 1997 through April 8, 1998, Bridel shall continue to be included, at Barry's expense, in Barry's life insurance and disability insurance plans. 3B.3 For the period from February 13, 1997 through April 8, 1998, Barry's shall continue to provide the same automobile-related benefits to Bridel as provided under the existing Employment Agreement (including lease payments and payment of maintenance, gas, oil, insurance and license as provided in the existing Employment Agreement). Further, at April 8, 1998, if Bridel so requests, Barry's will consider (but shall be under no obligation to) transfer the lease (including the purchase option contained therein, if any) relating to the automobile currently provided for Bridel's use to Bridel. 3C. In the event of Bridel's death prior to the full Severance Amount having been paid as provided in Section 3A above, Barry's shall be obligated to continue to provide such benefit to Bridel's spouse, subject to the terms and elections available under the Tophat Plan, as applicable. 4. Bridel agrees that he will comply with Section 9 of the Employment Agreement, notwithstanding the termination of his employment by Barry's. In this regard, Barry's acknowledges that Bridel has made himself reasonably available to Barry's for the purpose of returning confidential information to Barry's as provided in said Section 9. Bridel acknowledges, however, that Barry's has no means of independently verifying full -2- 3 compliance by Bridel with said Section 9, and as a result Bridel agrees that he will in the future fully comply with the document return and other provisions of said Section. 5. Bridel agrees that any and all claims or obligations, including any claim for violation of any state or federal statute (such as statutes concerning discrimination based on disability or perceived disability, race, sex, or national origin), which he may have against Barry's are fully and completely settled by this Agreement, and ad] liability or potential liability on any such claim is hereby released. This release of claims includes claims against Barry's directors, officers, employees and representatives (collectively, "Representatives"), and against any and all present and future affiliated companies of Barry's and their respective Representatives. This release also includes all claims arising out of Bridel's employment with Barry's and the termination of that employment, including all rights and benefits under the Employment Agreement. Bridel does not, by signing this Agreement, release claims with respect to fulfillment of the promises contained in this Agreement. Barry's (on behalf of itself and its present and future affiliated companies and their respective Representatives) similarly agrees that any and all claims or obligations which it may have against Bridel relating to Bridel's service as an officer, director and employee of Barry's are fully and completely settled by this Agreement, and a liability or potential liability on any such claim is hereby released. Barry's does not, by signing this Agreement, release claims with respect to fulfillment of the promises contained in this Agreement. 6. Except as specifically noted in Section 5 above, each of Barry's and Bridel waives any and all rights it/he may have to invoke, or in any other way to seek the benefits of, Section 1542 of the California Civil Code (or any other similar statute). Section 1542 provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. 7. Bridel understands and acknowledges that (a) this Agreement constitutes a voluntary waiver of any and all claims he has against Barry's as of the date of his execution of this Agreement, including claims under the Age Discrimination in Employment Act of 1967, 29 U.S.C. Sec. 621 et seq.; (b) he has waived any and all such claims pursuant to this Agreement and in exchange for consideration, the value of which is substantial; (c) he has been, and is now, advised to consult with an attorney concerning this Agreement before signing it; (d) he has been, and is now, informed that he has a period of at least 21 days to consider the terms of this Agreement (though he need not take the full 21 days if he, in his sole discretion, does not wish to do so); and (e) he may revoke this Agreement at any time during the 7 days following the date of his signing of the Agreement, and this Agreement shall not become effective or enforceable until the eighth day after Bridel's signing of the Agreement. If Bridel so revokes this Agreement, Bridel agrees and acknowledges that Barry's will likewise not be bound by the agreements set forth herein and will reserve the right, among others, to assert that Bridel's termination is for "cause" under the Employment Agreement, seek a return of the Severance Amount and other benefits described in Section 3 above and seek other remedies available at law or in equity. -3- 4 8. Each party agrees that this Agreement is confidential and neither will voluntarily disclose its terms, except that Bridel and the management of Barry's may discuss the Agreement with their spouses, their attorneys, and their tax advisers (including, in the case of Barry's management, Barry's attorneys and tax advisers). 9. In connection with Bridel's separation from Barry's, Barry's is providing a reference letter, addressed to Bridel, in the form attached hereto as Exhibit "B". 10. Bridel promises that he will not in the future file a claim against Barry's with respect to a matter released herein. Barry's promises that it will not in the future file a claim against Bridel with respect to a matter released herein. 11. If either Barry's or Bridel files a claim to enforce this Agreement or a claim otherwise arising in any way out of this Agreement, the claim will be decided by binding and final arbitration. The procedures for conducting that arbitration will be decided by the parties. 12. Each party acknowledges that he or it has had an opportunity to negotiate with regard to the terms of this Agreement, to receive advice with regard to it, and carefully to read and consider the terms of the Agreement before signing it. 13. This Agreement contains the entire agreement of Barry's and Bridel concerning the subjects covered in the Agreement. This Agreement supersedes any previous discussions or agreements about those subjects. Date: 3/20/97 /Robert Bridel/ --------------------------- ------------------------------------------- Robert Bridel Date: BARRY'S JEWELERS, INC. By:/William Eberle/ ---------------------------------------- Its: Chairman of the Board of Directors -4- EX-10.14(A) 5 FORM OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10.14(a) FORM OF EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") dated as of _______________, 199_ (the "Effective Date") is made by and between _______________ (the "Executive") and Barry's Jewelers, Inc., a California corporation (the "Company"). RECITALS WHEREAS, the Company wishes to obtain the future services of the Executive for the Company; and WHEREAS, the Executive is willing, upon the terms and conditions herein set forth, to provide services hereunder; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, and intending to be legally bound hereby, the parties agree as follows: 1. EMPLOYMENT. 1.1 Position as an Officer. Subject to Section 8, the Company hereby employs the Executive, and the Executive hereby accepts such employment, during the Term of Employment, as ________________________ of the Company to perform such duties and responsibilities, consistent with such position, as may be reasonably assigned to the Executive from time to time by the Board of Directors of the Company (the "Board"). (The definitions of capitalized terms used in this Agreement are contained in Section 11 of this Agreement.) 1.2 Position as a Director. The Company shall cause the Executive to be nominated and renominated as a director of the Company for each term of office commencing during the Term of Employment. 2. Devotion of Time. During the Term of Employment, the Executive shall perform his duties hereunder faithfully and to the best of his ability, at the principal executive office of the Company, under the direction of the Board. Except for 2 vacations and reasonable absences due to temporary illness and incapacity, the Executive shall devote his full business time and attention to the performance of his duties hereunder. Notwithstanding the foregoing, the Executive may (i) make and manage passive personal business investments of his choice and serve in any capacity with any civic, educational or charitable organization, without seeking or obtaining approval by the Board, provided such activities and service do not materially interfere or conflict with the performance of his duties hereunder and (ii) with the approval of the Board, serve on the boards of directors of other corporations or any trade association. Nothing contained herein shall require Executive to follow any directive or to perform any act which would violate any laws, ordinances, regulations or rules of any governmental, regulatory or administrative body, agency or authority, any court or judicial authority, or any public, private, industry, professional, regulatory or licensing authority (collectively, the "Regulations"). Executive shall act in good faith in accordance with all Regulations. 3. Term of Employment. The term of the Executive's employment hereunder shall commence on the Effective Date and shall end on ____________________ (the "Expiration Date"); provided, however, that 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 _______ year from such Renewal Date, unless at least 90 days prior to such Renewal Date either party hereto gives written notice to the other that the term shall not be so extended. Notwithstanding anything to the contrary herein, it is hereby acknowledged and understood that either party may give notice to the other at least 90 days prior to the Expiration Date or any Renewal Date of its intent to renegotiate the Terms of this Agreement in good faith, and such notice shall not be treated as a notice of non-renewal for purposes of the definition of "Good Reason" or any other purpose hereunder. The term, as extended in the manner described in the preceding sentence, is referred to herein as the "Term of Employment." Notwithstanding the foregoing, the Term of Employment may be terminated prior to the expiration thereof, by the Company pursuant to Section 8.2 or by the Executive pursuant to Section 8.3, in which event the Term of Employment shall end on the Date of Termination. 4. Compensation. 3 During the Term of Employment, the Executive shall be compensated as follows: 4.2 Base Salary. The Company shall pay the Executive a base salary at the rate of $_______ per annum, payable in arrears not less frequently than monthly in accordance with the normal payroll practices of the Company. Such base salary shall be subject to review each year by the Board in its sole discretion, but shall in no event be decreased from its then-existing level. 4.2 Annual Bonus. In addition, the Executive shall be eligible to receive a bonus ("Annual Bonus") with respect to each fiscal year of the Company, beginning with its year ended May 31, 1998, to the extent that the performance targets for such year are achieved; provided, however, that his Annual Bonus shall not exceed an amount (the "Annual Bonus Cap") equal to ____% of his base salary for such year. Such performance targets shall be agreed upon by the Executive and the Board, in writing, prior to the beginning of each fiscal year. On the Annual Bonus Payment Date for such year, the Company shall pay the Executive his Annual Bonus determined based on actual achievement of the performance targets. On November 1 of each year during the Term of Employment, the Company shall advance to the Executive an amount equal to ____ percent of his Annual Bonus Cap for the fiscal year of the Company that includes such date. The Executive shall be entitled to retain this advance whether or not any of the performance targets are actually achieved and whether or not his employment by the Company terminates during such fiscal year. 4.3 Incentive Bonus. 4.3.1 In addition, the Executive shall be entitled to receive a one-time incentive bonus (the "Incentive Bonus"), in an amount equal to ___ (__) times the Executive's average annual base salary over the Term of Employment, upon the achievement of performance goals (including, without limitation, cash flow and pre-tax earnings goals) and other terms of an incentive bonus program to be mutually agreed upon by the Board and the Executive prior to ______, 1997 and set forth on a schedule which shall be attached hereto (the "Incentive Bonus Targets"). The Incentive Bonus shall be paid in a cash lump sum within thirty days after the Incentive Bonus Targets are achieved; provided, however, that, except to the extent provided herein, the Incentive Bonus will not be paid to the Executive if he is not employed by the Company on the date such Incentive Bonus is payable. 3 4 4.3.2 In the event that Company has become subject to a Bankruptcy Proceeding during the Term of Employment, in lieu of the Incentive Bonus under Section 4.3.1 (assuming it has not previously been paid), the Executive shall be eligible to earn an Incentive Bonus in an amount equal to ___ (__) times the Executive's average annual base salary over the Term of Employment. The Incentive Bonus shall be subject to Incentive Bonus Targets which shall be set by mutual agreement between the Company and the Executive prior to the commencement of any Bankruptcy Proceeding, provided that the Incentive Bonus Target for _____ (__) percent of such Incentive Bonus shall be the consummation of a plan of reorganization that has been approved by the Bankruptcy Court within two years of the date the order for relief is entered in connection with such proceeding (the "Reorganization Target"). In the event that the parties cannot reach agreement as to the additional Incentive Bonus Targets as provided above, than _____ (__) percent of such Incentive Bonus shall be based on the Reorganization Target. The Incentive Bonus shall be paid in a cash lump sum within thirty days after all Incentive Bonus Targets are achieved, provided, however, that, except to the extent provided in Section 8 hereof, the Incentive Bonus will not be paid to the Executive if he is not employed by the Company on the date such Incentive Bonus is payable. 4.4 Stock Options. The Company and the Executive will enter into a stock option agreement substantially in the form of Exhibit A hereto. 4.5 Other Incentive Compensation. In addition, the Executive shall be eligible to receive awards under the Company's 1994 employee Stock Option Plan (the "Option Plan") and any other stock option or other equity based incentive compensation plan or arrangement now in effect or hereafter adopted by the company for which senior executives are eligible. The level of the Executive's future participation in any such plan or arrangement shall be in the sole discretion of the Board. 5. Reimbursement of Expenses. During the Term of Employment, the Company shall reimburse the Executive for expenses in accordance with the Company's policies and the rules and regulations of the Internal Revenue Service. 4 5 6. Benefits. During the Term of Employment, the Executive shall be entitled to benefits, as follows: 6.1 Company Plans. The Executive shall be entitled to perquisites and benefits established by the Company, from time to time, for management of the Company (including, without limitation, health and dental insurance, disability insurance, participation in the Company's 401(k) and deferred compensation plans), subject to the policies and procedures of the Company of general applicability in effect, from time to time, regarding participation in such benefits. 6.2 Automobile. In addition, the Company, at its expense, shall provide the Executive with an automobile of a kind to be selected by the Executive for the business use of the Executive, provided that its payments for such automobile and related costs for maintenance and insurance shall not exceed, on average, $____ per month. At the Executive's option, the Company shall pay the Executive a monthly allowance of $______ in lieu of providing him with an automobile. 6.3 Insurance. In addition, the Company shall be obligated to pay the premium on a life insurance policy for the benefit of the Executive with a face amount of $______ and long-term disability insurance with coverage equal to (i) one times the Executive's base salary, less (ii) the amount of long-term disability insurance coverage provided to the Executive under Company-sponsored long-term disability plans. 6.4 Relocation Allowance. In addition, the Company shall pay the Executive a relocation allowance equal to the lesser of (i) ten percent of his annual base salary and (ii) the actual cost of the Executive's relocation to Los Angeles, at such time as the Executive leases or purchases a residence in the Los Angeles area. 6.5 Vacation. In addition, the Executive shall be entitled to four (4) weeks of paid vacation during each year. 7. Purchase of Shares. The Executive shall have the right, but not the obligation, to be exercised no later than ________, 199__, to purchase from the Company ______ shares of common stock of the Company for an aggregate purchase price of $______, $______ of which shall be 5 6 payable in cash and $_________ of which shall be payable by delivery of a non-recourse promissory note due ____ months after the date of purchase, bearing interest at the applicable federal rate and secured by all of such shares. In the event that the Executive elects to purchase such shares, the Company shall use its best efforts to grant the Executive demand registration rights with respect thereto, exercisable at any time after the first anniversary of the Effective Date. 8. TERMINATION OF EMPLOYMENMT. 8.1 Termination Due to Death or Disability. Subject to the payments contemplated by Section 8.8, the Executive's employment by the Company shall terminate upon the death of the Executive or upon the Executive becoming Disabled. 8.2 Early Termination by the Company. Subject to the payments contemplated by Sections 8.4 and 8.5, the Executive's employment by the Company may be terminated at any time by the Company (after adoption of a resolution by the Board to do so) as follows: 8.2.1 For Cause; or 8.2.2 For any other reason or no reason, it being understood that no reason is required. Such termination by the Company shall be effected by delivery by the Company to the Executive of a written notice of termination (which notice shall include a copy of the resolution adopted by the Board) specifying the Date of Termination and stating in the case of termination for Cause, the grounds which the Board has determined exist for such termination, and shall be subject to the requirements for advance notice and opportunity to cure provided in this Agreement, if and to the extent applicable. 8.3 Early Termination by the Executive. Subject to the payments contemplated by Sections 8.4 and 8.5, the Executive's employment by the Company may be terminated at any time by the Executive, as follows: 8.3.1 For Good Reason; or 8.3.2 For any other reason or no reason, it being understood that no reason is required. Such termination by the Executive shall be effected by delivery by the Executive to the Company of a written notice 6 7 of termination, specifying the Date of Termination and stating in the case of termination for Good Reason, the grounds which the Executive has determined exist for such termination, and shall be subject to the requirements for advance notice and opportunity to cure provided in this Agreement, if and to the extent applicable. 8.4 Payments if Termination by the Company for Cause or by the Executive without Good Reason. In the event that the Executive's employment by the Company is terminated by the Company for Cause or by the Executive without Good Reason, the Company shall be obligated to: 8.4.1 Pay to the Executive his Accrued Salary and Benefits, in a lump sum in cash, within five (5) business days after the Date of Termination (provided, however, that any portion of the Accrued Salary and Benefits which consists of deferred compensation or post-termination benefits shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive); and 8.4.2 Pay to the Executive a prorated portion of the Annual Bonus with respect to the fiscal year of the Company in which such termination occurs, in a lump sum in cash, on the Annual Bonus Payment Date for such year, provided that the performance targets for such year are met. 8.5 Payments if Termination by the Company Without Cause or by the Executive for Good Reason. In the event that the Executive's employment by the Company is terminated by the Company without Cause or by the Executive for Good Reason, the Company shall be obligated to: 8.5.1 Pay to the Executive his Accrued Salary and Benefits in a lump sum, in cash, within five (5) business days after the Date of Termination (provided, however, that any portion of the Accrued Salary and Benefits which consists of deferred compensation or post-termination benefits shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive); 8.5.2 Pay to the Executive a prorated portion of the Annual Bonus with respect to the fiscal year of the Company in which such termination occurs, in a lump sum in cash, on the Annual Bonus Payment Date for such year, based on the Annual Bonus Cap for such year (without regard to whether the performance targets for such year have been met); 7 8 8.5.3 Pay to the Executive, in a lump sum in cash, within five (5) business days after the Date of Termination, an amount equal to the amount of the Incentive Bonus (as applicable to the Executive under Section 4.3.1 or 4.3.2 hereof), prorated by a fraction the numerator of which is the total number of months the Executive was employed by the Company (including the month in which his employment was terminated) and the denominator of which is (i) in the case of 4.3.1., 36 months and (ii) in the case of 4.3.2, 24 months; provided, however, that in no event shall such prorated amount exceed 100% of the Incentive Bonus; and provided, further, that if such termination occurs within the one-year period following a Change of Control or results from termination by the Company without Cause in anticipation of a Change of Control, the full amount of the Incentive Bonus shall be paid without any proration, unless the three-year incentive bonus period has expired as of the Date of Termination. Such Incentive Bonus shall be paid to the Executive whether or not the Incentive Bonus Targets are achieved prior to the Date of Termination. The amount, if any, of such Incentive Bonus shall be reduced by the amount of any such Bonus paid to the Executive prior to the Date of Termination; 8.5.4 Continuation of Executive's base salary in the same manner as it was being paid as of the Date of Termination for a period of ____________ (____) months following the Date of Termination, unless such termination occurs either (a) within the one-year period following a Change of Control or results from termination by the Company without Cause in anticipation of a Change of Control or (b) as a result of Good Reason pursuant to item (ix) of the definition thereof (relating to a Bankruptcy Proceeding), in which events such amount shall be equal to a multiple of the Executive's base compensation (which shall be _________ (____) in the case of item (a) above and ________ (____) in the case of item (b) above) reduced by the "Acceleration Amount", if any. For purposes hereof the "Acceleration Amount" is the amount of the Incentive Bonus paid to the Executive pursuant to 8.5.4 hereof that is in excess of the portion of the Incentive Bonus that has been earned by the Executive as of the Date of Termination, with such earned amount to be determined based on the Company's degree of achievement (expressed on a percentage basis) under the Incentive Bonus Targets. In the event the parties cannot reach agreement as to the Acceleration Amount, the determination of the Acceleration Amount shall be made by a nationally recognized independent compensation consulting firm selected by mutual agreement of the parties hereto, the cost of which shall be 8 9 borne solely by the Company. The determination of such firm shall be final and binding on the parties; 8.5.5 If the Executive determines that he would become subject to the excise tax imposed by Section 4999 of the Code for any reason, he may notify the Company that he wishes to renegotiate certain payments provided by this Agreement so that such excise tax will not apply, and the Company shall negotiate with the Executive in good faith to accomplish such result; and 8.5.6 In its sole discretion, the Company may elect prior to the Date of Termination to extend the Restricted Period for twelve (12) months beyond the Date of Termination, in which case it shall pay to the Executive, in a cash lump sum within five (5) business days after the Date of Termination, an amount equal to twelve (12) months of the Executive's base salary as of the Date of Termination. 8.6 Proration of Annual Bonus. For purposes of Sections 8.4 and 8.5, the Executive's Annual Bonus with respect to any fiscal year of the Company shall be prorated by a fraction, the numerator of which is the number of months in such fiscal year in which the Executive was employed by the Company (including the month in which his employment was terminated) and the denominator of which is 12. The amount advanced, if any, to the Executive pursuant to Section 4.2 shall be credited against the payment of such prorated Annual Bonus. Notwithstanding anything to the contrary contained in this Agreement, if the Executive's employment by the Company is terminated due to his death or Disability, he shall be entitled to receive his full Annual Bonus without any proration thereof, but less any portion of such Bonus already paid him. 8.7 Election to Defer. Not later than July 31, 1997, the Company shall implement a deferred compensation plan which shall entitle the Executive to elect to defer a portion of his Base Salary, Annual Bonus and Incentive Bonus. 8.8 Payment if Termination due to Death or Disability. In the event that the Executive's employment by the Company is terminated due to the Executive's death or disability, the Company shall be obligated to: 8.8.1 Pay to the Executive his Accrued Salary and Benefits, in a lump sum in cash, within five (5) business days after the Date of Termination (provided, however, that any portion of the Accrued Salary and Benefits would 9 10 consists of deferred compensation or post-termination benefits shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive); 8.8.2 Pay to the Executive his full Annual Bonus without proration with respect to the fiscal year of the Company in which such Termination occurs, in a lump sum in cash, on the Annual Bonus Payment Date for such year, based on the Annual Bonus Cap for such year (without regard to whether the performance targets for such year have been met); 8.8.3 Pay to the Executive the Incentive Bonus, prorated by a fraction the numerator of which is the total number of months the Executive was employed by the Company (including the month in which his employment was terminated) and the denominator of which is 36 months; provided, however, that in no event shall such prorated amount exceed 100% of the Incentive Bonus. Such Incentive Bonus shall be paid to the Executive whether or not the Incentive Bonus Targets are achieved prior to the Date of Termination. The payment, if any, of such Incentive Bonus shall be reduced to the extent that it was paid to the Executive prior to the Date of Termination; 8.8.4 Pay to the Executive an amount equal to ___ months of the Executive's base salary as of the Date of Termination, with such payment to be made in equal monthly installments. The payments described in this Section 8.8 shall be in addition to any life insurance and disability benefits payable to the Executive from the Company. 8.9 No Additional Severance Payments. Except for the payments provided in this Section 8, the Executive shall not be entitled to any payments by the Company in the event of the termination of his employment by the Company. In such event, the Executive shall have no obligation to seek other employment to mitigate damages and any income earned by the Executive from other employment or self-employment shall not be offset against any of the Company's payment obligations under this Section 8. 9. Confidential Information. 9.1 Nondisclosure of Confidential Information. During and after the Term of Employment, Executive will not disclose to any person, or use or otherwise exploit for the Executive's own benefit or for the benefit of anyone other 10 11 than the Company, any Confidential Information of the Company, whether prepared by the Executive or not. At the request of the Company, the Executive agrees to deliver to the company, at any time during the Term of Employment, or thereafter, all Confidential Information which he may possess or control. The Executive agrees that all Confidential Information of the Company (whether now or hereafter existing) conceived, discovered or made by him during the Term of Employment exclusively belongs to the Company (and not to the Executive). The Executive will promptly disclose such Confidential Information to the Company and perform all actions reasonably requested by the Company to establish and confirm such exclusive ownership. 9.2 Exceptions to Nondisclosure Obligations. The provisions of Section 9.1 shall not apply to (i) information disclosed in the performance of the Executive's duties to the Company based on his good faith belief that such disclosure is in the best interests of Company; (ii) information that is public knowledge; (iii) information disseminated by the Company to third parties in the ordinary course of business; (iv) information lawfully received by the Executive from a third party who, based upon inquiry by the Executive, is not bound by a confidential relationship to the Company; (v) information disclosed under a requirement of law or as directed by applicable legal authority having jurisdiction over the Executive; or (vi) information necessary in order to enforce his rights under this Agreement or necessary to defend himself against a claim asserted directly or indirectly by the Company or any of its affiliated companies. 9.3 Survival of Nondisclosure Obligations. The terms of this Section 9 shall survive the termination of this Agreement regardless of who terminates this Agreement or the reasons therefor. 10. Non-competition; Non-Solicitation. During the Restricted Period, the Executive shall not, without the prior written approval of the Board, directly or indirectly, as an employee, agent, consultant, stockholder, director, co-partner or in any other individual or representative capacity, (i) recruit or solicit for employment any person who is employed by the Company on the Date of Termination; or (ii) engage in any business which competes, directly or indirectly, with the Business in the Market ("Competitive Business") without regard to (A) whether the Competitive Business has its office, manufacturing or other business facilities within or without the Market, (B) whether any of the activities of the Executive referred to above occur or 11 12 are performed within or without the Market or (C) whether the Executive resides, or reports to an office, within or without the Market; provided, however, that the Executive may, directly or indirectly, in one or a series of transactions, own, invest or acquire an interest in up to five percent (5%) of the capital stock of a corporation whose capital stock is traded publicly. 11. Definitions. Capitalized terms used in this Agreement shall have the meanings set forth in this Section 11. "Accrued Salary and Benefits" means, as of the applicable date, the sum of (i) the Executive's base salary under Section 4.1 through such date to the extent not theretofore paid, and (ii) any vacation pay, expense reimbursements and other cash entitlements accrued by the Executive as of such date to the extent not theretofore paid. "Annual Bonus" is defined in Section 4.2. "Annual Bonus Cap" is defined in Section 4.2. "Annual Bonus Payment Date" means with respect to any fiscal year of the Company, a date which is no later than thirty days after the day on which the Company's independent public accountants sign their report with respect to such year. "Bankruptcy Proceeding" means a case commenced under Title 11 of the United States Code in which an order for relief is entered in respect of the Company under either Chapter 11 or Chapter 7 thereof. "Board" is defined in Section 1.1. "Business" means any business conducted, or engaged in, by the Company or its subsidiaries at any time during the Term of Employment. "Cause" shall mean any of the following: (i) The Executive's conviction for, or plea of nolo contendere to, any felony: (ii) The Executive's willful fraud or material dishonesty in connection with the Executive's performance of his duties hereunder; 12 13 (iii) The Executive's failure, other than due to illness, disability or death or as a result of any event that constitutes Good Reason hereunder, to substantially perform his duties hereunder that results in material harm to the Company; or (iv) The Executive's gross negligence in the performance of his duties hereunder (other than arising solely due to physical or mental disability) that results in material harm to the Company; in each case, for purposes of clauses (iii) and (iv), after the Board has provided the Executive with 30 days' written notice of such circumstances and the possibility of an event giving rise to termination for Cause, and the Executive fails to cure such circumstances within those 30 days. "Change of Control" shall mean the occurrence of (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 (unless the principal purpose of such transaction is to change the state of the Company's incorporation), (iii) upon a sale of assets of the Company or its subsidiaries having a fair market value equal to more than 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 30% 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 Exchange Act of 1934 and the rules and regulations promulgated thereunder which is not an affiliate of the Company. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Company" is defined in the introduction. "Confidential Information" means any confidential information of the Company including, without limitation, any study, data, calculations, software storage media or other compilation of information, patent, patent application, copyright, trademark, trade name, service mark, service name, "know-how," trade secrets, customer lists, 13 14 details of client or consultant contracts, pricing policies, operational methods, marketing plans or strategies, product development techniques or plans, business acquisition plans or any portion or phase of any scientific or technical information, ideas, discoveries, designs, computer programs (including source or object codes), processes, procedures, formulas, improvements of other proprietary or intellectual property of the Company or relating to its business, whether or not in written or tangible form, and whether or not registered, and including all files, records, manuals, books, catalogues, memoranda, notes, summaries, plans, reports, records, documents and other evidence thereof, whether existing now or hereafter discovered or developed. "Date of Termination" means (i) in the event of a termination of the Executive's employment pursuant to Section 8.2, the date specified in the written notice of termination from the Company, (ii) in the event of a termination of the Executive's employment pursuant to Section 8.3, the date specified in the written notice of termination from the Executive, (iii) in the event of the Executive's death, the date of the Executive's death and (iv) in the event of the Executive's Disability, the date he is determined to be Disabled. "Disabled" or "Disability" means, with respect to the Executive, the occurrence of an event or events that renders the Executive with respect to his physical or mental condition unable to perform, in the view of the Board and as certified in writing by a competent medical physician, his duties hereunder and which results in his being entitled to benefits under the Company's disability insurance plan. "Effective Date" is defined in the introduction. "Executive" means __________________ or his estate, if deceased. "Good Reason" means any of the following: (i) A material diminution in the Executive's duties or responsibilities as set forth in Section 1; (ii) Failure of the shareholders or the Board to elect or re-elect the Executive as a director of the Company; 14 15 (iii) A breach by the Company of the compensation and benefit provisions set forth in Sections 4 through 6; (iv) A written notice of non-renewal of this Agreement being given by the Company to the Executive pursuant to Section 3. (v) The inability of the Company and the Executive to reach agreement on the terms of a new employment agreement prior to the Expiration Date or any Renewal Date that follows notice by the Company to the Executive of its intent to renegotiate the terms of this Agreement. (vi) Any termination by the Executive within twelve (12) months following the occurrence of a Change in Control; (vii) The inability of the Company to perform its obligations under the Incentive Stock Option Agreement attached as Exhibit A hereto; (viii) A material breach by the Company of any other term of this Agreement; or (ix) During the pendency of a Bankruptcy Proceeding, (a) an order of the Bankruptcy Court providing for the assumption of this Agreement is not entered within 90 days of the order for relief (b) a motion to reject this Agreement is filed with the Bankruptcy Court, or (c) the Company fails to satisfy its obligations under Section 12.16; provided that in any such case, the Executive agrees, if requested by the Company, to continue to serve in his position (and on the same terms and conditions applicable under this Agreement) until a successor can be hired by the Company, but for a period that shall not exceed 120 days from the date of the event that gives rise to Good Reason hereunder. "Incentive Bonus" is defined in Section 4.3. "Incentive Bonus Target" is defined in Section 4.3. "Market" means any state in the United States of America in which the Business is conducted by or engaged in by the Company at any time during the Term of Employment. "Plan" is defined in Section 4.4. 15 16 "Renewal Date" is defined in Section 3. "Restricted Period" means the period beginning on the Effective Date and ending on (i) the Date of Termination, or (ii) if the Term of Employment is terminated prior to the Expiration Date by the Company without Cause or by the Executive for Good Reason and if the Company elects, pursuant to Section 8.5.6, to extend the provisions of Section 10, the date which is twelve (12) months following the Date of Termination, provided the Company continues to make all payments to the Executive required by Section 8.5 hereof. "Term of Employment" is defined in Section 3. 12. General. 12.1 Notice. Any notice, request, demand or other communication required or permitted to be given under this Agreement shall be given in writing and delivered personally, or sent by certified or registered mail, return receipt requested, as follows (or to such other addressee or address as shall be set forth in a notice given in the same manner). If to Executive: ------------------------------------- ------------------------------------- ------------------------------------- If to Company: Barry's Jewelers, Inc. 111 West Lemon Avenue Monrovia, California 91016 Attn: Chairman of the Board Any such notices shall be deemed to be given on the date personally delivered or such return receipt is issued. 12.2 Executive's Representations. The Executive hereby warrants and represents to the Company that the Executive has carefully reviewed this Agreement, including his obligations hereunder, and has consulted with such attorneys and advisors as the Executive considers appropriate in connection with this Agreement, and is not subject to any covenants, agreements or restrictions, including without limitation any covenants, agreements or restrictions arising out of the Executive's prior employment which would be breached or violated by the Executive's execution of this Agreement or by the Executive's performance of his duties hereunder. 16 17 12.3 Validity. If, for any reason, any provision hereof shall be determined to be invalid or unenforceable, the validity and effect of the other provisions hereof shall not be affected thereby. 12.4 Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 12.5 Tax Withholding. The Company shall provide for the withholding of any taxes required to be withheld by federal, state, or local law with respect to any payment in cash, shares of stock and/or other property made by or on behalf of the Company to or for the benefit of the Executive under this Agreement or otherwise. The Company may, at its option: (i) withhold such taxes from any cash payments owing from the Company to the Executive, (ii) require the Executive to pay to the Company in cash such amount as may be required to satisfy such withholding obligations and/or (iii) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 12.6 Waiver of Breach; Attorneys' Fees. The waiver by the Company or the Executive of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other breach of such other party. Each of the parties to this Agreement will be entitled to enforce its respective rights under this Agreement and to exercise all other rights existing in its favor. In the event either party takes legal action or commences an arbitration proceeding to enforce any of the terms or provisions of this Agreement, the nonprevailing party shall pay the successful party's costs and expenses, including but not limited to, attorneys' fees, incurred in such action or proceeding. 12.7 Governing Law. This Agreement shall be governed by, construed, applied and enforced in accordance with the laws of the state of California, except that no doctrine of choice of law shall be used to apply any law other than that of California, and no defense, counterclaim or right of setoff given or allowed by the laws of any other state or 17 18 jurisdiction, or arising out of the enactment, modification or repeal of any law, regulation, ordinance or decree of any foreign jurisdiction, shall be interposed in any action hereon. 12.8 Specific Performance. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of Section 9 or 10 of this Agreement and that the Company may in its sole discretion apply for specific performance and/or injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions in order to enforce or prevent any violations of such provisions of this Agreement. 12.9 Forum. The Executive and the Company agree that any action or proceeding arising out of this Agreement (excluding any actions or proceedings subject to the mandatory arbitration provisions of Section 12.10, but including any action to confirm an award of such arbitrators and enter judgment thereon) may be commenced in the courts of the State of California located in the County of Los Angeles or the United States District Courts located in the County of Los Angeles. The Executive and the Company consent to in personam jurisdiction with respect to such courts, agree that venue will be proper in such courts and waive any objections based upon forum non conveniens. The choice of forum set forth in this Section 12.9 shall not be deemed to preclude the enforcement of any judgment obtained in such forum or the taking of any action under this Agreement to enforce same in any other jurisdiction. 12.10 Arbitration. The Company and the Executive agree that, with the exception of actions for specific performance, restraining orders or other injunctive relief pursuant to Section 12.8 and actions to enforce an arbitration award, all claims and disputes between the Company and the Executive in connection with this Agreement or otherwise related to the Executive's employment by the Company (including without limitation the termination of Executive's employment) shall be submitted to final and binding arbitration administered and conducted by the American Arbitration Association in Los Angeles, California pursuant to its Labor Arbitration Rules then in effect; provided that, the party seeking to submit a claim or dispute hereunder to arbitration shall give the other party written notice of any arbitration proceeding at least 60 days prior to such proceeding; provided, further, that the parties mutually agree to negotiate in good faith to resolve their differences prior to such arbitration proceeding. 18 19 12.11 Assignment; Third Parties. The Executive may not assign, transfer, pledge, hypothecate, encumber or otherwise dispose of this Agreement or any of his respective rights or obligations hereunder, without the prior written consent of the Company. Except as expressly provided herein, the Company may not assign or transfer this Agreement or any of its rights or obligations hereunder, without the prior written consent of the Executive. The Company may assign its rights and obligations hereunder to its successor in connection with a merger, consolidation, sale of assets, acquisition, recapitalization or other similar transaction (and such successor shall thereafter be deemed the "Company" for purposes of this Agreement). The provisions of this Agreement shall be binding upon, and shall inure to the benefit of, the respective heirs, legal representatives and successors of the parties hereto. 12.12 Prior Understandings. This Agreement, together with the exhibits and schedules attached hereto which are incorporated herein by this reference, embodies the entire understanding of the parties hereto and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof. No change, alteration or modification hereof may be made except in a writing specifically referring hereto and signed by the Executive and the Chairman of the Board of the Company or his designee. The headings in this Agreement are for convenience and reference only and shall not be construed as part of this Agreement or to limit or otherwise affect the meaning hereof. Section references refer to this Agreement unless otherwise specified. 12.13 Further Action. The Executive and the Company agree to perform any further acts and to execute and deliver any document which may be reasonable to carry out the provisions hereof. 12.14 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.15 Indemnification. During the Term of Employment and thereafter, the Company shall indemnify the Executive to the fullest extent permitted by applicable law, and the Executive shall be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of its directors and officers, with respect to all expenses, judgments, fines, settlements and other amounts (including, without limitation, attorneys' 19 20 fees) incurred or sustained by the Executive in connection with any action, suit or proceeding to which he may be made a party by reason of being or having been a director, officer or employee of the Company or his serving or having served any other enterprise as a director, officer or employee at the request of the Company. 12.16 Bankruptcy Proceeding. In the event that the Company becomes subject to a Bankruptcy Proceeding during the Term of Employment, and the Company is reorganized as a result of the Bankruptcy Proceeding, the Executive's rights to purchase the Company's common stock under Section 4.4 and Section 7 hereof shall be converted into rights to purchase an equivalent interest in the common voting shares of the entity into which the Company is reorganized. The aggregate number of new shares (the "New Share") of the reorganized entity that the Executive shall attain the right to acquire hereunder shall represent the same percentage equity ownership interest of the Company, on a fully diluted basis, as is represented by __________ shares of the Company's common stock on the Effective Date. The Executive may purchase all or any portion of the New Shares, at his option, but shall not be required to purchase the New Shares. The purchase price of the New Shares shall be set at the closing trading price of the New Shares on the date that is 30 days following the date of consummation of a plan or reorganization. The Executive's right to acquire the new Shares shall otherwise be exercisable on terms and conditions that are comparable to those applicable under Sections 4.4 and 7 hereof. (Signature Page Follows) 21 IN WITNESS WHEREOF, the parties hereto have set their hands as of the day and year first written above. EXECUTIVE: --------------------------------------- [NAME] COMPANY: BARRY'S JEWELERS, INC. By: ----------------------------------- William D. Eberle Chairman of the Board 21 EX-10.14(B) 6 TERM SHEET 1 EXHIBIT 10.14(b) BARRY'S JEWELERS EXECUTIVE COMPENSATION PACKAGE COMPARISON OF TERMS REVISED BY DEBTOR (9/3/97) AND BANK GROUP (9/12/97) PART ONE - BASE SALARY
EXECUTIVE BARRY'S BASE LENDERS' BASE - --------- ------------ ------------- Merksamer $ 400,000 $ 400,000 Healey 275,000 275,000 McCullough 225,000 225,000 Haggar 165,000 165,000 Edgel 120,000 120,000 ---------- ---------- Totals $1,185,000 $1,185,000
PART TWO - ANNUAL BONUS PARAMETERS(a)
% BARRY'S PARAMETERS % LENDERS' PARAMETERS - --- ------------------ --- ------------------- 50% Payable if Barry's achieves its FYE 50% Payable if Barry's achieves projected EBITDA target. Monthly and year- EBITDA for the FYE 5/31/98 based on end EBITDA targets to be audited numbers(a) established by debtor and approved by the board. 50% Payable if debtor achieves its target 10% *Match or exceed 11/30/97 projected for aggregate cash, eligible A/R, Inventory Levels(b). and eligible inventory as of the end 10% *Match or exceed 12/31/97 projected cash of the calendar year. Targets have deposit, receivable and Inventory Levels. been approved by the court in 10% *Match or be lower than 12/31/97 connection with the cash collateral projected G&A expenses. stipulation. 10% *Total Availability(c) at end of February 1998 of $4.1 Million and payables are maintained within agreed upon vendor terms as of February 1998. 10% Receipt of 1.4x amount of inventory returned by November 1997 and at end of February 1998.
(a) Projected EBITDA will be determined by Barry's board of directors. The Bank Group and Committees will be provided with a written notice by November 1, 1997 of the forecasted EBITDA monthly and for the fiscal year ending 5/31/98 and shall have the right to object to such projections and have the Court determine the reasonableness of the EBITDA projections. 2 (b) Inventory Levels is defined as owned plus consigned inventory as set forth in the Budget annexed to the Amended Cash Collateral Stipulation. (c) Total Availability is defined as excess (or deficit) availability under the borrowing base plus total cash balances. PART THREE (A) - ANNUAL BONUS CAP (a)
EXECUTIVE BARRY'S CAP LENDERS' CAP - --------- ----------- ------------ Merksamer 100% ($400,000) 100% ($400,000) Healey 75% ($206,250) 75% ($206,250) McCullough 60% ($135,000) 60% ($135,000) Haggar 50% ($82,500) 50% ($82,500) Edgel 33% ($40,000) 33% ($40,000) -------- -------- Totals $863,750 $863,750
(a) Calculated as a percentage of Barry's Base Salary. PART THREE (B) - EXECUTIVE'S EMPLOYMENT TERMINATED BY COMPANY WITHOUT CAUSE OR BY THE EXECUTIVE FOR GOOD REASON OR DUE TO DEATH OR DISABILITY
EXECUTIVE BARRY'S BONUS (a) LENDERS' BONUS (b) - --------- ----------------- ------------------ Merksamer 100% ($400,000) 100% ($400,000) Healey 75% ($206,250) 75% ($206,250) McCullough 60% ($135,000) 60% ($135,000) Haggar 50% ($82,500) 50% ($82,500) Edgel 33% ($40,000) 33% ($40,000) -------- -------- Totals $863,750 $863,750
(a) This full Annual Bonus will be payable WHETHER OR NOT any calendar year-end or fiscal year-end targets have been achieved. Bonus amounts are based on the Annual Bonus Cap for each executive. Bonus will be due and payable on the Date of Termination. Bonuses are based on the annual bonus cap for each employee. (b) This full annual bonus will be payable IF AND ONLY if (i) the fiscal year end 5/31/98 targets have been achieved or (ii) (x) in the event of a change in control of the company at a time when the company is a going concern or (y) death or disability of an executive, provided, in either event, that any applicable Annual Bonus parameters at such time have been met. Bonus amounts are based on the Annual Bonus Cap for each executive. -2- 3 PART THREE (C) - EXECUTIVE'S EMPLOYMENT TERMINATED BY COMPANY FOR CAUSE OR BY THE EXECUTIVE WITHOUT GOOD REASON
EXECUTIVE BARRY'S BONUS (a) LENDERS' BONUS (b) - --------- ----------------- ------------------ Merksamer 100% ($400,000) Healey 75% ($206,250) McCullough 60% ($135,000) (None) Haggar 50% ($82,500) Edgel 33% ($40,000) -------- Total (Varies)
(a) The amount of the bonus for each executive will be a pro-rated portion of the executive's Annual Bonus Cap. Figures shown here are the maximum possible bonus each executive could receive. This bonus will be payable on the date(s) on which such amounts would have been due had termination not occurred and will be payable ONLY IF calendar year-end or fiscal year-end targets are achieved. (b) No bonus would be paid because new management would have to be hired. "Cause" is assumed to be malfeasance or misfeasance. PART THREE (D) - BONUS IF EXECUTIVE NOT TERMINATED PRIOR TO CONFIRMATION AND CONFIRMATION OCCURS PRIOR TO THE END OF ANY FISCAL YEAR
EXECUTIVE BARRY'S BONUS (a) LENDERS' BONUS - --------- ----------------- -------------- Merksamer 100% ($400,000) Healey 75% ($206,250) Same as Part Three (B). McCullough 60% ($135,000) It is understood, however, Haggar 50% ($82,500) that the FYE 5/31/98 condition Edgel 33% ($40,000) set forth in footnote (b)(i) of -------- Part Three (B) would be prospective. Total (Varies)
(a) The executive's employment agreement will terminate on the Confirmation Date. The executive will be entitled to his full annual bonus amount for the fiscal year, payable in full for the fiscal year ended 5/31/98 and prorated for any fiscal year thereafter, provided that the Company has achieved its year-to-date EBITDA target up to the month prior to the Confirmation. Bonuses are based on the annual bonus cap for each employee. -3- 4 PART FOUR (A) - CONFIRMATION BONUS (a)
EXECUTIVE BARRY'S BONUS (b) LENDERS' BONUS (c) - --------- ----------------- ------------------ Before 5/l/98 5/1/98-6/30/98 7/1/98-9/30/98 Merksamer 1.5x ($600,000) 1.25x ($500,000) l.0x ($400,000) .75x ($300,000) Healey 1.0x ($275,000) 1.25x ($343,750) 1.0x ($275,000) .75x ($206,250) McCullough 1.0x ($225,000) 1.25x ($282,250) 1.0x ($225,000) .75x ($168,750) Haggar 1.0x ($165,000) 1.25x ($206,250) 1.0x ($165,000) .75x ($123,750) Edgel 1.0x ($120,000) 1.25x ($150,000) 1.0x ($120,000) .75x ($ 90,000) ---------- ---------- ---------- -------- Total $1,385,000 $1,481,250 $1,185,500 $888,750
(a) Based on a percentage of Barry's Base Salary. (b) If the Confirmation Date is after 5/31/98, potential bonuses are reduced by 5% per month, including the month in which the Confirmation Date occurs. Confirmation bonuses are based on Barry's Base Salary schedule. (c) Confirmation bonus is based on (i) the entry of an confirmation order of a plan of reorganization (provided that the sole conditions to the effective date of the confirmed plan are tied to the performance of a third party) on the above dates, and (ii) demonstration of capacity on confirmation date to finance seasonal working capital requirements in the form of an asset based working capital facility that contains market advance rates and market collateral eligibility parameters. PART FOUR (B) - BONUS IF EXECUTIVE TERMINATED PRIOR TO CONFIRMATION BY COMPANY WITHOUT CAUSE OR BY THE EXECUTIVE FOR GOOD REASON (a)
EXECUTIVE BARRY'S BONUS (b) LENDERS' BONUS - --------- ----------------- -------------- Merksamer 1.5x ($600,000) Same as Part Four (A); provided, however Healey 1.0x ($275,000) if the executive terminates his or her McCullough 1.0x ($225,000) employment because Barry's has been sold Haggar 1.0x ($165,000) pursuant to section 363 of the Bankruptcy Edgel 1.0x ($120,000) Code prior to confirmation of a plan of ---------- reorganization and a plan is confirmed Total $1,385,000 within the frames set forth in Part Four (A), the applicable Confirmation Bonus in Part Four (A) will be due.
(a) Good Reason would include a sale of Barry's under section 363 of the Bankruptcy Code. (b) If termination occurs for Cause or by the Executive without Good Reason, the -4- 5 Confirmation Bonus will not be payable; however, due to the Executive's death or Disability, this bonus will be prorated. Bonuses are based on each executive's annual salary. PART FOUR (C) - BONUS IF EXECUTIVE TERMINATED PRIOR TO CONFIRMATION BY COMPANY WITH CAUSE OR BY THE EXECUTIVE WITHOUT GOOD REASON No bonus would be paid because new Management would have to be hired. Cause is assumed to be malfeasance or misfeasance. PART FIVE - STOCK OPTIONS No stock options or warrants shall be included in the management agreements. Stock options can be negotiated in connection with a Plan of Reorganization. The debtor has agreed to this requirement in its most recent proposal. PART SIX - TERM OF EMPLOYMENT In the original executive management contract motion, the Employment Agreements extend through 5/31/00, subject to automatic renewal thereafter. The debtor has proposed to terminate the Employment Agreements upon confirmation of a plan of reorganization and eliminate the clause about automatic renewals. PART SEVEN - NON-COMPETITION CLAUSES The Employment Agreements include non-competition and non-solicitation provisions for Mr. Merksamer only. The debtor proposes to remove these provisions from Mr. Merksamer's Employment Agreement, regardless of the reason for termination. -5- EX-10.14(C) 7 SCHEDULE OF CERTAIN TERMS OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10.14(c) Schedule of Certain Terms of Employment Agreements At a hearing of the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court") held on September 24, 1997, the Bankruptcy Court authorized the Company to enter into employment agreements (the "Employment Agreements") with Mr. Merksamer and each of Messrs. Healey, McCullough, Haggar and Edgel (each an "Executive"). Upon entry of the related Bankruptcy Court order, the Company will enter into such Employment Agreements, which extend through confirmation of a plan of reorganization of the Company. Set forth below is a summary of certain other terms of such Employment Agreements. 2 CERTAIN TERMS OF EMPLOYMENT AGREEMENTS
Plan of Reorganization Confirmation Bonus (as a percentage of annual base salary)(2) ------------------------------------------------------------ If confirmation Maximum Annual occurs on or after If confirmation Cash Bonus May 1, 1998 occurs on or after (as a percentage If confirmation through and July 1, 1998 Annual Base of annual occurs prior to including and prior to Executive/Title Salary base salary(1) May 1, 1998 June 30, 1998 September 30, 1998 - --------------- ----------- ---------------- --------------- ------------------ ------------------ Samuel J. Merksamer.... $400,000 100% 125% 100% 75% President and Chief Executive Officer E. Peter Healey........ $275,000 75% 125% 100% 75% Executive Vice President, Chief Financial Officer and Secretary Randy N. McCullough.... $225,000 60% 125% 100% 75% Senior Vice President - Merchandising Chad C. Haggar......... $165,000 50% 125% 100% 75% Vice President - Operations Bill R. Edgel.......... $120,000 33% 125% 100% 75% Vice President - Marketing
- ----------------------- (1) Such bonuses are payable as follows: (i) 50% thereof are payable if the Company achieves projected earnings before interest, taxes, depreciation and amortization for its 1998 fiscal year, (ii) 10% thereof are payable if the Company meets or exceeds its November 30, 1997 projected inventory levels, (iii) 10% thereof are payable if the Company meets or exceeds its December 31, 1997 projected cash deposit, receivable and inventory levels, (iv) 10% thereof are payable if the Company meets its December 31, 1997 projected general and administrative expenses, (v) 10% thereof are payable if, as of February 1998, there is total availability under the borrowing base in the Company's revolving credit facility (as modified by the cash collateral stipulation field with the Bankruptcy Court) plus total cash balances of at least $4.1 million, and payables are maintained within agreed upon vendor terms, and (vi) the remaining 10% are payable upon receipt from vendors of 1.4 times the amount of inventory returned by November 1997 and at the end of February 1998. (2) A condition to the payment of such bonus will require that the Company have an asset-based, working capital credit facility on market terms on the confirmation date of a plan or reorganization. 2 3 Under the Employment Agreements, if an Executive's employment is terminated by the Company without cause, by the Executive with good reason (including a sale of the Company under the Bankruptcy Code), due to an Executive's death or disability, or as a result of the confirmation of a plan of reorganization, such Executive is entitled to receive (i) accrued annual base salary and vacation, (ii) his maximum annual cash bonus if (A) the fiscal year end 1998 performance targets have been achieved (provided that such target will be prospectively applicable with respect to termination resulting from confirmation of a plan prior to the end of such fiscal year) or (B) in the event of a Change-in-Control (as defined below) of the Company at a time when the Company is a going concern or the death or disability of an Executive if any applicable performance conditions have been met, and (iii) if such termination without cause or with good reason occurs prior to confirmation of a plan of reorganization of the Company, his confirmation bonus. If the Executive's employment is terminated by the Company for cause (i.e., malfeasance or misfeasance) or by the Executive without good reason, such Executive is entitled to receive accrued annual base salary and vacation, but no annual cash bonus or confirmation bonus (if such termination occurs prior to confirmation). Under the Employment Agreements, a "Change-in-Control" includes the dissolution or liquidation of the Company, a reorganization, merger or consolidation of the Company with one or more corporations in which the Company is not the surviving entity or as a result of which the Company's outstanding voting securities are converted to or reclassified as cash, securities of another corporation or other property, a sale of assets of the Company or its subsidiaries having a fair market value equal to more than 50% of the total fair market value of the Company's assets to a nonaffiliate of the Company, or the acquisition of more than 30% of the then-outstanding voting securities of the Company by a nonaffiliate. 3 EX-10.15(A) 8 TRADE FINANCING AGREEMENT TERM SHEET 1 EXHIBIT 10.15(a) TRADE FINANCING AGREEMENT TERM SHEET This term sheet with respect to the principle terms of a Trade Financing Agreement is entered into this 22nd day of July, 1997, subject only to approval by the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court") in Case No. LA 97-27988-VZ (the "Bankruptcy Case"), by and among Barry's Jewelers. Inc. ("Barry's" or the "Debtor"), the Official Committee of Unsecured Creditors appointed in the Bankruptcy Case (the "Creditors' Committee") the Official Committee of Bondholders appointed in the Bankruptcy Case (the "Bondholder Committee"), and BankBoston, N.A. f/k/a The First National Bank of Boston (the "Collateral Agent"), Jackson National Life Insurance Company, Sanwa Business Credit Corporation and The CIT Group/Business Credit, Inc. (collectively, the "Bank Group"). Barry's, the Creditors' Committee, the Bondholder Committee, the Collateral Agent and the Bank Group are collectively referred to herein as the "Parties." 1. A vendor return program will be open to all of Barry's prepetition Jewelry vendors. In order to participate in the program, each participating vendor must execute a Trade Financing Agreement (the "Trade Financing Agreement") and agree to provide, on the terms set forth herein, revolving credit for merchandise purchases to Barry's on 90-day terms ("Credit Merchandise") in an amount equal to two and one-half times the value (as determined pursuant to Paragraph 2(b) below and hereinafter referred to as "Value") of the prepetition merchandise to be returned to the participating vendor (the "Minimum Credit Commitment"). 2. Barry's will return to each participating vendor prepetition merchandise with a Value equal to 75% (or such lesser amount as specified by the vendor) of the relevant vendor's prepetition claim against Barry's based upon the provision of prepetition merchandise (the "Prepetition Claim") up to an aggregate maximum Prepetition Claim amount of $10.55 million (e.g.. the Value of the prepetition merchandise returned shall not exceed $7.912.500) (the "Maximum Return Amount"). a. On or before September 30, 1997, returns shall equal no more than thirty-seven and one-half percent (37.5%) of any particular participating vendor's Prepetition Claim. No further returns shall be made until a minimum of thirty (30) days following the bar date established for filing proofs of claim in the Bankruptcy Case (the "Bar Date"), which Bar Date shall be no later than October 31, 1997. Following the Bar Date, if the claims of merchandise vendors exceed S10.55 million. Barry's shall not return merchandise to any vendor which exceeds such vendor's pro-rata share of the Maximum Return Amount based on the face amount of the Prepetition Claims filed and deemed filed by merchandise vendors. To the extent that the aggregate claims of merchandise vendors on account of Prepetition Claims subsequently are reduced. Barry's will return additional merchandise to the vendors, on a pro-rata basis, up to the Maximum Return Amount. b. For purposes of the vendor return program, the prepetition merchandise shall be valued, in accordance with Bankruptcy Code section 546(g), based solely on the purchase price set forth in the prepetition invoice for such prepetition merchandise, subject to 2 verification by Barry's as to accuracy. Barry's will use reasonable and good faith efforts, in cooperation with the vendor, to identify the prepetition Invoice pursuant to which the vendor shipped the merchandise. Should Barry's be unable, despite such reasonable and good faith efforts, to match the vendor's goods with the vendor's invoices, the vendor will then nonetheless be required to accept the goods under the return program, so long as such goods are of the same Category and to reduce its Prepetition Claim accordingly. The Categories shall be: (1) Diamond Merchandise; (2) Watches; (3) Gold Merchandise; (4) Colored Stone Merchandise; and (5) Miscellaneous. Barry's may select the prepetition merchandise to be returned in its sole and absolute discretion subject to the requirement that the Value of prepetition merchandise returned does not exceed the Maximum Return Amount; the prepetition merchandise to be returned shall not include merchandise obtained by Barry s on consignment or memo. 3. The prepetition merchandise returned to a vendor shall be credited dollar-for-dollar against and shall offset the vendor's Prepetition Claim. Under any plan of reorganization, the return of the prepetition merchandise shall not be treated as an early "distribution" or earl "dividend" to the vendor on account of the vendor' Prepetition Claim, but rather, the amount of the vendor's claim entitled to distributions or dividends under such a plan shall be the amount remaining after the credit and offset of such claim for the Value of the prepetition merchandise returned. 4. Upon execution of a Trade Financing Agreement with a prepetition vendor, Barry's shall promptly provide the vendor with an inventory of approximately fifty percent (50%) of the prepetition merchandise to be returned to the vendor. Subject to paragraph 2 (including the, Maximum Return Amount) Barry's shall return the prepetition merchandise to participating vendors no later than (a) on or prior to September 30, 1997, one week after Barry's receipt of merchandise with an aggregate Value of $5.54 million (1.4 times the Value of the prepetition merchandise to be returned prior to September 30, 1997); and (b) on or after October 1, 1997 and prior to November 30, 1997, one week after Barry's receipt of merchandise with a Value which when added to the Value of merchandise received prior to September 30, will equal or exceed $9.9 million. Barry's must (and is required to) purchase and have received at least $5.54 million of merchandise on or before September 30, 1997 and an aggregate total of $9.9 million by November 30, 1997. 5. The Collateral Agent shall have liens upon the Credit Merchandise to the same extent and with the same priority and validity as the liens on the prepetition merchandise returned hereunder. 6 . Barry's and the vendor will cooperate with each other in conducting a joint review and reconciliation of Barry's prepetition accounts payable to the vendor, with a view to determining and agreeing upon the exact amount of the Prepetition Claim. Pending agreement on the amount of the Prepetition Claim, solely for purposes of determining the maximum amount of prepetition merchandise that may be returned initially and credited against the vendor's Prepetition Claim, Barry's records shall be determinative. If Barry's and the participating vendor have not reconciled the vendor's Prepetition Claim before September 1, 1997, the participating vendor may ask the Court to resolve the dispute. The Collateral Agent, the Bank Group and the Bondholder Committee shall be deemed parties-in-interest in this reconciliation proceeding before the Court. If the Court determines that the Prepetition Claim is greater than that asserted by Barry's, Barry's -2- 3 will return additional prepetition merchandise to the vendor as set forth herein (subject, of course, to the vendor complying with the terms of the Trade Financing Agreement and to the Maximum Return Amount limitations set forth in paragraph 2). 7. The Minimum Credit Commitment will continue for one (1) year from the execution by the vendor of a Trade Financing Agreement but shall terminate earlier if there is an Event of Default (as defined below) under this Term Sheet or as set forth herein. Upon an Event of Default under this Term Sheet other than as set forth in paragraph 8(d) below. all post-petition payables for merchandise (i) consigned and sold or (ii) shipped on credit pursuant to this Term Sheet shall be immediately due and payable, and subject to the Amended Cash Collateral Stipulation, the Trade Subordination and the Trade Trust (1) shall be paid and (2) all merchandise ordered but not yet received by Barry's shall be paid for C.O.D. 8. Unless waived in writing by the Creditors' Committee in its sole discretion, each of the following shall constitute an "Event of Default" under this Term Sheet and the Trade Financing Agreements: a. With respect to all participating vendors, default in the payment or performance of any of Barry's obligations or agreements under Trade Financing Agreements with participating vendors with Prepetition Claims totaling in excess of $2 million, which continues for more than ten (10) business days after such vendors or the Creditors' Committee gives Barry's written notice thereof, or b. With respect to all participating vendors, any representation or warranty made by Barry's in any certificate, statement or agreement, including but not limited to any of such furnished in connection with the Trade Financing Agreement to the Committee or participating vendors with Prepetition Claims totaling in excess of $2 million, should prove to be false or misleading in any material respect; or C. An order of the Bankruptcy Court is entered (i) prohibiting Barry's us, of cash and cash proceeds constituting cash collateral in an amount sufficient to meet its obligations under Trade Financing Agreements prior to the confirmation of a plan of reorganization; or (ii) if the Amended Cash Collateral Stipulation is approved, if at any time the use of cash collateral is subsequently restricted in a manner which renders Barry's unable to timely pay its obligations under Trade Financing Agreements; or (iii) appointing a chapter 11 trustee in the Chapter 11 Case; or (iv) converting the Chapter 11 Case to a chapter 7; or (v) dismissing the Chapter 11 Case. The Amended Cash Collateral Stipulation shall be deemed to provide sufficient cash to satisfy Barry's obligations under Trade Financing Agreements and shall not therefore be a basis for a default under clause (i) or (ii) above so long as it remains in effect in the form agreed to by the Parties. d. A plan of reorganization is confirmed and becomes effective which does not provide for (i) all post-petition trade payables to be paid in full on or before the later of the effective date of the plan or the date such trade payables become due and payable unless a participating vendor agrees to a less favorable treatment in its sole discretion, (ii) all prepetition memo merchandise still in the Debtor's possession to be paid for in full or -3- 4 returned subject to the provisions of paragraph 17 below unless a participating vendor agrees to a less favorable treatment in its sole discretion; (iii) the Trade Trust and Subordination to be maintained in accordance with paragraph 13 hereof; and (iv) satisfying any of Barry's obligations to return merchandise hereunder which remain unperformed at confirmation; or e. The occurrence of a material adverse event that materially impairs Barry's performance under the Trade Financing Agreements. The Creditors' Committee (on behalf of participating vendors) shall be deemed to be the sole beneficiary of the Trade Trust (as hereinafter defined) which, if there is an Event of Default, shall, after giving the Debtor, the Collateral Agent, the Bank Group and Bondholder Committee written notice of default and a ten (10) business day opportunity to cure or obtain injunctive relief or a judicial determination that an Event of Default has not occurred, be immediately distributed to participating vendors on a pro-rata basis, based on participating vendors' claims under Trade Financing Agreements, without further order of the Court. 9. The following shall constitute an Event of Default under a Trade Financing Agreement but not under this Term Sheet: a. With respect to any particular vendor's obligations under its Trade Financing Agreement, default in the payment or performance of any of Barry's obligations or agreements under the Trade Financing Agreement which continues for more than ten (10) business days after the vendor gives Barry's written notice thereof; or b. With respect to any particular vendor's obligations under its Trade Financing Agreement, any representation or warranty made by Barry's in any certificate, statement or agreement, including but not limited to any of such furnished in connection with the Trade Financing Agreement, should prove to be false or misleading in any material respect. 10. Any material breach of a Trade Financing Agreement by a vendor which remains uncured for ten (10) business days after the vendor's receipt of written notice of such alleged material breach, shall result in the vendor forfeiting all rights and protections under its Trade Financing Agreement. Barry's agrees to promptly provide written notice of any material breach. 11. Unless waived in writing by the Creditors' Committee in its sole discretion, any material breach of this Term Sheet by Barry's or the occurrence of an Event of Default which, in either case, remains uncured for ten (10) business days after Barry's receipt of written notice of such breach or Event of Default under this Term Sheet, shall entitle participating vendors to retain all benefits hereunder but be relieved of any and all further obligations to provide Barry's with merchandise. Any material breach of a Trade Financing Agreement or Event of Default under a particular vendor's Trade Financing Agreement which, in either case, remains uncured for ten (10) business days after Barry's receipt of written notice of such breach or Event of Default under the particular vendor's Trade Financing Agreement, shall entitle such vendor to retain all benefits hereunder but be relieved of any and all further obligations to provide Barry's with merchandise. All Parties agree to promptly provide written notice of a material breach or Event of Default. -4- 5 12. Each participating vendor must accept orders from Barry's for the purchase of any goods offered by the vendor for sale to retailers at the same prices offered by the vendor to the vendor's other mall-based customers of a similar size ("Similar Customers"), and all shipments must be upon the industry's normal and customary delivery schedules for the particular type of merchandise. Any and all Credit Merchandise shall be delivered and accepted pursuant to written policies and procedures reasonably adopted by Barry's and reasonably approved by the vendor. Each vendor must accept from Barry's returns of any and all Credit Merchandise on terms no less favorable than the vendor extends to Similar Customers. 13. a. The members of the Bondholder Committee hereby subordinate four million dollars ($4 million) of the members' allegedly secured claims to post-petition trade payables relating to the purchase by the Debtor of Credit Merchandise or to post-petition payables arising out of the sale of goods consigned by any consignor participating in the program set forth in the second sentence of paragraph 17 (the "Trade Subordination") (without prejudice to their rights to seek to adjust any recovery of the bondholders from the Debtor or their interest in the collateral (whether through a plan or otherwise) to ensure that in the event the Trade Subordination is ever enforced, the bondholders will share the burden of such subordination on a pro-rata basis). The Trade Subordination is irrevocable and indefeasible. b. The Debtor agrees to fund promptly upon entry of an order approving the Amended Cash Collateral Stipulation on a final basis two million dollars ($2 million) into a trust for the sole benefit of the Creditors' Committee on behalf of participating vendors hereunder (the "Trade Trust"). The Debtor may not fund more than $2 million into the Trade Trust. The Bank Group and the Collateral Agent shall subordinate their security interests and the replacement liens granted to them under the Amended Stipulation to the interest granted herein to the vendors in the Trade Trust. The Trade Trust shall be placed in an interest-bearing account in a bank that is not affiliated with the Bank Group in the name of the Creditors' Counting in trust for trade vendors. The Creditors' Committee, with the cooperation of Barry's, shall have the sole responsibility for administering the Trade Trust, and neither the Bank Group nor the Bondholders shall have any such responsibility. Notwithstanding any other provision of this Agreement, if the Amended Cash Collateral Stipulation is terminated pursuant to paragraph 17 thereof, the funds in the Trade Trust shall be applied as set forth in paragraph 18 of the Amended Cash Collateral Stipulation and any funds remaining shall be immediately returned to the Debtor. c. If the Trade Trust is eliminated or reduced, the members of the Bondholders' Committee hereby indefeasibly and irrevocably subordinate to post-petition trade payables relating to the purchase by the Debtor of Credit Merchandise or to post-petition payables arising out of the sale of goods consigned by any consignor participating in the program set forth in the second sentence of paragraph 17, an additional amount equal to two million dollars ($2 million) minus any amounts previously paid to vendors from the -5- 6 Trade Trust; provided that the aggregate Trade Subordination shall not exceed six million dollars ($6 million). On the Wednesday following the Debtor's funding of the Trade Trust, the Debtor shall provide the Parties with a borrowing base certificate, reflecting that, on the date the Trade Trust was funded, the borrowing base had not been exceeded, and a certificate from the Chief Financial Officer attesting that there were, to the best of his knowledge, on the date the Trade Trust was funded, no existing defaults under the Amended Cash Collateral Stipulation. Within 2 business days after receipt of these certificates, the Collateral Agent must give the other Parties written notice of any objection to the funding of the Trade Trust or be forever barred from raising any such objection as to the Trade Trust, the Creditors' Committee or participating vendors. Thereafter, subject only to the last sentence of 13(b), the Parties agree that the Trade Trust will not be subject to challenge even if the Amended Cash Collateral Stipulation is terminated and shall be maintained solely for the Creditors' Committee for the benefit of participating vendors. Subject to the Amended Cash Collateral Stipulation, the Trade Trust and Trade Subordination, all Credit Merchandise payables arising from goods shipped prior to December 31, 1997 must be paid in full by the earlier of February 28, 1998 or ninety (90) days following receipt by Barry's of the invoice for the merchandise in question. On disbursement (following an Event of Default), the Trade Trust shall first be disbursed pro-rata to participating vendors based upon the amount of credit such vendors have outstanding under Trade Financing Agreements. Any funds remaining following payment in full of all trade payables generated from Credit Merchandise shall be distributed on a pro-rata basis to vendors who remain owed post-petition trade payables as a result of memo merchandise sold pursuant to paragraph 17 hereof. The Trade Trust shall be returned to the Debtor after the Debtor has paid all trade payables outstanding at the time all Trade Financing Agreements have either expired or terminated. 14. The participating vendors will receive a superpriority administrative claim pursuant to Bankruptcy Code Section 364(c)(1) for all unpaid post-petition trade payables in excess of $6 million subordinate only to any superpriority administrative claim of the Collateral Agent for a failure of adequate protection by use of cash collateral. 15. Barry's will offer participation in the Trade Financing Agreement to every prepetition merchandise vendor and to every vendor from whom Barry's wishes to order asset merchandise post-petition; provided that vendors who do not have Prepetition Claims do not receive returns of prepetition merchandise. 16. Barry's will not use the provisions of Bankruptcy Code section 1129, or any other section of the Bankruptcy Code, to alter its obligations under the Trade Financing Agreement unless any such alteration is agreed to by the vendor in its sole discretion. The effectiveness of a plan of reorganization shall constitute a termination of a Trade Financing Agreement, and all outstanding payables hereunder shall be paid as set forth in paragraph 8(d) hereof unless the vendor agrees otherwise. Nothing herein shall constitute an express or implied obligation by the Bank Group or the members of the Bondholders' Committee to fund the payments required for a plan to become effective, including, but not limited to the trade payables referenced in this paragraph 16. -6- 7 17. Barry's will agree to a global UCC filing to cover consigned goods provided to Barry's post-petition. If a prepetition consignor agrees that Barry's may sell consigned goods provided to Barry's prepetition, Barry's will pay the consignor on 30-day terms as the goods are sold; provided however, that Barry's must sell the prepetition consigned goods for an average of no less than 50% off the retail price for such goods. On or before February 28, 1998, Barry's may return up to (but not more than) $500,000 at cost of unsold prepetition memo inventory to vendors and prior to May 1, 1998, Barry's may return up to (but not more than) an additional $200,000 at cost of prepetition memo merchandise to vendors (in both cases based upon the price of the goods as set forth in the prepetition memo for such goods), provided however that to participate under this paragraph 17, such prepetition memo vendor must have agreed to provide Barry's with new memo merchandise under the post-petition consignment agreement equal to or greater than one and one-half times the amount of prepetition memo inventory returned, and memo vendors in the aggregate must in fact have provided to Barry's in excess of one hundred-fifty percent (150%) of the prepetition memo inventory in new memo merchandise. No party shall challenge any payments or returns made under and in accordance with this paragraph. The Bank Group has no responsibility for any proration hereunder. 18. This Agreement may be executed in counterparts, each of which shall constitute an original, and all of which taken together shall be the Agreement of the signatories. This Agreement will be deemed executed upon receipt by the Debtor of a faxed or telecopied signature. 19. The Bondholder Committee shall promptly obtain signatures of each of its members reaffirming the Term Sheet and specifically the Trade Subordination. 20. This Term Sheet shall be binding upon the Debtor, the Creditors' Committee, the Collateral Agent, the Bank Group, each member of the Bondholders' Committee, participating vendors, and each of their respective successors and assigns and shall inure to the benefit of the Debtor, the Creditors' Committee, the Collateral Agent, the Bank Group, the Bondholder Committee, participating vendors, and each of their respective successors and assigns. 21. The Debtor shall move promptly for Court approval of this Term Sheet, and all Parties hereto shall support, and use their best efforts to obtain, expeditious entry of an order approving this Term Sheet. -7- 8 Agreed to subject only to Bankruptcy Court approval. Barry's Jewelers. Inc. By: /s/ SAMUEL J. MERKSAMER ----------------------------------------- Name: Samuel J. Merksamer --------------------------------------- Its: President ---------------------------------------- Official Committee of Bondholders By: /s/ S. RICHARDS ----------------------------------------- Name: S. Richards --------------------------------------- Its: Counsel ---------------------------------------- Official Committee of Unsecured Creditors By: /s/ SHELLY ROTHSCHILD ----------------------------------------- Name: Shelly Rothschild --------------------------------------- Its: Counsel ---------------------------------------- BankBoston. N.A. f/k/a The First National Bank of Boston Individually and as Collateral Agent By: /s/ STEVEN ATWATER ----------------------------------------- Name: Steven Atwater --------------------------------------- Its: Vice President ---------------------------------------- Jackson National Life Insurance Company By PPM America, Attorney-in-fact By: /s/ JOEL KLEIN ----------------------------------------- Name: Joel Klein --------------------------------------- Its: Vice President ---------------------------------------- -8- 9 Sanwa Business Credit Corporation By: /s/ JEFF G. GERRY ----------------------------------------- Name: Jeff G. Gerry --------------------------------------- Its: Vice President ---------------------------------------- CIT Business Credit, Inc. By: /s/ JAMES CONBEENEY ----------------------------------------- Name: James Conbeeney --------------------------------------- Its: Vice President ---------------------------------------- -9- 10 UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA In re Case No. LA 97-27988 VZ Chapter 11 BARRY'S JEWELERS, INC., a California corporation; et NOTICE OF ENTRY OF JUDGMENT OR al., ORDER AND CERTIFICATE OF MAILING Debtor TO: THOSE PARTIES LISTED ON EXHIBIT "A" ATTACHED HERETO AND INCORPORATED HEREIN BY REFERENCE. You are hereby notified, pursuant to Bankruptcy Rules 7005 and 9022, and Local Bankruptcy Rule 116(l)(a)(iv), that a judgment* or order entitled ORDER APPROVING "TRADE FINANCING AGREEMENT TERM SHEET" AND AUTHORIZING (A) DEBTOR'S ENTRY INTO TRADE FINANCING AGREEMENTS; (B) RETURN OF PREPETITION MERCHANDISE FREE AND CLEAR OF LIENS AND CLAIMS PURSUANT TO BANKRUPTCY CODE SECTION 546(G); (C) MAINTENANCE OF TRADE TRUST; AND (D) GRANTING OF SUPERPRIORITY ADMINISTRATIVE CLAIMS PURSUANT TO TRADE FINANCING AGREEMENTS was entered on . I hereby certify that I mailed a copy of this notice and a true copy of the Order or judgment to the above-named persons on_____________________. DATED: JON D. CERETTO CLERK OF COURT By --------------------------------- Deputy Clerk If a judgment is by default, then a copy of the judgment must be attached to this notice. 11 Linda Bailey, Esq. Michael L. Tuchin, Esq. Gregory Bray Office of the United States Trustee Stutman Treister & Glatt Professional Stroock & Stroock & Lavan 221 North Figueroa Street Corporation 2029 Century Park East, Suite 1800 Suite 800 3699 Wilshire Boulevard Los Angeles, CA 90067-3089 Los Angeles, CA 90012 Suite 900 Los Angeles, CA 90010 Jeremy Richards Shelly Rothschild, Esq. Ms. Deborah Schner-Rape, Esq. Pachulski, Stang, Ziehl & Young Andrews & Kurth, LLP Andrews & Kurth 10100 Santa Monica Boulevard 601 South Figueroa Street 1717 Main Street Suite 1100 Suite 4200 Suite 3700 Los Angeles, CA 90067 Los Angeles, CA 90017 Dallas, TX 75201
EX-10.15(B) 9 FORM OF TRADE FINANCING AGREEMENT 1 EXHIBIT 10.15(b) FORM OF TRADE FINANCING AGREEMENT This Trade Financing Agreement ("Agreement") made as of the __ th day of, 1997, is by and between (Company), ("Supplier"), with its principal offices at (Address1) (Address2), (City), (State) (PostalCode), and Barry's Jewelers, Inc., a California corporation ("Barry's"), with its principal offices at 111 West Lemon Avenue, Monrovia, California 91016. WITNESSETH: A. RECITALS. WHEREAS, on May 11, 1997 ("Petition Date"), Barry's filed a voluntary petition for relief with the United States Bankruptcy Court for the Central District of California ("Bankruptcy Court") under chapter 11, title 11 of the United States Code, Case No. CA 97-27988-VZ ("Chapter 11 Case"); WHEREAS, Barry's utilizes inventory and other merchandise in its operations; WHEREAS, Barry's obtained inventory from Supplier on credit terms prior to the Petition Date; WHEREAS, Barry's desires to return to Supplier certain merchandise purchased prior to the Petition Date, for credit against Supplier's prepetition claim against Barry's in accordance with the terms of this Agreement and that certain Trade Financing Agreement Term Sheet ("Term Sheet") by and among Barry's, the Official Committee of Unsecured Creditors appointed in the Chapter 11 Case (the "Creditors' Committee"), the Official Committee of Bondholders appointed in the Chapter 11 Case (the Bondholders' Committee"), and Bank Boston (the "Collateral Agent"), Jackson National Life Insurance Company, Sanwa Business Credit Corporation and the CIT Group/Business Credit, Inc. (collectively, the "Bank Group"), a copy of which is attached hereto as Exhibit "A" and incorporated herein by this reference; WHEREAS, Supplier is willing to accept the return of merchandise purchased by Barry's prior to the Petition Date, for credit against Supplier's prepetition claim against Barry's in accordance with this Agreement and the Term Sheet; WHEREAS, Barry's desires to obtain merchandise on credit from Supplier following the Petition Date in accordance with the terms of this Agreement and the Term Sheet; WHEREAS, Supplier is willing to supply merchandise following the Petition Date to Barry's on credit, on the terms and conditions set forth in this Agreement and the Term Sheet; 1 2 WHEREAS, the Term Sheet was approved, and Barry's was authorized to enter into Trade Financing Agreements such as this Agreement, pursuant to an order of the United States Bankruptcy Court for the Central District of California entered on August 7, 1997; and WHEREAS, the foregoing Recitals shall be construed as part of this Agreement. NOW, THEREFORE, in consideration of the mutual promises hereinafter contained, the parties do hereby agree as follows: B. RETURN OF GOODS. 1. Subject to, and in accordance with, the terms of the Term Sheet, Barry's agrees to return and deliver, and Supplier agrees to accept return of $amt75 in merchandise purchased by Barry's prior to the Petition Date (the "Prepetition Merchandise"). For purposes of this Agreement, in accordance with Bankruptcy Code section 546(g), the Prepetition Merchandise shall be valued based solely on the purchase price set forth in the prepetition invoice for such Prepetition Merchandise, subject to verification by Barry's as to accuracy. Barry's will use reasonable and good faith efforts, in cooperation with Supplier, to identify the prepetition invoice pursuant to which Supplier shipped the Prepetition Merchandise. Should Barry's be unable, despite such reasonable and good faith efforts, to match the Prepetition Merchandise to be returned to Supplier with Supplier's invoices, Supplier will nonetheless be required to accept the Prepetition Merchandise (as long as the Prepetition Merchandise being returned to Supplier is of the same Category or Categories as the merchandise supplied to Barry's by Supplier prepetition) and to reduce its Prepetition Claim (as described in paragraph D.1) accordingly. The Categories shall be: (1) Diamond Merchandise; (2) Watches; (3) Gold Merchandise; (4) Colored Stone Merchandise; and (5) Miscellaneous. Barry's may select the Prepetition Merchandise to be returned in its sole and absolute discretion. For all purposes, as used in this Agreement, the term Prepetition Merchandise does not include merchandise obtained by Barry's on consignment or memo. 2. Prepetition Merchandise returned to Supplier shall be credited dollar-for-dollar against and shall offset Supplier's Prepetition Claim. 3. Under any plan of reorganization, the return of the Prepetition Merchandise shall not be treated as an early "distribution" or early "dividend" to Supplier on account of Supplier's Prepetition Claim, but rather, the amount of Supplier's Prepetition Claim entitled to distributions or dividends under such a plan shall be the amount remaining after the credit and offset of such claim for the value of the Prepetition Merchandise returned. 4. In accordance with the terms of the Term Sheet, on or before September 30, 1997, Barry's shall not return Prepetition Merchandise having more than 2 3 a value of thirty-seven and one-half percent (37.5%) of Supplier's Prepetition Claim. Any additional returns shall be made in accordance with the Term Sheet. Barry's shall keep Supplier apprised of the timing and amount of any additional returns. C. POSTPETITION CREDIT. 1. Supplier hereby agrees to provide postpetition revolving credit for merchandise purchases to Barry's on 90-day terms in an amount not less than $amt25, an amount equal to two and one-half times the value of the Prepetition Merchandise to be returned to Supplier (which minimum level of credit is hereinafter referred to as the "Minimum Credit Commitment"), for a period of one year form the date of this Agreement. The Minimum Credit Commitment shall terminate earlier if there is an uncured and unwaived Event of Default by Barry's under this Agreement (as set forth in Section F hereof) or an Event of Default by Barry's under the Term Sheet (as set forth in Section G hereof). 2. Supplier will accept orders from Barry's for the purchase of any goods offered by Supplier for sale to retailers at the same prices offered by Supplier to Supplier's other mall-based customers of a similar size ("Similar Customers"), and all shipments must be upon the industry's normal and customary delivery schedules for the particular type of merchandise. Any and all Credit Merchandise shall be delivered and accepted pursuant to written policies and procedures substantially in the form of Exhibit "B" hereto. Supplier will accept from Barry's returns of any and all Credit Merchandise on terms no less favorable than Supplier extends to Similar Customers. 3. To the extent provided in the Term Sheet, Supplier will receive a superpriority administrative claim pursuant to Bankruptcy Code ss. 364(c)(1) for all unpaid payables under this Agreement subordinate only to any superpriority administrative claim of the Collateral Agent for a failure of adequate protection by use of cash collateral. 4. Upon execution of this Agreement, Barry's will promptly provide Supplier with an inventory of approximately fifty percent (50%) of the Prepetition Merchandise to be returned to Supplier. Barry's shall return the Prepetition Merchandise to Supplier according to the terms of the Term Sheet. D. RECONCILIATION. 1. Barry's and Supplier agree to cooperate with each other in conducting a joint review and reconciliation of Barry's prepetition accounts payable to Supplier, with a view to determining and agreeing upon the exact amount of Supplier's prepetition claim to be allowed against Barry's in the chapter 11 case ("Prepetition Claim"); pending agreement on the amount of the Prepetition Claim, for purposes of determining the maximum amount of Prepetition Merchandise that may be returned initially and credited against the Supplier's Prepetition Claim, Barry's records shall be determinative. If Barry's and Supplier have not reconciled the vendor's Prepetition 3 4 Claim before September 1, 1997, the participating vendor may ask the Court to resolve the dispute. The Collateral Agent, the Bank Group and the Bondholders' Committee shall be deemed parties-in-interest in this reconciliation proceeding before the Court. If the Court determines that the Prepetition Claim is greater than that asserted by Barry's, paragraph B.1 above shall be increased accordingly (and Barry's will return additional Prepetition Merchandise to Supplier subject to the limitation set forth in paragraph 2 of the Term Sheet) provided that Supplier increases its Minimum Credit Commitment pursuant to paragraph C.1 and otherwise complies with the terms of this Agreement and the Term Sheet. E. TERM OF AGREEMENT; ASSIGNABILITY. 1. This Agreement and the Minimum Credit Commitment shall remain in full force and effect for a minimum term of one year from the date hereof unless terminated earlier in accordance with this Agreement or the Term Sheet. Notwithstanding any expiration or termination of this Agreement, except for the Minimum Credit Commitment and Supplier's obligations to ship Credit Merchandise, upon any such termination or expiration the remaining provisions of this Agreement shall remain in full force and effect until all Credit Merchandise delivered to Barry's has been paid for in full, unless this Agreement is terminated in accordance with paragraph H hereof. 2. This Agreement is not assignable without the prior written approval of Supplier and Barry's in their respective sole discretion. 3. This Agreement shall be binding upon Supplier and its successors and assigns. F. EVENTS OF DEFAULT BY BARRY'S UNDER THIS AGREEMENT. 1. The following shall constitute Events of Default under this Agreement by Barry's: a. Default in the payment or performance of any of Barry's obligations or agreements hereunder which continues for more than ten (10) business days after Barry's receipt of written notice thereof; or b. Any representation or warranty made by Barry's herein or in any certificate, statement or agreement, including but not limited to any of such furnished in connection with this Agreement, should prove to be false or misleading in any material respect. 2. Any material breach of this Agreement or Event of Default under this Agreement which, in either case, remains uncured for ten (10) business days after Barry's receipt of written notice of such breach or Event of Default under this Agreement, shall entitle Supplier to retain all benefits hereunder but be relieved of any and all further obligations to provide Barry's with merchandise. 4 5 G. EVENTS OF DEFAULT BY BARRY'S UNDER THE TERM SHEET. 1. The occurrence of any of the events set forth in sections a through e of paragraph 8 of the Term Sheet, unless waived in writing by the Creditors' Committee in its sole discretion, shall constitute an Event of Default by Barry's under the Term Sheet. 2. Unless waived in writing by the Creditors' Committee in its sole discretion, any material breach of the Term Sheet by Barry's or the occurrence of an Event of Default by Barry's under the Term Sheet which, in either case, remains uncured for ten (10) business days after Barry's receipt of written notice of such breach of Event of Default by Barry's under the Term Sheet, shall entitle Supplier to: (i) retain all benefits under this Agreement but to be relieved of any and all further obligations to provide Barry's with merchandise; and (ii) share, on a pro-rata basis (based on Supplier's claims under this Agreement) in the proceeds from the Trade Trust and/or the Trade Subordination (both as defined in the Term Sheet) as and to the extent set forth in the Term Sheet. H. EVENTS OF DEFAULT BY SUPPLIER. 1. As used herein, the term "Event of Default by Supplier" shall mean the occurrence of any one or more of the following: a. Default in performance of any of Supplier's obligations or agreements hereunder which continues for more than ten (10) business days after Supplier receives written notice thereof; or b. Any representation or warranty made by Supplier herein or in any certificate, statement or agreement furnished in connection with this Agreement should prove to be false or misleading in any material respect. 2. Any material breach of this Agreement by Supplier or any Event of Default by Supplier which, in either case, remains uncured for ten (10) business days after Supplier's receipt of written notice of such alleged material breach, shall result in Supplier forfeiting all rights and protections under this Agreement and the Term Sheet. Barry's shall also retain all rights and remedies available under applicable law. Barry's agrees to promptly provide written notice of any material breach by Supplier under this Agreement. I. OTHER PROVISIONS. 1. Each party to this Agreement agrees that if it hereafter commences, joins in, or seeks relief through any suit arising out of this Agreement, then the prevailing party shall pay to the other party all attorneys' fees and expenses reasonably incurred by said party in defending or otherwise responding to said suit or claim. Subject to the foregoing, the parties shall bear their own respective attorneys' fees and expenses in connection with the negotiation and implementation of this Agreement. 5 6 2. Except as expressly set forth herein, nothing herein shall be deemed to waive any claims or causes of action, including any avoidance actions, of Supplier, Barry's or Barry's estate. 3. Barry's will not use the provisions of Bankruptcy Code section 1129, or any other section of the Bankruptcy Code, to alter its obligations under this Agreement, unless any such alteration is agreed to by Supplier in its sole discretion. The effectiveness of a plan of reorganization shall constitute a termination of this Agreement, and all outstanding payables hereunder shall be paid as set forth in the Term Sheet, unless Supplier agrees otherwise. Supplier understands that upon confirmation of such plan, any obligations of Barry's under this Agreement arising thereafter shall not constitute administrative priority claims, because Barry's ability to confer administrative priority status in accordance with law shall cease on confirmation of any such plan. 4. This Agreement and the Term Sheet set forth the parties' final and entire understanding with respect to its subject matter, cannot be changed, wavered or terminated orally, and shall be governed by and construed under the laws of the State of California (without reference to its rules as to conflicts of law). If any provision shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not affect or render invalid or unenforceable any other provision of this Agreement and this Agreement shall be construed as if such provision were drafted so as not to be invalid or unenforceable. 5. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be deemed to be an original, but all of which taken together shall constitute but one and the same instrument. Signatures may be exchanged by telecopy, and each party agrees to be bound by its own telecopied signature and to accept the telecopied signature of the other party. 6. The Bankruptcy Court in Barry's chapter 11 case shall retain exclusive jurisdiction regarding this Agreement. 7. Any notice given hereunder or in connection herewith shall be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by telecopy), the day of delivery by commercial courier to a responsible individual or the third day after mailing by certified or registered mail, postage prepaid, as follows: 6 7 a. If to Barry's: Barry's Jewelers, Inc. Attention: Chief Financial Officer 111 West Lemon Avenue Monrovia, California 91016 Telephone: (818) 303-4741 Telecopy: (818) 305-9281 With a copy to: Stutman, Treister & Glatt Professional Corporation Attention: Michael L. Tuchin 3699 Wilshire Boulevard, Suite 900 Los Angeles, CA 90010 Telephone: (213) 251-5100 Telecopy: (213) 251-5288 b. If to Supplier: ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ With a copy to: ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ or to such other address as any party may have furnished in writing to the other party in the manner provided above. 8. Supplier represents and warrants to Barry's that it has not assigned or transferred any interest in its Prepetition Claim. 9. Each signatory hereto represents and warrants that he or she has the power and authority to execute and deliver this Agreement on behalf of the party for whom he or she is executing this Agreement. 10. Each of the parties hereto has agreed to the use of the particular language of the provisions of this Agreement, and any question of doubtful interpreta- 7 8 tion shall not be resolved by any rule providing for interpretation against the party who causes the uncertainty to exist or against the drafter of this Agreement. 11. The parties to this Agreement shall execute or procure the execution of such documents and take such steps as may reasonably be required to give the parties the full benefit of this Agreement and the Term Sheet. 12. To the extent of any inconsistency between this Agreement and the Term Sheet, the Term Sheet shall govern. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BARRY'S JEWELERS, INC.: Randy McCullough Date: __________________________ By_______________________________ Authorized Signatory (Company) (FirstName) (LastName) Date: __________________________ By_______________________________ Authorized Signatory EX-10.15(C) 10 EXHIBIT B TO FORM OF TRADE FINANCING AGREEMENT 1 EXHIBIT 10.15(c) EXHIBIT B Barry's Jewelers, Inc. has recently established a policy and procedures for all of its approved vendors. We would greatly appreciate your carefully reviewing the following policy and procedures. Thereafter, we ask that you please sign a copy of this Exhibit B acknowledging your consent hereto, and return the copy to us. 1. Purchases Only a duly authorized purchasing agent may authorize purchases. 2. Purchase Orders/Consignment Orders A) All merchandise ordered, whether oral or written, must be approved by an authorized purchasing agent of Barry's Jewelers, Inc. All orders will be written on an official purchase order/consignment order. B) All merchandise will be shipped to the location designated on each purchase order. C) All purchase orders will have mutually agreed upon payment terms written on the purchase order. The terms will be the latter of the terms of the shipping invoice or the terms of the purchase order. D) No substitutes will be accepted without the prior consent of the authorized purchasing agent. At our option, merchandise substitutes without advance approval may be returned to you. E) Your company may not modify or vary any provision of the purchase order without the prior written approval of an authorized purchasing agent. F) In the event that any or all of the merchandise delivered under the purchase order is defective, or in the event merchandise has been delivered pursuant to a sample and the merchandise is not in every aspect as represented or warranted or identical to the sample in all aspects, then Barry's Jewelers, Inc. at its sole and exclusive option, may at any time return the whole or any part of such merchandise ordered to you or may retain the same. In the event of rejection, Barry's Jewelers, Inc. shall be reimbursed in full for all merchandise. G) Transportation costs for goods on back order shall be paid by Barry's Jewelers, Inc. at the rates which would have been applicable had the complete order been shipped at one time. Any excess transportation costs shall be borne by the supplier. H) If the goods are FOB shipping point, only actual postage and insurance will be paid by Barry's Jewelers, Inc. No service, packing or handling charges will be paid by Barry's Jewelers, Inc. 3. Invoices A) All of your invoices must reference the purchase order number. B) Separate invoices must be issued for each purchase order. Do not mix merchandise from multiple purchase orders on one invoice. 2 C) All invoices must clearly and separately show the "shipped to" and "billed to" location and address. D) Original invoices must be mailed to the "bill to" address. A copy of the invoice must accompany the merchandise to the place of shipment. 4. Code of Ethics A) Under no circumstances are any members of your company to discuss any knowledge of Barry's Jewelers, Inc.'s business or business practices with other vendors, retailers, or investors without prior approval from Barry's Jewelers, Inc. All information about Barry's Jewelers, Inc. and the products it purchases are confidential. You may, however, respond to normal credit inquiries about Barry's Jewelers, Inc. B) Gifts to Barry's Jewelers, Inc. employees are strongly discouraged. Any holiday or special occasion gifts must be of a consumable nature and minimal (i.e. less than $25) in value. 5. Warranties and Representations A) All merchandise must fully comply with the Federal Trade Commission's Guide for the jewelry industry. All karat gold merchandise must be plumb. Weights and total weights of all precious and semi-precious stones must be accurate within the legal tolerance. Enhancements of any precious or semi-precious stones must be disclosed if known. Also, where required by law, you will disclose the county of origin of all merchandise and so label the merchandise. B) All merchandise shipped must fully comply with the National Gold and Silver Marketing Act, as amended, and all other applicable federal or state laws. Trademarks must accompany quality marks on all precious-metal jewelry. C) The supplier agrees to indemnify and hold Barry's Jewelers, Inc. harmless from and against any injury, loss, damage, claim or liability, whether direct or consequential, arising out of the use of, or inability to use any of, the goods provided by the supplier. The supplier agrees to carry products liability insurance on any goods covered by this purchase order, and if requested, to name Barry's Jewelers, Inc. as an insured under any such insurance policy. The supplier further agrees to indemnify Barry's Jewelers, Inc. and hold it harmless in respect of any and all expenses, damages, claims, costs, penalties and fees which it may incur or be liable for, whether liquidated or otherwise, in connection with the purchase, sale, resale, use, distribution or handling of any such goods which are not as agreed, represented and warranted above, and to defend any suits brought against Barry's Jewelers, Inc. with respect thereto (provided that Barry's Jewelers, Inc. may, in its sole discretion, elect to defend any such suits at the expense of Barry's Jewelers, Inc.). The acceptance of the purchase order constitutes a making of the above agreements, representations and warranties, and it is expressly agreed and understood by the parties hereto that the above agreements, representations and warranties are made for the purpose of inducing the purchase by Barry's Jewelers, Inc. of such goods, and that such purchase is made in reliance thereon. 3 D) In the event of a breach of the terms of a purchase order by the supplier, Barry's Jewelers, Inc. shall be entitled to recover its attorney's fees and costs incurred in conjunction with such breach. E) Venue with respect to any matters relating to or arising out of any dispute regarding purchased goods shall lie in Los Angeles County, California, and the laws of the State of California shall apply to any such matters. [SUPPLIER] By ----------------------------------- Date: Authorized Signatory ---------------------------- EX-10.15(D) 11 FORM OF CONSIGNMENT AGREEMENT 1 EXHIBIT 10.15(d) FORM OF CONSIGNMENT AGREEMENT This Agreement made as of the_________th day of___________, 1997, is by and between SUPPLIER ("Consignor"), with its principal offices at and Barry's Jewelers, Inc., a California corporation ("Consignee") with its principal offices at 111 W. Lemon Ave., Monrovia, CA 91016. WITNESSETH: A. RECITALS. WHEREAS, on May 11, 1997 ("Petition Date"), Consignee filed a petition for relief before the United States Bankruptcy Court for the Central District of California ("Bankruptcy Court") under title 11, chapter 11 of the Bankruptcy Code, Case No. CA 97-27988-VZ ("Chapter 11 Case"); WHEREAS, Consignee utilizes (DESCRIBE MERCH) and other merchandise in its operations; WHEREAS, Consignee desires to obtain goods on consignment from Consignor following the Petition Date in accordance with the terms of this Agreement; WHEREAS, Consignor is willing to consign (DESCRIBE MERCH) and such other merchandise as is delivered pursuant to this Agreement from time to time following the Petition Date (the "Consigned Merchandise") to Consignee for sale or return by Consignee constituting a true consignment, on the terms and conditions in this Agreement; and WHEREAS, the effectiveness of this Agreement is subject to entry of the Consignment Order (as specified below). NOW, THEREFORE, in consideration of the promises and of the mutual promises hereinafter contained, the parties do hereby agree as follows: B. CONSIGNMENT ARRANGEMENTS. 1. Consignor shall from time to time deliver to Consignee on consignment such amounts of Consigned Merchandise as may be mutually agreed upon, upon the terms and conditions set forth herein and, to the extent not inconsistent, in the Memo accompanying Consigned Merchandise. The delivery date shall be as reasonably specified by Consignee in its orders for Consigned Merchandise. Such Consigned Merchandise provided by Consignor shall bear the appropriate trademark designated by Consignor. Schedule A hereto, prepared by Consignor, lists all such trademarks. Consignor shall promptly update 2 Schedule A to add new trademarks or delete trademarks, and provide such updated Schedule to Consignee. 2. The Consigned Merchandise shall be maintained at all times at Consignee's distribution center(s) or held for sale by Consignee to Consignee's customers in the stores Consignee operates, which distribution center(s) and stores are listed on Schedule B hereto. Schedule B shall include any trade names and the name and state of incorporation of any affiliated corporation operating the stores referred to therein. Consignee shall promptly update Schedule B to add new trade names and states of incorporation and new stores or distribution center(s) or delete trade names and states of incorporation and stores or distribution centers, and provide such updated Schedule to Consignor. 3. Title to the Consigned Merchandise delivered to Consignee shall at all times remain with Consignor until purchased by Consignee at the time of its sale to its customer. Consignee may only sell the Consigned Merchandise in the ordinary course of its business, and may not sell Consigned Merchandise in bulk. Nothing in this Agreement prohibits Consignee from selling merchandise other than Consigned Merchandise out of the ordinary course of its business or in bulk. 4. Consignor commits to maintain a minimum amount of $000,000 of Consigned Merchandise with Consignee (which minimum level of Consigned Merchandise hereinafter is referred to as the "Minimum Commitment") for a period of two years from the date of this Agreement; provided that such two-year period shall be automatically extended thereafter in one-year increments after the expiration of such initial two-year period unless Consignee or Consignor in their respective sole discretion provides written notice of termination on or before ninety (90) calendar days prior to the expiration of such two-year period or ninety (90) calendar days prior to the expiration of any one-year extension. The foregoing commitment and any obligation of Consignor thereafter to ship Consigned Merchandise shall terminate earlier as specified in Paragraph 13 hereof or upon a Default by Consignee (as defined in Paragraph 15 hereof). Any consigned goods delivered to Consignee prior to the Petition Date and on hand with Consignee on the Petition Date (hereinafter "Prepetition Consigned Merchandise") shall not be included in determining the Minimum Commitment. For all purposes, as used in this Agreement, the term Consigned Merchandise does not include Prepetition Consigned Merchandise. 5. Consignee shall insure the Consigned Merchandise for its full value for and against all risks of loss. Consignee accepts all risks of loss to the Consigned Merchandise from the time accepted by it until returned to Consignor. Consignee warrants that it shall promptly pursue on Consignor's behalf all remedies and payments in the event of a loss and will immediately notify Consignor of any loss. 2 3 6. Consignor and Consignee may mutually agree that Consignee shall return to Consignor slow moving or obsolete Consigned Merchandise, that Consignor shall cease automatic replenishment of such slow moving or obsolete Consigned Merchandise, and/or that Consignee shall select replacement Consignment Merchandise. Consignor and Consignee shall cooperate in good faith regarding all such matters. 7. Every ninety (90) calendar days, or such other time as mutually agreed by Consignor and Consignee, Consignor shall submit to Consignee a detailed statement ("Consignor Statement") specifying Consignor's records with respect to shipments, returns, credits, invoices and balances regarding Consigned Merchandised. Promptly following Consignee's receipt of such Consignor Statement, Consignee shall prepare and submit to Consignor a report reconciling the Consignor Statement to Consignee's records ("Reconciliation Report"). Consignor and Consignee shall cooperate in good faith regarding the Reconciliation Report and to resolve any differences between the Reconciliation Report and the Consignor Statement. Any shrinkage evidenced by the Reconciliation Report (as modified to resolve any differences) shall be deemed to reflect sales of such Consigned Merchandise as of the date of the Reconciliation Report to be paid for by Consignee in accordance with Paragraph 8 hereof. In addition to the forgoing, at least once each year Consignee shall conduct a physical inventory or other agreed upon method for taking inventory, and a Reconciliation Report based thereon shall be prepared and any payment due as a result thereof shall be made in accordance with the provisions of this Paragraph and Paragraph 8 hereof. 8. a. Consignor shall prepare a document, labeled "Memo," which will accompany each shipment of Consigned Merchandise to Consignee. The Memo shall generally describe and identify the items of Consigned Merchandise contained in that shipment. b. Consignee shall, no later than five (5) business days after the end of each week, send to Consignor, by fax, a sales report listing the piece(s) of Consigned Merchandise sold, transferred to layaway or otherwise disposed of during that week (the "Consignee Sales Report"). c. Upon receipt of the Consignee Sales Report, Consignor shall promptly prepare an invoice, setting forth the payment due from Consignee based upon the Consignee Sales Report. Consignee shall remit payment to Consignor in the amount of such invoice within thirty (30) calendar days of Consignee's date of such invoice. d. The prices to be charged by Consignor and to be paid by Consignee for the Consigned Merchandise shall be set forth on the "Memo" accompanying the goods. 3 4 e. Consignor may at its sole discretion from time to time announce a price change for the Consigned Merchandise. Consignor shall give Consignee sixty (60) calendar days' prior written or verbal notice of any price changes for Consigned Merchandise (new prices shall not be materially different than prices charged to Consignor's other customers for similar goods sold under similar terms and conditions); during this sixty (60) calendar day period Consignee may buy Consigned Merchandise from Consignor at the old price. New orders by the Consignee after the date of notification of a price change shall be made at the new price. If Consignee in its sole discretion does not agree to any such price change Consignee may promptly return to Consignor all unsold Consigned Merchandise subject to such price change, or otherwise terminate this Agreement on ten (10) calendar days' written notice to Consignor and, in such event, all sold Consigned Merchandise shall be paid for and all unsold Consigned Merchandise shall be promptly returned to Consignor. f. The terms for reporting sales under Paragraph 8(b) and for paying invoices under Paragraph 8(c) may be altered only by the prior written consent of Consignor and Consignee. g. Consignee shall be entitled to credit against any outstanding amounts otherwise due or thereafter due under a Consignee Sales Report, or if no amounts are thereafter due, receive payment from Consignor, for any bona fide returns of Consigned Merchandise actually returned to Consignee at the store on or before thirty (30) calendar days from the date of sale. Consignee shall not be entitled to any such credit or payment, as the case may be, for any returns after such thirty (30) calendar days. C. SECURITY INTEREST IN CONSIGNED MERCHANDISE. 9. Consignor understands that Consignee commingles all proceeds from the sale of inventory, including merchandise on consignment, and that no identifiable cash or noncash proceeds now or hereinafter exist in Consignee's business. 10. The parties hereto agree that this Agreement creates a true consignment and that all transactions hereunder shall constitute true consignments of the Consigned Merchandise and not the purchase and sale of merchandise by Consignee. However, in the event that there is a final determination by a court of competent jurisdiction that this Agreement and the Memos for any reason do not create a true consignment, then in such event, Consignee hereby grants to Consignor a continuing security interest in the Consigned Merchandise, but not to the cash or noncash proceeds thereof now or hereafter existing. Without expressly or impliedly limiting the phrase "cash or noncash proceeds now or hereafter existing," such phrase includes: (a) any accounts, chattel paper, 4 5 general intangibles, or receivables of Consignee created upon the sale of the Consigned Merchandise, or (b) any rights in and to any pooling, securitization, structured or similar or other financing (including without limitation the issuance of asset-backed securities) involving any accounts, chattel paper, general intangibles, receivables, or other property of Consignee or any of its affiliates, including any special-purpose entity organized by or on behalf of Consignee. Consignee shall sign and deliver to Consignor such financing statements (UCC-1's) and other documents as Consignor may reasonably request to perfect its interest as a consignor in accordance with the provisions of the Uniform Commercial Code. Such UCC-1 financing statements will expressly exclude proceeds (as broadly illustrated herein) from the description of collateral and shall be in a form reasonably acceptable to Consignee. 11. Consignee warrants that except with respect to the security interests of the parties identified on Schedule C, Consignor's security interest in Consigned Merchandise created under Paragraph 10 hereof, and any other security interest given in goods on consignment, Consignee will not hereafter permit any other security interest or other lien or encumbrance to attach to Consigned Merchandise (excluding proceeds, as broadly defined herein) at any time. D. TERM OF AGREEMENT; ASSIGNABILITY. 12. This Agreement and the Minimum Commitment thereunder shall remain in full force and effect for a minimum term of two years from the date hereof and shall be automatically extended thereafter in one-year increments in accordance with the provisions of Paragraph 4 hereof regarding the automatic extension of the Minimum Commitment unless terminated earlier in accordance with this Agreement, including, without limitation, a termination resulting from Default by Consignee. Notwithstanding any expiration or termination of this Agreement for any reason, except for the Minimum Commitment and Consignor's obligation thereafter to ship Consigned Merchandise, upon any such termination or expiration the remaining provisions of this Agreement shall remain in full force and effect until all Consigned Merchandise delivered to Consignee is purchased and paid for by Consignee or returned to Consignor, and, in such event, upon written demand of Consignor the following shall promptly occur: (a) Consignee shall return to Consignor all remaining Consigned Merchandise, (b) Consignee shall issue a final Consignee Sales Report, (c) payment thereon shall be made in accordance with Paragraph 8 hereof, and (d) the parties shall undertake to reconcile any differences in their respective records in accordance with Paragraph 7 hereof. 13. Notwithstanding anything to the contrary in this Agreement, the Minimum Commitment and any obligation of Consignor to continue to ship Consigned Merchandise shall terminate unless either (a) or (b) timely occurs: (a) on or before November 3, 1997, an order is entered in the Chapter 11 Case approving debtor in possession financing or otherwise authorizing Consignee to use cash 5 6 and proceeds constituting cash collateral within the meaning of the Bankruptcy Code sufficient to pay all postpetition obligations of Consignee when due and payable through no earlier than February 28, 1998; or (b)(i) on or before December 1, 1997, Consignor and Consignee -- enter into a written agreement (which agreement is binding on Consignor and its estate) mutually acceptable to the parties pursuant to which Consignee shall place in a deposit account (for Consignor's sole benefit) funds sufficient to satisfy Consignee's obligations hereunder for Consigned Merchandise estimated to be sold in December 1997 and (ii) Consignee actually places such funds in such account (for --- Consignor's sole benefit) on or before December 8, 1997. If event (a) above does not occur by November 3, 1997, then the Minimum Commitment and any obligation of Consignor to continue to ship Consigned Merchandise shall terminate on December 1, 1997 unless event (b)(i) above timely occurs on that date. If event (b)(i) above timely occurs on December 1, 1997, then the Minimum Commitment and any obligation of Consignor to continue to ship Consigned Merchandise shall terminate on December 8, 1997 if event (b)(ii) above does not timely occur on that date. In the event of any termination of the Minimum Commitment and any obligation thereunder to ship Consigned Merchandise, the remaining provisions of this Agreement shall otherwise remain in full force and effect until all Consigned Merchandise delivered to Consignee is purchased and paid for by Consignee or returned to Consignor, and, in such event, upon written demand of Consignor the following shall promptly occur: (a) Consignee shall return to Consignor all remaining Consigned Merchandise; (b) Consignee shall issue a final Consignee Sales Report, (c) payment thereon shall be made in accordance with Paragraph 8 above, and (d) the parties shall undertake to reconcile any differences in their respective records in accordance with Paragraph 7 hereof. 14. The Agreement is not assignable without the prior written approval of Consignor and Consignee in their respective sole discretion. E. DEFAULTS. 15. As used herein, the term "Default by Consignee" shall mean the occurrence of any one or more of the following: a. Default in the payment or performance of any of Consignee's obligations or agreements hereunder which continues for more than ten (10) business days after Consignor gives Consignee written notice thereof; or b. Any representation or warranty made by Consignee herein or in any certificate, statement or agreement furnished in connection with this Agreement should prove to be false or misleading in any material respect; or c. An order of the Bankruptcy Court is entered (i) prohibiting Consignee's use of cash and cash proceeds constituting cash collateral within the meaning of the Bankruptcy Code sufficient to timely pay all postpetition 6 7 obligations of Consignee when due and payable; (ii) appointing a chapter 11 trustee in the Chapter 11 Case; (iii) converting the Chapter 11 Case to a chapter 7; or (iv) dismissing the Chapter 11 Case; or d. Consignee moves the Bankruptcy Court for an order, or any order is otherwise entered in the Chapter 11 Case, granting a lien on Consigned Merchandise, other than a lien junior in all respects to the interest of Consignor therein; or e. The occurrence of an adverse event that materially impairs Consignee's performance under this Agreement; or f. Any two of Samuel Merksamer, E. Peter Healey or Randy McCullough are no longer employed by Consignee in capacities having at least as much responsibility as each held as of the Petition Date. g. An order of the Bankruptcy Court is entered authorizing the sale of Consignee or substantially all of the assets of the Consignee. In the event of Default by Consignee, subject to the Consignment Order Consignor shall have all rights and remedies available under applicable law. In addition to Consignee's liability hereunder for the payment for, or return of, all Consigned Merchandise, Consignee shall indemnify and hold Consignor harmless for any costs, damages or expenses, including reasonable attorneys' fees and expenses, resulting from any Default by Consignee constituting a fraudulent or malicious act by Consignee. 16. As used herein, the term "Default by Consignor" shall mean the occurrence of any one or more of the following: a. Default in performance of any of Consignor's obligations or agreements hereunder which continues for more than ten (10) business days after Consignee gives Consignor written notice thereof; or b. Any representation or warranty made by Consignor herein or in any certificate, statement or agreement furnished in connection with this Agreement should prove to be false or misleading in any material respect; or c. The occurrence of an adverse event that materially impairs Consignor's performance under this Agreement. In the event of Default by Consignor, subject to the Consignment Order Consignee shall have all rights and remedies available under applicable law. 7 8 F. CONSIGNMENT ORDER. 17. The effectiveness of this Agreement is conditioned upon entry of the Consignment Order: (i) authorizing Consignee to enter into and perform under an agreement substantially in the form of this Agreement (which agreement, including this Agreement, is referred to as a "Postpetition Consignment Agreement"); (ii) providing that such Postpetition Consignment Agreement shall be binding and enforceable on Consignee and the estate and shall be in full force and effect; (iii) specifying that a Consignor may file UCC-1's and any other documents reasonably required by such Consignor to perfect its interest in Consigned Merchandise (other than proceeds) under such Postpetition Consignment Agreement; (iv) providing that all amounts payable under such Postpetition Consignment Agreement with respect to Consigned Merchandise shall at all times, before or after any termination thereof, constitute an allowed administrative expense claim under Bankruptcy Code sections 503(b)(1)(A) and 507(a)(1) against Consignee and its estate and any superseding case of Consignee; and (v) providing that pending the effectiveness of a plan of reorganization the Bankruptcy Court shall have exclusive jurisdiction over any dispute or matter arising under such Postpetition Consignment Agreement, including the allowability of and payment on any claims entitled to priority hereunder, and that, subject to the foregoing, Consignor shall be entitled to exercise all rights and remedies under the Uniform Commercial Code and otherwise with respect to Consigned Merchandise, and provide all notices authorized under such Postpetition Consignment Agreement, including exercising rights in and to Consigned Merchandise, notwithstanding the Chapter 11 Case and the automatic stay otherwise in effect in the Chapter 11 Case or any superseding case of Consignee. G. OTHER PROVISIONS. 18. This Agreement only governs the rights and obligations of the parties regarding Consigned Merchandise and does not address the rights and obligations of the parties in and to Prepetition Consigned Merchandise. 19. Any and all Consigned Merchandise shall be delivered and accepted pursuant to written policies and procedures reasonably adopted by Consignee and approved by Consignor in writing. 20. Each party to this Agreement agrees that if it hereafter commences, joins in, or seeks relief through any suit arising out of this Agreement, then the prevailing party shall pay to the other party all attorneys' fees and expenses reasonably incurred by said party in defending or otherwise responding to said suit or claim. Subject to the foregoing, the parties shall bear their own respective attorneys' fees and expenses in connection with the negotiation and implementation of this Agreement. 8 9 21. Consignee will not use the provisions of Bankruptcy Code section 1129 or any other section of the Bankruptcy Code to alter its obligations under this Agreement, unless any such alteration is agreed to by Consignor in its sole discretion; provided that Consignor agrees that the confirmation or effectiveness of a plan of reorganization shall not cause or constitute an acceleration of the obligations under, or termination of, this Agreement. Consignor understands that upon confirmation of such plan, any obligations of Consignee under this Agreement arising thereafter shall not constitute administrative priority claims, because Consignee's ability to confer administrative priority status in accordance with law shall cease on confirmation of any such plan. 22. This Agreement sets forth the parties' final and entire understanding with respect to its subject matter, cannot be changed, wavered or terminated orally and shall be governed by and construed under the laws of the State of California (without reference to its rules as to conflicts of law). If any provision shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not effect or render invalid or unenforceable any other provision of this Agreement and this Agreement shall be construed as if such provision were drafted so as not to be invalid or unenforceable. 23. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be deemed to be an original, but all of which taken together shall constitute but one and the same instrument. Signatures may be exchanged by telecopy, and each party agrees to be bound by its own telecopied signature and to accept the telecopied signatures of the other parties. 24. All notices under this agreement will be in writing and will be delivered by personal service or telegram, telecopy or certified mail to such address as may be designated from time to time by the relevant party, and which will initially be as set forth below: If to Consignee: If to Consignor: Barry's Jewelers, Inc. NAME 111 W. Lemon Avenue ADDRESS Monrovia, CA 91016 CITY Attn: Randy McCullough Attn: 9 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BARRY'S JEWELERS, INC.: NAME (Consignee) (CONSIGNOR) Date: __________________________ DATE: ____________________________ ________________________________ __________________________________ Authorized Signatory Authorized Signatory 10 11 SCHEDULE A TO CONSIGNMENT AGREEMENT BETWEEN BARRY'S JEWELERS, INC., AND CONSIGNOR 11 12 SCHEDULE B TO CONSIGNMENT AGREEMENT BETWEEN BARRY'S JEWELERS, INC. AND CONSIGNOR SEE STORE LISTING ATTACHED 12 13 SCHEDULE C TO CONSIGNMENT AGREEMENT BETWEEN BARRY'S JEWELERS, INC. AND CONSIGNOR 1. Bank Boston, N.A., individually and as agent ("Agent") for CIT Group/Business Credit, Inc., Sanwa Business Credit Corporation, and Jackson National Life Insurance Company, and each of their respective successors and assigns (collectively, the "Lenders"). 2. CIT Group/Business Credit, Inc., and its successors and assigns; 3. Sanwa Business Credit Corporation, and its successors and assigns; 4. Jackson National Life Insurance Company, and its successors and assig\ns; 5. First Trust National Association, as the trustee (the "Indenture Trustee") for the holders of 11% Senior Secured Notes due December 22, 2000, and its successors and assigns; 6. The holders of the 11% Senior Secured Notes due December 22, 2000, and their successors and assigns; 7. BankBoston, N.A., as the collateral agent for itself (for the benefit of the Lenders) and the Indenture Trustee, and its successors and assigns. 13 EX-23 12 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23 INDEPENDENT AUDITOR'S CONSENT AND REPORT ON SCHEDULE We consent to the incorporation by reference in Registration Statement No. 33-67814 of Barry's Jewelers, Inc. in Form S-8 of our report dated October 1, 1997 appearing in this Annual Report on Form 10-K of Barry's Jewelers, Inc. for the year ended May 31, 1997. Our audit of the financial statements referred to in our aforementioned report also included the financial statement schedule of Barry's Jewelers, Inc. and Subsidiary, listed in Item 14. The financial statement schedule is the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audit. In our opinion, such 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 October 14, 1997 EX-27 13 FINANCIAL DATA SCHEDULE
5 YEAR MAY-31-1997 JUN-01-1996 MAY-31-1997 7,322 0 64,852 (10,300) 41,374 105,390 24,836 (9,413) 123,483 5,908 0 0 0 33,247 (45,943) 123,483 130,446 144,346 93,002 93,002 64,641 18,766 12,745 (44,808) 284 (45,092) 0 (876) 0 (45,968) (11.47) (11.47)
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