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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 8, 2000
REGISTRATION NO. 333-95465
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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WHITEHALL JEWELLERS, INC.
(Exact name of the Registrant as specified in its charter)
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DELAWARE 36-1433610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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155 NORTH WACKER DRIVE
SUITE 500
CHICAGO, IL 60606
(312) 782-6800
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
JOHN R. DESJARDINS
EXECUTIVE VICE PRESIDENT, FINANCE & ADMINISTRATION
155 NORTH WACKER DRIVE
SUITE 500
CHICAGO, IL 60606
(312) 782-6800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
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CHRISTINE A. LEAHY, ESQ. VALERIE FORD JACOB, ESQ.
SIDLEY & AUSTIN FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
BANK ONE PLAZA ONE NEW YORK PLAZA
10 SOUTH DEARBORN NEW YORK, NEW YORK 10004
CHICAGO, ILLINOIS 60603
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
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Common stock, $0.001 par value(1) 3,363,750 shares(2) $25.125(3) $84,514,219 $22,312(4)
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(1) Includes associated preferred stock purchase rights to purchase 1/150 of a
share of Series A Junior Participating Preferred Stock, par value $.001 per
share. Rights initially are attached to and trade with the common stock of
the Registrant. The value attributable to such rights, if any is reflected
in the market price for common stock.
(2) Includes an aggregate of 438,750 shares of Common Stock which the
Underwriters have the option to purchase from the Registrant and the selling
stockholders to cover over-allotments, if any. See "Underwriting."
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. Based upon the
average high and low sale prices of the common stock on the Nasdaq National
Market System on January 24, 2000.
(4) Previously paid.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED
WITHOUT NOTICE. WHITEHALL JEWELLERS AND THE SELLING STOCKHOLDERS MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES, AND WHITEHALL JEWELLERS AND THE SELLING
STOCKHOLDERS ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY
STATE WHERE THE OFFER OR SALE OF THESE SECURITIES IS NOT PERMITTED.
Prospectus (Not Complete)
Issued February 8, 2000
2,925,000 SHARES
WHITEHALL LOGO
COMMON STOCK
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Whitehall Jewellers, Inc. and the selling stockholders are offering shares
of common stock in a firmly underwritten offering. Whitehall Jewellers is
offering 2,300,000 shares and the selling stockholders are offering 625,000
shares. Whitehall Jewellers will not receive any of the proceeds of shares sold
by the selling stockholders.
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Since January 27, 2000, the common stock has traded on the New York Stock
Exchange under the symbol "JWL." Before January 27, 2000, the common stock
traded on the Nasdaq National Market System under the symbol "WHJI." On February
4, 2000, the last reported sale price for the common stock on the New York Stock
Exchange was $24 per share.
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INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
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PER SHARE TOTAL
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Offering Price......................................... $ $
Discounts and Commissions to Underwriters.............. $ $
Offering Proceeds to Whitehall Jewellers............... $ $
Offering Proceeds to the Selling Stockholders.......... $ $
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Whitehall Jewellers and the selling stockholders have granted the
underwriters the right to purchase up to an additional 345,000 and 93,750 shares
of common stock, respectively, to cover any over-allotments. The underwriters
can exercise this right at any time within thirty days after the offering. Banc
of America Securities LLC expects to deliver the shares of common stock to
investors on or about , 2000.
BANC OF AMERICA SECURITIES LLC CREDIT SUISSE FIRST BOSTON
WILLIAM BLAIR & COMPANY
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, 2000
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[pictures of stores]
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Use of Proceeds............................................. 13
Dividend Policy............................................. 13
Price Range of Common Stock................................. 14
Capitalization.............................................. 15
Selected Financial and Operating Data....................... 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Industry.................................................... 27
Business.................................................... 28
Management.................................................. 39
Principal and Selling Stockholders.......................... 42
Description of Capital Stock................................ 45
United States Tax Consequences to Non-United States
Holders................................................... 50
Underwriting................................................ 53
Legal Matters............................................... 54
Experts..................................................... 54
Where You Can Find More Information......................... 55
Incorporation of Documents by Reference..................... 55
Index to Financial Statements............................... F-1
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FORWARD-LOOKING STATEMENTS
This prospectus, including the documents incorporated by reference herein,
contains "forward-looking statements" regarding our plans, expectations,
estimates and beliefs within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. All statements
other than statements of historical fact in this prospectus, including
statements regarding our competitive strengths, business strategy, plans to open
new stores in 2000, 2001 and 2002, individually and combined, plans to expand
our presence in outlet malls, estimated average cost to open a new store,
including net inventory and capital expenditures, plans to develop a website and
our e-commerce business, anticipated website development costs, plans to utilize
new marketing initiatives such as direct mail and in-store promotions, future
financial position, budgets, projected costs and plans and objectives of
management, are forward-looking statements. In addition, forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may," "will," "expect," "should," "intend," "estimate," "anticipate,"
"believe," "continue" or similar terminology.
Although we believe that the expectations reflected in any forward-looking
statements are reasonable, we can give no assurance that these expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from our expectations are disclosed under "Risk Factors" and
elsewhere in this prospectus and expressly qualify all written and oral
forward-looking statements attributable to us. These factors include, among
others, risks related to our ability to successfully execute our expansion
program, our need to identify and sign leases for most of the new stores we plan
to open, potential fluctuation in our quarterly operating results due to
seasonality, the susceptibility of our business to adverse economic conditions,
the risk of losing key personnel or not attracting additional qualified
personnel, significant competition and potential Internet competition, the
potential decrease in availability or increase in cost of consumer credit, our
dependence on major suppliers and on the availability of consigned merchandise,
our leverage, our susceptibility to fluctuations in gem and gold prices, risks
related to regulation, risks related to acquisitions, and the potential
influence of our management and principal stockholders on our business.
You should rely only on the information contained in this prospectus and in
the documents incorporated by reference in this prospectus. Neither we nor the
underwriters have authorized any other person to provide you with information
different from that contained in this prospectus. If anyone provides you with
different or inconsistent information, you should not rely on it. Neither we nor
the underwriters are making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. The information appearing
in this prospectus is accurate only as of the date on the front cover of this
prospectus regardless of the time of delivery of this prospectus or of any sale
of our common stock. Our business, financial condition, results of operations
and prospects may have changed since that date.
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PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and may
not contain all of the information that may be important to you. Before you
decide to invest in Whitehall Jewellers you should read the entire prospectus
carefully, including the "Risk Factors" section, our financial statements and
the related notes included in this prospectus, and the documents incorporated by
reference into this prospectus. References to "Whitehall Jewellers", "we", "us"
and "our" refer to Whitehall Jewellers, Inc. but not to the underwriters. Unless
otherwise indicated, the information contained in this prospectus reflects a
3-for-2 stock split we effected in the form of a stock dividend on January 4,
2000 and assumes that the underwriters do not exercise their over-allotment
option to purchase additional shares of common stock. Our fiscal year ends
January 31. References to fiscal years by date refer to the fiscal year
beginning February 1 of that calendar year. For example, "fiscal 1998" began on
February 1, 1998 and ended on January 31, 1999.
WHITEHALL JEWELLERS
Founded in 1895, Whitehall Jewellers is a leading, national specialty
retailer of fine jewelry (based on number of stores) offering an in-depth
selection in the following key categories: diamond, gold, precious and
semi-precious jewelry. Our target customers are middle to upper-middle income
women over 25 years old. As of February 4, 2000, we operated 294 mall based
stores in 33 states under the established brand names of Whitehall Co. Jewellers
(239 stores), Lundstrom Jewelers (52 stores) and Marks Bros. Jewelers (3
stores). Our small but flexible store format, averaging approximately 880 square
feet, and our strong sales culture contribute to our highly productive stores
which averaged annual sales of approximately $1.1 million per store in fiscal
1998. Our merchandising and marketing expertise, including the use of non-
recourse credit, have also contributed to our 25 consecutive quarters of
positive comparable store sales growth through January 31, 2000.
We have more than doubled our store base since 1994 through organic growth,
the 1998 acquisition of 36 Jewel Box stores and opportunistic acquisitions of
real estate leases through the strategic purchase of single or multiple retail
locations (both jewelry and other formats). This store growth, combined with an
average 7.4% comparable store sales increase over the past five years, produced
total sales of $238.9 million in fiscal 1998, resulting in a compound annual
rate of growth in sales of 22.3% since fiscal 1994. Due to our operating
efficiencies during the same period, operating income grew at a compound annual
rate of 23.6% to $27.3 million in fiscal 1998, reflecting an operating margin of
11.4%. For the nine months ended October 31, 1999 our sales were $187.8 million,
representing a 37% increase over the comparable 1998 period. Income from
operations and net income for the nine months ended October 31, 1999 increased
51.3% and 51.1%, respectively. In fiscal 1999, we opened 46 new stores and
closed six stores as compared to fiscal 1998, when we opened 70 stores (which
includes the 36 Jewel Box stores) and closed or sold 11 stores. In connection
with this offering, we have recently accelerated our growth strategy by
increasing our planned new store openings in fiscal 2000 to 62 stores from 50
stores and by increasing our planned new store openings in fiscal 2000, 2001 and
2002 combined to 200 stores.
OPERATING STRATEGY
Small, Flexible Store Format. We believe that we have a competitive
advantage in obtaining high traffic, "center court" locations in desirable
regional and super-regional malls due principally to:
- our small average store size of approximately 880 square feet, which,
while considerably smaller than the average store size of many of our
mall-based competitors, generates comparable sales volumes;
- our ability to adapt our store design to various sizes and
configurations; and
- our high average sales per square foot (approximately $1,273 for the 12
months ended October 31, 1999).
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Our stores are located in high visibility mall locations and provide our
customers with a comfortable and inviting shopping environment. We have followed
a disciplined and systematic approach when evaluating new store opportunities.
We select locations for our stores based on an evaluation of individual site
economics and market conditions. Because of our flexible store format and our
reputation among mall developers as a strong tenant, we have historically
received more offers for attractive new store sites than we can accept. We are,
and have been, opportunistic in acquiring other retail formats in a single store
or multiple store acquisition.
Attractive Store Operating Model. Our store model has proven to be very
attractive across brands, mall locations and in both new and existing markets.
New stores opened in fiscal 1998 (excluding the acquired Jewel Box stores)
performed at approximately 90% of mature store sales in their first year of
operation. Based on our experience with recent store openings, we estimate that
the average net investment to open a new store is approximately $650,000, which
includes capital expenditures and initial inventory, net of payables. During
their first full 12 months of operations, our new stores opened in fiscal 1998
generated average net sales of approximately $1,050,000 and store-level
operating cash flow (defined as income from operations plus depreciation and
amortization) of approximately $176,000, or approximately 16.8% of net sales.
Consistent Brand Imaging. We reinforce the upscale, trustworthy image of
our store brand names, Whitehall Jewellers and Lundstrom Jewelers, with
consistent merchandise selection and price points, store layout and fixtures,
packaging, marketing and promotions. Whitehall Co. Jewellers is our primary
trademark and is positioned to be somewhat more upscale than the average
mall-based jewelry store. Additionally, having two strong brands allows us to
enter a given mall with multiple locations, leverage our infrastructure within a
given region and increase the number of potential store sites available to us.
Differentiated Merchandising. We offer an in-depth selection of
high-quality merchandise in several key categories of fine jewelry: diamond,
gold, precious and semi-precious jewelry. This "key category" focus is oriented
toward our target customer, the middle to upper-middle income woman over 25
years old. Within these categories, we augment our selection with consignment
items which reflect more fashion forward themes, providing increased selection
while minimizing our inventory risk.
Motivated, Sales-Oriented Store Personnel. We believe that the quality of
our sales personnel is critical to our success and represents a significant
competitive advantage. To assist our sales personnel in their selling efforts,
our sales personnel are authorized to discount prices within specifically
developed guidelines. Compensation and bonus programs reinforce sales and margin
goals on a daily, weekly and monthly basis.
Absence of Recourse Credit Risk. We operate based upon a "no credit risk"
policy. When purchasing on credit, customers must use their personal credit
cards, our private label credit cards (which are available through a third party
and are non-recourse to us), or other non-recourse third party credit
arrangements. Our strict policy eliminates credit risk associated with a
customer's failure to pay. This policy also distinguishes us from most of our
competitors, which not only bear such credit risk, but also rely on finance
income in addition to merchandise sales.
Strict Operating Controls. Our management team exercises significant
control over many non-sale aspects of our store operations, including site
selection, purchasing, store development, financial reporting and sales
training. We believe that this commitment to operational control enables us to:
- operate substantially all of our stores on a profitable basis;
- identify opportunities to improve productivity quickly; and
- react quickly to shifts in product pricing and consumer purchasing
trends.
Emphasis on Risk Management. One of our strengths is our disciplined
approach to the core elements of our business model. While we continue to
evolve, there are certain key operating strategies that are designed to mitigate
risk to our business. They include our small, flexible store format, our non-
recourse credit policy and our use of consignment inventory.
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Experienced Management Team. Our five person executive management team has
on average 18 years of retail industry experience and 15 years of experience
with Whitehall Jewellers. In addition, after the completion of the offering this
group will continue to have a combined beneficial interest in the company in
excess of 15.4% of our common stock.
GROWTH STRATEGY
Accelerate New Store Growth. In fiscal 1997 and fiscal 1998, we opened a
total of 64 stores and acquired 36 stores through the acquisition of the Jewel
Box chain. In fiscal 1999, we opened 46 new stores. During this growth period we
entered 20 new markets, including eight new states. Based on our successful
track record of opening and/or converting these new stores and our solid
infrastructure to support our expansion strategy, we believe we are well
positioned for accelerated growth over the next several years. As of January 31,
2000, we had already identified substantially all of the 62 sites we intend to
select for fiscal 2000, and we had reached understandings with respect to 54 of
these stores. We anticipate that, in the near term, approximately 80% of new
stores each year will be in existing markets and 20% will be in new markets. In
addition, we expect to continue to evaluate acquisition opportunities as they
arise as an element of our growth strategy.
Refine Merchandising Initiatives. We continue to refine our merchandise mix
and improve the quality of our product offerings, resulting in an increase in
the number of customer transactions and the average transaction value per
customer. We intend to continually apply these practices, by increasing the
quality, selection and price points of our core items -- diamonds, gold,
precious and semi-precious jewelry.
Enhance Sales and Marketing Initiatives. We use direct marketing, in-store
promotions and intend to use our new website in our marketing process to drive
comparable store sales. We plan to leverage our customer file of over one
million names with additional direct mailing initiatives. In the first half of
fiscal 2000, we plan to launch e-commerce capabilities to complement our
store-based operations.
RECENT DEVELOPMENTS
Fiscal 1999 Sales. During the fourth quarter of fiscal 1999, our comparable
store sales increased 11.1% as compared to a comparable store sales increase of
8.3% for the fourth quarter of fiscal 1998. Net sales rose 25.2% during the
fourth quarter of fiscal 1999 to $127.7 million as compared to $102.0 million
for the fourth quarter of fiscal 1998. Comparable store sales increased 11.0% in
fiscal 1999 as compared to a comparable store sales increase of 5.8% in fiscal
1998. Net sales increased 32.0% in fiscal 1999, to $315.4 million from $238.9
million in fiscal 1998. Comparable store sales increased due to the strong
economic environment for jewelry, continued use of non-recourse credit and
enhanced marketing programs.
Recent Accounting Pronouncements. We offer a layaway program that enables
our customers to hold an item at our stores and pay for it over a one-year
period without interest charges. We retain possession of merchandise placed in
layaway until the customer has made all required payments. On December 3, 1999
the Securities and Exchange Commission issued Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements." SAB 101, among other things,
requires that layaway sales should only be recognized upon delivery of
merchandise to the customer. The accounting required by this bulletin needs to
be adopted no later than the first fiscal quarter of the fiscal year beginning
after December 15, 1999. Accordingly, we have elected to adopt this
pronouncement in the first quarter of fiscal year 2000. It is expected that we
will reflect a charge of approximately $3.0 million, net of a 40% tax benefit,
which will be presented as a cumulative effect of this accounting change as of
February 1, 2000. We expect that SAB 101 will not have a material effect on our
future sales but will only impact the timing of recognition of revenue.
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We are incorporated under the laws of Delaware. Our principal executive
offices are located at 155 North Wacker Drive, Suite 500, Chicago, IL 60606 and
our telephone number is (312) 782-6800. We maintain a site on the World Wide Web
at http://www.whitehalljewellers.com; however, the information found on our
website is not part of this prospectus.
3
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THE OFFERING
Common stock offered by Whitehall
Jewellers............................. 2,300,000 shares
Common stock offered by the selling
stockholders.......................... 625,000 shares
Total shares to be offered............ 2,925,000 shares
Common stock outstanding after the
offering.............................. 16,809,744 shares
Use of proceeds....................... Upon the completion of this offering,
we expect to receive $51.9 million in
net proceeds (assuming an estimated
offering price per share of $24). We
intend to use the proceeds:
- to reduce debt under our existing
credit facility (which debt may be
subsequently reborrowed),
- to accelerate new store openings,
and
- for working capital and other
general corporate purposes.
We will not receive any of the
proceeds from the sale of common
stock by the selling stockholders.
New York Stock Exchange symbol........ JWL
The information regarding shares of common stock outstanding after the
offering is based on the number of shares of common stock outstanding as of
January 31, 2000 and assumes that the underwriters do not exercise their
over-allotment option. The number of shares outstanding excludes 2,611,769
shares reserved for issuance under our incentive compensation and stock purchase
plans, of which options to purchase 2,131,621 shares at an average exercise
price of $10.42 are currently outstanding.
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SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth certain of our financial and operating data.
The selected statement of operations data and balance sheet data as of and for
the fiscal year ended January 31, 1999 (fiscal 1998) and each of the two prior
fiscal years are derived from our audited financial statements. The interim
period data for the nine months ended October 31, 1998 and 1999 are derived from
our unaudited financial statements. This summary financial and operating data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
the related notes included in this prospectus.
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NINE MONTHS ENDED
FISCAL YEAR ENDED JANUARY 31, OCTOBER 31,
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1997 1998 1999 1998 1999
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(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
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STATEMENT OF OPERATIONS DATA:
Net sales.......................... $155,474 $ 188,898 $ 238,942 $ 136,916 $ 187,754
Gross profit....................... 64,340 78,025 99,574 53,931 74,649
Income from operations............. 19,031 22,216 27,313 7,713 11,671
Income from continuing operations
before taxes..................... 12,038 18,410 23,190 4,857 7,353
Net income......................... $ 17,400 $ 10,195 $ 14,262 $ 2,992 $ 4,521
Earnings per share before
extraordinary
items -- Diluted(1).............. $ 0.60 $ 0.73 $ 0.92 $ 0.19 $ 0.30
Weighted average shares
outstanding -- Diluted(1)........ 12,324 15,338 15,495 15,534 15,079
SELECTED OPERATING DATA:
Stores open at end of period....... 164 191 250 244 289
Average net sales per store(2)..... $990,000 $1,045,000 $1,073,000 $1,044,000 $1,116,000
Average net sales per gross square
foot(3).......................... $ 1,247 $ 1,325 $ 1,323 $ 1,287 $ 1,273
Average merchandise sale........... $ 255 $ 273 $ 286 $ 296 $ 315
Comparable store sales
increase(4)...................... 7.9% 4.8% 5.8% 4.0% 10.9%
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AS OF OCTOBER 31, 1999
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ACTUAL AS ADJUSTED(5)
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BALANCE SHEET DATA: (at end of period)
Working capital............................................. $ 19,805 $ 71,745
Total assets................................................ 229,893 229,893
Total debt.................................................. 83,269 31,329
Stockholders' equity........................................ 57,042 109,282
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(1) All diluted earnings per share and weighted average shares outstanding
amounts reflect our 3 for 2 stock split effected in the form of a stock
dividend on January 4, 2000.
(2) Average net sales per store represents the total net sales for stores open a
full fiscal year divided by the total number of such stores.
(3) Average net sales per gross square foot represents total net sales for
stores open for a full fiscal year divided by the total square feet of such
stores. For the nine-month periods ended October 31, 1999 and October 31,
1998, trailing 12 month data was used.
(4) A store becomes comparable after it has been open for 12 full months. Fiscal
year 1998 includes sales from the acquired Jewel Box stores from October
1998 through January 1999. The nine months ended October 31, 1999 include
sales from the acquired Jewel Box stores for the first six months of fiscal
1999 and the month of October 1999. The nine months ended October 31, 1998
include sales from the acquired Jewel Box stores for the month of October
1998.
(5) Adjusted to reflect the completion of this offering and the use of the
proceeds thereof.
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RISK FACTORS
Before you invest in our common stock, you should be aware that there are
various risks, including those described below, associated with an investment in
our common stock. Such risks could have a material adverse effect on our
business, financial condition or results of operations. You should carefully
consider these risk factors, together with all of the other information included
in this prospectus (including the documents incorporated by reference into this
prospectus), before you decide whether to purchase shares of our common stock.
The risks and uncertainties described below are not the only ones we face;
additional risks and uncertainties, including those of which we are not aware or
which we currently deem immaterial, may also adversely affect our business.
WE MAY NOT BE ABLE TO SUCCESSFULLY EXECUTE OUR EXPANSION PROGRAM.
The growth of our net sales and earnings will depend to a significant
degree on our ability to expand our operations through the opening of new stores
in existing and new markets and to operate those stores profitably. The results
achieved by new stores may vary substantially. We currently operate 294 stores
in 33 states and plan to open a total of 62 new stores in fiscal 2000 compared
to 46 new stores opened in fiscal 1999. We have recently increased our planned
store openings to 62 from 50 for fiscal 2000 and to a total of approximately 200
for fiscal 2000, 2001 and 2002 combined, contingent upon the completion of this
offering of common stock. However, we may not be able to open all of the stores
discussed in our growth strategy and any new stores that we open may not be
profitable.
Achieving our expansion goals will depend on a number of factors, including
our ability to identify and secure suitable locations on acceptable terms, open
new stores in a timely manner, adapt our distribution and other managerial and
operational systems to an expanded network of stores, hire and train additional
store and supervisory personnel, and integrate new stores into our operations on
a profitable basis. Our expansion plan could also be materially adversely
impacted by adverse national and regional economic conditions, including a
recession. In addition, opening new stores in our existing markets could have
the effect of diminishing sales at our other stores in these markets. We also
cannot assure you that our store format and operating strategy will be effective
in new markets. We anticipate that there will continue to be significant
competition among specialty retailers for desirable store sites and qualified
personnel.
There can be no assurance that we will be able to open and operate new
stores on a timely and profitable basis and our expansion could be significantly
slower than our current plans due to a number of factors. We have not identified
most of the sites or signed leases for most of the sites we plan to enter in
2001 and 2002. In addition, we cannot assure you that our new Whitehall store
concept will be successful in our existing or new markets. If we are
unsuccessful in executing our expansion program our financial condition and
operating results could be materially adversely affected. Furthermore, we will
continually need to evaluate the adequacy of our store management and systems to
manage our planned expansion. To manage our growth effectively, we must continue
to develop and improve our operational and financial systems. Failure to
maintain adequate and efficient systems could have a material adverse effect on
our results of operations or financial condition.
We expect to fund the opening of new stores with cash flow from operating
activities and borrowings under our credit facility. We estimate that the cost
of opening a new store on average is approximately $650,000, including initial
inventory (net of payables) and capital expenditures. However, the actual cost
of opening any new store may be greater than this current estimate. If we expand
more rapidly than our current plans anticipate, or if we fail to generate
sufficient cash flow, we may require additional capital (in addition to the
proceeds of this offering of common stock) in order to finance our expansion. In
particular, we will need to reborrow amounts we are repaying with the proceeds
of this offering in order to complete our expansion plan. There can be no
assurance as to the future availability or terms of additional financing.
Failure to obtain such financing on acceptable terms could require us to alter
our expansion plans or otherwise adversely affect our business. A change in our
expansion plans could have a material adverse effect on our results of
operations or financial condition.
6
<PAGE> 11
We will also continue to evaluate acquisition opportunities as they arise
as an element of our growth strategy. In 1998, for example, we acquired a
jewelry chain which added 36 stores located in eight states. It is possible that
recent or future acquisitions could have an adverse effect upon our operating
results, particularly in the fiscal quarters immediately following the
completion of such transactions, while the operations of the acquired entities
are being integrated into our operations. Acquisitions involve risks that could
cause our actual growth to differ from our expectations. For example:
- We may not be able to successfully integrate acquired businesses in a
timely manner. We may also incur substantial costs, delays or other
operational or financial problems during the integration process and our
operating results could be adversely affected during the integration
process.
- We could be required to incur additional indebtedness to finance
acquisitions.
- We could be required to amortize goodwill or other intangible assets,
which would have an adverse effect on our net income.
- We could elect to finance future acquisitions by using common stock for
some or all of the purchase price, which would dilute the ownership
interests of stockholders.
We currently have no agreements or understandings with respect to any
acquisitions and may not make any acquisitions in the future.
OUR QUARTERLY OPERATING RESULTS WILL FLUCTUATE DUE TO SEASONALITY AND OTHER
FACTORS, AND VARIATION IN QUARTERLY RESULTS COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE.
Our business is highly seasonal, with a significant portion of our sales
and most of our net income generated during the fourth fiscal quarter ending
January 31. Sales in the fourth quarter of fiscal 1998 accounted for 42.7% of
annual sales for such fiscal year and income from operations for the fourth
quarter of fiscal 1998 accounted for 71.8% of annual income from operations for
such fiscal year. We have historically experienced lower net sales and minimal
net income in each of our first three fiscal quarters and we expect this trend
to continue for the foreseeable future. We expect to continue to experience
fluctuations in our net sales and net income due to a variety of factors. A
shortfall in results for the fourth quarter of any fiscal year could have a
material adverse effect on our annual results of operations. Our quarterly
results of operations also may fluctuate significantly as a result of a variety
of factors, including the timing of new store openings, net sales contributed by
new stores, increases or decreases in comparable store sales, timing of certain
holidays, changes in our merchandise, general economic, industry and weather
conditions that affect consumer spending, and actions of competitors.
WE MAY NOT BE ABLE TO ACHIEVE COMPARABLE STORE SALES GAINS IN THE FUTURE.
A variety of factors affect our comparable store sales results, including
economic conditions, the retail sales environment, the availability and cost of
credit from third party credit providers, the results of our merchandising
strategies, the success of our marketing and promotional programs, and our
ability to otherwise execute our business strategy. We experienced a 5.8% and
11.0% comparable store sales increase in fiscal 1998 and fiscal 1999,
respectively. We do not expect comparable store sales to increase at such rates
in the future, and there can be no assurance that we will continue to achieve
comparable store sales gains. Our comparable store sales results could cause the
price of our common stock to fluctuate substantially.
OUR BUSINESS IS PARTICULARLY SUSCEPTIBLE TO ADVERSE ECONOMIC CONDITIONS.
Jewelry purchases are discretionary for consumers and may be particularly
affected by adverse trends in the general economy. The success of our operations
and our ability to execute our expansion plans depend to a significant extent
upon a number of factors relating to discretionary consumer spending, including
economic conditions (and perceptions of such conditions) affecting disposable
consumer income such as employment wages and salaries, business conditions,
interest rates, availability and cost of credit
7
<PAGE> 12
and taxation, for the economy as a whole and in regional and local markets where
we operate. In addition, we are dependent upon the continued popularity of malls
as a shopping destination and the ability of malls or tenants and other
attractions to generate customer traffic for our stores. There can be no
assurance that consumer spending will not be adversely affected by general
economic conditions or a decrease in mall traffic, thereby negatively impacting
our results of operations or financial condition and ability to execute our
expansion plans.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT ADDITIONAL QUALIFIED PERSONNEL
AS WE GROW, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
We are highly dependent upon the ability and experience of our senior
executives and other key employees, including Hugh M. Patinkin, Chairman,
President and Chief Executive Officer, John R. Desjardins, Executive Vice
President, Finance & Administration, Matthew M. Patinkin, Executive Vice
President, Store Operations, Manny A. Brown, Executive Vice President, Store
Operations, and Lynn D. Eisenheim, Executive Vice President, Merchandising. The
loss of services of one or more of these individuals or other members of
management could have a material adverse effect on our results of operations or
financial condition. We do not maintain "key executive" life insurance on any of
our executives and we have not entered into employment agreements with our key
executive officers. Our success also depends on our ability to continue to
attract, manage and retain other qualified personnel as we grow. We cannot
assure you that we will continue to attract or retain such personnel.
WE FACE SIGNIFICANT COMPETITION.
The retail jewelry business is fragmented and highly competitive. We
compete with national and regional jewelry chains and local independently owned
jewelry stores, especially those that operate in malls, as well as with
department stores, catalog showrooms, discounters, direct mail suppliers and
televised home shopping networks. A number of our competitors are substantially
larger and have greater financial resources than us. We believe that the primary
competitive factors affecting our operations are store location and atmosphere,
quality of sales personnel and service, breadth and depth of merchandise
offered, pricing, credit and reputation. We also believe that we compete for
consumers' discretionary spending dollars with retailers that offer merchandise
other than jewelry. In addition, we compete with jewelry and other retailers for
desirable locations and qualified personnel. The foregoing competitive
conditions (which could intensify) may adversely affect our results of
operations or financial condition and ability to successfully execute our
expansion plans.
We also face significant new competition from Internet jewelry retailers.
Direct marketing of fine jewelry, including marketing of jewelry via the
Internet, historically has not met with substantial consumer acceptance.
However, in the past year a number of well-financed businesses have announced
plans to market fine jewelry via the Internet and some have begun selling fine
jewelry via the Internet. Large scale consumer acceptance of Internet fine
jewelry retailing could transform the jewelry retailing business, result in
lower price points and margins, and have a substantial adverse effect on our
results of operations or financial condition. Although we plan to launch an
e-commerce sales program in the first half of 2000, there can be no assurance
that this initiative will be successful. Our ability to develop a successful
e-commerce site may depend to a substantial degree on building brand recognition
of the site which may require substantial marketing costs.
A DECREASE IN AVAILABILITY OR AN INCREASE IN COST OF CONSUMER CREDIT COULD HAVE
A NEGATIVE IMPACT ON OUR BUSINESS.
The third party credit we offer to our customers is supplied to us
primarily through a "private label" credit card arrangement with Monogram Credit
Services, L.L.C., a joint venture between Bank One, N.A. and G.E. Capital
Corporation, and other credit programs offered by other financial institutions.
During fiscal 1998, private label credit card sales accounted for approximately
39% of our net sales while total credit sales, including major credit cards such
as Visa, MasterCard, American Express and others, generally constituted
approximately 73% of our net sales. The loss or any substantial modification of
any of
8
<PAGE> 13
these arrangements could have a material adverse effect on our results of
operations or financial condition. During periods of increasing consumer credit
delinquencies in the retail industry generally, financial institutions may
reexamine their lending practices and procedures. There can be no assurance that
increased delinquencies being experienced by providers of consumer credit
generally would not cause providers of third party credit offered by us to
decrease the availability or increase the cost of such credit. See
"Business -- Credit."
WE DEPEND ON OUR MAJOR SUPPLIERS AND ON THE AVAILABILITY OF CONSIGNED
MERCHANDISE.
We do not manufacture our own merchandise but instead work closely with a
number of suppliers. During the first 11 months of fiscal 1999, our largest
supplier accounted for approximately 13% of our total purchases, and our largest
five suppliers accounted for approximately 38% of such purchases. Our
relationships with our primary suppliers are generally not pursuant to long-term
agreements. Although we believe that there are a number of suppliers of fine
jewelry, the loss of one or more of our major suppliers, particularly at
critical times during the year, could have a material adverse effect on our
results of operations or financial condition.
A substantial portion of the merchandise we sell is carried on a
consignment basis prior to sale or is otherwise financed by vendors, thereby
reducing our direct capital investment in inventory. The weighted average
percentage of our total inventory that was carried on consignment for fiscal
1996, 1997 and 1998 and the first nine months of fiscal 1998 and 1999 (based on
the inventory levels at the end of each fiscal quarter) was 17.3%, 18.3%, 20.1%,
19.5%, and 21.2%, respectively. The willingness of vendors to enter into such
arrangements may vary substantially from time to time based on a number of
factors, including the merchandise involved, the financial resources of vendors,
interest rates, availability of financing, fluctuations in gem and gold prices,
inflation, our financial condition and a number of economic or competitive
conditions in the jewelry business or the economy generally. Any change in these
relationships could have a material adverse effect on our results of operations
or financial condition.
OUR CURRENT LEVELS OF DEBT COULD IMPACT OUR OPERATIONS IN THE FUTURE.
Our debt as of October 31, 1999 would have been approximately $31.3 million
and approximately 22.3% of our total debt and stockholders' equity, calculated
on an as-adjusted basis after giving effect to this offering of common stock and
the anticipated use of net proceeds generated thereby. Our debt levels fluctuate
from time to time based on seasonal working capital needs.
The degree to which we are leveraged could impair our ability to obtain
additional financing for working capital, capital expenditures, acquisitions or
other general corporate purposes. In addition, we may be more highly leveraged
than some of our competitors, which may place us at a competitive disadvantage,
and our leverage could make us more vulnerable to changes in general economic
conditions or factors affecting the jewelry business generally. In addition, our
credit facility includes negative covenants and financial covenants which could
restrict or limit our operations.
A substantial portion of our indebtedness bears interest at fluctuating
rates, and changes in interest rates or rates charged under our gold consignment
facility could adversely affect our results of operations or financial
condition.
OUR BUSINESS IS PARTICULARLY SUSCEPTIBLE TO FLUCTUATIONS IN GEM AND GOLD PRICES.
Our company and the jewelry industry in general are affected by
fluctuations in the prices of diamonds and gold and, to a lesser extent, other
precious and semi-precious metals and stones. During fiscal 1999, diamonds,
gold, precious and semi-precious jewelry accounted for approximately 98% of our
net merchandise sales. A significant change in prices or in the availability of
diamonds, gold or other precious and semi-precious metals and stones could have
a material adverse effect on our results of operations or financial condition.
The supply and price of diamonds in the principal world markets are
significantly influenced by a single entity, the Central Selling Organization, a
marketing arm of DeBeers Consolidated Mines Ltd. of South Africa (CSO). The CSO
has traditionally controlled the marketing of a
9
<PAGE> 14
substantial majority of the world's supply of diamonds and sells rough diamonds
to worldwide diamond cutters from its London office in quantities and at prices
determined in its sole discretion. The availability of diamonds to the CSO and
our suppliers is to some extent dependent on the political situation in diamond
producing countries, such as South Africa, Botswana, Zaire, republics of the
former Soviet Union and Australia, and on continuation of the prevailing supply
and marketing arrangements for raw diamonds. Until alternate sources could be
developed, any sustained interruption in the supply of diamonds or any
oversupply from the producing countries could adversely affect us and the retail
jewelry industry as a whole. Higher priced jewelry items tend to have a slower
rate of turnover, thereby increasing the risks to us associated with price
fluctuations and changes in fashion trends.
We have a gold consignment facility with a lending institution pursuant to
which we accept as consignee, and are responsible to return at some future date,
a fixed number of ounces of gold. The periodic charges we pay are computed based
on a percentage of the value of the gold consigned. Therefore, an increase in
the price of gold could substantially increase the annual costs to us of the
gold consignment and the eventual cost to us upon the termination of this
arrangement. Furthermore, borrowing availability under our revolving credit
facility is based on amounts outstanding thereunder, including the value of
consigned gold under the gold consignment facility which fluctuates based on
current gold prices. Therefore, an increase in the price of gold would reduce
availability under our revolving credit facility.
WE ARE SUBJECT TO SUBSTANTIAL REGULATION.
Our operations are affected by numerous federal and state laws that impose
disclosure and other requirements upon the origination, servicing and
enforcement of credit accounts, and limitations on the maximum amount of finance
charges that may be charged by a credit provider. Although credit to our
customers is provided by third parties without recourse to us based upon a
customer's failure to pay, any restrictive change in the regulation of credit,
including the imposition of, or changes in, interest rate ceilings, could
adversely affect the cost or availability of credit to our customers and,
consequently, our results of operations or financial condition.
Our operations are also affected by federal and state laws relating to
marketing practices in the retail jewelry industry. In marketing to our
customers, we compare most of our prices to "reference prices." Our literature
indicates to customers that our reference price for an item is either the
manufacturer's suggested retail price or our determination of the non-discounted
price at which comparable merchandise of like grade or quality is advertised or
offered for sale by competitive retailers and is not our current selling price
or the price at which we formerly sold such item. We are, from time to time,
subject to regulatory investigation relating to our use of "reference prices" in
marketing to our customers. Although we believe that pricing comparisons are
common in the jewelry business, there can be no assurance that this practice
would be upheld. An investigator for the Office of Consumer Affairs for the
Commonwealth of Virginia recently requested that we substantiate our advertised
claim of 50% off "reference prices." We are currently responding to that
request. The investigation is in a preliminary stage.
MANAGEMENT AND PRINCIPAL STOCKHOLDERS COULD HAVE SUBSTANTIAL INFLUENCE OVER US.
After consummation of this offering of common stock, our five senior
executive officers (Messrs. H. Patinkin, Desjardins, M. Patinkin, Eisenheim and
Brown) will beneficially own approximately 15.4% of the shares of outstanding
common stock. By virtue of such holdings, and if and to the extent these senior
executive officers act in concert, they will have substantial influence over the
election of directors and other matters, including the outcome of many
fundamental corporate transactions (such as mergers and sales of all or
substantially all of our assets) requiring stockholder approval. The interests
of these executive officers may not be consistent with the interests of our
other stockholders and these officers may support positions with which you
disagree.
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<PAGE> 15
THE PRICE OF OUR COMMON STOCK COULD BE VOLATILE.
There has been in recent years and may continue to be significant
volatility in the market price for our common stock, and there can be no
assurance that an active market for our common stock can be sustained. See
"Price Range of Common Stock and Dividend Policy." Our stock price may rise and
fall in a manner which is not related to our performance. Factors such as
quarterly fluctuations in our financial results, whether or not our quarterly
results meet or exceed analysts' or investors' expectations, our comparable
store sales results, announcements by us and other jewelry retailers, the
overall economy and the condition of the financial markets and general events
and circumstances beyond our control could have a significant impact on the
future market price of our common stock and the relative volatility of such
market price. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
instituted against that company. If similar litigation were instituted against
us, it could result in substantial costs and a diversion of our management's
attention and resources, which could have an adverse effect on our business.
ANTI-TAKEOVER PROVISIONS IN DELAWARE LAW AND OUR CHARTER AND BY-LAWS COULD DELAY
OR DEFER A CHANGE IN CONTROL.
Certain provisions of our certificate of incorporation and by-laws and
certain sections of the Delaware General Corporation Law, including those which
authorize our board of directors to issue shares of preferred stock and to
establish the voting rights, preferences and other terms of preferred stock
without further action by stockholders, may be deemed to have an anti-takeover
effect and may discourage takeover attempts not first approved by our board of
directors (including takeovers which some stockholders may deem to be in their
best interests). These provisions could delay or frustrate the removal of
incumbent directors or the assumption of control by an acquiror, even if such
removal or assumption of control would be beneficial to our stockholders. These
provisions also could discourage or make more difficult a merger, tender offer
or proxy contest, even if they would be beneficial, in the short term, to the
interests of our stockholders.
The specific provisions of our certificate of incorporation which may be
deemed to have an anti-takeover effect include, among others, the following:
- a classified board of directors serving staggered three-year terms;
- the elimination of stockholder voting by written consent;
- a provision providing that only the President or board of directors may
call special meetings of stockholders;
- the removal of directors only for cause, and then only by the holders of
at least a majority of the outstanding shares entitled to vote for such
removal;
- a provision permitting the board of directors to take into account
factors in addition to potential economic benefits to stockholders; and
- advance notice requirements for stockholder proposals and nominations for
election to the board of directors.
We are also subject to Section 203 of the Delaware General Corporation Law
which, in general, imposes restrictions upon certain acquirors (including their
affiliates and associates) of 15% or more of our common stock. We also have
entered into severance agreements with our senior executives which could
increase the cost of any potential acquisition of us. See
"Management -- Severance Agreements."
In addition, our board of directors has adopted a stockholders rights plan
pursuant to which each share of our common stock has associated with it one
right entitling our stockholders, upon the occurrence of a triggering event, to
purchase shares of our preferred stock or shares of the acquiror at a discount
from the prevailing market price. Triggering events generally include events or
transactions that relate to a potential acquisition, merger or consolidation
involving Whitehall Jewellers that has not been approved by
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<PAGE> 16
our board of directors. The stockholders rights plan may be deemed to have an
anti-takeover effect and may discourage or prevent takeover attempts not first
approved by our board of directors (including takeovers which certain
stockholders may deem to be in their best interests). See "Description of
Capital Stock -- Delaware Law and Certain Charter and By-Law Provisions" and
"-- Preferred Stock Purchase Rights."
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<PAGE> 17
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of the
2,300,000 shares of common stock offered by us at the assumed public offering
price of $24 per share, after deducting underwriting discounts and estimated
offering expenses payable by us, of approximately $51.9 million ($59.8 million
if the underwriters' over-allotment option is exercised in full). We will not
receive any of the proceeds from the sale of common stock by the selling
stockholders.
We intend to use the net proceeds from this offering (a) to fully repay the
outstanding balance of the revolving portion of our credit facility (which was
$50.9 million as of February 4, 2000), plus accrued interest thereon, subject to
reborrowings, (b) to accelerate the pace of new store openings (which may
include selective acquisitions) and (c) for working capital and other general
corporate purposes. Interest under our credit facility is based, at our option,
on Eurodollar rates or the bank's prime rate. Interest on the revolving portion
of our credit facility as of February 4, 2000 averaged approximately 7.6% per
annum. The revolving portion of our credit facility matures on September 10,
2003. We expect to reborrow under our credit facility as needed to fund our
store expansion program, working capital needs and for general corporate
purposes.
Pending application of the proceeds to the uses we have specified above, we
intend to invest the net proceeds of the offering in short-term, interest
bearing, investment grade securities.
DIVIDEND POLICY
We have never paid cash dividends on our capital stock. It is our present
policy to retain earnings to finance our operations and growth, and we do not
expect to pay dividends in the foreseeable future. Our board of directors will
determine any future change in dividend policies based on financial conditions,
profitability, cash flow, capital requirements, and business outlook, as well as
other factors relevant at the time. Our credit facility restricts our ability to
pay dividends.
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<PAGE> 18
PRICE RANGE OF COMMON STOCK
Our common stock is currently traded on the New York Stock Exchange under
the symbol "JWL." Prior to January 27, 2000 our common stock was traded on the
Nasdaq National Market under the symbol "WHJI." The table below sets forth, for
the periods presented, the range of high and low closing prices for our common
stock as reported on the Nasdaq National Market or the New York Stock Exchange,
as the case may be, in each case as adjusted to reflect the 3 for 2 stock split
effected on January 4, 2000.
<TABLE>
<CAPTION>
COMMON STOCK PRICE
---------------------
HIGH LOW
---- ---
<S> <C> <C>
Year ended January 31, 1999:
First Quarter............................................. $13 21/64 $11 1/2
Second Quarter............................................ 13 10 21/64
Third Quarter............................................. 12 5/64 6 43/64
Fourth Quarter............................................ 12 7 1/2
Year ended January 31, 2000:
First Quarter............................................. 11 53/64 8 21/64
Second Quarter............................................ 18 13/64 10 19/64
Third Quarter............................................. 20 1/4 15 59/64
Fourth Quarter............................................ 27 3/4 15 21/64
Year ended January 31, 2001:
First Quarter (through February 4, 2000).................. 24 1/4 23 3/4
</TABLE>
On February 4, 2000, the closing price of our common stock as reported on
the New York Stock Exchange was $24 per share. As of January 31, 2000, we had
approximately 182 holders of record of common stock.
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<PAGE> 19
CAPITALIZATION
The following table sets forth our capitalization as of October 31, 1999
and as adjusted to reflect the sale of common stock offered by us in this
offering. You should read this information in conjunction with our financial
statements and the notes to those financial statements appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
OCTOBER 31, 1999
-----------------------
AS
ACTUAL ADJUSTED(1)
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Credit facility(2)........................................ $ 64,129 $ 12,189
Outstanding checks, net................................... 5,854 5,854
-------- ----------
Total............................................. $ 69,983 $ 18,043
-------- ----------
Long-term debt (including current maturities):
Term loan................................................. $ 18,500 $ 18,500
Subordinated notes:....................................... 640 640
-------- ----------
Total............................................. 19,140 19,140
Stockholders' equity:
Common stock and additional paid-in capital............... 60,368 112,608
Accumulated earnings...................................... 6,671 6,671
Less treasury stock....................................... (9,997) (9,997)
-------- ----------
Total stockholders' equity........................ 57,042 109,282
-------- ----------
Total capitalization.............................. $ 76,182 $ 128,422
======== ==========
</TABLE>
- ---------------
(1) As adjusted to give effect to (i) the issuance of 2,300,000 million shares
at an estimated public offering price of $24 per share, less underwriting
discounts and other expenses payable by us, (ii) the receipt of $0.3 million
in proceeds from the exercise of options to purchase 40,000 shares in
connection with this offering, and (iii) the anticipated use of proceeds
from this offering.
(2) Borrowings under our credit facility fluctuate throughout the year based on
the seasonality of working capital needs. During the first nine months of
fiscal 1999, average borrowings under our credit facility (excluding the
current portion of long-term debt) were approximately $48.4 million. As of
February 4, 2000, there was $50.9 million outstanding under the revolving
portion of our credit facility.
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<PAGE> 20
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating data. The
statement of operations data and balance sheet data as of and for the fiscal
year ended January 31, 1999 (fiscal 1998) and each of the four prior fiscal
years are derived from our audited financial statements. The interim period data
for the nine months ended October 31, 1999 and 1998 have been derived from and
should be read in conjunction with our unaudited financial statements. The
selected financial information set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our audited financial statements.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JANUARY 31, OCTOBER 31,
-------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1998 1999
-------- -------- -------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $106,683 $131,022 $155,474 $ 188,898 $ 238,942 $ 136,916 $ 187,754
Cost of sales (including
buying and occupancy
expenses)................ 64,223 77,722 91,134 110,873 139,368 82,985 113,105
-------- -------- -------- ---------- ---------- ---------- ----------
Gross profit............... 42,460 53,300 64,340 78,025 99,574 53,931 74,649
Selling, general and
administrative
expenses................. 30,748 37,887 45,309 55,809 72,261 46,218 62,978
-------- -------- -------- ---------- ---------- ---------- ----------
Income from operations..... 11,712 15,413 19,031 22,216 27,313 7,713 11,671
Interest expense........... 10,594 12,314 6,993 3,806 4,123 2,856 4,318
Stock award expense........ -- 461 -- -- -- -- --
ESOP compensation
expense.................. 547 590 -- -- -- -- --
-------- -------- -------- ---------- ---------- ---------- ----------
Income from continuing
operations before
taxes.................... 571 2,048 12,038 18,410 23,190 4,857 7,353
Income tax expense
(benefit)(1)............. -- (14,924) 4,695 7,180 8,928 1,865 2,832
-------- -------- -------- ---------- ---------- ---------- ----------
Net income before
extraordinary items...... 571 16,972 7,343 11,230 14,262 2,992 4,521
Extraordinary item,
net(2)................... -- -- 10,057 (1,035) -- -- --
-------- -------- -------- ---------- ---------- ---------- ----------
Net income................. $ 571 $ 16,972 $ 17,400 $ 10,195 $ 14,262 $ 2,992 $ 4,521
======== ======== ======== ========== ========== ========== ==========
Earning per share before
extraordinary items --
Diluted(3)............... $ 0.07 $ 2.33 $ 0.60 $ 0.73 $ 0.92 $ 0.19 $ 0.30
Weighted average shares
outstanding -- Diluted(3)... 7,806 7,284 12,324 15,338 15,495 15,534 15,079
-------- -------- -------- ---------- ---------- ---------- ----------
SELECTED OPERATING DATA:
Stores open at end of
period................... 131 146 164 191 250 244 289
Average net sales per
store(4)................. $836,000 $936,000 $990,000 $1,045,000 $1,073,000 $1,044,000 $1,116,000
Average net sales per gross
square foot(5)........... $ 1,068 $ 1,183 $ 1,247 $ 1,325 $ 1,323 $ 1,287 $ 1,273
Average merchandise sale... $ 229 $ 245 $ 255 $ 273 $ 286 $ 296 $ 315
Comparable store sales
increase(6).............. 7.6% 11.0% 7.9% 4.8% 5.8% 4.0% 10.9%
BALANCE SHEET DATA: (at end
of period)
Working capital............ $ 20,460 $ 21,512 $ 25,824 $ 34,967 $ 38,478 $ 27,765 $ 19,805
Total assets............... 61,512 87,403 93,533 118,003 169,606 182,325 229,893
Total debt................. 110,806 107,891 21,267 28,907 49,526 64,502 83,269
Stockholders' equity
(deficit)................ (66,578) (47,858) 37,507 47,803 62,168 50,898 57,042
</TABLE>
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<PAGE> 21
- ---------------
(1) Income tax benefit in the year ended January 31, 1996 (fiscal 1995) resulted
from the reversal of our deferred tax valuation allowance and corresponding
recognition of a deferred tax asset as a result of its realization becoming
more likely than not.
(2) In fiscal 1996, we recorded an extraordinary gain on extinguishment of debt
due to the early repayment of approximately $18.3 million of debt. We also
recorded an extraordinary loss in connection with the redemption of Series D
Notes. In fiscal 1997, we recorded an extraordinary loss in connection with
our tender offer for Series C Notes.
(3) All diluted earnings per share and weighted average shares outstanding
amounts reflect our 3 for 2 stock split effected in the form of a stock
dividend on January 4, 2000.
(4) Average net sales per store represents the total net sales for stores open a
full fiscal year divided by the total number of such stores.
(5) Average net sales per gross square foot represents total net sales for
stores open for a full fiscal year divided by the total square feet of such
stores. For the nine-month periods ended October 31, 1999 and October 31,
1998, trailing 12 month data was used.
(6) A store becomes comparable after it has been open for 12 full months. Fiscal
year 1998 includes sales from the acquired Jewel Box stores from October
1998 through January 1999. The nine months ended October 31, 1999 include
sales from the acquired Jewel Box stores for the first six months of fiscal
1999 and the month of October 1999. The nine months ended October 31, 1998
include sales from the acquired Jewel Box stores for the month of October
1998.
17
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our financial
statements and the related notes which are included in this prospectus. This
prospectus contains forward-looking statements that reflect our plans,
expectations, estimates and beliefs. Our actual results could differ materially
from those discussed in the forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed below and elsewhere in this prospectus, particularly in "Risk
Factors." In addition to the other information in this prospectus, you should
carefully consider the following discussion and the information set forth under
"Risk Factors" in evaluating us and our business before purchasing our common
stock in this offering.
BACKGROUND
We are a leading, national specialty retailer of fine jewelry operating 294
stores in 33 states as of February 4, 2000. Our sales and income from operations
have increased consistently since fiscal 1992 to $238.9 million and $27.3
million, respectively, in fiscal 1998. During that same period, the number of
stores grew to 250 from 113 and our average annual store sales increased to
$1,073,000 from $784,000. The growth of our net sales and earnings will depend
to a significant degree on our ability to successfully expand our operations
through the opening of new stores. We have recently increased our new store
opening plan based on the consummation of this offering and intend to open
approximately 62 new stores in calendar 2000 and a total of approximately 200
stores in 2000, 2001 and 2002 combined. Our policy is to charge as incurred
pre-opening costs associated with new stores.
In September 1998, we purchased substantially all of the Jewel Box chain,
acquiring 36 jewelry stores located in eight states in the southeastern United
States. We financed this acquisition through an amended and expanded term loan
and revolving credit facility. All of the acquired stores have been converted to
Whitehall/Lundstrom merchandise assortments, credit programs, operating
procedures and brand names.
In 1999, we conducted a detailed analysis of possible Internet marketing
strategies, costs, financing alternatives, benefits and risks. After completing
this analysis, we retained an established e-commerce development firm to develop
our e-commerce website and associated software. We plan to launch our e-commerce
website in the first half of 2000.
A variety of factors affect the sales results for our stores, including
economic conditions, the retail sales environment, the availability and cost of
credit from third party credit providers, the results of our merchandising and
marketing strategies, and our ability to otherwise execute our business
strategy. We experienced 5.8% and 11.5% comparable store sales increases in
fiscal 1998 (which includes sales from October 1998 through January 1999 from
the Jewel Box stores acquired in September 1998) and in the first 11 months of
fiscal 1999 (which includes the store sales from February through July 1999 and
from October through December 1999 from the acquired Jewel Box stores),
respectively. There can be no assurance that we will achieve comparable store
sales increases in future reporting periods.
We offer a layaway program that enables our customers to hold an item at
our stores and pay for it over a one-year period without interest charges. We
retain possession of merchandise placed in layaway until the customer has made
all required payments. On December 3, 1999 the SEC issued Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements." SAB 101, among
other things, requires that layaway sales should only be recognized upon
delivery of merchandise to the customer. The accounting required by this
bulletin needs to be adopted no later than the first fiscal quarter of the
fiscal year beginning after December 15, 1999. Accordingly, we have elected to
adopt this pronouncement in the first quarter of fiscal year 2000. It is
expected that we will reflect a charge of approximately $3.0 million, net of a
40% tax benefit, which will be presented as a cumulative effect of this
accounting change as of February 1, 2000.
18
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
information derived from our statements of operations expressed as a percentage
of net sales for such periods.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED JANUARY 31, ENDED OCTOBER 31,
----------------------------- ------------------
1997 1998 1999 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of sales (including buying and occupancy
expenses)........................................ 58.6 58.7 58.3 60.6 60.2
----- ----- ----- ----- -----
Gross profit..................................... 41.4 41.3 41.7 39.4 39.8
Selling, general and administrative expenses....... 29.2 29.5 30.3 33.7 33.6
----- ----- ----- ----- -----
Income from operations........................... 12.2 11.8 11.4 5.7 6.2
Interest expense................................... 4.5 2.0 1.7 2.1 2.3
----- ----- ----- ----- -----
Income before income taxes....................... 7.7 9.8 9.7 3.6 3.9
Income tax expense................................. 3.0 3.8 3.7 1.4 1.5
----- ----- ----- ----- -----
Net income before extraordinary items............ 4.7 6.0 6.0 2.2 2.4
Extraordinary item, net............................ 6.5 (0.6) -- -- --
----- ----- ----- ----- -----
Net income....................................... 11.2% 5.4% 6.0% 2.2% 2.4%
===== ===== ===== ===== =====
</TABLE>
FIRST NINE MONTHS OF FISCAL 1999 COMPARED TO FIRST NINE MONTHS OF FISCAL 1998
Net Sales. Net sales for the nine months ended October 31, 1999 increased
$50.8 million, or 37.1%, to $187.8 million. Comparable store sales, which
includes the Jewel Box store sales for the first six months of fiscal 1999 and
the month of October 1999, increased $15.0 million, or 10.9%, in the first nine
months of fiscal 1999. Sales from new stores contributed $25.9 million to the
overall sales increase. Sales from the acquired stores contributed $12.2 million
in increased sales. These sales increases were partially offset by lost sales of
$1.6 million related to store closings, together with stores closed for
remodeling for limited periods. The total number of merchandise units sold
increased by approximately 29.3% for the first nine months of fiscal 1999, while
the average price per merchandise sale increased to $315 in the first nine
months of fiscal 1999 from $296 in the first nine months of fiscal 1998.
Comparable store sales increased in part due to the strong economic environment
for jewelry purchases, increased use of non-recourse credit, marketing programs,
strong store inventory assortments and the contribution from acquired jewelry
stores. We opened 41 new stores and closed two stores in the first nine months
of fiscal 1999, increasing the number of stores opened to 289 as of October 31,
1999 compared to 244 as of October 31, 1998.
Gross Profit. Gross profit increased $20.7 million to $74.6 million in the
first nine months of fiscal 1999 compared to the first nine months of fiscal
1998. Gross profit as a percentage of sales increased to 39.8% in the first nine
months of fiscal 1999 compared to 39.4% for the same period of fiscal 1998. This
increase primarily resulted from higher merchandise margins and lower buying
expenses as a percentage of sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $16.8 million, or 36.3%, to $63.0 million in
the first nine months of fiscal 1999 from $46.2 million in the prior year
period. As a percentage of net sales, selling, general and administrative
expenses decreased to 33.5% from 33.8% in the prior year period. The dollar
increase primarily relates to higher payroll expenses of $11.3 million, higher
other expenses of $4.1 million, and higher credit costs of $1.3 million. Credit
sales as a percentage of net sales increased to 43.5% in the first nine months
of fiscal 1999 from 40.7% in the first nine months of fiscal 1998, primarily as
a result of increased sales through secondary credit programs and increased
promotions.
Income from Operations. As a result of the factors discussed above, income
from operations increased 51.3% to $11.7 million in the first nine months of
fiscal 1999 from $7.7 million in the first nine months of fiscal 1998.
19
<PAGE> 24
Interest Expense. Interest expense increased $1.5 million to $4.3 million
in the first nine months of fiscal 1999 from $2.8 million in the first nine
months of fiscal 1998. This increase was attributable to the impact of higher
average borrowings due to store expansion, working capital needs and our stock
repurchase program that were partially offset by reduced interest rates we paid
on outstanding borrowings.
Income Taxes. Income tax expense increased approximately $1.0 million to
$2.8 million in the first nine months of fiscal 1999 from $1.8 million in the
prior period, reflecting an effective annual tax rate of 38.5% in both periods.
Net Income. As a result of the above, net income in the first nine months
of fiscal 1999 increased approximately 51.1% to $4.5 million as compared to
approximately $3.0 million in the first nine months of fiscal 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales. Net sales increased $50.0 million, or 26.5%, to $238.9 million
in fiscal 1998 from $188.9 million in fiscal 1997. Comparable store sales
increased $11.0 million, or 5.8% in fiscal 1998. Sales for the Jewel Box stores
(purchased in September 1998) from October 1998 through January 1999 contributed
approximately 0.3% of the comparable store sales increase for fiscal 1998. Sales
from new stores contributed $27.8 million to the overall increase in net sales.
Sales from the acquired stores contributed $12.5 million in increased sales.
Increases in layaway balances contributed to a higher sales increase of $0.7
million compared to the prior fiscal year. These increases were offset partially
by lower sales of $1.9 million related to store closings, together with stores
closed for remodeling for limited periods. The total number of merchandise units
sold increased by approximately 21.2% from fiscal 1997 to fiscal 1998, while the
average price per merchandise sale increased by 4.8% to $286 in fiscal 1998 from
$273 in fiscal 1997. Comparable store sales increased due to the strong economic
environment for jewelry purchases, increased use of non-recourse credit,
enhanced marketing programs, strong store inventory assortments, the
contribution from the acquired jewelry stores and on-going improvements in the
quality of our store-based personnel. We opened 70 new stores (including the 36
acquired stores) and closed or sold 11 stores during fiscal 1998, increasing the
number of stores operated to 250 as of January 31, 1999 from 191 as of January
31, 1998.
Gross Profit. Gross profit increased $21.5 million, or 27.6%, to $99.6
million in fiscal 1998, from $78.0 million in fiscal 1997. As a percentage of
net sales, gross margin increased to 41.7% in fiscal 1998 from 41.3% in fiscal
1997. This increase was due to a shift in product mix to somewhat higher margin
jewelry items and higher margins on gold, precious and semi-precious jewelry
categories. Occupancy, distribution and buying costs decreased as a percentage
of net sales due to economies of scale achieved through our larger store base
and increased net sales.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses increased $16.5 million, or 29.5%, to $72.3 million in
fiscal 1998 from $55.8 million in fiscal 1997. As a percentage of net sales,
selling, general and administrative expenses increased to 30.2% in fiscal 1998
from 29.5% in fiscal 1997. The dollar increase related primarily to higher
advertising expenses ($1.3 million), higher payroll expenses ($10.6 million),
increased other operating expenses ($2.9 million), and higher credit expenses
($1.5 million). Selling, general and administrative expenses attributable to the
34 stores opened and 36 stores acquired in fiscal 1998 and 30 stores opened in
fiscal 1997 accounted for $10.4 million of the total increase in selling,
general and administrative expenses. Expenses associated with the acquisition
and integration of jewelry stores accounted for approximately $1.0 million of
the increase. Advertising expenses increased in fiscal 1998 as compared to
fiscal 1997 due to an expansion of our marketing programs, including radio
advertising during the Christmas holiday season and direct marketing campaigns.
Payroll costs increased in fiscal 1998, as compared to fiscal 1997, due
primarily to a continuing effort to upgrade the quality of store managers, an
increase in incentive compensation paid to store-based personnel, plus the
addition of more field-based supervisors. Credit sales as a percentage of net
sales increased to 38.6% in fiscal 1998 from 38.0% in fiscal 1997 due to greater
emphasis on private label credit promotions. The
20
<PAGE> 25
usage of private label credit contributed to an increase in the average price
per merchandise sale and higher total sales.
Income from Operations. As a result of the factors discussed above, income
from operations increased 22.9% to $27.3 million in fiscal 1998 from $22.2
million in fiscal 1997. As a percentage of net sales, income from operations
decreased to 11.4% in fiscal 1998 from 11.8% in fiscal 1997.
Interest Expense. Interest expense increased $0.3 million, or 8.3%, to $4.1
million in fiscal 1998 from $3.8 million in fiscal 1997. As a percentage of net
sales, interest expense decreased to 1.7% in fiscal 1998 from 2.0% in fiscal
1997. The dollar increase in interest expense was due primarily to higher
average indebtedness.
Net Income. As a result of the above, net income in fiscal 1998 increased
approximately 39.9% to $14.3 million as compared to approximately $10.2 million
in fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales increased $33.4 million, or 21.5%, to $188.9 million
in fiscal 1997 from $155.5 million in fiscal 1996. Comparable store sales
increased $7.3 million, or 4.8%, in fiscal 1997. Sales from new stores
contributed $26.9 million to the overall increase in net sales. Increases in
layaway balances contributed to a higher sales increase of $0.4 million compared
to the prior fiscal year. These increases were offset partially by lower sales
of $1.1 million related to store closings, together with stores closed for
remodeling for limited periods. The number of units sold by stores included in
comparable store sales decreased by approximately 1.5% from fiscal 1996 to
fiscal 1997, while the average price per merchandise sale increased by 7.1% to
$273 in fiscal 1997 from $255 in fiscal 1996. Comparable store sales increased
in large part due to increased advertising and promotional initiatives,
including certain private label non-recourse credit programs, expanded
assortments of upscale merchandise, and improvements in the quality of our
personnel, as well as a solid retail environment for most of the year. These
increases were offset by higher returns as a result of the implementation of a
more liberal customer return policy during fiscal 1997. We opened 30 new stores
and closed three stores during fiscal 1997, increasing the number of stores
operated to 191 as of January 31, 1998 from 164 as of January 31, 1997.
Gross Profit. Gross profit increased $13.7 million, or 21.3%, to $78.0
million in fiscal 1997 from $64.3 million in fiscal 1996. As a percentage of net
sales, gross margin decreased slightly to 41.3% in fiscal 1997 from 41.4% in
fiscal 1996. This decrease was due primarily to a shift in product mix to
somewhat lower margin jewelry items. Occupancy, distribution and buying costs
decreased as a percentage of net sales due to economies of scale achieved
through our larger store base and increased net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $10.5 million, or 23.2%, to $55.8 million in
fiscal 1997 from $45.3 million in fiscal 1996. As a percentage of net sales,
selling, general and administrative expenses increased to 29.5% in fiscal 1997
from 29.1% in fiscal 1996. The dollar increase related primarily to higher
advertising expenses ($2.3 million), higher payroll expenses ($6.2 million) and
higher credit expenses ($0.7 million). Selling, general and administrative
expenses attributable to the 30 stores opened in fiscal 1997 and 20 stores
opened in fiscal 1996 accounted for $7.9 million of the total increase in
selling, general and administrative expenses. Advertising expenses increased in
fiscal 1997 as compared to fiscal 1996 due to an expansion of our marketing
programs, including the addition of radio advertising during the Christmas
holiday season. Payroll costs increased in fiscal 1997, as compared to fiscal
1996, due primarily to additions to the management team and an increase in the
number of field-based supervisors, as well as a continuing effort to upgrade the
quality of store managers and an increase in incentive compensation paid to
store-based personnel. Private label non-recourse credit sales as a percentage
of net sales decreased to 38.0% in fiscal 1997 from 40.1% in fiscal 1996
primarily as a result of the discontinuation of the first time buyers program in
December 1996, which represented 4.2% of sales in fiscal 1996. While private
label non-recourse credit sales as a percentage of total sales decreased,
private label non-recourse credit sales excluding first-time buyers increased to
38.0% in fiscal 1997 from 36.0% in the previous year. In fiscal 1997, we used a
one-year no-interest credit program which resulted in increased private label
credit sales. These private
21
<PAGE> 26
label non-recourse credit sales carry higher discount rates than bankcard sales.
The usage of private label non-recourse credit contributed to an increase in the
average price per merchandise sale and higher sales.
Income from Operations. As a result of the factors discussed above, income
from operations increased 16.7% to $22.2 million in fiscal 1997 from $19.0
million in fiscal 1996. As a percentage of net sales, income from operations
decreased to 11.8% in fiscal 1997 from 12.2% in fiscal 1996.
Interest Expense. Interest expense decreased $3.2 million, or 45.6%, to
$3.8 million in fiscal 1997 from $7.0 million in fiscal 1996. As a percentage of
net sales, interest expense decreased to 2.0% in fiscal 1997 from 4.5% in fiscal
1996. The dollar decrease in interest expense was due primarily to lower average
indebtedness and lower interest rates.
Net Income. As a result of the above, net income in fiscal 1997 was
approximately $10.2 million as compared to approximately $17.4 million in fiscal
1996.
LIQUIDITY AND CAPITAL RESOURCES
Over the last two fiscal years and the first nine months of 1999, our
ongoing capital requirements have been to fund increases in inventory at
existing stores, capital expenditures, and acquisitions of new stores and
working capital (primarily inventory) associated with our new stores. During the
same period, our primary sources of liquidity have been bank borrowings under
our credit facility and our cash flow from operations.
Our cash flow used in operating activities increased to $4.4 million in the
nine months ended October 31, 1999 from $4.0 million used in operating
activities in the nine months ended October 31, 1998. Higher income from
operations together with increases in accounts payable ($34.9 million) and
higher depreciation and amortization ($5.1 million) were offset by increases in
merchandise inventories ($45.1 million), by an increase in accrued liabilities
($2.9 million) and by an increase in layaway receivables ($1.5 million). The
increase in merchandise inventories primarily related to inventory for new store
openings and an increase in inventories in advance of the Christmas selling
season. In the first nine months of 1999, the primary sources of our liquidity
included a $32.2 million net increase in the amount outstanding under our
revolver, and proceeds of $3.0 million from gold consignment, partially offset
by a decrease of $2.0 million in outstanding checks. We utilized cash in the
first nine months of fiscal 1999 primarily to fund capital expenditures of $17.7
million, primarily related to the opening of 41 new stores in the first nine
months of 1999, to fund the purchase of our common stock ($10.0 million) and to
repay a portion of the term loan ($1.5 million).
Our cash flow from operating activities increased to $11.0 million in
fiscal 1998 from $0.4 million in fiscal 1997. Higher income from operations
together with increases in accounts payable ($9.1 million), accrued expenses
($9.2 million), depreciation and amortization ($5.2 million), and the proceeds
from accounts receivable sold ($4.0 million) were offset partially by increases
in merchandise inventories ($28.5 million), layaway receivables ($0.9 million),
and accounts receivable ($0.8 million). Cash used in investing activities in
fiscal 1998 included the purchase of 36 jewelry stores ($21.8 million) and the
funding of capital expenditures ($14.7 million) related primarily to the opening
of 34 new stores in fiscal 1998. Cash generated from financing activities in
fiscal 1998 included:
- proceeds from the term loan under the new credit facility ($20.0
million);
- an increase in revolver borrowings under the new credit facility ($12.0
million);
- proceeds from gold consigned under the gold consignment facility ($6.0
million); and
- proceeds from the exercise of stock options ($0.1 million).
We increased our use of cash for financing activities in fiscal 1998 due in
part to a decrease in the net amount of outstanding checks ($1.8 million). We
utilized cash for financing activities in fiscal 1998 primarily to repay the
previous term loan ($11.4 million). Stockholders' equity increased from $47.8
million at January 31, 1998 to $62.2 million at January 31, 1999.
22
<PAGE> 27
Our cash flow from operating activities increased to a positive cash flow
of $0.4 million in fiscal 1997 from a cash flow shortfall of $3.6 million in
fiscal 1996. Higher income from operations together with increases in accounts
payable ($1.8 million), accrued expenses ($2.7 million), and deferred income tax
($4.2 million) were offset partially by increases in merchandise inventories
($20.6 million) and accounts receivable ($1.2 million). Cash used in investing
activities included the funding of capital expenditures ($10.5 million), related
primarily to the opening of 30 new stores in fiscal 1997. Cash generated from
financing activities included:
- proceeds from the term loan ($11.4 million);
- an increase in revolver borrowings under the current revolving credit
facility ($6.1 million);
- proceeds from the exercise of stock options ($0.1 million); and
- an increase in the net amount of outstanding checks ($2.4 million).
We utilized cash in fiscal 1997 primarily to repay or repurchase subordinated
debt ($9.9 million) and to pay associated costs ($1.0 million, net of tax).
Stockholders' equity increased from $37.5 million at January 31, 1997 to $47.8
million at January 31, 1998.
In September 1998, we amended and expanded our credit facility to a total
of $110 million. We have a $90.0 million revolving credit facility and a $20.0
million term loan facility through September 10, 2003. A gold consignment
facility of up to $40.0 million is available under the $90.0 million revolving
credit facility. Interest rates and commitment fees charged on the unused
facility float in a grid based on our quarterly performance. Since these
interest rates are determined by reference to Eurodollar or prime rates, changes
in market interest rates can materially affect our interest expense. Borrowings
under the revolver are limited to a borrowing base determined based on levels of
inventory and accounts receivable. The peak outstanding borrowings under our
revolver during fiscal 1998 and 1997 were $45.5 million and $32.5 million,
respectively. The unused portion of the revolver was $44.1 million as of January
31, 1999 and $15.2 million at October 31, 1999.
We have a gold consignment facility with a lending institution pursuant to
which we accept as consignee, and are responsible to return at some future date,
a fixed number of ounces of gold. We pay periodic charges which are computed
based on a percentage of the value of the gold consigned. Therefore, an increase
in the price of gold could increase substantially the annual costs to us of the
gold consignment and the eventual cost to us upon the termination of this
arrangement. During fiscal 1996 and 1998, we sold and simultaneously consigned
39,000 and 20,000 troy ounces of gold for $15.3 and $6.0 million, respectively.
During fiscal 1997, we did not sell and consign any gold. On March 3, 1999, we
sold and simultaneously consigned 10,500 troy ounces of gold for $3.0 million
under our gold consignment facility. With the addition of the newly consigned
gold, on September 10, 2003, we are required to repurchase 69,500 troy ounces of
gold under the facility at the prevailing gold rate in effect on that date, or
the facility will not be renewed.
A substantial portion of the merchandise we sell is carried on a
consignment basis prior to sale or is otherwise financed by vendors, thereby
reducing our direct capital investment in inventory. The peak consigned
inventories from merchandise vendors were $43.2 million and $32.5 million during
fiscal 1998 and 1997, respectively. The willingness of vendors to enter into
such arrangements may vary substantially from time to time based on a number of
factors including the merchandise involved, the financial resources of vendors,
interest rates, availability of financing, fluctuations in gem and gold prices,
inflation, our financial condition and a number of economic or competitive
conditions in the jewelry business or the economy generally. Any change in these
relationships could have a material adverse effect on our results of operations
or financial condition.
On February 19, 1999, we announced that our board of directors had
authorized the repurchase of up to $10.0 million of our common stock. The
repurchase program authorized us to purchase shares of common stock over an 18
month period in the open market or through privately negotiated transactions. We
have effectively completed the repurchase program. As of October 31, 1999, we
had repurchased an
23
<PAGE> 28
aggregate of 883,350 shares at a total cost of approximately $10 million, or an
average per share price of $11.32. The program has been financed using our
revolving credit facility.
During 2000, we plan to open approximately 62 stores. New stores on average
require inventory of approximately $390,000 (net of accounts payable) and
capital expenditures of approximately $260,000. We anticipate capital
expenditures of approximately $21.5 million for new store openings and other
fixed assets to be placed in service during fiscal 2000.
Our inventory levels and working capital requirements historically have
been highest in advance of the Christmas season. We have funded these seasonal
working capital needs through borrowings under our revolver and increases in
trade payables and accrued expenses.
Management expects that cash flow from operating activities and funds
available under our revolving credit facility, together with the proceeds from
this offering, should be sufficient to support our current new store expansion
program and seasonal working capital needs for the foreseeable future.
SEASONALITY
Our business is highly seasonal, with a significant portion of our sales
and most of our income generated during the fourth fiscal quarter ending January
31. We have historically experienced lower net sales in each of our first three
fiscal quarters and expect this trend to continue. Our quarterly and annual
results of operations may fluctuate significantly as a result of factors
including, among others, the timing of new store openings, net sales contributed
by new stores, increases or decreases in comparable store sales, timing of
certain holidays, changes in our merchandise, marketing, or credit programs,
general economic, industry and weather conditions that affect consumer spending,
and pricing, merchandising, marketing, credit and other programs of competitors.
The following table sets forth our summary unaudited quarterly financial
information for each quarter in fiscal 1997 and fiscal 1998 and the first three
quarters of fiscal 1999. In the opinion of management, this quarterly
information has been prepared on a basis consistent with our audited financial
statements appearing elsewhere in this prospectus and reflects adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
such unaudited quarterly results when read in conjunction with the audited
financial statements and notes thereto. The operating results for any quarter
are not necessarily indicative of results for any future period and there can be
no assurance that any trends reflected in such results will continue in the
future.
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS ENDED FISCAL 1998 QUARTERS ENDED
------------------------------------------------ ------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1997 1997 1997 1998 1998 1998 1998 1999
--------- -------- ----------- ----------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $34,714 $40,515 $39,477 $74,192 $41,584 $46,849 $48,483 $102,026
Gross profit......... 13,651 16,297 15,514 32,563 16,139 18,762 19,030 45,643
Income from
operations.......... 1,809 3,868 2,504 14,035 1,946 3,574 2,193 19,600
Net income........... 540 1,760 909 6,986(1) 702 1,681 609 11,270
<CAPTION>
FISCAL 1999 QUARTERS ENDED
----------------------------------
APRIL 30, JULY 31, OCTOBER 31,
1999 1999 1999
--------- -------- -----------
<S> <C> <C> <C>
Net sales............ $58,935 $65,886 $62,933
Gross profit......... 22,987 26,623 25,039
Income from
operations.......... 3,157 5,080 3,434
Net income........... 1,168 2,268 1,085
</TABLE>
- ---------------
(1) Reflects extraordinary loss on extinguishment of debt in the fourth quarter
of fiscal 1997. See Note 9 of Notes to Financial Statements included in this
prospectus.
YEAR 2000
The "Year 2000" problem concerns the inability of information systems to
properly recognize and process date-sensitive information beyond January 1,
2000. As of January 31, 2000, we have not experienced any significant "Year
2000" problems in connection with our mission-critical systems.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. Our exposure to changes in interest rates relates
primarily to our borrowing activities to fund business operations. We
principally use floating rate borrowings under our revolving credit
24
<PAGE> 29
and term loan facilities. We do not use derivative financial instruments. The
information below summarizes our interest rate risk associated with debt
obligations outstanding as of October 31, 1999. The table presents principal
cash flows and related interest rates by fiscal year of maturity or repricing
date.
<TABLE>
<CAPTION>
EXPECTED FISCAL YEAR OF MATURITY/REPRICING
---------------------------------------------------
1999 2000 2001 2002 THEREAFTER TOTAL
------- ---- ---- ---- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Variable rate (a)............................ $82,500 -- -- -- -- $82,500
Average interest rate........................ 7.00% -- -- -- -- 7.00%
Fixed rate................................... -- -- -- -- $ 640 $ 640
Average interest rate........................ -- -- -- -- 12.15% 12.15%
</TABLE>
- ---------------
(a) Includes $18.5 million of term debt with scheduled principal payments due
between January 2000 and September 2003. All term loans are variable rate
which reprice within 1999. As of October 31, 1999, interest rates for
borrowings under the revolving loan and term loan facility are, at our
option, Eurodollar rates plus 137.5 and 187.5 basis points, respectively, or
the bank's prime rate plus zero and 50 basis points, respectively. Interest
rates charged on the facility float in a grid based on our quarterly
financial performance.
Gold Price Risk. Our exposure to changes in the price of gold relates to
our borrowing activities under our gold consignment facility. We accept as
consignee, and are responsible to return at some future date, a fixed number of
ounces of gold. The periodic charges we pay are computed based on a percentage
of the value of the gold consigned. An increase in the price of gold could
substantially increase the annual cost to us of the gold consigned and the
eventual costs to us upon the termination of this arrangement. Furthermore,
borrowing availability under our revolving credit facility is based on amounts
outstanding thereunder, including the value of consigned gold under the gold
consignment facility which fluctuates based on current gold prices. Therefore,
an increase in the price of gold would reduce availability under our revolving
credit facility. During fiscal 1996 and 1998, we sold and simultaneously
consigned 39,000 and 20,000 troy ounces of gold for $15.3 million and $6.0
million, respectively. During fiscal 1997, we did not sell and consign any gold.
On March 3, 1999 we sold and simultaneously consigned 10,500 troy ounces of gold
for $3.0 million.
The information below summarizes our market risks associated with gold
consigned as of January 31, 1999. The table below presents the number of troy
ounces of gold consigned and the average gold prices by fiscal year of maturity.
<TABLE>
<CAPTION>
EXPECTED FISCAL YEAR OF MATURITY
---------------------------------------------------
1999 2000 2001 2002 THEREAFTER TOTAL
------- ---- ---- ---- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Troy ounces of gold consigned.............. 69,500 -- -- -- -- 69,500
Average gold price......................... $ 288 -- -- -- -- $ 288
</TABLE>
INFLATION
We believe that inflation generally has not had a material effect on the
results of our operations. There is no assurance, however, that inflation will
not materially affect us in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998 the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides,
among other things, guidance for determining whether computer software is for
internal use and when the cost related to such software should be expended as
incurred or capitalized and amortized. SOP 98-1 is effective for the year ended
December 31, 1999. We do not expect the adoption of SOP 98-1 to have a material
effect on our results of operations and financial condition.
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<PAGE> 30
In April 1998 the Accounting Standards Executive Committee of AICPA issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities." SOP
98-5 generally requires costs of start-up activities to be expensed instead of
being capitalized and amortized. SOP 98-5 is effective for financial statements
for fiscal years beginning after December 15, 1998. We do not expect the
adoption of SOP 98-5 to have a material effect on our result of operations and
financial condition.
In June 1998 the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities Deferral of Effective Date of
FASB Statement No. 133," which deferred the effective date of SFAS No. 133 to
all fiscal quarters of fiscal years beginning after June 15, 2000. We do not
expect SFAS No. 133 or SFAS No. 137 to have an impact on our results of
operations, financial position or cash flows as we currently do not have any
derivative instruments or hedging activities.
On December 3, 1999 the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements." SAB 101, among other things, requires that
layaway sales should only be recognized upon delivery of merchandise to the
customer. The accounting required by this bulletin needs to be adopted no later
than the first fiscal quarter of the fiscal year beginning after December 15,
1999. Accordingly, we have elected to adopt this pronouncement in the first
quarter of fiscal year 2000. It is expected that we will reflect a charge of
approximately $3.0 million, net of a 40% tax benefit, which will be presented as
a cumulative effect of this accounting change as of February 1, 2000.
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<PAGE> 31
INDUSTRY
Total retail sales by jewelry stores in the United States in 1998 were
approximately $21.4 billion, and such sales grew between 1993 and 1998 at an
annual rate of approximately 5.1% according to the U.S. Department of Commerce.
Growth in jewelry sales is partially attributable to favorable demographics as
baby boomers are at their prime jewelry purchasing ages. The baby boomers are
prime jewelry purchasers because they represent the largest segment of the U.S.
population and either have recently or are now experiencing a significant
increase in their personal wealth. This strong growth in wealth is occurring
primarily because the baby boomers are at their peak earnings potential, are
ready to receive substantial inheritances, and or have had an increase in their
availability of credit. According to the U.S. Bureau of Labor Statistics, per
capita jewelry expenditures are increasingly higher in older age brackets. For
example, based on an industry analyst report published in 1999, per capita
jewelry expenditures were $101 for those aged 35 to 44, $143 for those between
45 and 54 and $172 for those aged 55 to 64. Additionally, growth in jewelry
expenditures has also resulted from the recent economic expansion as jewelry
purchases increase as annual household income rises.
The jewelry market is generally divided into three segments: fine jewelry,
costume jewelry, and guild jewelry. The broad "fine" jewelry market segment
represents a majority of the jewelry market in terms of revenue, and it includes
jewelry made from precious metals and gemstones, as well as finer watches. Fine
jewelry is sold at a range of price points from middle to upper-end, with the
upper-end consisting of luxury items such as unique design jewelry items and
expensive timepieces. Except for a few designer label offerings, fine jewelry is
generally not marketed under brand names. Costume jewelry consists of jewelry
made of non-precious stones and rhinestones, as well as inexpensive watches. The
"guild" market represents a small percentage of the total market.
Jewelry is mainly distributed through jewelry stores (both independent
stores and chains), general merchandise and discount stores, department stores,
mail order and catalogs, apparel and accessories stores, and televised home
shopping networks. Many independent and chain jewelry stores are mall-based and
regional malls can often contain between six and eight jewelry stores. General
merchandisers, discount stores, and apparel and accessories stores generally
sell costume jewelry and lower-priced "fine" jewelry. Mail order and home
shopping distributors generally offer costume jewelry and fine jewelry at low to
middle price points. Department stores generally offer a wider assortment of
merchandise including a selection of costume, fine and some "guild" jewelry.
Recently, a number of Internet-based retailers of fine jewelry have begun
selling merchandise online. These Internet competitors include both traditional
"brick and mortar" retailers, as well as venture capital-backed startups.
Internet retailing offers the possibility of substantial economies of scale,
widespread international branding, and lower fixed costs than those associated
with traditional "brick and mortar" stores. It is not clear, however, if
purchasing fine jewelry via the Internet will appeal to consumers due to
concerns regarding retailer reputation, merchandise quality and customer
service. The retail Internet jewelry business is still in its infancy, and no
retailer has emerged as a market leader.
Jewelry stores including independent stores and jewelry chains, represent
the largest distribution channel based on industry sales. Most jewelry stores
cater to the broad fine jewelry market offering a variety of items at a range of
price points. The retail jewelry industry is highly fragmented with no single
chain accounting for a significant percentage of the fine jewelry market. The
five largest jewelry retailers accounted for approximately 15% of total 1998
retail jewelry sales. We believe that the retail jewelry industry is
consolidating and will continue to consolidate due to a variety of factors.
27
<PAGE> 32
BUSINESS
OVERVIEW
Founded in 1895, Whitehall Jewellers is a leading, national specialty
retailer of fine jewelry (based on number of stores) offering an in-depth
selection in the following key categories: diamond, gold, precious and
semi-precious jewelry. Our target customers are middle to upper-middle income
women over 25 years old. As of February 4, 2000, we operated 294 mall based
stores in 33 states under the established brand names of Whitehall Co. Jewellers
(239 stores), Lundstrom Jewelers (52 stores) and Marks Bros. Jewelers (3
stores). Our small but flexible store format, averaging approximately 880 square
feet, and our strong sales culture contribute to our highly productive stores
which averaged annual sales of approximately $1.1 million per store in fiscal
1998. Our merchandising and marketing expertise, including the use of non-
recourse credit, have also contributed to our 25 consecutive quarters of
positive comparable store sales growth through January 31, 2000.
We have more than doubled our store base since 1994 through organic growth,
the 1998 acquisition of 36 Jewel Box stores and opportunistic acquisitions of
real estate leases through the strategic purchase of single or multiple retail
locations (both jewelry and other formats). This store growth, combined with an
average 7.4% comparable store sales increase over the past five years, produced
total sales of $238.9 million in fiscal 1998, resulting in a compound annual
rate of growth in sales of 22.3% since fiscal 1994. Due to our operating
efficiencies during the same period, operating income grew at a compound annual
rate of 23.6% to $27.3 million in fiscal 1998, reflecting an operating margin of
11.4%. For the nine months ended October 31, 1999 our sales were $187.8 million,
representing a 37% increase over the comparable 1998 period. Income from
operations and net income for the nine months ended October 31, 1999 increased
51.3% and 51.1%, respectively. In fiscal 1999, we opened 46 new stores and
closed six stores as compared to fiscal 1998, when we opened 70 stores (which
includes the 36 Jewel Box stores) and closed or sold 11 stores. In connection
with this offering, we have recently accelerated our growth strategy by
increasing our planned new store openings in fiscal 2000 from 50 to 62 new
stores and increasing our planned new store openings in fiscal 2000, 2001 and
2002 combined to 200.
OPERATING STRATEGY
The principal elements of our operating strategy that contribute to our
ability to open profitable new stores, drive comparable store sales, increase
store productivity, and improve operating margins are as follows:
Small, Flexible Store Format. We believe that we have a competitive
advantage in obtaining high traffic, "center court" locations in desirable
regional and super-regional malls due principally to:
- our small average store size of approximately 880 square feet, which,
while considerably smaller than the average store size of many of our
mall-based competitors, generates comparable sales volumes;
- our ability to adapt our store design to various sizes and
configurations; and
- our high average sales per square foot (approximately $1,273 for the 12
months ended October 31, 1999).
Our stores are located in high visibility mall locations and provide our
customers with a comfortable and inviting shopping environment. The stores'
open, attractive design appeals to customers, while facilitating foot traffic
and enhancing sales opportunities for us. In addition, the stores' small
flexible format (which lowers our fixed occupancy costs) and high productivity
are desirable to mall owners.
In addition, we have followed a disciplined and systematic approach when
evaluating new store opportunities. We select locations for our stores based on
an evaluation of individual site economics and market conditions. Because of our
flexible store format and our reputation among mall developers as a strong
tenant, we have historically received more offers for attractive new store sites
than we can accept.
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<PAGE> 33
We are, and have been, opportunistic in acquiring other retail formats in a
single store or multiple store acquisition. We believe that real estate is key
to our business and site selection is a core competency of our management team.
Attractive Store Operating Model. Our store model has proven to be very
attractive across brands, mall locations and in both new and existing markets.
New stores opened in fiscal 1998 (excluding the acquired Jewel Box stores)
performed at approximately 90% of mature store sales in their first year of
operation. Based on our experience with recent store openings, we estimate that
the average net investment to open a new store is approximately $650,000, which
includes capital expenditures and initial inventory, net of payables. During
their first full 12 months of operations, our new stores opened in fiscal 1998
generated average net sales of approximately $1,050,000 and store-level
operating cash flow (defined as income from operations plus depreciation and
amortization) of approximately $176,000, or approximately 16.8% of net sales.
Consistent Brand Imaging. We reinforce the upscale, trustworthy image of
our store brand names, Whitehall Jewellers and Lundstrom Jewelers, with
consistent merchandise selection and price points, store layout and fixtures,
packaging, marketing and promotions. Whitehall Co. Jewellers is our primary
trademark and is positioned to be somewhat more upscale than the average
mall-based jewelry store. Additionally, having two strong brands allows us to
enter a given mall with multiple locations, leverage our infrastructure within a
given region and increase the number of potential store sites available to us.
Differentiated Merchandising. We offer an in-depth selection of
high-quality merchandise in several key categories of fine jewelry: diamond,
gold, precious and semi-precious jewelry. This "key category" focus is oriented
toward our target customer, the middle to upper-middle income woman over 25
years old. Within these categories, we augment our selection with consignment
items which reflect more fashion forward themes, providing increased selection
while minimizing our inventory risk. We are continuously expanding our
merchandise assortment in higher price points. For example, in fiscal 1999 more
than one-quarter of our overall sales resulted from purchases of items priced at
or above $1,500. Unlike many of our competitors, we carry only a limited
selection of watches and virtually no costume jewelry or gift merchandise.
Motivated, Sales-Oriented Store Personnel. We believe that the quality of
our sales personnel is critical to our success and represents a significant
competitive advantage. To assist our sales personnel in their selling efforts,
our sales personnel are authorized to discount prices within specifically
developed guidelines. Compensation and bonus programs reinforce sales and margin
goals on a daily, weekly and monthly basis. We continually seek to enhance the
selling skills of our sales associates through recruitment of experienced sales
personnel and extensive, ongoing training programs. Many non-sale activities are
centralized, allowing sales personnel to focus on our customers.
Absence of Recourse Credit Risk. We operate based upon a "no credit risk"
policy. When purchasing on credit, customers must use their personal credit
cards, our private label credit cards (which are available through a third party
and are non-recourse to us), or other non-recourse third party credit
arrangements. Our strict policy eliminates credit risk associated with a
customer's failure to pay. This policy also distinguishes us from most of our
competitors, which not only bear such credit risk, but also rely on finance
income in addition to merchandise sales. In cooperation with providers of
non-recourse credit under private label programs, we offer our customers
competitive, interest-free terms and other attractive offerings in the promotion
of our jewelry.
Strict Operating Controls. Our management team exercises significant
control over many non-sale aspects of our store operations, including site
selection, purchasing, store development, financial reporting and sales
training. We believe that this commitment to operational control enables us to:
- operate substantially all of our stores on a profitable basis;
- identify opportunities to improve productivity quickly; and
- react quickly to shifts in product pricing and consumer purchasing
trends.
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<PAGE> 34
Emphasis on Risk Management. One of our management's strengths is our
disciplined approach to the core elements of our business model. While we
continue to evolve, there are three principal operating strategies that are
designed to mitigate risk to our business: our small, flexible store format, our
non-recourse credit policy and our use of consignment inventory. Our unique
store format, which averages approximately 880 square feet, is smaller than that
of many of our mall-based competitors. This usually means that we are not
competing with these competitors for the same location in a mall, which often
gives us more location opportunities. It also means that our rents are lower,
not only because of reduced competition for space, but also because a smaller
store means lower fixed occupancy costs. Secondly, we have limited credit risk.
Unlike most of our competitors, we utilize a non-recourse, private label credit
card program. As a result, we eliminate our credit risk associated with a
customer's failure to pay. Lastly, we utilize consignment inventory on a
selective basis, reducing our exposure to changes in fashion trends and
inventory obsolescence.
Experienced Management Team. Our five person executive management team has
on average 18 years of retail industry experience and 15 years of experience
with Whitehall Jewellers. In addition, after the completion of the offering this
group will continue to have a combined beneficial interest in the company in
excess of 15.4% of our common stock. We also have an experienced middle
management team. We are focused on identifying, recruiting and retaining highly
skilled and experienced individuals at every level of our organization. We
believe that this strategy will continuously provide a substantial depth of
management in our organization. We also believe the opportunity for advancement
within the organization helps us attract, develop and retain skilled employees.
GROWTH STRATEGY
We have achieved comparable store sales increases of 4.8%, 5.8% and 11.5%
in fiscal 1997, fiscal 1998 and for the first 11 months of fiscal 1999,
respectively. We believe that we will continue to have significant opportunities
to increase sales and profits through continued execution of our store expansion
strategy, continued comparable store sales gains and continued focus on strict
operating controls. The key elements of our growth strategy are as follows:
Accelerate New Store Growth. In fiscal 1997 and fiscal 1998, we opened a
total of 64 stores and acquired 36 stores through the acquisition of the Jewel
Box chain. In fiscal 1999, we opened 46 new stores. During this growth period we
entered 20 new markets, including eight new states. Based on our successful
track record of opening and/or converting these new stores and our solid
infrastructure to support our expansion strategy, we believe we are well
positioned for accelerated growth over the next several years. As of January 31,
2000, we had already identified substantially all of the 62 sites we intend to
select for fiscal 2000, and we had reached understandings with respect to 54 of
these stores. We anticipate that, in the near term, approximately 80% of new
stores each year will be in existing markets and 20% will be in new markets. We
believe that our Whitehall Jewellers and Lundstrom Jewelers stores are highly
portable store concepts that achieve strong cash returns on investment and can
operate successfully in a wide variety of geographic and demographic markets.
Because of this, we believe that there is the potential to double our store base
within our existing markets. Additionally, we opened our first store in an
outlet mall in fiscal 1999. Based upon that store's initial performance, we
expect to open additional stores in outlet malls. In addition, we expect to
continue to evaluate acquisition opportunities as they arise as an element of
our growth strategy.
Refine Merchandising Initiatives. We continue to refine our merchandise mix
and improve the quality of our product offerings, resulting in an increase in
the number of customer transactions and the average transaction value per
customer. We intend to continually apply these practices, by increasing the
quality, selection and price points of our core items -- diamonds, gold,
precious and semi-precious jewelry. We are enhancing these initiatives with new
store fixtures and merchandise packaging.
Enhance Sales and Marketing Initiatives. We use direct marketing and
in-store promotions and intend to use our new website in our marketing process
to drive comparable store sales. We plan to leverage our customer file of over
one million names with additional direct mailing initiatives. For example,
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<PAGE> 35
we will increase our mailing for Valentine's Day this year to 300,000 mailings
versus 30,000 mailings in fiscal 1999. In addition, in the first half of fiscal
2000, we plan to launch e-commerce capabilities to complement our store-based
operations.
STORE OPERATIONS
Site Selection. We are very strict in our site selection methodology. Our
stores average 878 square feet and our layout is flexible enough to adapt to
each location. We typically locate our stores in high traffic, "center court"
locations in desirable regional and super-regional malls throughout the United
States. We select locations for stores based on our evaluation of individual
site economics and market conditions. When deciding to enter a new market, we
evaluate a number of criteria including the following:
- current and future size, demographic make-up and growth potential of
the market;
- total store sales potential;
- ability to leverage existing infrastructure, personnel, brand
awareness, marketing and advertising dollars; and
- the size, strength and merchandising philosophy of existing and
potential competitors in the marketplace.
In choosing specific sites within a given mall, in a new or existing
market, we apply site selection criteria taking into account numerous factors
including the following:
- size of space;
- store visibility;
- traffic patterns;
- real estate costs;
- store locations of our competitors; and
- overall retail potential.
Store Layout. Our stores are located in high visibility locations and
provide our customers with a comfortable and inviting shopping environment.
Nearly all of the stores have an open entrance rather than the more traditional
single-doorway entrance. Stores are brightly-lit and generally are designed to
have display cases situated along the lease line. By formatting the stores in
this "customer-friendly" manner and without a formal entryway, a casual mall
shopper comes in very close contact with the store's merchandise and personnel
without the natural apprehension many have upon "entering" a fine jewelry store.
We are introducing a new, more elegant look for our Whitehall stores beginning
in fiscal 2000 to further reinforce the quality and the trustworthiness of our
Whitehall brand image. Our new concept is intended to enhance the upscale image
of our stores and includes initiatives such as adding new store fixtures and new
merchandise packaging. All new Whitehall stores and fully renovated Whitehall
stores will reflect the new concept.
Store Management. Each of our stores is operated under the direction of a
store manager who is responsible for management of all store-level operations,
including sales and most personnel matters. Many non-sales related
administrative functions are performed at our corporate office in Chicago. A
significant portion of the compensation of store managers is based on incentives
which focus on sales productivity. The store managers are assisted by a staff
that usually includes an assistant manager and four to eight sales associates,
depending upon store operating hours and anticipated sales volume. We have
approximately 43 supervisors who concentrate their efforts on store-focused
sales strategies. Each supervisor is based in one store, but spends most of his
or her time visiting other stores. Our senior officers
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<PAGE> 36
spend a substantial percentage of their time visiting stores to reinforce the
close communication between senior executives and store personnel.
Operating Cost Controls. Our store operations are designed to maintain low
operating costs at the store level. Our small average store size reduces fixed
costs, and the lack of recourse credit eliminates the need for most overhead
expenses normally associated with credit operations. We also seek to reduce
store-level operating costs through efficient sales staff utilization. To assist
store personnel in their selling efforts, many of the administrative functions
normally performed at the store level are performed at the corporate level. Due
to computerization, more efficient use of personnel, and the elimination of
certain non-essential functions, we reduced central overhead as a percentage of
net sales from 6.0% in fiscal 1994 ($6.4 million) to 5.1% in fiscal 1998 ($12.2
million). During that period, our sales increased by over 123% and the number of
stores increased by 91%. For the nine months ended October 31, 1999 our
operating expenses were $63.0 million versus $46.2 million for the nine months
ended October 31, 1998.
Store Employee Compensation. We seek to hire experienced sales personnel
and motivate our store employees by linking a substantial percentage of employee
compensation to individual and store sales performance, as well as by offering
opportunities for promotion within the company.
Employee Training. We believe that providing knowledgeable and responsive
customer service is critical to our success and, accordingly, have developed and
implemented extensive employee training programs. In addition to training during
the first weeks of employment and continuous on-the-job training provided by
management, we have several training videos to supplement our written training
materials for sales associates. Store managers complete a manager training and
development program.
MERCHANDISING
We believe that an important element of our success is a focused
merchandising strategy that reflects our upscale customer orientation and small
store format. We seek to provide a deep assortment of items across a broad range
of price points in our key product categories: diamonds (such as diamond
jewelry, diamond solitaires and bridal), gold, and precious and semi-precious
jewelry. Unlike many of our competitors, we carry only a limited selection of
watches and virtually no costume jewelry or gift merchandise.
Each store offers approximately 2,500 individual items, including
approximately 600 core jewelry items, which accounted for approximately 37% of
net sales for fiscal 1999. In addition, we have expanded our merchandise
assortment in higher price points. Our average price per merchandise sale has
increased from $255 in fiscal 1996 to $273 in fiscal 1997 to $286 in fiscal 1998
and to $303 in fiscal 1999. Consistent with many fine jewelry retailers, a
substantial portion of our sales are made at prices discounted from listed
reference prices. The methodology for achieving these discounts is carefully
studied and maintained.
The following table sets forth our percentage of total merchandise sales by
category for the following periods:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------------
1995 1996 1997 1998 1999 2000
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Diamonds........................................ 56.8% 57.6% 57.5% 61.3% 59.9% 60.3%
Gold............................................ 25.0 25.2 25.4 21.2 20.3 20.2
Precious/Semi-Precious.......................... 15.1 14.6 14.8 15.5 17.7 17.4
Watches......................................... 2.4 2.1 2.1 2.0 2.1 2.1
Other........................................... 0.7 0.5 0.2 -- -- --
----- ----- ----- ----- ----- -----
Total................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
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<PAGE> 37
All stores carry our core items. We also customize the merchandising of our
stores based upon each store's sales volume, individual market preferences and
historical selling patterns. We continually test new items in our stores and
monitor their sales performance to identify additional sales opportunities.
Along with our broad product assortment, we also provide jewelry repair
services to our customers (sales from which represented 3.5% of fiscal 1998 net
sales). Actual repair work is performed by jewelers under independent contract
in many of our stores.
ADVERTISING AND PROMOTIONS
The key elements of our advertising strategy include in-store and
point-of-sale marketing, direct mail campaigns and radio advertising campaigns.
We believe that the quality of our customer database, which currently consists
of over one million customers, has allowed us to develop efficient advertising,
marketing and promotional campaigns. We have conducted holiday season radio
campaigns in certain markets, and we continuously test various direct mail
campaigns as part of our advertising initiatives. Frequent special promotions
such as diamond remount events, "Vice President's Day Events," and similar
promotions are designed to increase traffic through our stores and generate an
urgency for customers to make purchases. These events vary from year to year and
among stores. Publicized events are an important part of our marketing efforts,
and we generate a significant portion of our revenues during such events.
In fiscal 1999, we upgraded the signage and sign fixtures in all our stores
in order to facilitate a more upscale look for our in-store and point-of sale
signage. In addition, we expanded our holiday radio advertising program by over
30% and our direct marketing program mailings by over 60% from fiscal 1998.
We also plan to increase our use of media advertising programs in fiscal
2000. In addition, we intend to significantly expand our direct mail programs in
fiscal 2000. For example, we expect to deliver 300,000 direct mail fliers in
connection with Valentines Day in fiscal 2000, as compared to 30,000 in fiscal
1999.
We generally offer a 30-day return policy. For certain sales, however,
store personnel may choose from a variety of return or exchange options to offer
the customer, including, among others, a 30-day return policy or a 90-day
exchange policy.
We also offer a layaway program that enables our customers to hold an item
at our stores and pay for it over a one-year period without interest charges.
The customer is required to make an initial deposit to establish the layaway and
is required to make monthly payments. We retain possession of merchandise placed
in layaway until the customer has made all required payments.
CREDIT
We operate based upon a "no credit risk" policy. When purchasing on credit,
customers must use their personal credit cards (e.g., Visa, MasterCard, American
Express and others), our private label credit cards, which are available through
a third party and are non-recourse to us, or other non-recourse third party
credit arrangements. Because our credit programs are non-recourse to us, we have
no customer credit risk for non-payment by the customer associated with the
sale. At the same time, we believe that our ability to offer credit through our
"private label" credit cards and other non-recourse arrangements is attractive
to many customers, including those who prefer not to have their jewelry
purchases count towards their credit limits on their personal third party credit
cards. We encourage sales on our private label credit card or other non-recourse
third-party credit arrangements because customer purchases on this type of
credit tend to generate higher average sales. In fiscal 1998, our average credit
sale was approximately $780, versus approximately $100 for a purchase paid for
with cash or by check. We believe that our success in building our non-recourse
credit sales has been a significant factor in our improvement in comparable
store sales. Our success in this area has also helped us expand our customer
database since approximately 39% of our sales are generated from sales to
customers who use private label credit cards.
Our credit strategy and our focus on a more upscale clientele are
interrelated. A substantial portion of the users of private label credit offered
by most jewelers tend to be customers with more limited financial
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<PAGE> 38
resources or a weaker credit history. In contrast, our adherence to a "no credit
risk" policy limits our sales to such individuals. Thus, we have historically
oriented our merchandising programs to appeal to a more affluent, less
credit-reliant consumer.
We have established our private label program through Bank One (and other
non-recourse credit purveyors), whereby customers may apply for instant credit
on merchandise purchases. In late 1998, Bank One and G.E. Capital Corporation
formed a private label credit joint venture called Monogram Credit Services,
L.L.C. In January 1999, we consented to have our contract with Bank One assigned
to Monogram Credit Services. Under these credit programs, the credit purveyors
have no recourse against us based on the customer's failure to pay; recourse
against us is restricted to those limited cases where the receivable itself is
defective (such as incorrectly completed documentation or certain situations
involving customer fraud). Our expense related to these limited cases was less
than 0.5% of sales during fiscal 1998. Our credit card discount expense for
fiscal 1998 and fiscal 1997 represented 3.0% and 2.9%, respectively, of credit
sales for those years. In general, our credit card discount expense is higher
for our private label programs than for personal credit cards, such as Visa and
MasterCard. Pursuant to our relationship with Monogram Credit Services, the
joint venture provides credit to our customers using its own credit criteria and
policies. We pay a fee to Monogram Credit Services based primarily upon the
volume of credit so extended. We have similar non-recourse arrangements with
other credit purveyors, which we use in addition to the Monogram Credit Services
program to assist customers in financing their purchases. In addition, we
utilize a check authorization company which guarantees payments on transactions
involving certain personal checks.
During the third quarter of fiscal 1997, we introduced a "One-Year
No-Interest" program through a non-recourse agreement with Bank One. Under this
program, Bank One offered customers a financing arrangement with no interest for
one year, for which we paid Bank One a significantly higher fee than we pay
under its standard program. We used this program throughout fiscal 1998 and for
the first 11 months of fiscal 1999 and feel the use of this program contributed
to an increase in comparable store sales. We continue to offer this program
through Monogram Credit Services. This program enables us to offer our customers
competitive, interest-free terms and other attractive promotions despite our "no
credit risk" policy.
E-COMMERCE
We intend to capitalize on the Whitehall Jewellers name and national
reputation by establishing a whitehalljewellers.com e-commerce site to
complement our store-based operations and provide us with an additional channel
to reach our customers. We expect to introduce this e-commerce site in the first
half of 2000. A recent study conducted on our behalf determined that 87% of
jewelry consumers prefer to buy from a jewelry e-commerce site associated with a
retail jewelry chain rather than a stand-alone Internet jeweler. More
specifically, consumers cited trustworthiness and reputation, followed by the
ability to use the store to pickup and return merchandise, to handle repairs,
and to resolve problems as the primary advantages a national retail based
Internet jewelry retailer has over a stand-alone Internet jeweler.
Given these consumer preferences, our strategy is to develop an e-commerce
site that enhances our store-based operation and leverages our existing
infrastructure and capabilities including merchandising, buying and sales and
marketing expertise, fulfillment capabilities, existing supplier relationships
and credit programs. In addition, we plan to outsource our website customer
service functions to a third party who will provide us with dedicated sales
personnel to focus on meeting all of our Internet customer needs, including
responses to questions and information requests. We have hired a nationally
recognized Internet and e-commerce site development firm with significant
experience in specialty retailing, to develop and design our site. We do not
expect to incur significant costs in connection with this initiative, as much of
the required technology and systems will utilize our existing infrastructure. We
anticipate the total cost to develop our site will be approximately $2.0 million
through fiscal 2000, the majority of which will be funded with cash flow from
operations. We intend to promote our site through our existing in-store
promotions and direct mail programs, as well as by offering on-line shopping
discounts and product guarantees to encourage sales. The "look and feel" of our
site is planned to mirror our retail stores and
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<PAGE> 39
emphasize quality. Our site will permit customers to search for merchandise and
information and browse by item, content and event. In addition, our site is
expected to allow the user to accumulate and compare the items they have
selected. We also have the ability to set up a website for our Lundstrom
Jewelers brand for a minimal additional cost by utilizing our existing
whitehalljewellers.com infrastructure. We believe that because of our brand name
and reputation, we will have the ability to combine the convenience of an
e-commerce site with the service, inventory and reputation that only national
retail jewelry chains can provide.
PURCHASING
We do not manufacture our merchandise. We purchase substantially all of our
inventory, including loose gems, directly from leading suppliers located in the
United States and abroad. We purchase merchandise from approximately 180
vendors, primarily in the United States, Israel, Italy and the Far East, who
supply various jewelry products under U.S. dollar-denominated agreements. During
fiscal 1998, our largest supplier and five largest suppliers accounted for
approximately 11% and 34%, respectively, of the merchandise we purchased. During
the first 11 months of fiscal 1999, our largest supplier and five largest
suppliers accounted for approximately 13% and 38%, respectively, of the
merchandise we purchased. We also have certain subcontracting arrangements with
jewelry finishers to set loose diamonds and gemstones into rings and other
jewelry, using styles established by us or by other companies. We believe that
the relationships we have established with our suppliers and subcontractors are
good. We have not experienced any difficulty in obtaining satisfactory sources
of supply and believe that adequate alternative sources of supply exist for
substantially all types of merchandise sold in our stores. However, the loss of
one or more of our major suppliers, particularly at certain critical times
during the year, could have a material adverse effect on us.
We maintain a strict quality assurance program, with almost all shipments
from suppliers being counted or weighed and visually inspected upon receipt at
our headquarters in Chicago, Illinois.
During fiscal 1998, our average net monthly investment in inventory (i.e.,
the total cost of inventory owned and paid for) was 61% of the total cost of our
on-hand merchandise with the remaining percentage being trade payables and
consignment inventory. For example, the average amount of consignment
merchandise per store was $151,000 on January 31, 1999. Our vendor relationships
for non-consignment inventory are often granted exchange privileges which permit
us to return or exchange certain unsold merchandise for new products at any
time. In summary, our relationships with vendors encourage their participation
in, and responsibility for, merchandise turnover and profitability. These
arrangements also permit us to have more merchandise available for sale in
stores and reduce somewhat our exposure to changes in fashion trends and
inventory obsolescence.
As participants in the jewelry industry, we are affected by general
industry-wide fluctuations in the prices of diamonds and gold and, to a lesser
extent, other precious and semi-precious metals and stones. During fiscal 1998,
diamonds, gold, precious and semi-precious jewelry accounted for approximately
98% of our net merchandise sales. The supply and price of diamonds in the
principal world markets are significantly influenced by a single entity, the
Central Selling Organization, a marketing arm of DeBeers Consolidated Mines Ltd.
of South Africa. The Central Selling Organization has traditionally controlled
the marketing of a substantial majority of the world's supply of diamonds and
sells rough diamonds to worldwide diamond cutters from its London office in
quantities and at prices determined in its sole discretion. The availability of
diamonds to the Central Selling Organization and our suppliers is to some extent
dependent on the political situation in diamond producing countries, such as
South Africa, Botswana, Zaire, republics of the former Soviet Union and
Australia, and on continuation of the prevailing supply and marketing
arrangements for raw diamonds. Until alternate sources could be developed, any
sustained interruption in the supply of diamonds or any oversupply from the
producing countries could adversely affect us and the retail jewelry industry as
a whole. We are constantly altering the mix of our products and we have
increased the percentage of higher priced items in our stores. Higher priced
jewelry items tend to have a slower rate of turnover, thereby increasing the
risks to us associated with price fluctuations and changes in fashion trends.
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<PAGE> 40
INVENTORY LOSS PREVENTION
We undertake substantial efforts to safeguard our jewelry inventory from
loss and theft, including the use of security alarm systems and safes at each
store and the taking of daily inventory of higher value items. In addition, our
inventory management and control system, which tracks each item in our
inventory, provides a further check against loss or theft. During fiscal 1998,
in-store inventory shrinkage amounted to approximately 1.0% of sales. We have a
full-time manager who directs our loss prevention department. We maintain
insurance (subject to certain deductibles) covering the risk of loss of
merchandise in transit, on store premises (and in our distribution facility
whether owned or on consignment) in amounts that we believe are reasonable and
adequate for the types and amounts of merchandise that we carry.
MANAGEMENT INFORMATION SYSTEMS
We utilize customized management information systems throughout our
business to facilitate the design and implementation of selling strategies and
as an integral part of our financial and other operational controls. Our
management information system utilizes IBM AS400 systems as its foundation. The
system incorporates point-of-sale computers in our stores with a merchandise
management and purchase order management system and utilizes software
specifically designed for the jewelry industry, which we have customized
extensively to meet our needs. Our website will utilize a majority of our
existing technology infrastructure. The information system has been upgraded to
support our current needs but further upgrading is necessary to support our
growth.
We use the management information system to track each individual item of
merchandise from receipt to ultimate sale or return to the vendor. As a result,
management can closely monitor inventory by location, sales, gross margin,
inventory levels and turnover statistics, reallocating inventory among stores
when beneficial. This system also enables management to review each store's and
each employee's productivity and performance. Based on the sales data, we tailor
each store's inventory composition and plan our purchasing requirements
accordingly. The system enables us to manage our inventory at the store level,
including the automatic replenishment of merchandise generally twice a week.
The system also automatically provides a daily reconciliation of each
store's transactions for prompt investigation of discrepancies. The
point-of-sale computers are polled nightly by the headquarters system and
updated data is available at the beginning of the following day for use by
central office and store supervisory personnel, and for transfer into our
accounting, merchandising, and other management information systems.
We have implemented, through our point-of-sale system, the ability to
capture and retain selected customer data from each sale (name, address, phone,
birthday, anniversaries, historical purchases, etc.). Our store managers and
sales associates often use this data in their efforts to contact customers and
anticipate and facilitate future add-on purchases by our customers. We believe
that additional sales volume can be achieved by utilizing such programming
initiatives. We use the customer data in our direct marketing promotional
campaigns. The point of sale systems also track required inspection dates for
customers with diamond warranties. Sales associates are prompted by the system
to contact these customers to remind them of the required in-store inspection.
COMPETITION
The jewelry business is fragmented and highly competitive. We compete with
national and regional jewelry chains and local independently owned jewelry
stores, especially those that operate in malls, as well as with department
stores, catalog showrooms, discounters, direct mail suppliers, televised home
shopping networks and Internet commerce. Certain of our competitors are
substantially larger and have greater financial resources than us and can take
advantage of national advertising programs. We also believe that we compete for
consumers' discretionary spending dollars with retailers that offer merchandise
other than jewelry.
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We believe that the primary competitive factors affecting our operations
are store location and atmosphere, quality of sales personnel and service,
breadth and depth of merchandise offered, pricing, credit and reputation. We
emphasize our merchandise selection, sales personnel, store location and design
and pricing in competing in our target market, which is relatively less credit
sensitive.
Direct marketing of fine jewelry, including marketing of jewelry via the
Internet, historically has not met with substantial consumer acceptance.
However, in the past year a number of well-financed businesses have announced
plans to market fine jewelry via the Internet and some have begun selling fine
jewelry via the Internet. Large scale consumer acceptance of Internet fine
jewelry retailing could transform the jewelry retailing business, result in
lower price points and margins, and have a substantial adverse effect on our
results of operations or financial condition. Although we have initiated an
e-commerce sales program, there can be no assurance that its initiative will be
successful.
INTELLECTUAL PROPERTY
Whitehall(R) Co. Jewellers, Lundstrom(R) Jewelers and Marks Bros.(R)
Jewelers are registered trademarks in the United States. We also have registered
the Internet domain names "whitehalljewellers.com" and "lundstromjewelers.com."
We may, in the future, consider licensing our trademarks and tradenames on an
opportunistic basis.
EMPLOYEES
As of January 31, 2000, we had 2,367 employees, including approximately
2,205 store level employees. We usually hire a limited number of temporary
employees during each Christmas selling season. None of our employees are
represented by a union. We believe that our relations with our employees are
good.
REGULATION
Our operations are affected by numerous federal and state laws that impose
disclosure and other requirements upon the origination, servicing and
enforcement of credit accounts, and limitations on the maximum amount of finance
charges that may be charged by a credit provider. Although credit to our
customers is provided by third parties without recourse to us based upon a
customer's failure to pay, any restrictive change in the regulation of credit,
including the imposition of, or changes in, interest rate ceilings, could
adversely affect the cost or availability of credit to our customers and,
consequently, our results of operations or financial condition.
Our operations are also affected by federal and state laws relating to
marketing practices in the retail jewelry industry. In marketing to our
customers, we compare many of our prices to "reference prices." Our literature
indicates to customers that our reference price for an item is either the
manufacturer's suggested retail price or our determination of the non-discounted
price at which comparable merchandise of like grade or quality is advertised or
offered for sale by competitive retailers and is not our current selling price
or the price at which we formerly sold such item. We are, from time to time,
subject to regulatory investigation relating to our "reference prices" in
marketing to our customers. Although we believe that pricing comparisons are
common in the jewelry business, there can be no assurance that this position
would be upheld. An investigator for the Office of Consumer Affairs for the
Commonwealth of Virginia recently requested that we substantiate our advertised
claim of 50% off "reference prices." We are currently responding to that
request. The investigation is in a preliminary stage.
PROPERTIES
As of February 4, 2000, we operated 294 stores in 33 states. All of these
stores are leased and are located in regional or super-regional malls. Our
typical new store lease has a term of 10 years plus the first partial lease
year. Terms generally include a minimum base rent, a percentage rented based on
store sales and certain other occupancy charges. At January 31, 2000 the average
remaining life of the leases for our
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stores was approximately six years. While there can be no assurance, we expect
to be generally able to renew these leases as they expire.
We also lease approximately 28,400 square feet of office and administrative
space in Chicago, Illinois in an office building housing our corporate
headquarters, distribution functions and quality assurance operations. This
lease expires on May 13, 2004.
LEGAL PROCEEDINGS
An investigator for the Office of Consumer Affairs for the Commonwealth of
Virginia recently requested that we substantiate our advertised claim of 50% off
"reference prices." We are currently responding to that request. The
investigation is in a preliminary stage. Other than such investigation, we are
involved in certain legal actions and regulatory investigations from time to
time arising in the ordinary course of business. We believe that none of these
other actions or investigations will have a material adverse effect on our
results of operations or financial condition.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning our directors
and executive officers as of January 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Hugh M. Patinkin..................... 49 Chairman, Chief Executive Officer and President
John R. Desjardins................... 49 Executive Vice President, Finance &
Administration, Secretary and a Director
Matthew M. Patinkin.................. 42 Executive Vice President, Store Operations, and
a Director
Manny A. Brown....................... 44 Executive Vice President, Store Operations
Lynn D. Eisenheim.................... 48 Executive Vice President, Merchandising
Norman J. Patinkin(1)................ 73 Director
Jack A. Smith(2)..................... 64 Director
Daniel H. Levy(1)(2)................. 56 Director
Richard K. Berkowitz(1)(2)........... 57 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Messrs. Hugh M. Patinkin and Matthew M. Patinkin are brothers. Mr. Norman
J. Patinkin is a first cousin, once removed, of Messrs. Hugh and Matthew
Patinkin.
Mr. Hugh M. Patinkin has served as our President and Chief Executive
Officer since 1989 and was elected Chairman in February 1996. He has served as a
director from 1979 to 1988 and from 1989 to the present. He joined us as
Assistant Secretary in 1979. Prior thereto he practiced law with the firm of
Sidley & Austin.
Mr. John R. Desjardins joined us in 1979 and has served as our Executive
Vice President, Finance & Administration and Secretary and as a director since
1989. He also served as our Treasurer from 1989 through October 1998.
Previously, he worked as a certified public accountant with Deloitte & Touche
L.L.P.
Mr. Matthew M. Patinkin joined us in 1979 and has served as our Executive
Vice President, Store Operations and as a director since 1989.
Mr. Manny A. Brown joined us in 1997 as our Executive Vice President, Store
Operations. Mr. Brown was employed from 1986 through 1997 by Foster Medical
Corporation which later merged with HomedCo and was then purchased by Apria
Healthcare. Mr. Brown held various sales and operations management positions
with Apria Healthcare including Executive Vice President, East Operations and
Senior Vice President, Central Operations. Mr. Brown was employed by FMC
Corporation from 1980 through 1985 in various sales management and marketing
positions. Mr. Brown was employed by American Brands from 1978 through 1980 in
various sales management positions.
Mr. Lynn D. Eisenheim joined us in 1991 as our Executive Vice President,
Merchandising. He has 25 years of experience in the jewelry business, having
served with Zale Corporation (where he served as Executive Vice President,
Merchandising immediately prior to joining us) and Service Merchandise Co.
Mr. Norman J. Patinkin has served as one of our directors since 1989. He
recently retired as the Chief Executive Officer of United Marketing Group,
L.L.C., but remains on the board of directors of United Marketing Group. United
Marketing Group operates telemarketing services, motorclubs, travel clubs and
direct response merchandise programs for large corporations.
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<PAGE> 44
Mr. Jack A. Smith has served as one of our directors since July 1996. Mr.
Smith is the former Chairman of the Board of The Sports Authority, Inc., a
national sporting goods chain, which he founded in 1987. Prior to founding The
Sports Authority, Mr. Smith served as Chief Operating Officer of Herman's
Sporting Goods and held various executive management positions with major
national retailers, including Sears & Roebuck, Montgomery Ward & Co. and
Jefferson Stores. Mr. Smith serves on the board of directors of Darden
Restaurants, Inc., Beverages & More!, and National Wholesale Liq.
Mr. Daniel H. Levy has served as one of our directors since January 7, 1997
(and had served as a director from March 1996 until May 1996). Mr. Levy is
currently Chief Executive Officer and a director of Donnkenny, Inc. Mr. Levy
served as Chairman and Chief Executive Officer of Best Products Co. Inc., a
large discount retailer of jewelry and brand name hardline merchandise, from
April 1996 until January 1997. Best Products filed a petition for bankruptcy
under Chapter 11 of the Bankruptcy Code in the Eastern District of Virginia on
September 24, 1996. Prior to such time, Mr. Levy was a Principal for LBK
Consulting from 1994 until 1996. Mr. Levy served as Chairman and Chief Executive
Officer of Conran's during 1993. Prior to such time, Mr. Levy was Vice Chairman
and Chief Operating Officer for Montgomery Ward & Co. from 1991 until 1993.
Mr. Richard K. Berkowitz has served as one of our directors since 1998. He
retired from Arthur Andersen, L.L.P. in August 1998 after serving 21 years as a
partner. Prior to his retirement, Mr. Berkowitz served as head of Arthur
Andersen's tax division in Miami, Florida. Mr. Berkowitz also serves on the
Advisory Board of Security Plastics, Inc.
BOARD OF DIRECTORS
Our board of directors is currently composed of seven directors. Our board
of directors is divided into three classes as nearly equal in size as possible
with staggered, three year terms. The term of office of Class I directors will
expire at the annual meeting of stockholders to be held in 2000; the term of
office of Class II directors will expire at the annual meeting of stockholders
to be held in 2001; and the term of office of Class III directors will expire at
the annual meeting of stockholders to be held in 2002. At each annual meeting of
the stockholders, the successors to the directors whose terms will then expire
will be elected to serve from the time of their election and qualification until
the third annual meeting following their election or until their successors have
been duly elected and qualified, or until their earlier resignation and removal,
if any. Messrs. Hugh M. Patinkin, Norman J. Patinkin and Daniel H. Levy have
been designated as Class I directors; Messrs. John R. Desjardins and Jack A.
Smith have been designated as Class II directors; and Messrs. Matthew M.
Patinkin and Richard K. Berkowitz have been designated as Class III directors.
The classification of our board of directors could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, control of Whitehall Jewellers. In addition, our certificate of
incorporation provides that the authorized number of directors may be changed
only by resolution of the board of directors. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the total number of directors.
SEVERANCE AGREEMENTS
We have entered into severance agreements with five of our executive
officers and fourteen of our other management employees which provide for
specified payments after a "change of control."
A "change of control" is defined under these agreements to include:
- an acquisition by a third party (excluding certain of our affiliates) of
beneficial ownership of at least 25% of the outstanding shares of our
common stock;
- a change in a majority of the incumbent board of directors; and
- a merger, consolidation or sale of substantially all of our assets if our
stockholders do not continue to own at least 60% of the equity of the
surviving entity.
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Employees with severance agreements will receive specified payments and
benefits if they terminate employment voluntarily six months after a change of
control, or earlier if they terminate for "good reason," as defined in the
severance agreements (such as certain changes in duties, titles, compensation,
benefits or work locations) or if we terminate them after a change of control,
other than for cause. The severance agreements for our five executive officers
also provide for certain payments absent a change of control if they terminate
employment for good reason or if we terminate them other than for cause. In the
case of our five executive officers, their payment will equal 2.5 times (1.5
times if a change of control has not occurred) their highest salary plus bonus
over the five years preceding the change of control, together with continuation
of health and other insurance benefits for 30 months (18 months if a change of
control has not occurred). In the case of the other employees, their payments
will equal their highest salary plus bonus over the five years preceding the
change of control with continuation of health and other insurance benefits for
one year.
The severance agreements also provide for payment of a bonus for any
partial year during which employment is terminated equal to the higher of (x)
the employee's average bonus for the immediately preceding two years and (y) 50%
of the maximum bonus the employee could have earned in the year employment
terminates, pro rated for the portion of the year completed. If any payments to
any of the five executive officers under these agreements would constitute an
"excess parachute payment" under Section 280G(b)(1) of the Internal Revenue
Code, such payments will be "grossed up" for any excise tax payable so that the
amount retained after paying all federal income taxes due would be the same as
such person would have retained if such section had not been applicable.
REGISTRATION RIGHTS
Pursuant to the Second Amended and Restated Registration Agreement, as
amended, effective as of May 1, 1996, we granted to Frontenac Venture V Limited
Partnership, Frontenac Diversified III Limited Partnership, Continental Illinois
Venture Corporation, and William Blair Venture Partners III Limited Partnership,
and Hugh M. Patinkin, Matthew M. Patinkin and John R. Desjardins and other
related persons, rights to require us to register the sale of shares of their
common stock under the Securities Act of 1933. The number of such registrations
which we are obligated to effect is limited to four. The Registration Agreement
also provides that, in the event we propose to register any of our securities
under the Securities Act at any time or times, subject to certain limitations,
we will use our best efforts to include these shares in such registration upon
the request of the persons identified above. Pursuant to the Registration
Agreement, shares offered by the selling stockholders and shares that may be
sold by the selling stockholders upon the exercise of the underwriters'
over-allotment option are being included in the registration statement of which
the prospectus is a part. We are generally required to bear the expenses of all
such registrations, except underwriting discounts and commissions. We also have
agreed to indemnify the persons identified above and their controlling persons
against certain liabilities, including liabilities under the Securities Act. In
addition, pursuant to the Registration Agreement effective as of May 1, 1996
between us and the Whitehall Jewellers, Inc. Employee Stock Ownership Trust, the
ESOP has the right to demand one registration with respect to the shares of
common stock it holds.
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<PAGE> 46
PRINCIPAL AND SELLING STOCKHOLDERS
BENEFICIAL OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of January 21, 2000, and as adjusted to reflect
the sale of the shares in this offering, of each of our directors and executive
officers, all such directors and executive officers as a group, each person
known to us to own more than 5% of our equity securities, and each selling
stockholder.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, subject to applicable community property
law, and generally includes voting or investment power with respect to
securities. We believe based on information provided to us that all persons
listed below have sole voting and investment power with respect to their shares
of common stock, except as otherwise indicated and to the extent authority is
shared by spouses under applicable law. A person is deemed to be the beneficial
owner of securities that can be acquired within 60 days from the date of this
prospectus through the exercise of any option, warrant or right. Shares of
common stock subject to options, warrants or rights that are currently
exercisable or exercisable within 60 days are deemed outstanding for computing
the ownership percentage of the person holding such options, warrants or rights,
but are not deemed outstanding for computing the ownership percentage of any
other person. The information in the table assumes that the underwriters will
not exercise their over-allotment option to purchase additional shares in this
offering.
<TABLE>
<CAPTION>
BEFORE THE OFFERING SHARES AFTER THE OFFERING
---------------------- BEING -----------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
- --------------------------- --------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Directors and Executive Officers
Hugh M. Patinkin(3)................................. 1,400,413 9.4% 150,000 1,250,413 7.3%
Matthew M. Patinkin(4).............................. 846,824 5.8 100,000 746,824 4.4
John R. Desjardins(5)............................... 589,414 4.0 100,000 489,414 2.9
Lynn D. Eisenheim(6)................................ 117,943 * 35,000 82,943 *
Manny A. Brown(7)................................... 106,106 * 40,000 66,106 *
Norman J. Patinkin(8)............................... 44,848 * -- 44,848 *
Jack A. Smith(9).................................... 30,223 * -- 30,223 *
Richard K. Berkowitz(10)............................ 16,756 * -- 16,756 *
Daniel H. Levy(11).................................. 15,574 * -- 15,574 *
All executive officers and directors as a group (9
persons).......................................... 3,113,424 2,688,424
5% Stockholders
Wasatch Advisors, Inc.(12)
150 Social Hall Avenue
Salt Lake City, UT 84111.......................... 2,218,196 15.3 -- 2,218,196 13.2
Westport Asset Management, Inc.(13)
253 Riverside Avenue
Westport, CT 06880................................ 1,225,050 8.5 -- 1,225,050 7.3
Capital Research and Management Company
SMALLCAP World Fund, Inc.(14)
333 South Hope Street
Los Angeles, CA 90071............................. 765,000 5.3 -- 765,000 4.6
Other Selling Stockholders
U.S. Trust Company of California, N.A.,
as trustee for the ESOP Trust,
1300 Eye Street, N.W., Suite 280 East
Washington, D.C. 20005(15)........................ 617,850 4.3 100,000 517,850 3.1
MJSB Investment Partners, L.P.(16).................. 388,440 2.7 50,000 338,440 2.0
John R. Desjardins, 1995 Family Trust, U/A/D
12/28/95(17)...................................... 43,248 1.4 20,000 23,248 *
Matthew M. Patinkin, 1994 Family Trust, U/A/D
12/19/94(18)...................................... 185,208 1.3 30,000 155,208 *
</TABLE>
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<PAGE> 47
- ---------------
* Less than 1%.
(1) Except as set forth in the footnotes to this table, the persons named in
the table above have sole voting and investment power with respect to all
shares shown as beneficially owned by them.
(2) The applicable percentage of ownership before the offering is based on
14,469,744 shares of common stock outstanding on January 31, 2000 and the
applicable percentage of ownership after the offering is based on
16,809,744 shares of common stock outstanding. In calculating the
applicable percentage of ownership with respect to any particular person,
the number of shares outstanding also includes common stock issuable
pursuant to stock options exercisable within 60 days of the date of this
prospectus with respect to such person but not with respect to any other
person.
(3) Includes 395,283 shares of common stock issuable pursuant to presently
exercisable stock options or stock options which will become exercisable
within 60 days of this prospectus as well as 43,344 performance-based
options that are expected to accelerate and become exercisable in the next
60 days based on our fiscal 1999 performance. Includes 388,440 shares
beneficially owned by Hugh M. Patinkin, which shares are held by MJSB
Investment Partners, L.P., a Delaware limited partnership, U/A/D 10/28/97
of which Hugh H. Patinkin is the sole managing agent. Includes 54,677
shares held by Hugh M. Patinkin, Mark A. Patinkin, Matthew M. Patinkin,
Douglas M. Patinkin and Nicholas M. Patinkin, as Trustees of the Patinkin
1994 Grandchildren's Trust U/A/D 11/18/94, with respect to which shares
Hugh M. Patinkin, Mark A. Patinkin, Matthew M. Patinkin, Douglas M.
Patinkin and Nicholas M. Patinkin share voting and investment power. The
mailing address of Hugh M. Patinkin is c/o Whitehall Jewellers, Inc., 155
North Wacker Drive, Suite 500, Chicago, Illinois 60606.
(4) Includes 204,301 shares of common stock issuable pursuant to presently
exercisable stock options or stock options which will become exercisable
within 60 days of this prospectus as well as 13,314 performance-based
options that are expected to accelerate and become exercisable in the next
60 days based on our fiscal 1999 performance. Includes 185,208 shares
beneficially owned by Matthew M. Patinkin, which shares are held by Robin
J. Patinkin and Debra Soffer, as Trustees of the Matthew M. Patinkin 1994
Family Trust U/A/D 12/19/94. Robin J. Patinkin and Debra Soffer have shared
investment power with respect to such shares. Includes 16,646 shares held
by Matthew M. Patinkin and Robin J. Patinkin, as Trustees of various trusts
for the benefit of their children. Includes 13,281 shares held by Robin J.
Patinkin, as Trustee of various trusts for the benefit of the children of
Matthew M. Patinkin and Robin J. Patinkin, with respect to which shares
Matthew M. Patinkin disclaims beneficial ownership because Robin J.
Patinkin has sole voting and investment power with respect to such shares.
Includes 54,677 shares held by Hugh M. Patinkin, Mark A. Patinkin, Matthew
M. Patinkin, Douglas M. Patinkin and Nicholas M. Patinkin, as Trustees of
the Patinkin 1994 Grandchildren's Trust U/A/D 11/18/94, with respect to
which shares Hugh M. Patinkin, Mark A. Patinkin, Matthew M. Patinkin,
Douglas M. Patinkin and Nicholas M. Patinkin share voting and investment
power. The mailing address of Matthew M. Patinkin is c/o Whitehall
Jewellers, Inc., 155 North Wacker Drive, Suite 500, Chicago, Illinois
60606.
(5) Includes 209,016 shares of common stock issuable pursuant to presently
exercisable stock options or stock options which will become exercisable
within 60 days of this prospectus as well as 18,029 performance-based
options that are expected to accelerate and become exercisable in the next
60 days based on our fiscal 1999 performance. Includes 43,248 shares
beneficially owned by John R. Desjardins, which shares are held by Cheryl
Desjardins and Stephen Kendig, as Trustees of the John R. Desjardins 1995
Family Trust U/A/D 12/28/95. Cheryl Desjardins and Stephen Kendig have
shared investment power with respect to such shares. Shares beneficially
owned by Mr. Desjardins include shares allocated to his account in the ESOP
(12,440 shares), as to which he shares voting power with the ESOP. The ESOP
has sole investment power with respect to such shares.
(6) Includes 43,278 shares of common stock issuable pursuant to presently
exercisable stock options or stock options which will become exercisable
within 60 days of this prospectus as well as 7,083 performance-based
options that are expected to accelerate and become exercisable in the next
60 days based on our fiscal 1999 performance. Shares beneficially owned by
Mr. Eisenheim include
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shares allocated to his account in the ESOP (3,350 shares) as to which he shares
voting power with the ESOP. The ESOP has sole investment power with respect to
such shares.
(7) Includes 105,356 shares of common stock issuable pursuant to presently
exercisable stock options or stock options which will become exercisable
within 60 days of this prospectus as well as 7,855 performance-based
options that are expected to accelerate and become exercisable in the next
60 days based on our fiscal 1999 performance. Options for 40,000 shares
(46,000 shares if the underwriters overallotment option is exercised in
full) will be exercised in connection with the offering. Includes 750
shares owned by Marcy Brown, Mr. Brown's wife, in her self directed IRA
account, with respect to which shares Manny A. Brown disclaims beneficial
ownership.
(8) Includes 26,324 shares of common stock issuable pursuant to presently
exercisable stock options or stock options which will become exercisable
within 60 days of this prospectus. Includes 899 shares of restricted common
stock which may not be sold or transferred until after March 11, 2000.
(9) Includes 11,324 shares of common stock issuable pursuant to presently
exercisable stock options or stock options which will become exercisable
within 60 days of this prospectus. Includes 899 shares of restricted common
stock which may not be sold or transferred until after March 11, 2000.
(10) Includes 11,357 shares of common stock issuable pursuant to presently
exercisable stock options or stock options which will become exercisable
within 60 days of this prospectus. Includes 899 shares of restricted common
stock which may not be sold or transferred until after March 11, 2000.
(11) Includes 10,175 shares of common stock issuable pursuant to presently
exercisable stock options or stock options which will become exercisable
within 60 days of this prospectus. Includes 899 shares of restricted common
stock which may not be sold or transferred until after March 11, 2000.
(12) Share information based solely on information contained on a Form 13F,
dated November 16, 1999, filed with the SEC.
(13) Share information based solely on information contained on a Form 13F,
dated November 12, 1999, filed with the SEC. According to a Schedule 13G,
dated February 16, 1999, filed with the SEC, Westport Asset Management,
Inc., an investment adviser registered under Section 203 of the Investment
Advisers Act of 1940, has shared voting and investment power with respect
to the reported shares, all of which are held in certain discretionary
managed accounts. Westport Asset Management, Inc. disclaims beneficial
ownership of such shares and disclaims the existence of a group.
(14) Share information based solely on information contained on a Form 13F,
dated November 12, 1999, filed with the SEC. According to a Schedule 13G,
dated February 11, 1999, filed with the SEC, Capital Research and
Management Company, an investment adviser registered under Section 203 of
the Investment Advisers Act of 1940, has sole investment power with respect
to the reported shares and does not have any voting power with respect to
such shares. The Schedule 13G was furnished jointly by Capital Research and
Management Company and SMALLCAP World Fund, Inc., an investment company
registered under the Investment Company Act. SMALLCAP World Fund has sole
voting power with respect to the reported shares and does not have any
investment power with respect to such shares.
(15) Share information based solely on information contained on a Form 13F,
dated December 13, 1999, filed with the SEC. The participants in the ESOP
have voting power with respect to the shares held by the ESOP.
(16) The shares held by MJSB Investment Partners, L.P., a Delaware limited
partnership of which Hugh M. Patinkin is the sole managing agent, are
beneficially owned by Hugh M. Patinkin.
(17) The shares held by the John R. Desjardins, 1995 Family Trust, U/A/D
12/28/95 are held by Cheryl Desjardins and Stephen Kendig, as Trustees, and
are beneficially owned by John R. Desjardins. The Trustees have shared
investment power with respect to such shares.
(18) The shares held by the Matthew M. Patinkin, 1994 Family Trust, U/A/D/
12/19/94 are held by Robin J. Patinkin and Debra Soffer, as Trustees, and
are beneficially owned by Matthew M. Patinkin. The Trustees have shared
investment power with respect to such shares.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Our authorized capital stock consists of 30,000,000 shares of common stock
(16,769,744 of which will be outstanding when this offering is completed),
26,026 shares of Class B common stock (151.973 of which is currently
outstanding), 39,371 shares of Class C common stock (all of which have been
retired and canceled), 60,000 shares of Class D common stock (all of which have
been retired and canceled) and 2,000,000 shares of preferred stock issuable in
series (none of which are issued or outstanding, but 309,183 of which have been
designated Series A Junior Participating Preferred Stock).
COMMON STOCK
Holders of our common stock are entitled to one vote for each share they
hold on all matters submitted to a vote of stockholders. Our stockholders do not
have cumulative voting rights. Accordingly, holders of a majority of the shares
of our common stock entitled to vote in any election of directors may elect all
of the directors standing for election. Holders of common stock are entitled to
receive ratably any dividends which may be declared by our board of directors
out of funds legally available for payment of dividends, subject to any
preferential dividend rights of outstanding preferred stock. Upon our
liquidation, dissolution or winding up, the holders of our common stock will be
entitled to receive ratably our net assets available after the payment of all
our debts and other liabilities and subject to the prior rights of holders of
any outstanding preferred stock. Holders of our common stock have no preemptive,
subscription, redemption or conversion rights.
Holders of our Class B common stock are entitled to vote together with the
holders of our common stock, but each share of Class B common stock has
approximately 35.4 votes. Class B common stock carries:
- a $130 per annum per share cumulative dividend preference over all other
classes of common stock (accruing through March 4, 1995); and
- a liquidation preference over all other classes of common stock for
accumulated and unpaid dividends.
Class B common stock participates in dividends and liquidation payments to be
made with respect to the common stock on the basis that one share of Class B
common stock is equivalent to approximately 35.4 shares of common stock.
PREFERRED STOCK
Our certificate of incorporation provides that our board of directors is
authorized, subject to certain limitations prescribed by law, without further
stockholder approval, to issue from time to time up to an aggregate of 2,000,000
shares of preferred stock in one or more series and to fix or alter the
designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each series of preferred stock. The board may,
among other things, determine with respect to each series of preferred stock
specific voting rights, designations, dividend rights (and whether dividends are
cumulative), dividend rates, terms of redemption (including sinking fund
provisions), redemption price or prices, conversion rights and liquidation
preferences. Because the board of directors will have the power to establish the
preferences and rights of the shares of any series of preferred stock without
any further action or vote by the stockholders, the board may afford the holders
of any series of preferred stock preferences, powers and rights, including
voting rights, senior to the rights of the holders of common stock.
One of the effects of undesignated preferred stock may be to enable the
board of directors to render more difficult, discourage or prevent an attempt to
obtain control of Whitehall Jewellers by means of a tender offer, proxy contest,
merger or otherwise and thereby protect the continuity of our current
management. The issuance of shares of the preferred stock pursuant to the board
of directors' authority
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may adversely affect the rights of holders of common stock. See "Risk
Factors -- Anti-takeover provisions in Delaware law and our charter and bylaws
could delay or deter a change in control" and "-- Preferred Stock Purchase
Rights."
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
A number of provisions in our certificate of incorporation, by-laws and
Delaware law may make it more difficult to acquire control of Whitehall
Jewellers by various means. These provisions could deprive the stockholders of
opportunities to realize a premium on the shares of common stock owned by them.
In addition, these provisions may adversely affect the prevailing market price
of the common stock. These provisions are intended to:
- enhance the likelihood of continuity and stability in the composition of
our board of directors and in the policies it formulates;
- discourage certain types of transactions which may involve an actual or
threatened change in control of Whitehall Jewellers;
- discourage certain tactics that may be used in proxy fights;
- encourage persons seeking to acquire control of Whitehall Jewellers to
consult first with our board of directors to negotiate the terms of any
proposed business combination or offer; and
- reduce our vulnerability to an unsolicited proposal for a takeover that
does not contemplate the acquisition of all outstanding shares of
Whitehall Jewellers or that is otherwise unfair to our stockholders.
Section 203 of the Delaware General Corporation Law. We are subject to the
provisions of Section 203 of the Delaware General Corporation Law. Subject to
certain exceptions, Section 203 prohibits a publicly held Delaware corporation
from engaging in certain business combinations with interested stockholders for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless either the interested stockholder
attained such status with the approval of the board of directors or the business
combination is approved in accordance with Section 203. a "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder which is not shared pro rata with our
other stockholders. Subject to certain exceptions, an "interested stockholder"
is a person who, together with affiliates and associates, owns, or within the
past three years did own, 15% or more of the corporation's voting stock.
Staggered board. Our certificate of incorporation provides for the division
of our board of directors into three classes as nearly equal in size as possible
with staggered three-year terms. Any director may be removed only with cause and
then only by the vote of a majority of the shares entitled to vote for the
election of directors.
Consideration of facts other than economic benefit. Our certificate of
incorporation empowers our board of directors, when considering a tender offer
or merger or acquisition proposal, to take into account factors in addition to
potential economic benefits to our stockholders. These factors may include:
- the comparison of the proposed consideration to be received by our
stockholders in relation to the then current market price of our capital
stock, our estimated current value in a freely negotiated transaction and
our estimated future value as an independent entity;
- the impact of such a transaction on our employees, suppliers and
customers and its effect on the communities in which we operate;
- our ability to fulfill our objectives of providing quality products and
services on a long-term basis; and
- whether the proposed transaction might violate applicable statutes and
regulations.
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Action by written consent; Special shareholder meetings. Our certificate of
incorporation provides that any action required or permitted to be taken by our
stockholders may be taken only at a duly called annual or special meeting of the
stockholders and that special meetings may be called only by our President or a
majority of the board of directors. These provisions could have the effect of
delaying, until the next annual stockholders meeting, stockholder actions which
are favored by the holders of our outstanding voting securities. These
provisions may also discourage another person or entity from making a tender
offer for our common stock, because such person or entity, even if it acquired
all or a majority of our outstanding voting securities, would be able to take
action as a stockholder (such as electing new directors or approving a merger)
only at a duly called stockholders meeting, and not by written consent.
Supermajority stockholders vote. The Delaware General Corporation Law
generally provides that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's certificate
of incorporation or by-laws, unless a corporation's certificate of incorporation
or by-laws, as the case may be, requires a greater percentage. Our certificate
of incorporation requires the affirmative vote of the holders of at least 75% of
our outstanding voting stock to amend or repeal any of the foregoing provisions,
and to reduce the number of authorized shares of common stock and preferred
stock. A 75% vote is required to amend or repeal our amended and restated
by-laws.
Advance notice for director nominations and shareholder proposals. Our
by-laws provide that for nominations for the board of directors or for other
business to be properly brought by a stockholder before an annual meeting of
stockholders, the stockholder must first have given timely notice of such
nomination in writing to our Secretary. To be timely, a stockholder's notice
generally must be delivered not later than 90 days in advance of the anniversary
date of the release of our proxy statement to stockholders in connection with
the prior year's annual meeting of stockholders. The notice must contain, among
other things, certain information about the stockholder delivering the notice
and, as applicable, background information about each nominee or a description
of the proposed business to be brought before the meeting. Our bylaws also
provide that special meetings of stockholders may be called only by the
President or a majority of the board of directors. Business transacted at a
special meeting is limited to the purposes for which the meeting is called.
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or discouraging a third party from attempting to
acquire, control of us.
PREFERRED STOCK PURCHASE RIGHTS
Our board of directors adopted a stockholders rights plan. Under the
stockholders rights plan, each share of common stock has associated with it one
preferred share purchase right and each share of Class B common stock has
associated with it approximately 35.4 preferred stock purchase rights. The terms
of the preferred stock purchase rights are set forth in an Amended and Restated
Stockholders Rights Agreement between us and BankBoston, N.A. Under certain
circumstances described below, each preferred stock purchase right entitles the
holder thereof to purchase one one-hundred and fiftieth of a share of Series A
Junior Participating Preferred Stock for a price of $34.67, subject to
adjustment, per one one-hundred and fiftieth of a share.
The preferred stock purchase rights are not presently exercisable and are
transferable only with the related shares of common stock and Class B common
stock. They will not become exercisable or be evidenced by separate certificates
or traded separately from the common stock or Class B common stock prior to the
occurrence of certain triggering events described below. If a triggering event
occurs, separate rights certificates would be issued and distributed
representing one preferred stock purchase right for each share of common stock
and approximately 35.4 preferred stock rights for each share of Class B common
stock. There is no present market for the preferred stock purchase rights
separate from the common stock or Class B common stock and we cannot predict
whether a trading market would develop with respect to these rights if these
rights ever become exercisable.
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Trigger Events. The preferred stock purchase rights would become
exercisable at the specified exercise price upon the earliest to occur of either
of the following trigger events:
- 10 business days after the first public announcement that any acquiring
person or group (other than an Exempt Person) has acquired beneficial
ownership of 15% or more of the outstanding shares of our common stock;
and
- 10 business days (unless delayed by the board of directors) after any
person or group (other than an Exempt Person) has commenced, or announced
the intention to commence, a tender or exchange offer which would, upon
its consummation, result in such person or group being the beneficial
owner of 15% or more of the outstanding shares of our common stock.
Preferred stock purchase rights may not be exercised following the
occurrence of an event described below under the caption "Flip-In" prior to the
expiration of the our right to redeem them. An "Exempt Person" includes
Whitehall Jewellers, Mr. Hugh M. Patinkin, Mr. John R. Desjardins and Mr.
Matthew M. Patinkin and certain related persons. Wasatch Advisors, Inc., which
currently holds approximately 15.3% of our outstanding common stock, is not
considered an acquiring person under the stockholders rights plan because our
board of directors has determined in good faith that Wasatch acquired over 15%
of our outstanding common stock inadvertently and has been divesting as promptly
as practicable a sufficient number of shares to reduce its holdings below 15%.
After the completion of this offering, Wasatch Advisors, Inc.'s holdings are
expected to be below 15%.
Flip-In. After the preferred stock purchase rights become exercisable
(unless the triggering event is the commencement or the announcement of a tender
or exchange offer as described above), the holders of the preferred stock
purchase rights (other than an acquiring person and certain transferees of an
acquiring person) would be entitled to purchase shares of our common stock at a
50% discount. After the occurrence of a Flip-In event, the preferred stock
purchase rights of acquiring persons and their transferees become void.
Flip-Over. The holders of the preferred stock purchase rights (other than
rights which have become void) would be entitled to purchase common shares of
the acquiring person (or a person affiliated therewith) at a 50% discount if, on
or after the date on which an acquiring person has effected a triggering event:
- we merge into or consolidate with an interested stockholder (as defined
in the Amended and Restated Stockholders Rights Agreement) or, unless all
holders of the outstanding shares of our common stock are treated the
same, any other person (with limited designated exceptions);
- an interested stockholder or, unless all holders of the outstanding
shares of our common stock are treated the same, any other person (with
limited designated exceptions) merges into us; or
- we sell or transfer 50% or more of our consolidated assets or earning
power to an interested stockholder or, unless all holders of the
outstanding shares of our common stock are treated the same, any other
person (with limited designated exceptions).
In general, an interested stockholder is an acquiring person and certain
persons affiliated, associated or acting on behalf of or in concert therewith.
Redemption of Preferred Stock Purchase Rights. The preferred stock purchase
rights may be redeemed, as a whole, at a redemption price of $.01 per preferred
stock purchase right, subject to adjustment, at the direction of our board of
directors, at any time prior to the earliest of:
- 10 business days after the first public announcement that any person
(other than us and certain related entities) has become an acquiring
person;
- the occurrence of any transaction described under the caption
"Flip-Over"; and
- the date of final expiration of the preferred stock purchase rights,
which is May 2, 2006.
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Under certain circumstances set forth in the Amended and Restated
Stockholders Rights Agreement, the decision to redeem the preferred stock
purchase rights requires the concurrence of at least a majority of the
disinterested directors, after the occurrence of an event described under the
caption "Flip-In" and prior to the occurrence of a transaction described under
the caption "Flip-Over," to redeem the preferred stock purchase rights in whole,
but not in part, at the required price, but only (i) if the person who is the
acquiring person shall have reduced its beneficial ownership of the then
outstanding shares of our common stock to less than 10% or (ii) in connection
with the transaction described under the caption "Flip-Over" which does not
involve an interested stockholder and in which all holders of the our common
stock are treated the same.
Exchange of Shares for Rights. At any time after any person or group
becomes an acquiring person and before any person (other than an Exempt Person),
together with its affiliates and associates, becomes the beneficial owner of 50%
or more of the outstanding shares of our common stock, our board of directors
may direct the exchange of shares of common stock (or preferred stock) for all
or any part of the preferred stock purchase rights (other than any such rights
which have become void) at the exchange rate of one share of common stock (or
one one-hundred and fiftieth of a preferred share) per preferred stock purchase
right, subject to adjustment.
Series A Junior Participating Preferred Stock. The Series A Junior
Participating Preferred Stock which would be issuable upon exercise of the
preferred stock purchase rights (should the rights become exercisable) would not
be redeemable. Each share of Series A Preferred stock would entitle the holder
thereof to receive a preferential quarterly dividend equal to 150 times the
aggregate per share amount of all cash dividends, plus 150 times the aggregate
per share amount (payable in kind) of all non-cash dividends and other
distributions (other than in shares of common stock), declared on the common
stock during such quarter, adjusted to give effect to any dividend on the common
stock payable in shares of common stock or any subdivision, combination or
reclassification of the common stock. Each share of Series A Preferred Stock
would entitle the holder thereof to 150 votes on all matters submitted to a vote
of our stockholders, voting together as a single class with the holders of the
common stock and the holders of any other class of capital stock having general
voting rights, adjusted to give effect to any subdivision, combination or
reclassification of the common stock. In the event of our liquidation, the
holders of each share of Series A Preferred Stock would be entitled to receive a
preferential liquidation payment equal to 150 times the aggregate per share
amount to be distributed to the holders of the common stock, adjusted to give
effect to any subdivision, combination or reclassification of the common stock,
plus an amount equal to accrued and unpaid dividends and distributions on such
share of Series A Preferred Stock, whether or not declared, to the date of such
payment. In the event of any merger, consolidation or other transaction in which
the outstanding shares of our common stock are exchanged for or converted into
other capital stock, securities, cash and/or other property, each share of
Series A Preferred Stock would be similarly exchanged or converted into 150
times the per share amount applicable to our common stock, adjusted to give
effect to any subdivision, combination or reclassification of the common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe.
RESTRICTIONS ON PAYMENT OF DIVIDENDS
Our revolving credit agreement with a group of banks includes, among other
restrictions, restrictions on capital expenditures, investments, payments of
dividends, assumption of additional debt, and mergers, acquisitions and
divestitures.
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UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of the principal United States
federal income and estate tax consequences of the ownership and disposition of
our common stock by a non-U.S. holder. As used in this discussion, the term
"non-U.S. holder" means a beneficial owner of our common stock that is not, for
U.S. federal income tax purposes:
- an individual who is a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or of any political subdivision of the United States;
- an estate the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source; or
- a trust, in general, if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more U.S.
persons have authority to control all substantial decisions of the trust.
This discussion does not consider:
- U.S. state and local or non-U.S. tax consequences;
- specific facts and circumstances that may be relevant to a particular
non-U.S. holder's tax position, including, if the non-U.S. holder is a
partnership, that the U.S. tax consequences of holding and disposing of
our common stock may be affected by certain determinations made at the
partner level;
- the tax consequences for the shareholders, partners or beneficiaries of a
non-U.S. holder;
- special tax rules that may apply to particular non-U.S. holders, such as
financial institutions, insurance companies, tax-exempt organizations,
U.S. expatriates, broker-dealers, and traders in securities; or
- special tax rules that may apply to a non-U.S. holder that holds our
common stock as part of a "straddle," "hedge," "conversion transaction,"
"synthetic security" or other integrated investment.
The following discussion is based on provisions of the U.S. Internal
Revenue Code of 1986, as amended, applicable U.S. Treasury regulations and
administrative and judicial interpretations, all as in effect on the date of
this prospectus, and all of which are subject to change, retroactively or
prospectively. The following summary assumes that a non-U.S. holder holds our
common stock as a capital asset. EACH NON-U.S. HOLDER SHOULD CONSULT A TAX
ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER
TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF SHARES OF OUR COMMON
STOCK.
DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See "Dividend Policy." In the event, however, that we pay
dividends on our common stock, we will have to withhold U.S. federal income tax
at a rate of 30%, or a lower rate under an applicable income tax treaty, from
the gross amount of the dividends paid to a non-U.S. holder. Non-U.S. holders
should consult their tax advisors regarding their entitlement to benefits under
a relevant income tax treaty.
Dividends that are effectively connected with a non-U.S. holder's conduct
of a trade or business in the United States generally are taxed on a net income
basis at the regular graduated rates and in the manner applicable to U.S.
persons. In that case, we will not have to withhold U.S. federal income tax if
the non-U.S. holder complies with applicable certification and disclosure
requirements. In addition, a "branch profits tax" may be imposed at a 30% rate,
or a lower rate under an applicable income tax treaty, on dividends received by
a foreign corporation that are effectively connected with the conduct of a trade
or business in the United States.
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Dividends paid on or before December 31, 2000 to an address in a foreign
country are presumed, absent actual knowledge to the contrary, to be paid to a
resident of such country for purposes of the withholding discussed above and for
purposes of determining the applicability of a tax treaty rate. For dividends
paid after December 31, 2000:
- a non-U.S. holder who claims the benefit of an applicable income tax
treaty rate generally will be required to satisfy applicable
certification and other requirements;
- in the case of common stock held by a foreign partnership, the
certification requirement generally will be applied to the partners of
the partnership and the partnership will be required to provide certain
information, including a U.S. taxpayer identification number; and
- look-through rules will apply for tiered partnerships.
A non-U.S. holder that is eligible for a reduced rate of U.S. federal
income tax under an income tax treaty may obtain a refund or credit of any
excess amounts withheld by filing an appropriate claim for a refund with the
U.S. Internal Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be taxed on gain recognized on a
disposition of our common stock unless:
- the gain is effectively connected with the non-U.S. holder's conduct of a
trade or business in the United States, in which case, the gain will be
taxed on a net income basis at the regular graduated rates and in the
manner applicable to U.S. persons and, if the non-U.S. holder is a
foreign corporation, the "branch profits tax" described above may also
apply;
- the non-U.S. holder is an individual who holds our common stock as a
capital asset, is present in the United States for more than 182 days in
the taxable year of the disposition and meets other requirements; or
- we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the
five-year period ending on the date of disposition or the period that the
non-U.S. holder held our common stock.
Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property interests
plus its other assets used or held for use in a trade or business. The tax
relating to stock in a U.S. real property holding corporation generally will not
apply to a non-U.S. holder whose holdings, direct and indirect, at all times
during the applicable period, constituted 5% or less of our common stock,
provided that our common stock was regularly traded on an established securities
market. We believe that we are not currently, and we do not anticipate becoming
in the future, a U.S. real property holding corporation.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is a non-U.S.
holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes, unless an applicable estate tax or other
treaty provides otherwise and, therefore, may be subject to U.S. federal estate
tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the U.S. Internal Revenue Service and to each
non-U.S. holder the amount of dividends paid to that holder and the tax withheld
from those dividends. Copies of the information returns reporting those
dividends and withholding may also be made available to the tax
51
<PAGE> 56
authorities in the country in which the non-U.S. holder is a resident under the
provisions of an applicable income tax treaty or agreement.
Under some circumstances, U.S. Treasury regulations require additional
information reporting and backup withholding at a rate of 31% on some payments
on common stock. Under currently applicable law, non-U.S. holders generally will
be exempt from these additional information reporting requirements and from
backup withholding on dividends paid on or before December 31, 2000 if we either
were required to withhold a U.S. federal income tax from those dividends or we
paid those dividends to an address outside the United States. After December 31,
2000, however, the gross amount of dividends paid to a non-U.S. holder that
fails to certify its non-U.S. holder status in accordance with applicable U.S.
Treasury regulations generally will be reduced by backup withholding at a rate
of 31%.
Payments by a U.S. office of a broker of the proceeds of a sale of our
common stock are subject to both backup withholding at a rate of 31% and
information reporting, unless the non-U.S. holder certifies its non-U.S. holder
status under penalties of perjury or otherwise establishes an exemption. Under
U.S. Treasury regulations currently in effect, information reporting, but not
backup withholding, will also apply to payments of the proceeds from sales of
our common stock by foreign offices of U.S. brokers or foreign brokers with
certain types of relationships to the United States, unless the broker has
documentary evidence in its records that the holder is a non-U.S. holder and
certain other conditions are met, or the holder otherwise establishes an
exemption. However, backup withholdings may apply to such payments made after
December 31, 2000 under certain circumstances.
Non-U.S. holders should consult their own tax advisors regarding the
application of the information reporting and backup withholding rules to them,
including changes to these rules that will become effective after December 31,
2000.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be refunded, or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the U.S. Internal Revenue Service.
52
<PAGE> 57
UNDERWRITING
Whitehall Jewellers and the selling stockholders are offering the shares of
common stock described in this prospectus through a number of underwriters. Banc
of America Securities LLC, Credit Suisse First Boston Corporation and William
Blair & Company, L.L.C. are the representatives of the underwriters. We and the
selling stockholders have entered into a firm commitment underwriting agreement
with the representatives. Subject to the terms and conditions of the
underwriting agreement, we and the selling stockholders have agreed to sell to
the underwriters, and the underwriters have each agreed to purchase, the number
of shares of common stock listed next to its name in the following table:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ----------
<S> <C>
Banc of America Securities LLC..............................
Credit Suisse First Boston Corporation......................
William Blair & Company, L.L.C..............................
----------
Total............................................. 2,925,000
==========
</TABLE>
The underwriting agreement provides that the underwriters must buy all of
the shares if they buy any of them. The underwriters will sell the shares to the
public when and if the underwriters buy the shares from us and the selling
stockholders.
The underwriters initially will offer shares to the public at the price
specified on the cover page of this prospectus. The underwriters may allow to
some dealers a concession of not more than $ per share. The underwriters may
also allow, and any other dealers may reallow, a concession of not more than
$ per share to some other dealers. If all the shares are not sold at the
initial public offering price, the underwriters may change the offering price
and the other selling terms. The common stock is offered subject to a number of
conditions, including
- receipt and acceptance of the common stock by the underwriters, and
- the right on the part of the underwriters to reject orders in whole or in
part.
We have granted the underwriters an option to buy up to 345,000 additional
shares of common stock, and the selling stockholders have granted the
underwriters an option to buy up to 93,750 additional shares of common stock.
These additional shares would cover sales of shares by the underwriters that
exceed the number of shares specified in the table above. The underwriters may
exercise this option from time to time on one or more occasions for 30 days
after the date of this prospectus. If the underwriters exercise this option,
they will each purchase additional shares approximately in proportion to the
amounts specified in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters. These amounts are shown assuming
no exercise and full exercise of the underwriters' option to purchase additional
shares.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share underwriting discounts and commissions............ $ $
Total underwriting discounts and commissions to be paid by
us........................................................ $ $
Total underwriting discounts and commissions to be paid by
the selling stockholders.................................. $ $
</TABLE>
The expenses of the offering, not including underwriting discounts and
commissions, are estimated to be approximately $500,000 and will be paid by us.
We, our executive officers and directors and the selling stockholders have
entered into lock-up agreements with the underwriters. Under these agreements,
subject to exceptions, we may not issue any new shares of common stock, and our
officers and directors and the selling stockholders may not dispose of
53
<PAGE> 58
or hedge any common stock or securities convertible into or exchangeable for
shares of common stock, without the prior written consent of Banc of America
Securities LLC. These restrictions will be in effect for a period of 90 days
after the date of this prospectus. At any time and without notice, Banc of
America Securities LLC may, in its sole discretion, release all or some of the
securities from these lock-up agreements.
We and the selling stockholders will indemnify the underwriters against
some liabilities, including some liabilities under the Securities Act. If we or
the selling stockholders are unable to provide this indemnification, we and the
selling stockholders will contribute to payments the underwriters may be
required to make in respect of those liabilities.
The common stock is traded on the New York Stock Exchange under the symbol
"JWL."
In connection with this offering, the underwriters may engage in activities
that stabilize, maintain or otherwise affect the price of the common stock.
These transactions may include:
- short sales;
- over allotment;
- purchases to cover positions created by short sales; and
- stabilizing transactions.
Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. In order to cover a
short position, the underwriters may bid for and purchase shares of common stock
in the open market or may exercise their overallotment option. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while this offering
is in progress.
The underwriters may also impose a penalty bid. This means that if the
representatives purchase shares in the open market in stabilizing transactions
or to cover short sales, the representatives can require the underwriters that
sold those shares as part of this offering to repay the underwriting discount
received by them.
As a result of these activities, the price of the common stock may be
higher than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the New York Stock
Exchange, in the over-the-counter market or otherwise.
An affiliate of Banc of America Securities LLC is a lender under our credit
facility and will receive a portion of the proceeds of this offering. Because
more than ten percent of the net proceeds of this offering may be received by
affiliates of NASD members participating in the offering, the offering will be
conducted in accordance with NASD Conduct Rule 2710(c)(8). In addition,
affiliates of each of Banc of America Securities LLC and William Blair & Co.
L.L.C. have equity investments in Whitehall Jewellers.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Sidley & Austin, Chicago, Illinois. Certain legal matters will be passed upon
for the underwriters by Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), New York, New York.
EXPERTS
The financial statements as of January 31, 1999 and 1998 and for each of
the three years in the period ended January 31, 1999, appearing in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
54
<PAGE> 59
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities Exchange Commission ("SEC"). You may read and
copy any document we file at the public reference facilities of the SEC in
Washington, D.C., Chicago, Illinois and New York, New York. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from the SEC's website at
http:\\www.sec.gov. You may also inspect our SEC reports and other information
at the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
We have filed with the SEC a registration statement on Form S-3, together
with any amendments or supplements thereto, under the Securities Act covering
the shares of common stock offered hereby. As permitted by the SEC, this
prospectus, which constitutes a part of such registration statement, does not
contain all the information included in the registration statement. Such
additional information may be obtained from the locations described above. This
prospectus summarizes material provisions of contracts and other documents that
we refer to you. Statements contained in this prospectus as to the contents of
any document as not necessarily complete. You should refer to the document for
all the details.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus and any information that we file later
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any additional documents
we file with the SEC after the date of this preliminary prospectus until the
offering of the common stock is terminated. The documents we incorporate by
reference are:
- Our Annual Report on Form 10-K for the year ended January 31, 1999.
- Our Quarterly Reports on Form 10-Q for each of the quarters ended April
30, 1999, July 31, 1999 and October 31, 1999, respectively.
- Our Current Reports on Form 8-K filed on February 3, 1999 and December
14, 1999, respectively.
- Our Registration Statement on Form 8-A, filed on January 12, 2000
relating to our common stock and our preferred stock purchase rights.
We also incorporate by reference each of the following documents that we
will file with the SEC after the date of this preliminary prospectus but before
all of the common stock offered by this prospectus has been sold:
- Reports filed under Sections 13(a) and 13(c) of the Exchange Act.
- Definitive proxy or information statements filed under Section 14 of the
Exchange Act in connection with any stockholders' meeting to the extent
such information discusses executive compensation (excluding any
compensation committee report), related party transactions, directors'
compensation, beneficial ownership, and biographies of directors and
officers.
- Any reports filed under Section 15(d) of the Exchange Act.
Any statement contained in this prospectus or in a document incorporated by
reference is modified or superseded for purposes of this prospectus to the
extent that a statement contained in any such document modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus.
You may request a copy of these filings, at no cost, by writing or
telephoning us at: Whitehall Jewellers, Inc., Attn: Investor Relations, 155
North Wacker Drive, Suite 500, Chicago, Illinois 60606, (312) 782-6800.
55
<PAGE> 60
WHITEHALL JEWELLERS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Whitehall Jewellers, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, shareholders' equity, and cash flows, present fairly, in all
material respects, the financial position of Whitehall Jewellers, Inc. (formerly
Marks Bros. Jewelers, Inc.) (the "Company") at January 31, 1999 and 1998, and
the results of its operations and its cash flows for each of the three years in
the period ended January 31, 1999, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 3, 1999, except as to Note 17 which is as of January 24, 2000
F-2
<PAGE> 62
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Current assets:
Accounts receivable, net......................... $ 3,147 $ 2,532 $ 3,020 $ 1,817
Layaway receivables, net......................... 3,514 2,636 5,061 3,201
Merchandise inventories.......................... 116,748 85,053 161,848 131,171
Other current assets............................. 1,329 996 951 833
Prepaid taxes.................................... -- -- 1,671 508
Deferred income taxes, net....................... 1,518 1,257 1,518 1,257
Deferred financing costs......................... 143 240 362 252
-------- -------- -------- --------
Total current assets..................... 126,399 92,714 174,431 139,039
Property and equipment, net........................ 34,304 22,701 47,246 32,760
Goodwill, net...................................... 6,448 -- 6,252 8,148
Deferred income taxes, net......................... 926 1,953 926 1,953
Deferred financing costs........................... 1,529 635 1,038 425
-------- -------- -------- --------
Total assets............................. $169,606 $118,003 $229,893 $182,325
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Outstanding checks, net.......................... $ 7,853 $ 9,608 $ 5,854 $ 2,079
Revolver loans................................... 28,886 16,841 64,129 43,862
Current portion of long-term debt................ 2,750 1,000 3,000 2,000
Accounts payable................................. 25,601 16,525 60,492 47,724
Income taxes..................................... 5,226 1,419 -- --
Accrued payroll.................................. 4,174 2,906 3,697 1,873
Other accrued expenses........................... 13,431 9,448 17,454 13,736
-------- -------- -------- --------
Total current liabilities................ 87,921 57,747 154,626 111,274
Total long-term debt, net of current portion....... 17,890 11,066 16,140 18,640
Other long-term liabilities........................ 1,627 1,387 2,085 1,513
-------- -------- -------- --------
Total liabilities........................ 107,438 70,200 172,851 131,427
Commitments and contingencies
Stockholders' equity:
Common Stock ($.001 par value; 30,000,000 shares
authorized; 15,278,763 shares, 15,223,529 shares,
15,344,375 shares and 15,278,763 shares issued
and outstanding, respectively)................... 15 15 15 15
Class B Common Stock ($1.00 par value; 29,567
shares authorized; 152 shares issued and
outstanding)..................................... -- -- -- --
Class C Common Stock ($.001 par value; 39,371
shares authorized; no shares issued and
outstanding)..................................... -- -- -- --
Class D Common Stock ($.001 par value; 60,000
shares authorized; no shares issued and
outstanding)..................................... -- -- -- --
Additional paid-in capital....................... 60,003 59,900 60,353 60,003
Accumulated earnings (deficit)................... 2,150 (12,112) 6,671 (9,120)
Treasury stock, at cost (26 shares at January 31,
1999 and 883,350 shares at October 31, 1999,
respectively)................................. -- -- (9,997) --
-------- -------- -------- --------
Total stockholders' equity............... 62,168 47,803 57,042 50,898
-------- -------- -------- --------
Total liabilities and stockholders'
equity................................. $169,606 $118,003 $229,893 $182,325
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 63
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR THE YEARS ENDED JANUARY 31, OCTOBER 31,
--------------------------------- -------------------
1999 1998 1997 1999 1998
--------- --------- --------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales............................... $238,942 $188,898 $155,474 $187,754 $136,916
Cost of sales (including buying and
occupancy expenses)................... 139,368 110,873 91,134 113,105 82,985
-------- -------- -------- -------- --------
Gross profit.......................... 99,574 78,025 64,340 74,649 53,931
Selling, general and administrative
expenses.............................. 72,261 55,809 45,309 62,978 46,218
-------- -------- -------- -------- --------
Income from operations................ 27,313 22,216 19,031 11,671 7,713
Interest expense........................ 4,123 3,806 6,993 4,318 2,856
-------- -------- -------- -------- --------
Income before income taxes............ 23,190 18,410 12,038 7,353 4,857
Income tax expense...................... 8,928 7,180 4,695 2,832 1,865
-------- -------- -------- -------- --------
Income before extraordinary items..... 14,262 11,230 7,343 4,521 2,992
Extraordinary item, net................. -- (1,035) 10,057 -- --
-------- -------- -------- -------- --------
Net income.................... $ 14,262 $ 10,195 $ 17,400 $ 4,521 $ 2,992
======== ======== ======== ======== ========
Basic earnings per share:
Income before extraordinary items..... $ .93 $ .74 $ .62 $ .31 $ .20
Extraordinary item, net............... -- (.07) .85 -- --
-------- -------- -------- -------- --------
Net income............................ $ .93 $ .67 $ 1.47 $ .31 $ .20
======== ======== ======== ======== ========
Weighted average common share and
common share equivalents........... 15,275 15,140 11,802 14,589 15,270
Diluted earnings per share:
Income before extraordinary items..... $ .92 $ .73 $ .60 $ .30 $ .19
Extraordinary item, net............... -- (.07) .81 -- --
-------- -------- -------- -------- --------
Net income............................ $ .92 $ .66 $ 1.41 $ .30 $ .19
======== ======== ======== ======== ========
Weighted average common share and
common share equivalents........... 15,495 15,338 12,324 15,079 15,534
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 64
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
CLASS B ADDITIONAL ACCUMULATED DEFERRED
COMMON COMMON PAID-IN EARNINGS/ TREASURY ESOP
STOCK STOCK CAPITAL (DEFICIT) STOCK COMPENSATION
------ ------- ---------- ----------- -------- ------------
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1996....... $-- $ 30 $ 8,766 $(14,673) $(20,333) $(21,648)
Net income........................ -- -- -- 17,400 -- --
Issued 4,904,250 shares in initial
public offering................. 5 -- 40,412 -- -- --
Conversion of stock............... 9 (24) 15 -- -- --
Restructuring of ESOP............. -- -- (15,609) (3,027) (3,012) 21,648
Cancellation of treasury stock.... (1) (6) (5) (23,333) 23,345 --
Issued 1,897,500 shares in
secondary public offering....... 1 -- 25,696 -- -- --
Exercise of options............... 1 -- 524 -- -- --
Tax effect of the disqualifying
disposition of stock options.... -- -- -- 1,326 -- --
--- ---- -------- -------- -------- --------
Balance at January 31, 1997....... 15 -- 59,799 (22,307) -- --
Net income........................ -- -- -- 10,195 -- --
Exercise of options............... -- -- 101 -- -- --
--- ---- -------- -------- -------- --------
Balance at January 31, 1998....... 15 -- 59,900 (12,112) -- --
Net income........................ -- -- -- 14,262 -- --
Exercise of options............... -- -- 103 -- -- --
--- ---- -------- -------- -------- --------
Balance at January 31, 1999....... 15 -- 60,003 2,150 -- --
--- ---- -------- -------- -------- --------
(UNAUDITED)
Net income........................ -- -- -- 4,521 -- --
Exercise of options............... -- -- 350 -- -- --
Treasury stock repurchase......... -- -- -- -- (9,997) --
--- ---- -------- -------- -------- --------
Balance at October 31, 1999
(unaudited)..................... $15 -- $ 60,353 $ 6,671 $ (9,997) --
=== ==== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 65
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED NINE MONTHS ENDED
JANUARY 31, OCTOBER 31,
----------------------------------- ----------------------
1999 1998 1997 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 14,262 $ 10,195 $ 17,400 $ 4,521 $ 2,992
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Loss (gain) on extinguishment of debt, net of
taxes...................................... -- 218 (10,687) -- --
Depreciation and amortization................ 5,204 3,964 3,656 5,089 3,653
Interest on zero coupon notes................ -- -- 121 -- --
Interest on senior accreting notes........... -- -- 1,339 -- --
Interest on subordinated debt................ -- -- 790 -- --
Loss on disposition of assets................ 84 41 132 89 124
Proceeds from accounts receivables sold,
net........................................ 4,041 -- -- -- --
Changes in assets and liabilities, net of
effects of acquisition:
(Increase) Decrease in accounts receivable,
net...................................... (754) (1,178) (185) 127 541
(Increase) in layaway receivables, net..... (878) (595) (465) (1,547) (565)
(Increase) in merchandise inventories, net
of gold consignment...................... (28,476) (20,571) (24,376) (45,100) (43,499)
(Increase) Decrease in other current
assets................................... (216) (358) 76 378 280
Decrease in deferred taxes, net............ 688 4,241 1,584 -- --
(Increase) in deferred financing costs..... (1,215) (100) (2,503) -- --
Increase in accounts payable............... 9,076 1,819 5,669 34,891 31,199
Increase (Decrease) in accrued liabilities
and long-term liabilities................ 9,193 2,712 3,869 (2,893) 1,234
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities................ 11,009 388 (3,580) (4,445) (4,041)
Cash flows from investing activities:
Capital expenditures......................... (14,667) (10,495) (7,041) (17,652) (11,763)
Payment for acquired jewelry stores.......... (21,760) -- -- -- (22,891)
Proceeds from assets sold, net............... 467 -- 8 -- 4,542
--------- --------- --------- --------- ---------
Net cash used in investing
activities.......................... (35,960) (10,495) (7,033) (17,652) (30,112)
Cash flows from financing activities:
Borrowing on old revolver loan............... -- -- 38,078 -- --
Repayment of old revolver loan............... -- -- (40,197) -- --
Borrowing on new revolver loan............... 273,930 499,529 224,835 232,694 181,701
Repayment of new revolver loan............... (261,885) (493,435) (214,088) (200,466) (154,680)
Repayment of term loan....................... -- -- (15,000) -- --
Repayment of old term loan................... (11,426) -- (26,600) (1,500) (11,426)
Repayment of senior accreting note........... -- -- (50,502) -- --
Repayment of zero coupon note................ -- -- (2,000) -- --
Repayment of old subordinated debt........... -- -- (10,618) -- --
Repayment of new subordinated debt........... -- (9,880) (9,480) -- --
Proceeds from term loan...................... 20,000 11,426 15,000 -- 20,000
Proceeds from subordinated debt.............. -- -- 20,000 -- --
Proceeds from gold consignment............... 5,984 -- 15,295 3,015 5,984
Proceeds from stock issuance, net............ -- -- 66,114 -- --
Proceeds from exercise of stock options...... 103 101 525 350 103
Purchases of treasury stock.................. -- -- -- (9,997) --
Increase (decrease) in outstanding checks,
net........................................ (1,755) 2,366 (749) (1,999) (7,529)
--------- --------- --------- --------- ---------
Net cash provided by financing
activities.......................... 24,951 10,107 10,613 22,097 34,153
--------- --------- --------- --------- ---------
Net change in cash and cash equivalents........ -- -- -- -- --
Cash and cash equivalents at beginning of
period....................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period..... $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
Supplemental disclosures of cash flow
information:
Interest paid during year.................... $ 3,913 $ 3,481 $ 4,304
Income taxes paid during year................ 4,659 945 82
Non-cash financing activity:
Tax effect of compensation expense........... $ -- $ -- $ --
Tax effect of the disqualifying disposition
of stock options........................... -- -- 1,326
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 66
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998)
1. DESCRIPTION OF OPERATIONS
The financial statements of Whitehall Jewellers, Inc. (formerly Marks Bros.
Jewelers, Inc.) (the "Company") include the results of the Company's chain of
specialty retail fine jewelry stores. The Company operates exclusively in one
business segment, specialty retail jewelry. The Company has a national presence
with 250 stores as of January 31, 1999, located in 28 states operating in
regional or super-regional shopping malls.
2. ACQUISITION
On September 10, 1998, the Company acquired substantially all of the assets
of 36 jewelry stores operating under the Jewel Box name from Carlyle & Co.
Jewelers and its affiliates, headquartered in Greensboro, North Carolina. The
stores are located in eight states in the Southeastern United States. The
Company purchased all associated inventory, accounts receivable and fixed assets
for approximately $22 million (including fees and other costs) in cash (the
"Acquisition"). The Company financed the Acquisition through a term loan and
revolving credit facility under its new Credit Agreement (see Note 8, Financing
Arrangements). In a related transaction, the Company sold all of the acquired
Jewel Box customer accounts receivable for cash to BancOne, N.A.
The Acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair values at the
date of Acquisition. The excess of the purchase price over the fair value of the
net assets acquired was approximately $6.6 million, and has been recorded as
goodwill which is being amortized on a straight-line basis over 25 years.
Goodwill amortization was $106,000 for the year ended January 31, 1999.
The net purchase price was allocated as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Inventory............................................ $ 9,636
Accounts receivable.................................. 3,902
Other current assets................................. 121
Fixed assets......................................... 1,861
Other accrued expenses............................... (315)
Goodwill............................................. 6,555
-------
Purchase price....................................... $21,760
=======
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For the purpose of the statements of cash flows, the Company considers all
temporary cash investments purchased with a maturity of three months or less to
be cash equivalents.
Outstanding Checks
Outstanding checks are stated net of store cash balances, of which cash
balances were approximately $1,787,000 and $2,488,000 as of January 31, 1999 and
1998, respectively.
Layaway Receivables, Net
Layaway receivables include those sales to customers under the Company's
layaway policies that have not been collected fully as of the end of the year.
Layaway receivables are net of customer payments received to date, and net of an
estimate for those layaway sales which the Company anticipates will never be
consummated. This estimate is based on the Company's historical calculation of
layaway sales that will
F-7
<PAGE> 67
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998)
never be completed. While it is reasonably possible that the estimate will
change, it is the Company's expectation that the financial impact will not be
significant in the near term. The Company charges the customer to cover the
costs of administration for inactive layaways.
Merchandise Inventories
Merchandise inventories are stated principally at the lower of average cost
or market. The Company also obtains merchandise from vendors under various
consignment agreements. The consigned inventory and related contingent
obligations are not reflected in the Company's financial statements. At the time
of sale, the Company records the purchase liability and the related cost of
merchandise in cost of sales.
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Furniture and fixtures are depreciated on a straight-line
basis over estimated useful lives ranging from five to ten years. Leasehold
improvements are amortized on a straight-line basis over the lesser of the
remaining lease terms or ten years. Upon retirement or disposition of property
and equipment, the applicable cost and accumulated depreciation are removed from
the accounts, and any resulting gains or losses are included in the results of
operations.
Long Lived Assets
When facts and circumstances indicate potential impairment, the Company
evaluates the recoverability of long lived assets carrying values, using
estimates of undiscounted future cash flows over remaining asset lives. When
impairment is indicated, any impairment loss is measured by the excess of
carrying values over fair values.
Goodwill
Goodwill represents the excess of cost over the fair values of assets
acquired and is amortized over 25 years using the straight-line method.
Deferred Financing Costs
In connection with the Company's financing agreements, the Company incurred
various financing costs which have been deferred on the Company's balance sheet
and are amortized over the terms of the agreements.
Store Preopening Expense
Expenses associated with the opening of new store locations are expensed in
the period such costs are incurred.
Lease Expense
The Company leases office facilities and all retail stores. Certain leases
require increasing annual minimum lease payments over the term of the lease.
Minimum lease expense under these agreements is recognized on a straight-line
basis over the terms of the respective leases. Virtually all leases covering
retail stores provide for additional contingent rentals based on a percentage of
sales. These costs are expensed in the period incurred.
F-8
<PAGE> 68
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998)
Earnings Per Share
Earnings per share are calculated by dividing net income by the weighted
average common share equivalents outstanding during the period.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable earnings. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Stock Based Compensation
The Company accounts for stock based compensation under the basis of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and will continue to do so in the future. However, the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation" have
been adopted.
Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130") "Reporting Comprehensive Income" for the years ended January 31,
1999, 1998 and 1997. The Company has no components of comprehensive income as
defined by SFAS 130 which are not contained in net income as reported on the
accompanying statements of operations.
Management Estimates
The preparation of financial statements in conjunction with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts for the years ended January 31, 1998 and 1997 were
reclassified to conform to the current year presentation.
4. ACCOUNTS RECEIVABLE, NET
The Company has charged $1,278,000, $1,182,000, and $1,037,000 for doubtful
accounts for the years ended January 31, 1999, 1998, and 1997, respectively.
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
---------------- ----------------
1999 1998 1999 1998
------- ------ ------- ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Accounts receivable...................... $ 4,174 $3,225 $ 4,599 $2,745
Less: allowance for doubtful accounts.... (1,027) (693) (1,579) (928)
------- ------ ------- ------
Accounts receivable, net................. $ 3,147 $2,532 $ 3,020 $1,817
======= ====== ======= ======
</TABLE>
F-9
<PAGE> 69
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998)
5. INVENTORY
As of January 31, 1999 and January 31, 1998, merchandise inventories
consisted of:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------
1999 1998 1999 1998
-------- -------- --------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Raw materials............................. $ 4,177 $ 3,504 $ 7,300 $ 6,278
Finished goods inventory.................. 112,571 81,549 154,548 124,893
-------- -------- --------- --------
Merchandise inventories................... $116,748 $ 85,053 $ 161,848 $131,171
======== ======== ========= ========
</TABLE>
Raw materials consist primarily of diamonds, precious gems, semi-precious
gems and gold. Included within finished goods inventory are allowances for
inventory shrink, scrap, and miscellaneous costs of $3,948,000 and $1,700,000 as
of January 31, 1999 and 1998, respectively and $3,559,000 and $4,199,000 as of
October 31, 1999 and 1998, respectively. As of January 31, 1999 and 1998,
merchandise consignment inventories held by the Company that are not included in
its balance sheets total $37,778,000 and $32,530,000, respectively. At October
31, 1999 and 1998 merchandise consignment inventories held by the Company that
are not included in its balance sheets total $53,490,000 and $37,665,000,
respectively.
In addition, gold consignments of $21,279,000 and $15,295,000 are not
included in the Company's balance sheet at January 31, 1999 and 1998,
respectively (see Note 8, Financing Arrangements). Gold consignments of
$24,294,000 and $21,279,000 are not included in the Company's balance sheets as
of October 31, 1999 and 1998, respectively.
Certain general and administrative costs are allocated to inventory. As of
January 31, 1999 and 1998, the amounts included in inventory are $1,950,000 and
$1,688,000, respectively. General and administrative expenses allocated
previously to inventory which are included in cost of sales were $2,945,000,
$2,608,000, and $2,237,000 for the years ended January 31, 1999, 1998 and 1997,
respectively.
6. PROPERTY AND EQUIPMENT
Property and equipment includes the following as of January 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures.................................... $39,188 $31,174
Leasehold improvements.................................... 22,398 15,005
------- -------
Property and equipment.................................... 61,586 46,179
Less accumulated depreciation and amortization............ 27,282 23,478
------- -------
Property and equipment, net............................... $34,304 $22,701
======= =======
</TABLE>
Depreciation expense was $4,791,000, $3,657,000, and $3,374,000 for the
years ended January 31, 1999, 1998, and 1997, respectively.
7. LONG-TERM LIABILITIES
Included in long-term liabilities at January 31, 1999 and 1998 are
$1,627,000 and $1,387,000, respectively, of deferred lease costs.
F-10
<PAGE> 70
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998)
8. FINANCING ARRANGEMENTS
In conjunction with the Company's Acquisition (see Note 2, Acquisition),
the Company entered into an Amended and Restated Revolving Credit, Term Loan and
Gold Consignment Agreement (the "Credit Agreement") with its bank group to
provide for a total facility of $110.0 million through September 10, 2003. The
facility provides for a $20.0 million term loan and $90.0 million revolver
facility. Proceeds from the Credit Agreement were used to repay the old credit
facility and to fund the Acquisition.
Under this Credit Agreement, the banks have a security interest in
substantially all of the assets of the Company including those purchased in the
Acquisition. The Credit Agreement contains certain restrictions on capital
expenditures, investments, payment of dividends, assumption of additional debt,
and mergers, acquisitions and divestitures, among others, and requires the
Company to maintain certain financial ratios based on levels of funded debt,
capital expenditures and earnings before interest, taxes, depreciation and
amortization.
Revolver Loan
The revolving loan facility under the Credit Agreement is available up to a
maximum of $90.0 million, including amounts borrowed under the gold consignment
facility, and is limited by a borrowing base computed based on the value of the
Company's inventory and accounts receivable. Availability under the revolver is
based on amounts outstanding thereunder, including the value of consigned gold
which fluctuates based on current gold prices. Effective October 5, 1999 the
revolving credit facility under the Credit Agreement was increased to $100
million through December 31, 1999. Interest rates and commitment fees on the
unused facility float in a grid based on the Company's quarterly financial
performance.
At January 31, 1999, interest rates for borrowings under this agreement
were, at the Company's option, Eurodollar rates plus 175 basis points at January
31, 1999 and Eurodollar rates plus 137.5 basis points at October 31, 1999, or
the banks' prime rate. Interest is payable monthly for prime borrowings and upon
maturity for Eurodollar borrowings. The interest expense under the current and
former revolver facilities for the years ended January 31, 1999, 1998 and 1997
was $2,060,000, $1,646,000 and $793,000, respectively, reflecting a weighted
average interest rate of 7.7%, 7.4% and 10.2%, respectively. The interest
expense under the current and former revolver facilities for the nine months
ended October 31, 1999 and 1998 was $2,386,000 and $1,493,000, reflecting a
weighted average interest rate 6.5% and 7.3%, respectively.
Term Loans
The term loan facility under the Credit Agreement is available up to a
maximum of $18.5 million (originally $20.0 million, less principal repayments).
At January 31, 1999, interest rates for these borrowings were, at the Company's
option, Eurodollar rates plus 225 basis points or the banks' prime rate plus 50
basis points. At October 31, 1999 interest rates for these borrowings are, at
the Company's option, Eurodollar rates plus 187.5 basis points or the banks'
prime rate plus 50 basis points. Interest is payable monthly for prime
borrowings and upon maturity for Eurodollar borrowings. Interest rates and the
commitment fee charged on the unused facility float in a grid based on the
Company's quarterly financial performance. The interest expense under the
current and former term loan facilities for the years ended January 31, 1999,
1998 and 1997 for these borrowings was $1,139,000, $75,000, and $1,330,000,
respectively, reflecting a weighted average interest rate of 7.8%, 7.9%, and
9.2%, respectively. The interest expense for the nine months ended October 31,
1999 and 1998 for these borrowings was $1,016,000 and $748,000 reflecting a
weighted average interest rate of 7.1% and 7.8%, respectively.
F-11
<PAGE> 71
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998)
Gold Consignment Facility
During the second quarter of 1996, the Company sold and simultaneously
consigned a total of 39,000 troy ounces of gold for $15.3 million under a gold
consignment facility. During the second quarter of 1998, the Company sold and
simultaneously consigned an additional 20,000 troy ounces of gold for $6.0
million. The facility provides for the sale of a maximum of 115,000 troy ounces
of gold or $40.0 million. Under the agreement, the Company pays consignment fees
of 175 basis points over the rate set by the bank based on the London Interbank
Bullion Rates payable monthly. A commitment fee of 50 basis points per annum on
the unused portion of the gold consignment facility is payable monthly. Interest
rates and the commitment fees charged on the unused facility float in a grid
based on the Company's quarterly financial performance. The consignment fees
totaled $549,000, $447,000 and $445,000 for the years ended January 31, 1999,
1998 and 1997, respectively, at a weighted average rate of 3.5%, 3.4%, and 3.8%,
respectively. The consignment fees totaled $489,000 at a weighted average rate
of 3.4% and $366,000 at a weighted average rate of 3.1% for the nine months
ended October 31, 1999 and 1998, respectively. On September 10, 2003, the
Company is required to repurchase 59,000 troy ounces of gold under this
agreement at the prevailing gold rate in effect on that date, or the facility
will be renewed. Based on the gold rate as of January 31, 1999, the value of the
gold consigned was $16.9 million. On March 3, 1999, the Company sold and
simultaneously consigned an additional 10,500 troy ounces of gold for $3.0
million which is also required to be repurchased on September 10, 2003.
Subordinated Notes
In conjunction with the Company's initial public offering, subsequent
follow-on offering and recapitalization, the Company issued Senior Subordinated
Notes totaling $20,000,000 due in 2004. Series A Senior Subordinated Notes due
2004 (the "Series A Notes") totaling $12,000,000 bear interest at 12.15% per
annum payable in cash, with interest payments due quarterly. The Series B Senior
Subordinated Notes due 2004 (the "Series B Notes") totaling $8,000,000 bear
interest at 15% per annum increasing 1% per annum beginning May 1, 1998, payable
in cash, with interest payments due quarterly.
The Series A Notes subsequently were exchanged for the Series C Notes which
are identical in all material respects to the Series A Notes, except that the
Series C Notes have been registered under the Securities Act of 1933, as
amended. The Series B Notes subsequently were exchanged for the Series D Notes
which are identical in all material respects to the Series B Notes, except that
the Series D Notes have been registered under the Securities Act of 1933, as
amended.
In conjunction with the Company's Common Stock offering in November 1996,
the Series D Notes were redeemed at a premium (see Note 9, Extraordinary Items).
In January 1998, $1,480,000 of the Series C Notes were redeemed for a total of
$1,554,000. In January 1998, the Company completed a tender offer to purchase
$9,880,000 of the Series C Notes at a premium of $1,087,000. Interest expense
was $78,000 and $1,185,000 for the years ended January 31, 1999 and 1998,
respectively. Interest expense was $58,000 for the nine months ended October 31,
1999 and 1998.
F-12
<PAGE> 72
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998)
As of January 31, 1999 and 1998, the current portion and noncurrent portion
of long-term debt consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt:
Term loan................................................. $ 2,750 $ 1,000
------- -------
Total..................................................... $ 2,750 $ 1,000
======= =======
Long-term debt, net of current portion:
Term loan................................................. $17,250 $10,426
Subordinated debt......................................... 640 640
------- -------
Total..................................................... $17,890 $11,066
======= =======
</TABLE>
Future scheduled maturities under the loan agreements, excluding the
revolver for January 31, 1999, are as follows:
<TABLE>
<CAPTION>
SUBORDINATED
TERM NOTES TOTAL
------- ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
January 31, 1999.............................. $ 500 $ -- $ 500
January 31, 2000.............................. 2,250 -- 2,250
January 31, 2001.............................. 3,250 -- 3,250
January 31, 2002.............................. 4,250 -- 4,250
January 31, 2003.............................. 5,250 -- 5,250
January 31, 2004.............................. 4,500 -- 4,500
April 30, 2004................................ -- 640 640
------- ---- -------
Total......................................... $20,000 $640 $20,640
======= ==== =======
</TABLE>
The carrying amount of the Company's borrowings under the Credit Agreement
and other long-term borrowings approximate fair value.
DEFERRED FINANCING COSTS
In conjunction with the Company's recapitalization of its financing
arrangements, the Company incurred $2,503,000 in deferred financing costs. In
conjunction with the Company's initial public offering and tender offer to
purchase debt and subsequent repayment of debt, $358,000 and $781,000 of these
costs were included in extraordinary loss on repayment of debt for the years
ended January 31, 1998 and 1997, respectively (see Note 9, Extraordinary Items).
In conjunction with the Company's new Credit Agreement, the Company incurred
$1,100,000 in deferred financing costs which are being amortized over the term
of the agreement. The unamortized portion of deferred financing costs from the
previous financing arrangement is being amortized over the term of the new
Credit Agreement. Amortization expense in the years ended January 31, 1999, 1998
and 1997 was $303,000, $308,000 and $282,000, respectively.
9. EXTRAORDINARY ITEMS
In connection with the Company's initial public offering and
recapitalization of its financing arrangements, the Company utilized a debt
discount due to the early repayment of debt of approximately $18.3 million, less
taxes of $7.1 million, resulting in an extraordinary gain on extinguishment of
debt.
F-13
<PAGE> 73
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998)
The $18.3 million of debt discount consists of the following:
i) $0.6 million on the senior accreting notes
ii) $4.0 million on the zero coupon note
iii) $13.7 million on the senior subordinated debt
In the fourth quarter of fiscal 1996, the Company recorded an extraordinary
loss of $1.1 million, net of $0.7 million of tax, in connection with the
redemption of the Series D Notes (see Note 8, Financing Arrangements). The loss
consisted of $1.0 million of costs associated with the extinguishment of debt
and $0.8 million in write-off of deferred financing costs. In the fourth quarter
of fiscal 1997, the Company recorded an extraordinary loss of $1.0 million, net
of $0.7 million tax in connection with the tender offer to purchase Series C
notes (see Note 8, Financing Arrangements). The loss consisted of $1.3 million
of costs associated with the extinguishment of debt and $0.4 million write-off
of deferred financing costs.
10. INCOME TAXES
The temporary differences between the tax basis of assets and liabilities
and their financial reporting amounts that give rise to a significant portion of
the deferred tax asset and deferred tax liability and their approximate tax
effects are as follows, as of January 31:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
TEMPORARY TAX TEMPORARY TAX
DIFFERENCE EFFECT DIFFERENCE EFFECT
---------- ------ ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Merchandise inventories........................ $ 665 $ 263 $ 878 $ 342
Property and equipment, net.................... 994 393 1,185 462
Accrued rent................................... 1,627 642 1,385 540
Other.......................................... 3,077 1,216 2,346 915
Net operating loss carryforwards............... -- -- 2,164 844
AMT credit carryforward........................ -- -- 175 175
------ ------ ------ ------
Total deferred tax asset............. 6,363 2,514 8,133 3,278
------ ------ ------ ------
Other liability................................ 177 70 177 68
------ ------ ------ ------
Total deferred tax liability......... (177) (70) (177) (68)
------ ------ ------ ------
Net deferred tax asset....................... $6,186 $2,444 $7,956 $3,210
====== ====== ====== ======
</TABLE>
The net current and non-current components of deferred income taxes
recognized in the balance sheet at January 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Net current assets.......................................... $1,518 $1,257
Net non-current assets...................................... 926 1,953
------ ------
$2,444 $3,210
====== ======
</TABLE>
F-14
<PAGE> 74
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998)
The income tax expense for the years ended January 31, consists of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current expense................................... $8,162 $2,456 $ 1,381
Deferred tax expense.............................. 766 4,063 9,744
------ ------ -------
Total income tax expense.......................... $8,928 $6,519 $11,125
====== ====== =======
</TABLE>
The provision for income taxes on income differs from the statutory tax
expense computed by applying the federal corporate tax rate of 35% for the year
ended January 31, 1999 and 34% for the years ended January 31, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Taxes computed at statutory rate........................ $8,116 $5,683 $ 9,699
State tax expense, net of federal benefit............... 943 743 1,457
Other................................................... (131) 93 (31)
------ ------ -------
Total income tax expense................................ $8,928 $6,519 $11,125
====== ====== =======
</TABLE>
11. COMMON STOCK
Following are the number of shares issued for each of the Company's classes
of Common Stock as of January 31:
<TABLE>
<CAPTION>
CLASS B CLASS C CLASS D
COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK
(PAR VALUE $.001) (PAR VALUE $1.00) (PAR VALUE $.001) (PAR VALUE $.001)
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Balance at January 31,
1995........................ 5,175,617 44,351 59,055 --
Issuance of Stock Awards.... 759,220 -- -- --
---------- ------- ------- ---
Balance at January 31,
1996...................... 5,934,837 44,351 59,055 --
---------- ------- ------- ---
Exercise of Warrants........ 266,831 -- -- --
Conversion of Class C Shares
to Common................. 2,091,782 -- (59,055) --
Conversion of Class B Shares
to Common................. 1,377,405 (38,873) -- --
Cancellation of Shares
Received from ESOP........ (111,576) -- -- --
Cancellation of Treasury
Shares.................... (2,095,178) (5,326) -- --
Initial Offering............ 4,904,250 -- -- --
Secondary Offering.......... 1,897,500 -- -- --
Exercise of Options......... 825,888 -- -- --
---------- ------- ------- ---
Balance at January 31,
1997...................... 15,091,739 152 -- --
---------- ------- ------- ---
Exercise of Options......... 131,815 -- -- --
---------- ------- ------- ---
Balance at January 31,
1998...................... 15,223,554 152 --
---------- ------- ------- ---
Exercise of Options......... 55,235 -- -- --
---------- ------- ------- ---
Balance at January 31,
1999...................... 15,278,789 152 -- --
========== ======= ======= ===
</TABLE>
F-15
<PAGE> 75
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998)
The Company declared a stock split of approximately 35.4 to 1 on April 1,
1996, and the financial statements have been revised to give effect for this
split. Each share of Class B Common Stock and Class D Common Stock are
convertible into Common Stock on a 35.4 for 1 basis. The Class C Common Stock
has been converted on a 35.4 for 1 basis to Common Stock. Each share of Common
Stock is entitled to one vote, and each share of Class B Common Stock is
entitled to the number of votes equal to the number of shares of Common Stock
into which it is convertible.
12. EARNINGS PER COMMON SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," in 1997. This new
accounting pronouncement eliminates the measure of performance called "primary"
earnings per share and replaces it with "basic" earnings per share. The
essential difference between the two calculations is that the dilutive effects
of stock options outstanding are not considered in the basic computation. As a
result, basic earnings per share tend to be slightly higher than primary
earnings per share. The pronouncement also changed the measure previously
reported as "fully diluted" earnings per share to "diluted" earnings per share.
All prior periods have been restated.
Basic earnings per share is computed by dividing net earnings available to
holders of common stock by the weighted average number of shares of common stock
outstanding. Diluted earnings per share is computed assuming the exercising of
all stock options that are profitable to the recipients. Under these
assumptions, the weighted average number of common shares outstanding is
increased accordingly.
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computations:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
EPS Numerator:
Income before extraordinary
item...................... $14,262 $14,262 $11,230 $11,230 $ 7,343 $ 7,343
EPS Denominator:
Average common shares
outstanding:.............. 15,275 15,275 15,140 15,140 11,802 11,802
Effect of dilutive
securities:
Stock options............... -- 220 -- 198 -- 522
------- ------- ------- ------- ------- -------
Total shares...... 15,275 15,495 15,140 15,338 11,802 12,324
======= ======= ======= ======= ======= =======
Earnings per share before
extraordinary item........ $ 0.93 $ 0.92 $ 0.74 $ 0.73 $ 0.62 $ 0.60
======= ======= ======= ======= ======= =======
</TABLE>
On February 19, 1999, the Company announced that its Board of Directors had
authorized the repurchase of up to $10.0 million of its Common Stock. Shares
repurchased by the Company will reduce the weighted average number of common
shares outstanding for basic and diluted earnings per share calculations. As of
March 31, 1999, the Company had repurchased 848,250 shares at a total cost of
approximately $9.3 million.
13. EMPLOYEE BENEFIT PLANS
Effective October 1, 1997, the Company established a 401(k) Plan (the
"Plan") for the benefit of substantially all employees. Employees become
eligible to participate in the Plan after one year of service which is defined
as at least one year of employment and 1,000 hours worked in that year. The
Company may make discretionary contributions to the Plan. No such contributions
have been made.
F-16
<PAGE> 76
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998)
In 1988, the Company established an Employee Stock Ownership Plan (the
"ESOP"), which is a noncontributory plan established to acquire shares of the
Company's Class B Common Stock for the benefit of all employees. In conjunction
with the completion of the Company's initial public offering and
recapitalization of its financing arrangements, the Company restructured its
ESOP. As of January 31, 1998, all remaining shares had been released to
participants. As long as the Company's stock is publicly traded, the Company is
not required to repurchase shares from ESOP participants. The only remaining
activity of the ESOP is to make distributions to existing participants or
beneficiaries.
14. STOCK PLANS
On September 28, 1995, the Company authorized the equivalent of 1,039,647
options under the Incentive Stock Option Plan (the "1995 Plan") to be granted to
certain members of the Company's management. Options for the equivalent of
1,032,342 were issued at exercise prices ranging from $0.60 to $0.66 per share.
These prices are greater than or equal to the fair market value at the date of
grant, as determined by an independent third party valuation. The options allow
the holders to purchase Common Stock within a period ranging from five years to
five years and eight months, at a fixed price. No expense was recorded in
connection with these options. On September 28, 1995, the Company granted the
equivalent of 759,222 shares of Restricted Stock to certain members of the
Company's management. During fiscal 1995, the Company recognized $461,000 in
compensation expense relating to the issuance of these shares. This amount
represents the fair market value of the shares at the grant date, as determined
by an independent third party valuation.
In April 1996, the Company approved the 1996 Long-Term Incentive Plan (the
"1996 Plan"). Under the 1996 Plan, the Company may grant incentive stock options
("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, or nonqualified stock options. In addition, the Company may grant
stock appreciation rights ("SARs"), bonus stock awards which are vested upon
grant, stock awards which may be subject to a restriction period and specified
performance measures, and performance shares. Performance shares are rights,
contingent upon the attainment of the performance measures within a specified
performance period, to receive one share of Common Stock, which may be
restricted, or the fair market value of such performance share in cash. A total
of 1,156,784 shares of Common Stock have been reserved for issuance under the
1996 Plan. Grants may be made under the 1996 Plan during the ten years after its
effective date. Options granted under the 1996 Plan generally vest in four equal
annual installments and expire ten years after the date of grant. Options and
shares granted under the plans are subject to forfeiture based on, among other
things, the nature and timing of the termination of employment.
During the year ended January 31, 1997, the Company canceled and reissued
85,764 options that had been granted earlier in the year. These options were
granted at various dates at current market prices ranging from $9.33 to $18.00,
with a weighted-average exercise price of $13.05. These options were reissued at
terms equal to the originally issued options with reduced exercise prices
ranging from $6.75 to $7.17 and a weighted-average exercise price of $7.02. The
reissued options were issued at exercise prices equal to the current market
price of the Company's stock at the date of reissuance. No options which had
been granted to executive officers were reissued.
The Company approved the 1997 Long-Term Incentive Plan (the "1997 Plan") on
February 24, 1997 and the stockholders adopted the 1997 Plan on June 5, 1997.
Under the 1997 Plan, the Company may grant ISOs or nonqualified stock options.
The 1997 Plan also provides for the grant of stock appreciation rights, bonus
stock awards which are vested upon grant, stock awards which may be subject to a
restriction period and specified performance measures, and performance shares.
Performance shares are rights, contingent upon the attainment of performance
measures within a specified performance period, to receive one share of Common
Stock, which may be restricted, or the fair market value of such performance
share in cash. A total of 600,000 shares of Common Stock have been reserved for
issuance under the 1997 Plan.
F-17
<PAGE> 77
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998)
Grants may be made under the 1997 Plan during the ten years after its effective
date. Options granted under the 1997 Plan generally vest in four equal annual
installments and expire ten years after the date of grant.
In December 1997, the Company adopted the 1998 Non-Employee Director Stock
Option Plan (the "1998 Plan"), effective February 1, 1998. Under the 1998 Plan,
non-employee directors may elect to receive all or a designated amount of their
directors' fee in the form of stock options. A total of 37,500 shares have been
reserved for issuance under the 1998 Plan. Grants may be made during the ten
years after its effective date. Options granted under the 1998 Plan vest at the
end of the quarter in which the date of grant occurs and expire ten years after
the date of grant. As of January 31, 1999, 15,335 options had been granted under
the 1998 Plan.
Option activity for the years ended January 31, 1997, 1998 and 1999 was as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE OPTIONS
SHARES EXERCISE PRICE EXERCISABLE
--------- ---------------- -----------
<S> <C> <C> <C>
Balance at January 31, 1996.................... 1,020,705 0.63 1,020,705
--------- ------ ---------
Options granted................................ 1,142,574 9.53
Options exercised.............................. (825,903) 0.63
--------- ------ ---------
Balance at January 31, 1997.................... 1,337,376 7.85 194,802
--------- ------ ---------
Options granted................................ 283,725 7.70
Options exercised.............................. (131,816) 0.63
Options canceled............................... (16,724) 6.45
--------- ------ ---------
Balance at January 31, 1998.................... 1,472,561 8.49 348,636
--------- ------ ---------
Options granted................................ 171,140 11.37
Options exercised.............................. (55,235) 2.13
Options canceled............................... (32,363) 9.45
--------- ------ ---------
Balance at January 31, 1999.................... 1,556,103 $ 9.02 659,057
========= ====== =========
</TABLE>
For years ended January 31, 1999, 1998, and 1997, respectively, the
weighted-average fair value of 171,140, 283,725, and 1,142,574 options at the
date of grant with an exercise price equal to market price was $5.34, $4.18, and
$5.10, respectively.
The following table summarizes the status of outstanding stock options as
of January 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------- ---------------------------------------------
NUMBER OF WEIGHTED AVERAGE WEIGHTED- NUMBER OF WEIGHTED-
RANGE OF OPTIONS REMAINING AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.60 -- $ 0.60...... 20,550 6.66 $ 0.60 20,550 $ 0.60
$6.75 -- $ 9.29...... 359,508 8.12 $ 7.51 113,165 $ 7.45
$9.33 -- $ 9.33...... 1,026,810 7.26 $ 9.33 513,408 $ 9.33
$9.42 -- $13.33...... 149,235 9.31 $11.56 11,934 $11.76
--------- ---- ------ ------- ------
$0.60 -- $13.33...... 1,556,103 7.65 $ 9.01 659,057 $ 8.77
========= ==== ====== ======= ======
</TABLE>
Had the Company elected to apply the provisions of SFAS No. 123,
"Accounting for Stock Based Compensation" regarding recognition of compensation
expense to the extent of the calculated fair value of
F-18
<PAGE> 78
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998)
stock options granted during the years ended January 31, 1999, 1998 and 1997,
reported net income and earnings per share would have been reduced as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income, as reported............................. $14,262 $10,195 $17,400
Pro forma net income................................ 12,641 8,782 16,495
Earnings per share, as reported..................... 0.92 0.66 1.41
Pro forma earnings per share........................ 0.82 0.57 1.34
</TABLE>
For purposes of pro forma net income and earnings per share calculation in
accordance with SFAS No. 123, for each option granted under the 1995 Plan during
the year ended January 31, 1996, the fair value is estimated as of the date of
grant using the Minimum Value method using a weighted-average assumption of 6.1%
risk-free interest rate and 5.5 year option life. For each option granted during
the years ended January 31, 1999, 1998 and 1997, the fair value is estimated
using the Black-Scholes option-pricing model. The assumptions used are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate........................... 5.3% 6.4% 6.7%
Dividend yield.................................... 0 0 0
Option life....................................... 6 years 6 years 6 years
Volatility........................................ 40% 47% 45%
</TABLE>
15. COMMITMENTS
The Company leases office facilities and all retail stores, generally under
noncancelable agreements for periods ranging from 7 to 13 years. Most leases
require the payment of taxes, insurance and maintenance costs. Future minimum
rentals under noncancelable operating leases as of January 31, 1999 are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING JANUARY 31, AMOUNT
------------------------ --------------
(IN THOUSANDS)
<S> <C>
2000................................................... $ 16,033
2001................................................... 15,836
2002................................................... 15,233
2003................................................... 14,303
2004................................................... 13,753
thereafter............................................. 47,564
--------
$122,722
========
</TABLE>
Total rental expense for all operating leases is as follows, for the years
ended January 31:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Rental expense:
Minimum......................................... $13,517 $10,748 $ 8,947
Rentals based on sales.......................... 2,015 1,746 1,523
------- ------- -------
$15,532 $12,494 $10,470
======= ======= =======
</TABLE>
16. UNAUDITED QUARTERLY RESULTS
The Company's results of operations fluctuate on a quarterly basis. The
following table sets forth summary unaudited financial information of the
Company for each quarter in fiscal 1998 and fiscal 1997. In the opinion of
management, this quarterly information has been prepared on a basis consistent
with the
F-19
<PAGE> 79
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998)
Company's audited financial statements appearing elsewhere in this annual
report, and reflects adjustments consisting of normal recurring adjustments
necessary for a fair presentation of such unaudited quarterly results when read
in conjunction with the audited financial statements and notes thereto.
<TABLE>
<CAPTION>
1998 QUARTERS ENDED
--------------------------------------------------------------------
APRIL 30, 1998 JULY 31, 1998 OCTOBER 31, 1998 JANUARY 31, 1999
-------------- ------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales..................... $41,584 $46,849 $48,483 $102,026
Gross profit.................. 16,139 18,762 19,030 45,643
Income from operations........ 1,946 3,574 2,193 19,600
Net income.................... 702 1,681 609 11,270
Diluted earnings per share:
Net income.................. $ .05 $ .11 $ .04 $ .73
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
1997 QUARTERS ENDED
--------------------------------------------------------------------
APRIL 30, 1997 JULY 31, 1997 OCTOBER 31, 1997 JANUARY 31, 1998
-------------- ------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales..................... $34,714 $40,515 $39,477 $74,192
Gross profit.................. 13,651 16,297 15,514 32,563
Income from operations........ 1,809 3,868 2,504 14,035
Income before extraordinary
item........................ 540 1,760 909 8,021
Net income.................... 540 1,760 909 6,986(1)
Diluted earnings per share:
Income before extraordinary
item..................... $ 0.03 $ 0.11 $ 0.06 $ 0.52
======= ======= ======= =======
</TABLE>
- ---------------
(1) Reflects extraordinary loss on extinguishment of debt in the fourth quarter
of fiscal 1997 (See Note 9, Extraordinary Items).
17. SUBSEQUENT EVENTS
On December 14, 1999, the Board of Directors of the Company approved a
three-for-two stock split to be effected in the form of a stock dividend payable
on January 4, 2000 to all common shareholders of record at the close of business
on December 24, 1999. The financial statements have been restated for all
periods presented to give effect for this split.
On December 3, 1999 the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101, among other things,
requires that layaway sales should only be recognized upon delivery of
merchandise to the customer. The accounting required by this bulletin needs to
be adopted no later than the first fiscal quarter of the fiscal year beginning
after December 15, 1999. Accordingly, the Company has elected to adopt this
pronouncement in the first quarter of fiscal year 2000.
It is expected that the Company will reflect a charge of approximately $3.0
million, net of a 40% tax benefit, which will be presented as a cumulative
effect of this accounting change as of February 1, 2000.
F-20
<PAGE> 80
[Map of United States showing geographic locations of stores; picture of stores]
<PAGE> 81
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,925,000 Shares
[WHITEHALL LOGO]
------------------------
PROSPECTUS
, 2000
------------------------
BANC OF AMERICA SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
WILLIAM BLAIR & COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth expenses and costs payable by Whitehall
Jewellers (other than underwriting discounts and commissions) expected to be
incurred in connection with the issuance and distribution of the securities
described in this registration statement. All amounts are estimated except for
the Securities and Exchange Commission's registration fee and the National
Association of Securities Dealers' filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $22,312
NASD filing fee............................................. 8,952
The New York Stock Exchange fee............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Printing and engraving expenses............................. *
Blue Sky fees............................................... *
Miscellaneous............................................... *
-------
Total............................................. $
=======
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Registrant's Restated Certificate of Incorporation and Amended and
Restated By-laws provide for indemnification of the Registrant's officers and
directors to the fullest extent permitted by applicable law. Section 145 of the
Delaware General Corporation Law (the "DGCL") empowers a Delaware corporation to
indemnify any persons who are, or are threatened to be made, parties to any
threatened, pending or completed legal action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of such corporation), by reason of the fact that such person was an
officer or director of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided that such officer or director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests, and, for criminal proceedings, had no reasonable cause to believe his
conduct was illegal. A Delaware corporation may indemnify officers and directors
in an action by or in the right of the corporation under the same conditions,
except that no indemnification is permitted without judicial approval if the
officer or director is adjudged to be liable to the corporation in the
performance of his duty. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
In accordance with the DGCL, the Registrant's Restated Certificate of
Incorporation contains a provision to limit the personal liability of the
Registrant's directors for violations of their fiduciary duty. This provision
eliminates each director's liability to the Registrant or its stockholders for
monetary damages except to the extent provided by the DGCL (i) for any breach of
the director's duty of loyalty to the Registrant or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under section 174 of the DGCL providing for
liability of directors for unlawful payment of dividends or unlawful stock
purchases or redemptions, or (iv) for any transactions from which a director
derived an improper personal benefit. The effect of this provision is to
II-1
<PAGE> 83
eliminate the personal liability of directors for monetary damages for actions
involving a breach of their fiduciary duty of care, including any such actions
involving gross negligence.
In addition, the Registrant maintains insurance policies which provide
coverage for its officers and directors in certain situations where the
Registrant cannot directly indemnify such officers or directors.
Additionally, reference is made to the underwriting agreement filed as
Exhibit 1.1 to this registration statement, with provides for indemnification by
the underwriters of Whitehall Jewellers, its directors and officers who sign the
registration statement and persons who control Whitehall Jewellers, under
specified circumstances.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1* -- Form of Underwriting Agreement
3.1 -- Restated Certificate of Incorporation of the Registrant,
is incorporated herein by reference to Exhibit 3.1 filed
with the Registrant's Statement on Form S-1, as amended
(Registration No. 333-1794)
3.2 -- Amended and Restated By-Laws of the Registrant are
incorporated herein by reference to Exhibit 3.2 filed
with the Registrant's Form 10-K for the fiscal year ended
January 31, 1999
3.3 -- Amended and Restated Stockholders Rights Plan,
incorporated by reference to Exhibit 99.3 filed with the
Registrant's Registration Statement, as amended, on Form
8-A (File No. 001-15615)
5.1 -- Opinion of Sidley & Austin
10.1 -- Whitehall Jewellers, Inc. 1996 Long-Term Incentive Plan
(modified as of July 26, 2000)
10.2 -- Whitehall Jewellers, Inc. 1997 Long-Term Incentive Plan
(modified as of July 26, 2000)
10.3 -- Form of Severance Agreement with Executive Officers (as
amended)
23.1 -- Consent of Sidley & Austin (included in Exhibit 5.1
hereto)
23.2 -- Consent of PricewaterhouseCoopers LLP
24.1 -- Powers of Attorney (included on signature page)
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities
II-2
<PAGE> 84
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, State of Illinois, on February 8, 2000.
WHITEHALL JEWELLERS, INC.
By: /s/ JOHN R. DESJARDINS
----------------------------------
John R. Desjardins
Executive Vice President,
Finance and Administration
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Whitehall Jewellers, Inc.,
hereby severally constitute and appoint Hugh M. Patinkin and John R. Desjardins
and each of them singly, our true and lawful attorneys, with full power to them
and each of them singly, to sign for us in our names in the capacities indicated
below, all pre-effective and post-effective amendments to this registration
statement, including any filings pursuant to Rule 462(b) under the Securities
Act of 1933, as amended, and generally to do all things in our names and on our
behalf in such capacities to enable Whitehall Jewellers, Inc. to comply with the
provisions of the Securities Act of 1933, as amended, and all requirements of
the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<C> <S> <C>
* Chairman, Chief Dated: February 8, 2000
------------------------------------------------- Executive Officer
Hugh M. Patinkin and President and
Director (Principal
Executive Officer)
By: /s/ JOHN R. DESJARDINS Executive Vice Dated: February 8, 2000
------------------------------------------------- President, Finance
John R. Desjardins & Administration
and Director
(Principal
Financial and
Accounting Officer)
* Director Dated: February 8, 2000
-------------------------------------------------
Matthew M. Patinkin
* Director Dated: February 8, 2000
-------------------------------------------------
Norman J. Patinkin
* Director Dated: February 8, 2000
-------------------------------------------------
Jack A. Smith
* Director Dated: February 8, 2000
-------------------------------------------------
Daniel H. Levy
* Director Dated: February 8, 2000
-------------------------------------------------
Richard K. Berkowitz
/s/ JOHN R. DESJARDINS
- -----------------------------------------------------
* By: John R. Desjardins,
Attorney-in-fact
</TABLE>
II-4
<PAGE> 86
EXHIBIT INDEX
TO REGISTRATION STATEMENT
ON FORM S-3
WHITEHALL JEWELLERS, INC.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1* -- Form of Underwriting Agreement
3.1 -- Restated Certificate of Incorporation of the Registrant,
is incorporated herein by reference to Exhibit 3.1 filed
with the Registrant's Statement on Form S-1, as amended
(Registration No. 333-1794)
3.2 -- Amended and Restated By-Laws of the Registrant are
incorporated herein by reference to Exhibit 3.2 filed
with the Registrant's Form 10-K for the fiscal year ended
January 31, 1999
3.3 -- Amended and Restated Stockholders Rights Plan,
incorporated by reference to Exhibit 99.3 filed with the
Registrant's Registration Statement, as amended, on Form
8-A (File No. 001-15615)
5.1 -- Opinion of Sidley & Austin
10.1 -- Whitehall Jewellers, Inc. 1996 Long-Term Incentive Plan
(modified as of July 26, 2000)
10.2 -- Whitehall Jewellers, Inc. 1997 Long-Term Incentive Plan
(modified as of July 26, 2000)
10.3 -- Form of Severance Agreement with Executive Officers (as
amended)
23.1 -- Consent of Sidley & Austin (included in Exhibit 5.1
hereto)
23.2 -- Consent of PricewaterhouseCoopers LLP
24.1 -- Powers of Attorney (included on signature page)
</TABLE>
- -------------------------
* To be filed by amendment.
<PAGE> 1
Exhibit 5.1
[SIDLEY & AUSTIN LETTERHEAD]
February 8, 2000
Whitehall Jewellers, Inc.
155 North Wacker Drive
Suite 500
Chicago, Illinois 60606
Re: Registration of 3,363,750 shares of Common Stock, $.001 par value,
and associated Preferred Stock Purchase Rights
------------------------------------------------------------------
Ladies and Gentlemen:
We refer to the Registration Statement (Registration No. 333-95465) on
Form S-3 originally filed on January 27, 2000 by Whitehall Jewellers, Inc., a
Delaware corporation (the "Company"), with the Securities and Exchange
Commission ("SEC") under the Securities Act of 1933, as amended (the
"Securities Act"), and Amendment No. 1 thereto being filed with the SEC on
February 8, 2000 (such registration statement, as so amended, being hereinafter
referred to as the "Registration Statement") relating to the registration of
3,363,750 shares of Common Stock, $.001 par value (the "Shares"), of the
Company, together with 3,363,750 Preferred Stock Purchase Rights (the "Rights")
associated therewith. The terms of the Rights are set forth in the Rights
Agreement dated as of May 1, 1996 (the "Rights Agreement") between the Company
and The First National Bank of Boston, as Rights Agent.
The Shares include 2,645,000 shares (the "Company Shares") to be sold by
the Company, including 345,000 Company Shares, some or all of which may be sold
pursuant to an overallotment option (the "Overallotment Option"). The Shares
also include 718,750 shares (the "Selling Stockholder Shares") to be sold by
certain selling stockholders, including 93,750 Selling Stockholder Shares, some
or all of which may be sold by certain selling stockholders named in the
Registration Statement pursuant to the Overallotment Option. The Selling
Stockholder Shares include shares that are currently issued and outstanding
(the "Outstanding Selling Stockholder Shares") and shares (the "Option Shares")
that are to be issued upon the exercise of outstanding options (the "Options")
as described in the Registration Statement.
We are familiar with the proceedings to date with respect to the proposed
offering and sale of the Shares, together with the associated Rights, and have
examined such records,
<PAGE> 2
SIDLEY & AUSTIN CHICAGO
Whitehall Jewellers, Inc.
February 8, 2000
Page 2
documents and questions of law, and satisfied ourselves as to such matters of
fact, as we have considered relevant and necessary as a basis for this opinion.
Based on the foregoing, we are of the opinion that:
1. The Company is duly incorporated and validly existing under the laws
of the State of Delaware.
2. The Company Shares will be legally issued, fully paid and
non-assessable when (i) the Registration Statement, as finally amended, shall
have become effective under the Securities Act; (ii) the Company's Board of
Directors or a duly authorized committee thereof shall have duly adopted final
resolutions authorizing the issuance and sale of the Company Shares as
contemplated by the Registration Statement; and (iii) certificates representing
the Company Shares shall have been duly executed, countersigned and registered
and duly delivered to the purchasers thereof against payment of the agreed
consideration therefor (not less than the par value thereof).
3. The Outstanding Selling Stockholder Shares have been legally issued
and are fully paid and non-assessable.
4. The Option Shares will be legally issued, fully paid and
non-assessable when certificates representing the Option Shares shall have been
duly executed, countersigned and registered and duly delivered to the holders
of the Options upon proper exercise thereof, including payment of the exercise
price.
5. The Rights associated with the Company Shares will be legally issued
when (i) the Registration Statement, as finally amended, shall have become
effective under the Securities Act; (ii) such Rights shall have been duly
issued in accordance with the terms of the Rights Agreement; and (iii) the
Company Shares shall have been duly issued and paid for as set forth in
paragraph 2.
6. The Rights associated with the Outstanding Selling Stockholder Shares
will be legally issued when such Rights shall have been duly issued in
accordance with the terms of the Rights Agreement.
7. The Rights associated with the Option Shares will be legally issued
when (i) such Rights shall have been duly issued in accordance with the terms
of the Rights Agreement and (ii) the Option Shares shall have been duly issued
and paid for as set forth in paragraph 4.
<PAGE> 3
SIDLEY & AUSTIN CHICAGO
Whitehall Jewellers, Inc.
February 8, 2000
Page 3
We do not find it necessary for the purpose of this opinion to cover, and
accordingly we express no opinion as to, the application of the securities or
blue sky laws of the various states to the sale of the Shares.
This opinion is limited to the General Corporation Law of the State of
Delaware and the Securities Act.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to all references to our Firm included in or made a
part of the Registration Statement.
Very truly yours,
/s/ Sidley & Austin
<PAGE> 1
EXHIBIT 10.1
MODIFIED AS OF 1/26/00
WHITEHALL JEWELLERS, INC.
1996 LONG-TERM INCENTIVE PLAN
I. INTRODUCTION
1.1 PURPOSES. The purposes of the 1996 Long-Term Incentive Plan (the
"Plan") of Whitehall Jewellers, Inc. (the "Company"), and its subsidiaries from
time to time (individually a "Subsidiary" and collectively the "Subsidiaries"),
are (a) to align the interests of the Company's stockholders and the recipients
of awards under this Plan by increasing the proprietary interest of such
recipients in the Company's growth and success, (b) to advance the interests of
the Company by attracting and retaining officers and other key employees, and
well-qualified persons who are not officers or employees of the Company
("non-employee directors") for service as directors of the Company and (c) to
motivate such employees and non-employee directors to act in the long-term best
interests of the Company's stockholders. For purposes of this Plan, references
to employment by the Company shall also mean employment by a Subsidiary.
1.2 CERTAIN DEFINITIONS.
"AFFILIATE" and "ASSOCIATE" shall have the respective meanings
ascribed to such terms in Rule 12b-2, as in effect on the effective date of this
Plan, under the Exchange Act; provided, however, that no director or officer of
the Company shall be deemed an Affiliate or Associate of any other director or
officer of the Company solely as a result of his or her being a director or
officer of the Company.
"AGREEMENT" shall mean the written agreement evidencing an award
hereunder between the Company and the recipient of such award.
"BENEFICIAL OWNER" (including the terms "BENEFICIALLY OWN" and
"BENEFICIAL OWNERSHIP"), when used with respect to any Person, shall be deemed
to include any securities which:
(a) such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly (determined as provided in Rule 13d-3,
as in effect on the effective date of this Plan, under the Exchange Act);
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(b) such Person or any of such Person's Affiliates or Associates,
directly or indirectly, has:
(i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time or upon the satisfaction
of any conditions, or both) pursuant to any written or oral agreement,
arrangement or understanding (other than customary agreements with and
among underwriters and selling group members with respect to a bona
fide public offering of securities), upon the exercise of any options,
warrants, rights or conversion or exchange privileges or otherwise;
provided, however, that a Person shall not be deemed the Beneficial
Owner of, or to Beneficially Own securities tendered pursuant to a
tender or exchange offer made by or on behalf of such Person or any of
such Person's Affiliates or Associates until such tendered securities
are accepted for purchase or exchange; or
(ii) the right to vote pursuant to any written or oral
agreement, arrangement or understanding; provided, however, that a
Person shall not be deemed the Beneficial Owner of, or to Beneficially
Own, any security otherwise subject to this item (ii) if such
agreement, arrangement or understanding to vote (1) arises solely from
a revocable proxy or consent given to such Person or any of such
Person's Affiliates or Associates in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations under the Exchange Act and (2) is not
also then reportable by such Person on Schedule 13D (or any comparable
or successor report then in effect) under the Exchange Act; or
(iii) the right to dispose of pursuant to any written or oral
agreement, arrangement or understanding (other than customary
agreements with and among underwriters and selling group members with
respect to a bona fide public offering of securities); or
(c) are beneficially owned, directly or indirectly, by any other
Person with which such Person or any of such Person's Affiliates or Associates
has any written or oral agreement, arrangement or understanding (other than
customary agreements with and among underwriters and selling group members with
respect to a bona fide public offering of securities) for the purpose of
acquiring, holding, voting (except to the extent contemplated by the proviso to
item (ii) of subparagraph (b) of the first paragraph of this definition) or
disposing of any securities of the Company.
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Notwithstanding the first paragraph of this definition, no director
or officer of the Company shall be deemed to be the "Beneficial Owner" of, or to
"Beneficially Own," shares of Common Stock or other securities of the Company
beneficially owned by any other director or officer of the Company solely as a
result of his or her being a director or officer of the Company.
"BOARD" shall mean the Board of Directors of the Company.
"BONUS STOCK" shall mean shares of Common Stock which are not
subject to a Restriction Period or Performance Measures.
"BONUS STOCK AWARD" shall mean an award of Bonus Stock under this
Plan.
"CAUSE" shall mean commission of a felony involving moral turpitude
or any material breach of any statutory or common law duty to the Company or a
Subsidiary involving willful malfeasance.
"CHANGE IN CONTROL" shall have the meaning set forth in Section
6.8(b).
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMMITTEE" shall mean the Committee designated by the Board,
consisting of two or more members of the Board, each of whom shall be (a) a
"Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange Act
and (b) an "outside director" within the meaning of Section 162(m) of the Code,
subject to any transition rules applicable to the definition of outside
director.
"COMMON STOCK" shall mean the common stock, $.001 par value, of the
Company.
"COMPANY" has the meaning specified in Section 1.1.
"DIRECTORS OPTIONS" shall have the meaning set forth in Section 5.1.
"DISABILITY" shall mean the inability for a continuous period of at
least six months of the holder of an award to perform substantially such
holder's duties and responsibilities, as determined solely by the Committee.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
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"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"EXEMPT PERSON" shall mean each of Hugh M. Patinkin, John R.
Desjardins, Matthew M. Patinkin and each Affiliate thereof.
"FAIR MARKET VALUE" shall mean the average of the high and low
transaction prices of a share of Common Stock as reported in the National
Association of Securities Dealers Automated Quotation National Market System on
the date as of which such value is being determined, or, if the Common Stock is
listed on a national securities exchange, the average of the high and low
transaction prices of a share of Common Stock on the principal national stock
exchange on which the Common Stock is traded on the date as of which such value
is being determined, or, if there shall be no reported transactions for such
date, on the next preceding date for which transactions were reported; provided,
however, that if Fair Market Value for any date cannot be so determined, Fair
Market Value shall be determined by the Committee by whatever means or method as
the Committee, in the good faith exercise of its discretion, shall at such time
deem appropriate.
"FREE-STANDING SAR" shall mean an SAR which is not issued in tandem
with, or by reference to, an option, which entitles the holder thereof to
receive, upon exercise, shares of Common Stock (which may be Restricted Stock),
cash or a combination thereof with an aggregate value equal to the excess of the
Fair Market Value of one share of Common Stock on the date of exercise over the
base price of such SAR, multiplied by the number of such SARs which are
exercised.
"INCENTIVE STOCK OPTION" shall mean an option to purchase shares of
Common Stock that meets the requirements of Section 422 of the Code, or any
successor provision, which is intended by the Committee to constitute an
Incentive Stock Option.
"INCUMBENT BOARD" shall have the meaning set forth in Section
6.8(b)(ii) hereof.
"MATURE SHARES" shall mean shares of Common Stock for which the
holder thereof has good title, free and clear of all liens and encumbrances and
which such holder either (a) has held for at least six months or (b) has
purchased on the open market.
"NON-EMPLOYEE DIRECTOR" shall mean any director of the Company who
is not an officer or employee of the Company or any Subsidiary (except in the
definition of Committee, in which case
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"Non-Employee Director" shall have the meaning set forth in Rule 16b-3 under the
Exchange Act).
"NON-STATUTORY STOCK OPTION" shall mean a stock option which is not
an Incentive Stock Option.
"PERFORMANCE MEASURES" shall mean the criteria and objectives,
established by the Committee, which shall be satisfied or met (a) as a condition
to the exercisability of all or a portion of an option or SAR or (b) during the
applicable Restriction Period or Performance Period as a condition to the
holder's receipt, in the case of a Restricted Stock Award, of the shares of
Common Stock subject to such award, or, in the case of a Performance Share
Award, of payment with respect to such award. Such criteria and objectives may
include one or more of the following: the attainment by a share of Common Stock
of a specified Fair Market Value for a specified period of time, earnings per
share, return to stockholders (including dividends), return on equity, earnings
of the Company, revenues, market share, cash flows or cost reduction goals, or
any combination of the foregoing. If the Committee desires that compensation
payable pursuant to any award subject to Performance Measures be "qualified
performance-based compensation" within the meaning of section 162(m) of the
Code, the Performance Measures shall be established by the Committee no later
than the end of the first quarter of the Performance Period or Restriction
Period, as applicable (or such other time designated by the Internal Revenue
Service).
"PERFORMANCE PERIOD" shall mean any period designated by the
Committee during which the Performance Measures applicable to a Performance
Share Award shall be measured.
"PERFORMANCE SHARE" shall mean a right, contingent upon the
attainment of specified Performance Measures within a specified Performance
Period, to receive one share of Common Stock, which may be Restricted Stock, or
in lieu thereof, the Fair Market Value of such Performance Share in cash.
"PERFORMANCE SHARE AWARD" shall mean an award of Performance Shares
under this Plan.
"PERMANENT AND TOTAL DISABILITY" shall have the meaning set forth in
Section 22(e)(3) of the Code or any successor thereto.
"PERSON" shall mean any individual, firm, corporation, partnership
or other entity, and shall include any successor (by merger or otherwise) of any
of the forgoing.
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"RESTRICTED STOCK" shall mean shares of Common Stock which are
subject to a Restriction Period.
"RESTRICTED STOCK AWARD" shall mean an award of Restricted Stock
under this Plan.
"RESTRICTION PERIOD" shall mean any period designated by the
Committee during which the Common Stock subject to a Restricted Stock Award may
not be sold, transferred, assigned, pledged, hypothecated or otherwise
encumbered or disposed of, except as provided in this Plan or the Agreement
relating to such award.
"SAR" shall mean a stock appreciation right which may be a
Free-Standing SAR or a Tandem SAR.
"STOCK AWARD" shall mean a Restricted Stock Award or a Bonus Stock
Award.
"TANDEM SAR" shall mean an SAR which is granted in tandem with, or
by reference to, an option (including a Non-Statutory Stock Option granted
prior to the date of grant of the SAR), which entitles the holder thereof to
receive, upon exercise of such SAR and surrender for cancellation of all or a
portion of such option, shares of Common Stock (which may be Restricted Stock),
cash or a combination thereof with an aggregate value equal to the excess of the
Fair Market Value of one share of Common Stock on the date of exercise over the
base price of such SAR, multiplied by the number of shares of Common Stock
subject to such option, or portion thereof, which is surrendered.
"TAX DATE" shall have the meaning set forth in Section 6.5.
"TEN PERCENT HOLDER" shall have the meaning set forth in Section
2.1(a).
1.3 ADMINISTRATION. This Plan shall be administered by the
Committee. Any one or a combination of the following awards may be made under
this Plan to eligible persons: (a) options to purchase shares of Common Stock in
the form of Incentive Stock Options or Non-Statutory Stock Options, (b) in the
form of Tandem SARs or Free-Standing SARs, (c) Stock Awards in the form of
Restricted Stock or Bonus Stock and (d) Performance Shares. The Committee
shall, subject to the terms of this Plan, select eligible persons for
participation in this Plan and determine the form, amount and timing of each
award to such persons and, if applicable, the number of shares of Common Stock,
the number of SARs and the number of Performance Shares subject to such an
award, the exercise price or base price associated
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with the award, the time and conditions of exercise or settlement of the award
and all other terms and conditions of the award, including, without limitation,
the form of the Agreement evidencing the award. The Committee shall, subject to
the terms of this Plan, interpret this Plan and the application thereof,
establish rules and regulations it deems necessary or desirable for the
administration of this Plan and may impose, incidental to the grant of an award,
conditions with respect to the award, such as limiting competitive employment or
other activities. All such interpretations, rules, regulations and conditions
shall be conclusive and binding on all parties.
The Committee may delegate some or all of its power and authority
hereunder to the Chief Executive Officer or other executive officer of the
Company as the Committee deems appropriate; provided, however, that the
Committee may not delegate its power and authority with regard to (a) the grant
of an award under this Plan to any person who is a "covered employee" within the
meaning of Section 162(m) of the Code or who, in the Committee's judgment, is
likely to be a covered employee at any time during the period an award hereunder
to such employee would be outstanding or (b) the selection for participation in
this Plan of an officer or other person subject to Section 16 of the Exchange
Act or decisions concerning the timing, pricing or amount of an award to such an
officer or other person.
No member of the Board of Directors or Committee, and neither the
Chief Executive Officer nor any other executive officer to whom the Committee
delegates any of its power and authority hereunder, shall be liable for any act,
omission, interpretation, construction or determination made in connection with
this Plan in good faith, and the members of the Board of Directors and the
Committee and the President and Chief Executive Officer or other executive
officer shall be entitled to indemnification and reimbursement by the Company in
respect of any claim, loss, damage or expense (including attorneys' fees)
arising therefrom to the full extent permitted by law, except as otherwise may
be provided in the Company's Certificate of Incorporation and/or By-laws, as the
same may be amended or restated from time to time, and under any directors' and
officers' liability insurance that may be in effect from time to time.
A majority of the Committee shall constitute a quorum. The acts of
the Committee shall be either (a) acts of a majority of the members of the
Committee present at any meeting at which a quorum is present or (b) acts
approved in writing by a majority of the members of the Committee without a
meeting.
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Notwithstanding anything to the contrary herein, any grant of awards
to a Non-Employee Director shall require the approval of the Board.
1.4 ELIGIBILITY. Participants in this Plan shall consist of such
directors, officers or other key employees of the Company and its Subsidiaries
as the Committee, in its sole discretion, may select from time to time. The
Committee's selection of a person to participate in this Plan at any time shall
not require the Committee to select such person to participate in this Plan at
any other time. Non-Employee Directors shall also be eligible to participate in
this Plan in accordance with Article V.
1.5 SHARES AVAILABLE. Subject to adjustment as provided in Sections
6.7 and 6.8, 774,631 shares of Common Stock shall be available under this Plan,
reduced by the sum of the aggregate number of shares of Common Stock (a) that
are issued upon the grant of a Stock Award and (b) which become subject to
outstanding options, including Directors' Options, outstanding Free-Standing
SARs and outstanding Performance Shares. To the extent that shares of Common
Stock subject to an outstanding option (other than in connection with the
exercise of a Tandem SAR), Free-Standing SAR or Performance Share are not issued
or delivered by reason of the expiration, termination, cancellation or
forfeiture of such award or by reason of the delivery or withholding of shares
of Common Stock to pay all or a portion of the exercise price of an award, if
any, or to satisfy all or a portion of the tax withholding obligations relating
to an award, then such shares of Common Stock shall again be available under
this Plan.
Shares of Common Stock to be delivered under this Plan shall be made
available from authorized and unissued shares of Common Stock, or authorized and
issued shares of Common Stock reacquired and held as treasury shares or
otherwise or a combination thereof.
To the extent required by Section 162(m) of the Code and the rules
and regulations thereunder, the maximum number of shares of Common Stock with
respect to which options or SARs, Stock Awards or Performance Share Awards, or a
combination thereof may be granted during any calendar year to any person shall
be 275,000, subject to adjustment as provided in Section 6.7.
II. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
2.1 STOCK OPTIONS. The Committee may, in its discretion, grant
options to purchase shares of Common Stock to
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such eligible persons as may be selected by the Committee. Each option, or
portion thereof, that is not an Incentive Stock Option, shall be a Non-Statutory
Stock Option. Each Incentive Stock Option shall be granted within ten years of
the effective date of this Plan. To the extent that the aggregate Fair Market
Value (determined as of the date of grant) of shares of Common Stock with
respect to which options designated as Incentive Stock Options are exercisable
for the first time by a participant during any calendar year (under this Plan or
any other plan of the Company, or any parent or Subsidiary) exceeds the amount
(currently $100,000) established by the Code, such options shall constitute
Non-Statutory Stock Options.
Options shall be subject to the following terms and conditions and
shall contain such additional terms and conditions, not inconsistent with the
terms of this Plan, as the Committee shall deem advisable:
(a) Number of Shares and Purchase Price. To the extent required, the
number of shares of Common Stock subject to an option shall be determined by the
Committee. The purchase price per share of Common Stock purchasable upon
exercise of the option shall be determined by the Committee; provided, however,
that the purchase price per share of Common Stock purchasable upon exercise of
an Option shall not be less than 100% of the Fair Market Value of a share of
Common Stock on the date of grant of such option; provided further, that if an
Incentive Stock Option shall be granted to any person who, at the time such
option is granted, owns capital stock possessing more than ten percent of the
total combined voting power of all classes of capital stock of the Company (or
of any parent or Subsidiary) (a "Ten Percent Holder"), the purchase price per
share of Common Stock shall be the price (currently 110% of Fair Market Value)
required by the Code in order to constitute an Incentive Stock Option.
(b) Option Period and Exercisability. The period during which an
option may be exercised shall be determined by the Committee; provided, however,
that no Incentive Stock Option shall be exercised later than ten years after its
date of grant; provided further, that if an Incentive Stock Option shall be
granted to a Ten Percent Holder, such option shall not be exercised later than
five years after its date of grant. The Committee may, in its discretion,
establish Performance Measures which shall be satisfied or met as a condition to
the grant of an option or to the exercisability of all or a portion of an
option. The Committee shall determine whether an option shall become exercisable
in cumulative or non-cumulative installments and in part or in full at any time.
An exercisable option, or portion thereof, may be exercised only with respect to
whole shares of
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Common Stock, except that if the remaining option then exercisable is for less
than a whole share, such remaining amount may be exercised.
(c) Method of Exercise. An option may be exercised (i) by giving
written notice to the Company specifying the number of whole shares of Common
Stock to be purchased and accompanied by payment therefor in full (or
arrangement made for such payment to the Company's satisfaction) either (1) in
cash, (2) by delivery of Mature Shares having a Fair Market Value, determined as
of the date of exercise, equal to the aggregate purchase price payable by reason
of such exercise, (3) by authorizing the Company to withhold whole shares of
Common Stock which would otherwise be delivered upon exercise of the option
having a Fair Market Value, determined as of the date of exercise, equal to the
aggregate purchase price payable by reason of such exercise, (4) in cash by a
broker-dealer acceptable to the Company to whom the optionee has submitted an
irrevocable notice of exercise or (5) a combination of (1), (2) and (3), in each
case to the extent set forth in the Agreement relating to the option, (ii) if
applicable, by surrendering to the Company any Tandem SARs which are canceled by
reason of the exercise of the option and (iii) by executing such documents as
the Company may reasonably request. The Committee shall have sole discretion to
disapprove of an election pursuant to any of clauses (2)-(5). Any fraction of a
share of Common Stock which would be required to pay such purchase price shall
be disregarded and the remaining amount due shall be paid in cash by the
optionee. No certificate representing Common Stock shall be delivered until the
full purchase price therefor has been paid.
(d) Additional Options. The Committee shall have the authority to
include in any Agreement relating to an option a provision entitling the
optionee to an additional option in the event such optionee exercises the option
represented by such option agreement, in whole or in part, by delivering
previously owned whole shares of Common Stock in payment of the purchase price
in accordance with this Plan and such Agreement. Any such additional option
shall be for a number of shares of Common Stock equal to the number of delivered
shares, shall have a purchase price determined by the Committee in accordance
with this Plan, shall be exercisable on the terms and subject to the conditions
set forth in the Agreement relating to such additional option.
2.2 STOCK APPRECIATION RIGHTS. The Committee may, in its discretion,
grant SARs to such eligible persons as may be selected by the Committee. The
Agreement relating to an SAR shall specify whether the SAR is a Tandem SAR or a
Free-Standing SAR.
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SARs shall be subject to the following terms and conditions and
shall contain such additional terms and conditions, not inconsistent with the
terms of this Plan, as the Committee shall deem advisable:
(a) Number of SARs and Base Price. The number of SARs subject to an
award shall be determined by the Committee. Any Tandem SAR related to an
Incentive Stock Option shall be granted at the same time that such Incentive
Stock Option is granted. The base price of a Tandem SAR shall be the purchase
price per share of Common Stock of the related option. The base price of a
Free-Standing SAR shall be determined by the Committee; provided, however, that
such base price shall not be less than 100% of the Fair Market Value of a share
of Common Stock on the date of grant of such SAR.
(b) Exercise Period and Exercisability. The Agreement relating to an
award of SARs shall specify whether such award may be settled in shares of
Common Stock (including shares of Restricted Stock) or cash or a combination
thereof. The period for the exercise of an SAR shall be determined by the
Committee; provided, however, that no Tandem SAR shall be exercised later than
the expiration, cancellation, forfeiture or other termination of the related
option. The Committee may, in its discretion, establish Performance Measures
which shall be satisfied or met as a condition to the exercisability of an SAR.
The Committee shall determine whether an SAR may be exercised in cumulative or
non-cumulative installments and in part or in full at any time. An exercisable
SAR, or portion thereof, may be exercised, in the case of a Tandem SAR, only
with respect to whole shares of Common Stock and, in the case of a Free-Standing
SAR, only with respect to a whole number of SARs. If an SAR is exercised for
shares of Restricted Stock, a certificate or certificates representing such
Restricted Stock shall be issued in accordance with Section 3.2(c) and the
holder of such Restricted Stock shall have such rights of a stockholder of the
Company as determined pursuant to Section 3.2(d). Prior to the exercise of an
SAR for shares of Common Stock, including Restricted Stock, the holder of such
SAR shall have no rights as a stockholder of the Company with respect to the
shares of Common Stock subject to such SAR.
(c) Method of Exercise. A Tandem SAR may be exercised (i) by giving
written notice to the Company specifying the number of whole SARs which are
being exercised, (ii) by surrendering to the Company any options which are
canceled by reason of the exercise of the Tandem SAR and (iii) by executing such
documents as the Company may reasonably request. A Free-Standing SAR may be
exercised (i) by giving written notice to the Company specifying the whole
number (or if the remaining SAR then
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exercisable is for less then one whole share, such remaining amount) of SARs
which are being exercised and (ii) by executing such documents as the Company
may reasonably request.
2.3 TERMINATION OF EMPLOYMENT OR SERVICE WITH THE COMPANY.
(a) Disability. Subject to paragraph (f) below and Section 6.8, and
unless otherwise specified in the Agreement relating to an option or SAR, as the
case may be, if the employment or service with the Company of the holder of an
option or SAR terminates by reason of Disability, each option and SAR held by
such holder shall be exercisable only to the extent that such option or SAR, as
the case may be, is exercisable on the effective date of such holder's
termination of employment or service and may thereafter be exercised by such
holder (or such holder's legal representative or similar person) until and
including the earliest to occur of (i) the date which is three months (or such
other period as set forth in the Agreement relating to such option or SAR) after
the effective date of such holder's termination of employment or service and
(ii) the expiration date of the term of such option or SAR.
(b) Retirement. Subject to paragraph (f) below and Section 6.8, and
unless otherwise specified in the Agreement relating to an option or SAR, as the
case may be, if the employment or service with the Company of the holder of an
option or SAR terminates by reason of retirement on or after age 65 with the
consent of the Company, each option and SAR held by such holder shall be
exercisable only to the extent that such option or SAR, as the case may be, is
exercisable on the effective date of such holder's termination of employment or
service and may thereafter be exercised by such holder (or such holder's legal
representative or similar person) until and including the earliest to occur of
(i) the date which is six months (or such other period as set forth in the
Agreement relating to such option or SAR) after the effective date of such
holder's termination of employment or service and (ii) the expiration date of
the term of such option or SAR.
(c) Death. Subject to paragraph (f) below and Section 6.8, and
unless otherwise specified in the Agreement relating to an option or SAR, as the
case may be, if the employment or service with the Company of the holder of an
option or SAR terminates by reason of death, each option and SAR held by such
holder shall be exercisable only to the extent that such option or SAR, as the
case may be, is exercisable on the date of such holder's death, and may
thereafter be exercised by such holder's executor, administrator, legal
representative, beneficiary or similar person, as the case may be, until and
including the
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earliest to occur of (i) the date which is one year (or such other period as set
forth in the Agreement relating to such option or SAR) after the date of death
and (ii) the expiration date of the term of such option or SAR.
(d) Other Termination. If the employment or service with the Company
of the holder of an option or SAR is terminated by the Company for Cause, each
option and SAR held by such holder shall terminate automatically on the
effective date of such holder's termination of employment or service.
Subject to paragraph (f) below and Section 6.8, and unless specified
in the Agreement relating to an option or SAR, as the case may be, if the
employment or service with the Company of the holder of an option or SAR
terminates for any reason other than Disability, retirement on or after age 65
with the consent of the Company, death or Cause, each option and SAR held by
such holder shall be exercisable only to the extent that such option or SAR is
exercisable on the effective date of such holder's termination of employment or
service and may thereafter be exercised by such holder (or such holder's legal
representative or similar person) until and including the earliest to occur of
(i) the date which is three months (or such other period as set forth in the
Agreement relating to such option or SAR) after the effective date of such
holder's termination of employment or service and (ii) the expiration date of
the term of such option or SAR.
(e) Death Following Termination of Employment or Service. Subject to
paragraph (f) below and Section 6.8, and unless otherwise specified in the
Agreement relating to an option or SAR, as the case may be, if the holder of an
option or SAR dies during the three-month period following termination of
employment or service by reason of Disability, or if the holder of an option or
SAR dies during the three-month period following termination of employment or
service by reason of retirement on or after age 65 with the consent of the
Company, or if the holder of an option or SAR dies during the three-month period
following termination of employment or service for any reason other than
Disability or retirement on or after age 65 with the consent of the Company (or,
in each case, such other period as set forth in the Agreement relating to such
option or SAR), each option and SAR held by such holder shall be fully
exercisable and may thereafter be exercised by the holder's executor,
administrator, legal representative, beneficiary or similar person, as the case
may be, until and including the earliest to occur of (i) the date which is one
year (or such other period as set forth in the Agreement relating to such option
or SAR) after the date of death and (ii) the expiration date of the term of such
option or SAR.
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(f) Termination of Employment or Service - Incentive Stock Options.
Subject to Section 6.8 and unless otherwise specified in the Agreement relating
to the option, if the employment or service with the Company of a holder of an
incentive stock option terminates by reason of Permanent and Total Disability
(as defined in Section 22(e)(3) of the Code), each incentive stock option held
by such optionee shall be exercisable only to the extent that such option is
exercisable on the effective date of such optionee's termination of employment
or service by reason of Permanent and Total Disability, and may thereafter be
exercised by such optionee (or such optionee's legal representative or similar
person) until and including the earliest to occur of (i) the date which is three
months (or such other period no longer than one year as set forth in the
Agreement relating to such option) after the effective date of such optionee's
termination of employment or service by reason of Permanent and Total Disability
and (ii) the expiration date of the term of such option.
Subject to Section 6.8 and unless otherwise specified in the
Agreement relating to the option, if the employment or service with the Company
of a holder of an Incentive Stock Option terminates by reason of death, each
Incentive Stock Option held by such optionee shall be exercisable only to the
extent that such option is exercisable on the date of such optionee's death and
may thereafter be exercised by such optionee's executor, administrator, legal
representative, beneficiary or similar person until and including the earliest
to occur of (i) the date which is one year (or such shorter period as set forth
in the Agreement relating to such option) after the date of death and (ii) the
expiration date of the term of such option.
If the employment or service with the Company of the optionee of an
Incentive Stock Option is terminated by the Company for Cause, each Incentive
Stock Option held by such optionee shall terminate automatically on the
effective date of such optionee's termination of employment or service.
Subject to Section 6.8 and unless otherwise specified in the
Agreement relating to the option, if the employment or service with the Company
of a holder of an Incentive Stock Option terminates for any reason other than
Permanent and Total Disability, death or Cause, each Incentive Stock Option held
by such optionee shall be exercisable only to the extent such option is
exercisable on the effective date of such optionee's termination of employment
or service, and may thereafter be exercised by such holder (or such holder's
legal representative or similar person) until and including the earliest to
occur of (i) the date which is three months after the effective date of
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such optionee's termination of employment or service and (ii) the expiration
date of the term of such option.
If the holder of an Incentive Stock Option dies during the
three-month period following termination of employment or service by reason of
Permanent and Total Disability (or such shorter period as set forth in the
Agreement relating to such option), or if the holder of an Incentive Stock
Option dies during the three-month period following termination of employment or
service for any reason other than Permanent and Total Disability, death or
Cause, each Incentive Stock Option held by such optionee shall be exercisable
only to the extent such option is exercisable on the date of the optionee's
death and may thereafter be exercised by the optionee's executor, administrator,
legal representative, beneficiary or similar person until and including the
earliest to occur of (i) the date which is one year (or such shorter period as
set forth in the Agreement relating to such option) after the date of death and
(ii) the expiration date of the term of such option.
III. STOCK AWARDS
3.1 STOCK AWARDS. The Committee may, in its discretion, grant Stock
Awards to such eligible persons as may be selected by the Committee. Subject to
adjustment as provided in Sections 6.7 and 6.8 of this Plan, the aggregate
number of shares of Common Stock available under this Plan pursuant to all Stock
Awards shall not exceed 100,000 of the aggregate number of shares of Common
Stock available under this Plan. The Agreement relating to a Stock Award shall
specify whether the Stock Award is a Restricted Stock Award or Bonus Stock
Award.
3.2 TERMS OF STOCK AWARDS. Stock Awards shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of this Plan, as the Committee shall
deem advisable.
(a) Number of Shares and Other Terms. The number of shares of Common
Stock subject to a Restricted Stock Award or Bonus Stock Award and the
Performance Measures (if any) and Restriction Period applicable to a Restricted
Stock Award shall be determined by the Committee.
(b) Vesting and Forfeiture. The Agreement relating to a Restricted
Stock Award shall provide, in the manner determined by the Committee, in its
discretion, and subject to the provisions of this Plan, for the vesting of the
shares of Common Stock subject to such award (i) if specified Performance
Measures
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are satisfied or met during the specified Restriction Period or (ii) if the
holder of such award remains continuously in the employment or service of the
Company during the specified Restricted Period and for the forfeiture of the
shares of Common Stock subject to such award (x) if specified Performance
Measures are not satisfied or met during the specified Restriction Period or (y)
if the holder of such award does not remain continuously in the employment or
service of the Company during the specified Restriction Period.
Bonus Stock Awards shall not be subject to any Performance Measures
or Restriction Periods.
(c) Share Certificates. During the Restriction Period, a certificate
or certificates representing a Restricted Stock Award shall be registered in the
holder's name and may bear a legend, in addition to any legend which may be
required pursuant to Section 6.6, indicating that the ownership of the shares of
Common Stock represented by such certificate is subject to the restrictions,
terms and conditions of this Plan and the Agreement relating to the Restricted
Stock Award. All such certificates shall be deposited with the Company, together
with stock powers or other instruments of assignment (including a power of
attorney), each endorsed in blank with a guarantee of signature if deemed
necessary or appropriate, which would permit transfer to the Company of all or a
portion of the shares of Common Stock subject to the Restricted Stock Award in
the event such award is forfeited in whole or in part. Upon termination of any
applicable Restriction Period (and the satisfaction or attainment of applicable
Performance Measures), or upon the grant of a Bonus Stock Award, in each case
subject to the Company's right to require payment of any taxes in accordance
with Section 6.5, a certificate or certificates evidencing ownership of the
requisite number of shares of Common Stock shall be delivered to the holder of
such award.
(d) Rights with Respect to Restricted Stock Awards. Unless otherwise
set forth in the Agreement relating to a Restricted Stock Award, and subject to
the terms and conditions of a Restricted Stock Award, the holder of such award
shall have all rights as a stockholder of the Company, including, but not
limited to, voting rights, the right to receive dividends and the right to
participate in any capital adjustment applicable to all holders of Common Stock;
provided, however, that a distribution with respect to shares of Common Stock,
other than a distribution in cash, shall be deposited with the Company and shall
be subject to the same restrictions as the shares of Common Stock with respect
to which such distribution was made.
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(e) Awards to Certain Executive Officers. Notwithstanding any other
provision of this Article III, and only to the extent necessary to ensure the
deductibility of the award to the Company, the Fair Market Value of the number
of shares of Common Stock subject to a Stock Award granted to a "covered
employee" within the meaning of Section 162(m) of the Code shall not exceed
$2,000,000 (i) at the time of grant in the case of a Stock Award granted upon
the attainment of Performance Measures or (ii) in the case of a Restricted Stock
Award with Performance measures which shall be satisfied or met as a condition
to the holder's receipt of the shares of Common Stock subject to such award, on
the earlier of (x) the date on which the Performance Measures are satisfied or
met and (y) the date the holder makes an election under Section 83(b) of the
Code.
3.3 TERMINATION OF EMPLOYMENT OR SERVICE. Subject to Section 6.8 and
unless otherwise set forth in the Agreement relating to a Restricted Stock
Award, if the employment or service with the Company of the holder of such award
terminates, the portion of such award which is subject to a Restriction Period
shall terminate as of the effective date of such holder's termination of
employment or service shall be forfeited and such portion shall be canceled by
the Company.
IV. PERFORMANCE SHARE AWARDS
4.1 PERFORMANCE SHARE AWARDS. The Committee may, in its discretion,
grant Performance Share Awards to such eligible persons as may be selected by
the Committee.
4.2 TERMS OF PERFORMANCE SHARE AWARDS. Performance Share Awards
shall be subject to the following terms and conditions and shall contain such
additional terms and conditions, not inconsistent with the terms of this Plan,
as the Committee shall deem advisable.
(a) Number of Performance Shares and Performance Measures. The
number of Performance Shares subject to any award and the Performance Measures
and Performance Period applicable to such award shall be determined by the
Committee.
(b) Vesting and Forfeiture. The Agreement relating to a Performance
Share Award shall provide, in the manner determined by the Committee, in its
discretion, and subject to the provisions of this Plan, for the vesting of such
award, if specified Performance Measures are satisfied or met during the
specified Performance Period, and for the forfeiture of such
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<PAGE> 18
award, if specified Performance Measures are not satisfied or met during the
specified Performance Period.
(c) Settlement of Vested Performance Share Awards. The Agreement
relating to a Performance Share Award (i) shall specify whether such award may
be settled in shares of Common Stock (including shares of Restricted Stock) or
cash or a combination thereof and (ii) may specify whether the holder thereof
shall be entitled to receive, on a current or deferred basis, dividend
equivalents, and, if determined by the Committee, interest on any deferred
dividend equivalents, with respect to the number of shares of Common Stock
subject to such award. If a Performance Share Award is settled in shares of
Restricted Stock, a certificate or certificates representing such Restricted
Stock shall be issued in accordance with Section 3.2(c) and the holder of such
Restricted Stock shall have such rights of a stockholder of the Company as
determined pursuant to Section 3.2(d). Prior to the settlement of a Performance
Share Award in shares of Common Stock, including Restricted Stock, the holder of
such award shall have no rights as a stockholder of the Company with respect to
the shares of Common Stock subject to such award.
4.3 TERMINATION OF EMPLOYMENT OR SERVICE. Subject to Section 6.8 and
unless otherwise set forth in the Agreement relating to a Performance Share
Award, if the employment or service with the Company of the holder of such award
terminates, the portion of such award which is subject to a Performance Period
on the effective date of such holder's termination of employment or service
shall be forfeited and such portion shall be canceled by the Company.
V. PROVISIONS RELATING TO NON-EMPLOYEE DIRECTORS OPTIONS
5.1 ELIGIBILITY. Each Non-Employee Director shall be granted options
to purchase shares of Common Stock in accordance with this Article V
(collectively "Directors Options"). All options granted under this Article V
shall constitute Non- Statutory Stock Options.
5.2 GRANTS OF STOCK OPTIONS. Each Non-Employee Director may be
granted Non-Statutory Stock Options in the discretion of the Committee (subject
to approval by the Board).
5.3 TERMINATION OF DIRECTORSHIP.
(a) Disability. Subject to Section 6.8, if the holder of an option
granted pursuant to this Article V ceases to be a director of the Company by
reason of Disability, each such option
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held by such holder shall be exercisable only to the extent that such option is
exercisable on the effective date of such holder's ceasing to be a director and
may thereafter be exercised by such holder (or such holder's guardian, legal
representative or similar person) until the earliest to occur of the (i) date
which is three months after the effective date of such holder's ceasing to be a
director and (ii) the expiration date of the term of such option.
(b) Retirement. Subject to Section 6.8, if the holder of an option
granted pursuant to this Article V ceases to be a director of the Company on or
after age 65, each such option held by such holder shall be exercisable only to
the extent that such option is exercisable on the effective date of such
holder's ceasing to be a director and may thereafter be exercised by such holder
(or such holder's legal representative or similar person) until the earliest to
occur of the (i) date which is three months after the effective date of such
holder's ceasing to be a director and (ii) the expiration date of the term of
such option.
(c) Death. Subject to Section 6.8, if the holder of an option
granted pursuant to this Article V ceases to be a director of the Company by
reason of death, each such option held by such holder shall be fully exercisable
and may thereafter be exercised by such holder's executor, administrator, legal
representative, beneficiary or similar person, as the case may be, until the
earliest to occur of the (i) date which is one year after the date of death and
(ii) the expiration date of the term of such option.
(d) Other Termination. Subject to Section 6.8, if the holder of an
option granted pursuant to this Article V ceases to be a director of the Company
for any reason other than Disability, retirement on or after age 65 or death,
each such option held by such holder shall be exercisable only to the extent
such option is exercisable on the effective date of such holder's ceasing to be
a director and may thereafter be exercised by such holder (or such holder's
legal representative or similar person) until the earliest to occur of the (i)
date which is three months after the effective date of such holder's ceasing to
be a director and (ii) the expiration date of the term of such option.
(e) Death Following Termination of Directorship. Subject to Section
6.8, if the holder of an option granted pursuant to this Article V dies during
the three-month period following such holder's ceasing to be a director of the
Company by reason of Disability, or if such a holder dies during the three-month
period following such holder's ceasing to be a director of the Company on or
after age 65, or if such a holder
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dies during the three-month period following such holder's ceasing to be a
director for any reason other than by reason of Disability or retirement on or
after age 65, each such option held by such holder shall be exercisable only to
the extent that such option is exercisable on the date of the holder's death and
may thereafter be exercised by the holder's executor, administrator, legal
representative, beneficiary or similar person, as the case may be, until the
earliest to occur of the (i) date one year after the date of death and (ii) the
expiration date of the term of such option.
5.4 DIRECTORS OPTIONS. Each Directors Option shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of this Plan, as the Committee shall
deem advisable:
(a) Option Period and Exercisability. If at any time prior to the
time that a Directors Option becomes exercisable, a Non-Employee Director shall
no longer be a member of the Board, such Directors Option shall become void and
of no further force or effect.
(b) Purchase Price. The purchase price for the shares of Common
Stock subject to any Directors Option shall be equal to 100% of the Fair Market
Value of a share of Common Stock on the date of grant of such Directors Option.
Such Directors Options shall be exercisable in accordance with Section 2.1(c).
(c) Restrictions on Transfer. Directors Options shall be subject to
the transfer restrictions and other provisions of Section 6.4.
(d) Expiration. Each Directors Option which has become exercisable
pursuant to Section 5.4(a), to the extent not theretofore exercised, shall
expire on the first to occur of (i) the date which is three months after the
first date on which the Non-Employee Director shall no longer be a member of the
Board or the Board of Directors of a Subsidiary and (ii) the tenth anniversary
of the date of grant of such option; provided, however, that if the Non-Employee
Director shall die within such three-month period following the date on which he
shall have ceased to serve as such a director, such option may be exercised at
any time within the one-year period following the date of death to the extent
not theretofore exercised (but in no event later than the tenth anniversary of
the date of grant).
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VI. GENERAL
6.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan shall be submitted to
the stockholders of the Company for approval and, if approved by the affirmative
vote of a majority of the voting power of the shares of capital stock of the
Company entitled to vote thereon, shall become effective as of the commencement
of the initial public offering of the Company. This Plan shall terminate ten
years after its effective date unless terminated earlier by the Board.
Termination of this Plan shall not affect the terms or conditions of any award
granted prior to termination.
Awards hereunder may be made at any time prior to the termination of
this Plan, provided that no award may be made later than ten years after the
effective date of this Plan. In the event that this Plan is not approved by the
stockholders of the Company, this Plan and any awards hereunder shall be void
and of no force or effect.
6.2 AMENDMENTS. The Board may amend this Plan as it shall deem
advisable, subject to any requirement of stockholder approval required by
applicable law, rule or regulation including Section 162(m) of the Code;
provided, however, that no amendment shall be made without stockholder approval
if such amendment would (a) increase the maximum number of shares of Common
Stock available for issuance under this Plan (subject to Section 6.7), (b)
reduce the minimum purchase price in the case of an option or the base price in
the case of an SAR, (c) effect any change inconsistent with Section 422 of the
Code or (d) extend the term of this Plan. No amendment may impair the rights of
a holder of an outstanding award without the consent of such holder.
6.3 AGREEMENT. Each award under this Plan shall be evidenced by an
Agreement setting forth the terms and conditions applicable to such award. No
award shall be valid until an Agreement is executed by the Company and the
recipient of such award and, upon execution by each party and delivery of the
Agreement to the Company, such award shall be effective as of the effective date
set forth in the Agreement.
6.4 NON-TRANSFERABILITY OF STOCK OPTIONS, SARS AND PERFORMANCE
SHARES. No option, SAR or Performance Share shall be transferable other than (i)
by will, the laws of descent and distribution or pursuant to beneficiary
designation procedures approved by the Company or (ii) as otherwise set forth in
the Agreement relating to such award. Each option, SAR or Performance Share may
be exercised or settled during the participant's lifetime only by the holder or
the holder's legal representative or similar person. Except as permitted by the
second preceding sentence, no option, SAR or Performance Share may be sold,
transferred, assigned, pledged, hypothecated,
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encumbered or otherwise disposed of (whether by operation of law or otherwise)
or be subject to execution, attachment or similar process. Upon any attempt to
so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of
any option, SAR or Performance Share, such award and all rights thereunder shall
immediately become null and void.
6.5 TAX WITHHOLDING. The Company shall have the right to require,
prior to the issuance or delivery of any shares of Common Stock or the payment
of any cash pursuant to an award made hereunder, payment by the holder of such
award of any Federal, state, local or other taxes which may be required to be
withheld or paid in connection with such award. An Agreement may provide that
(i) the Company shall withhold whole shares of Common Stock which would
otherwise be delivered to a holder, having an aggregate Fair Market Value
determined as of the date the obligation to withhold or pay taxes arises in
connection with an award (the "Tax Date"), or withhold an amount of cash which
would otherwise be payable to a holder, in the amount necessary to satisfy any
such obligation or (ii) the holder may satisfy any such obligation by any of the
following means: (1) a cash payment to the Company, (2) delivery to the Company
of Mature Shares having an aggregate Fair Market Value, determined as of the Tax
Date, equal to the amount necessary to satisfy any such obligation, (3)
authorizing the Company to withhold whole shares of Common Stock which would
otherwise be delivered having an aggregate Fair Market Value, determined as of
the Tax Date, or withhold an amount of cash which would otherwise be payable to
a holder, equal to the amount necessary to satisfy any such obligation, (4) in
the case of the exercise of an option, a cash payment by a broker-dealer
acceptable to the Company to whom the optionee has submitted an irrevocable
notice of exercise or (5) any combination of (1), (2) and (3), in each case to
the extent set forth in the Agreement relating to the award; provided, however,
that the Committee shall have sole discretion to disapprove of an election
pursuant to any of clauses (2)-(5). An Agreement may provide for shares of
Common Stock to be delivered or withheld having an aggregate Fair Market Value
in excess of the minimum amount required to be withheld. Any fraction of a share
of Common Stock which would be required to satisfy such an obligation shall be
disregarded and the remaining amount due shall be paid in cash by the holder.
6.6 RESTRICTIONS ON SHARES. Each award made hereunder shall be
subject to the requirement that if at any time the Company determines that the
listing, registration or qualification of the shares of Common Stock subject to
such award upon any securities exchange or under any law, or the consent or
approval of any governmental body, or the taking of any other action is
necessary or desirable as a condition of, or in
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connection with, the delivery of shares thereunder, such shares shall not be
delivered unless such listing, registration, qualification, consent, approval or
other action shall have been effected or obtained, free of any conditions not
acceptable to the Company. The Company may require that certificates evidencing
shares of Common Stock delivered pursuant to any award made hereunder bear a
legend indicating that the sale, transfer or other disposition thereof by the
holder is prohibited except in compliance with the Securities Act of 1933, as
amended, and the rules and regulations thereunder.
6.7 ADJUSTMENT. Except as provided in Section 6.8, in the event of
any stock split, stock dividend, recapitalization, reorganization, merger,
consolidation, combination, exchange of shares, liquidation, spin-off or other
similar change in capitalization or event, or any distribution to holders of
Common Stock other than a regular cash dividend, the number and class of
securities available under this Plan, the number and class of securities subject
to each outstanding option and the purchase price per security, the number of
securities subject to each option to be granted to Non-Employee Directors
pursuant to Article V, the terms of each outstanding SAR, the number and class
of securities subject to each outstanding Stock Award, and the terms of each
outstanding Performance Share shall be appropriately adjusted by the Committee,
such adjustments to be made in the case of outstanding options and SARs without
an increase in the aggregate purchase price or base price. The decision of the
Committee regarding any such adjustment shall be final, binding and conclusive.
If any such adjustment would result in a fractional security being (a) available
under this Plan, such fractional security shall be disregarded, or (b) subject
to an award under this Plan, the Company shall pay the holder of such award, in
connection with the first vesting, exercise or settlement of such award, in
whole or in part, occurring after such adjustment, an amount in cash determined
by multiplying (i) the fraction of such security (rounded to the nearest
hundredth) by (ii) the excess, if any, of (1) the Fair Market Value on the
vesting, exercise or settlement date over (2) the exercise or base price, if
any, of such award.
6.8 CHANGE IN CONTROL.
(a) (i) Notwithstanding any provision in this Plan or any
Agreement, in the event of a Change in Control pursuant to Section
(b)(iii) or (iv) below, (1) all outstanding options and SARS shall
immediately become exercisable in full, (2) the Restriction Period
applicable to any outstanding Restricted Stock Award shall lapse, (3)
the Performance Period applicable to any outstanding Performance Share
shall lapse and (4) the Performance Measures
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applicable to any outstanding Restricted Stock Award (if any) and to
any outstanding Performance Share shall be deemed to be satisfied at
the maximum level. If, in connection with such Change in Control,
holders of Common Stock receive solely shares of common stock that are
registered under Section 12 of the Exchange Act, there shall be
substituted for each share of Common Stock available under this Plan,
whether or not then subject to an outstanding award, the number and
class of shares into which each outstanding share of Common Stock shall
be converted pursuant to such Change in Control. If, in connection with
such Change in Control, holders of Common Stock receive solely cash and
shares of common stock that are registered under Section 12 of the
Exchange Act, each outstanding award shall be surrendered to and
canceled by the Company, and the holder shall receive, within ten days
of the occurrence of such Change in Control, a proportionate amount of
cash in the manner provided in Section (a)(ii) below, and there shall
be substituted for the award surrendered a similar award reflecting a
proportionate number of the class of shares into which each outstanding
share of Common Stock shall be converted to such Change in Control. In
the event of any such substitution, the proportion of cash and common
stock, the purchase price per share in the case of an option and the
base price in the case of an SAR, and any other terms of outstanding
awards shall be appropriately adjusted by the Committee, such
adjustments to be made in the case of outstanding options and SARs
without an increase in the aggregate purchase price or base price;
provided, that the proportion of cash and common stock substituted for
outstanding awards shall reflect the approximate proportion of cash and
common stock received by holders of Common Stock in such Change in
Control. If, in connection with a Change in Control, holders of Common
Stock receive any portion of the consideration in a form other than
cash or shares of common stock that are registered under Section 12 of
the Exchange Act, each share of Common Stock available under this Plan,
whether or not then subject to an outstanding award, shall be
substituted or surrendered for such proportion of common stock, cash or
other consideration as shall be determined by the Committee pursuant to
Section 6.7.
(ii) Notwithstanding any provision in this Plan or any
Agreement, in the event of a Change in Control pursuant to Section
(b)(i) or (ii) below, or in the event of a Change in Control pursuant
to Section (b)(iii) or (iv) below in connection with which the holders
of Common Stock receive cash, each outstanding award shall be
surrendered to the Company by the holder thereof, and each such award
shall
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immediately be canceled by the Company, and the holder shall receive,
within ten days of the occurrence of a Change in Control pursuant to
Section (b)(i) or (ii) below or within ten days of the approval of the
stockholders of the Company contemplated by Section (b)(iii) or (iv)
below, a cash payment from the Company in an amount equal to (1) in the
case of an option, the number of shares of Common Stock then subject to
such option, multiplied by the excess, if any, of the greater of (A)
the highest per share price offered to stockholders of the Company in
any transaction whereby the Change in Control takes place or (B) the
Fair Market Value of a share of Common Stock on the date of occurrence
of the Change in Control, over the purchase price per share of Common
Stock subject to the option; (2) in the case of a Free-Standing SAR,
the number of shares of Common Stock then subject to such SAR,
multiplied by the excess, if any, of the greater of (A) the highest per
share price offered to stockholders of the Company in any transaction
whereby the Change in Control takes place or (B) the Fair Market Value
of a share of Common Stock on the date of occurrence of the Change in
Control, over the base price of the SAR; and (3) in the case of a
Restricted Stock Award or Performance Share Award, the number of shares
of Common Stock or the number of Performance Shares, as the case may
be, then subject to such award, multiplied by the greater of (A) the
highest per share price offered to stockholders of the Company in any
transaction whereby the Change in Control takes place or (B) the Fair
Market Value of a share of Common Stock on the date of occurrence of
the Change in Control. In the event of a Change in Control, each Tandem
SAR shall be surrendered by the holder thereof and shall be canceled
simultaneously with the cancellation of the related option. Except as
may be provided in an agreement relating to an award, the Company may,
but is not required to, cooperate with any person who is subject to
Section 16 of the Exchange Act to assure that any cash payment in
accordance with the foregoing to such person is made in compliance with
Section 16 and the rules and regulations thereunder.
(b) "Change in Control" shall mean:
(i) the acquisition by any individual, entity or group (a
"Person"), including any "person" within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act, of Beneficial Ownership of
25% or more of either (1) the then outstanding shares of common stock
of the Company (the "Outstanding Company Common Stock") or (2) the
combined voting power of the then outstanding securities of the Company
entitled to vote generally in the election of
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directors (the "Outstanding Company Voting Securities"); excluding,
however, the following: (A) any acquisition directly from the Company
(excluding any acquisition resulting from the exercise of an exercise,
conversion or exchange privilege unless the security being so
exercised, converted or exchanged was acquired directly from the
Company), (B) any acquisition by the Company, (C) any acquisition by an
employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company, (D) any
acquisition by an Exempt Person or (E) any acquisition by any
corporation pursuant to a transaction which complies with clauses (1),
(2) and (3) of subsection (iii) of this Section 6.8(b); provided
further, that for purposes of clause (2), if any Person (other than an
Exempt Person, the Company or any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company) shall become the Beneficial Owner of 50% or
more of the Outstanding Company Common Stock or 50% or more of the
Outstanding Company Voting Securities by reason of an acquisition by
the Company, and such Person shall, after such acquisition by the
Company, become the Beneficial Owner of any additional shares of the
Outstanding Company Common Stock or any additional Outstanding Company
Voting Securities and such Beneficial Ownership is publicly announced,
such additional Beneficial Ownership shall constitute a Change in
Control;
(ii) individuals who, as of the effective date hereof,
constitute the Board of Directors (the "Incumbent Board") cease for any
reason to constitute at least a majority of such Board; provided that
any individual who becomes a director of the Company subsequent to the
effective date hereof whose election, or nomination for election by the
Company's stockholders, was approved by the vote of at least a majority
of the directors then comprising the Incumbent Board shall be deemed a
member of the Incumbent Board; and provided further, that any
individual who was initially elected as a director of the Company as a
result of an actual or threatened election contest, as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act, or any other actual or threatened solicitation of proxies or
consents by or on behalf of any Person other than the Board shall not
be deemed a member of the Incumbent Board;
(iii) approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of
all or substantially all of the assets of the Company (a "Corporate
Transaction"); excluding, however, a
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Corporate Transaction pursuant to which (1) all or substantially all of
the individuals or entities who are the Beneficial Owners,
respectively, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities immediately prior to such
Corporate Transaction will Beneficially Own, directly or indirectly,
more than 50% of, respectively, the outstanding shares of common stock,
and the combined voting power of the outstanding securities of such
corporation entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Corporate
Transaction (including, without limitation, a corporation which as a
result of such transaction owns the Company or all or substantially all
of the Company's assets either directly or indirectly) in substantially
the same proportions relative to each other as their Beneficial
Ownership, immediately prior to such Corporate Transaction, of the
Outstanding Company Common Stock and the Outstanding Company Voting
Securities, as the case may be, (2) no Person (other than an Exempt
Person; the Company; any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by
the Company; the corporation resulting from such Corporate Transaction;
and any Person which Beneficially Owned, immediately prior to such
Corporate Transaction, directly or indirectly, 50% or more of the
Outstanding Company Common Stock or the Outstanding Company Voting
Securities, as the case may be) will Beneficially Own, directly or
indirectly, 50% or more of, respectively, the outstanding shares of
common stock of the corporation resulting from such Corporate
Transaction or the combined voting power of the outstanding securities
of such corporation entitled to vote generally in the election of
directors and (3) individuals who were members of the Incumbent Board
will constitute at least a majority of the members of the board of
directors of the corporation resulting from such Corporate Transaction;
or
(iv) approval by the stockholders of the Company of a plan of
complete liquidation or dissolution of the Company.
Notwithstanding anything to the contrary herein, no Change of
Control shall be deemed to have taken place as a result of the issuance of
shares of Common Stock by the Company or the sale of shares of Common Stock by
its stockholders in connection with the Company's initial public offering.
6.9 NO RIGHT OF PARTICIPATION OR EMPLOYMENT/SERVICE. No person shall
have any right to participate in this Plan. Neither this Plan nor any award made
hereunder shall confer upon any person any right to continued employment or
service by the
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<PAGE> 28
Company, any Subsidiary or any affiliate of the Company or affect in any manner
the right of the Company, any Subsidiary or any affiliate of the Company to
terminate the employment or service of any person at any time without liability
hereunder.
6.10 RIGHTS AS STOCKHOLDER. No person shall have any right as a
stockholder of the Company with respect to any shares of Common Stock or other
equity security of the Company which is subject to an award hereunder unless and
until such person becomes a stockholder of record with respect to such shares of
Common Stock or equity security.
6.11 GOVERNING LAW. This Plan, each award hereunder and the related
Agreement, and all determinations made and actions taken pursuant thereto, to
the extent not otherwise governed by the Code or the laws of the United States,
shall be governed by the laws of the State of Delaware and construed in
accordance therewith without giving effect to principles of conflicts of laws.
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<PAGE> 1
EXHIBIT 10.2
MODIFIED AS OF 1.26.00
WHITEHALL JEWELLERS, INC.
1997 LONG-TERM INCENTIVE PLAN
I. INTRODUCTION
1.1 PURPOSES. The purposes of the 1997 Long-Term Incentive
Plan (the "Plan") of Whitehall Jewellers, Inc. (the "Company"), and its
subsidiaries from time to time (individually a "Subsidiary" and collectively the
"Subsidiaries"), are (a) to align the interests of the Company's stockholders
and the recipients of awards under this Plan by increasing the proprietary
interest of such recipients in the Company's growth and success, (b) to advance
the interests of the Company by attracting and retaining officers and other key
employees, and well-qualified persons who are not officers or employees of the
Company ("non-employee directors") for service as directors of the Company and
(c) to motivate such employees and non-employee directors to act in the
long-term best interests of the Company's stockholders. For purposes of this
Plan, references to employment by the Company shall also mean employment by a
Subsidiary.
1.2 CERTAIN DEFINITIONS.
"AFFILIATE" and "ASSOCIATE" shall have the respective meanings
ascribed to such terms in Rule 12b-2, as in effect on the effective date of this
Plan, under the Exchange Act; provided, however, that no director or officer of
the Company shall be deemed an Affiliate or Associate of any other director or
officer of the Company solely as a result of his or her being a director or
officer of the Company.
"AGREEMENT" shall mean the written agreement evidencing an
award hereunder between the Company and the recipient of such award.
"BENEFICIAL OWNER" (including the terms "BENEFICIALLY OWN" and
"BENEFICIAL OWNERSHIP"), when used with respect to any Person, shall be deemed
to include any securities which:
(a) such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly (determined as provided in
Rule 13d-3, as in effect on the effective date of this Plan, under the Exchange
Act);
(b) such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has:
(i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time or upon the satisfaction
of any conditions, or both) pursuant to any written or oral agreement,
arrangement or understanding (other than customary
<PAGE> 2
agreements with and among underwriters and selling group members with
respect to a bona fide public offering of securities), upon the
exercise of any options, warrants, rights or conversion or exchange
privileges or otherwise; provided, however, that a Person shall not be
deemed the Beneficial Owner of, or to Beneficially Own securities
tendered pursuant to a tender or exchange offer made by or on behalf of
such Person or any of such Person's Affiliates or Associates until such
tendered securities are accepted for purchase or exchange; or
(ii) the right to vote pursuant to any written or oral
agreement, arrangement or understanding; provided, however, that a
Person shall not be deemed the Beneficial Owner of, or to Beneficially
Own, any security otherwise subject to this item (ii) if such
agreement, arrangement or understanding to vote (1) arises solely from
a revocable proxy or consent given to such Person or any of such
Person's Affiliates or Associates in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations under the Exchange Act and (2) is not
also then reportable by such Person on Schedule 13D (or any comparable
or successor report then in effect) under the Exchange Act; or
(iii) the right to dispose of pursuant to any written or oral
agreement, arrangement or understanding (other than customary
agreements with and among underwriters and selling group members with
respect to a bona fide public offering of securities); or
(c) are beneficially owned, directly or indirectly, by any
other Person with which such Person or any of such Person's Affiliates or
Associates has any written or oral agreement, arrangement or understanding
(other than customary agreements with and among underwriters and selling group
members with respect to a bona fide public offering of securities) for the
purpose of acquiring, holding, voting (except to the extent contemplated by the
proviso to item (ii) of subparagraph (b) of the first paragraph of this
definition) or disposing of any securities of the Company.
Notwithstanding the first paragraph of this definition, no
director or officer of the Company shall be deemed to be the "Beneficial Owner"
of, or to "Beneficially Own," shares of Common Stock or other securities of the
Company beneficially owned by any other director or officer of the Company
solely as a result of his or her being a director or officer of the Company.
"BOARD" shall mean the Board of Directors of the Company.
"BONUS STOCK" shall mean shares of Common Stock which are not
subject to a Restriction Period or Performance Measures.
"BONUS STOCK AWARD" shall mean an award of Bonus Stock under
this Plan.
"CAUSE" shall mean commission of a felony involving moral
turpitude or any material breach of any statutory or common law duty to the
Company or a Subsidiary involving willful malfeasance.
"CHANGE IN CONTROL" shall have the meaning set forth in
Section 6.8(b).
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<PAGE> 3
"CODE" shall mean the Internal Revenue Code of 1986, as
amended.
"COMMITTEE" shall mean the Committee designated by the Board,
consisting of two or more members of the Board, each of whom shall be (a) a
"Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange Act
and (b) an "outside director" within the meaning of Section 162(m) of the Code,
subject to any transition rules applicable to the definition of outside
director.
"COMMON STOCK" shall mean the common stock, $.001 par value,
of the Company.
"COMPANY" has the meaning specified in Section 1.1.
"DIRECTORS OPTIONS" shall have the meaning set forth in
Section 5.1.
"DISABILITY" shall mean the inability for a continuous period
of at least six months of the holder of an award to perform substantially such
holder's duties and responsibilities, as determined solely by the Committee.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended.
"EXEMPT PERSON" shall mean each of Hugh M. Patinkin, John R.
Desjardins, Matthew M. Patinkin and each Affiliate thereof.
"FAIR MARKET VALUE" shall mean the average of the high and low
transaction prices of a share of Common Stock as reported in the National
Association of Securities Dealers Automated Quotation National Market System on
the date as of which such value is being determined, or, if the Common Stock is
listed on a national securities exchange, the average of the high and low
transaction prices of a share of Common Stock on the principal national stock
exchange on which the Common Stock is traded on the date as of which such value
is being determined, or, if there shall be no reported transactions for such
date, on the next preceding date for which transactions were reported; provided,
however, that if Fair Market Value for any date cannot be so determined, Fair
Market Value shall be determined by the Committee by whatever means or method as
the Committee, in the good faith exercise of its discretion, shall at such time
deem appropriate.
"FREE-STANDING SAR" shall mean an SAR which is not issued in
tandem with, or by reference to, an option, which entitles the holder thereof to
receive, upon exercise, shares of Common Stock (which may be Restricted Stock),
cash or a combination thereof with an aggregate value equal to the excess of the
Fair Market Value of one share of Common Stock on the date of exercise over the
base price of such SAR, multiplied by the number of such SARs which are
exercised.
3
<PAGE> 4
"INCENTIVE STOCK OPTION" shall mean an option to purchase
shares of Common Stock that meets the requirements of Section 422 of the Code,
or any successor provision, which is intended by the Committee to constitute an
Incentive Stock Option.
"INCUMBENT BOARD" shall have the meaning set forth in Section
6.8(b)(ii) hereof.
"MATURE SHARES" shall mean shares of Common Stock for which
the holder thereof has good title, free and clear of all liens and encumbrances
and which such holder either (a) has held for at least six months or (b) has
purchased on the open market.
"NON-EMPLOYEE DIRECTOR" shall mean any director of the Company
who is not an officer or employee of the Company or any Subsidiary (except in
the definition of Committee, in which case "Non-Employee Director" shall have
the meaning set forth in Rule 16b-3 under the Exchange Act).
"NON-STATUTORY STOCK OPTION" shall mean a stock option which
is not an Incentive Stock Option.
"PERFORMANCE MEASURES" shall mean the criteria and objectives,
established by the Committee, which shall be satisfied or met (a) as a condition
to the exercisability of all or a portion of an option or SAR or (b) during the
applicable Restriction Period or Performance Period as a condition to the
holder's receipt, in the case of a Restricted Stock Award, of the shares of
Common Stock subject to such award, or, in the case of a Performance Share
Award, of payment with respect to such award. Such criteria and objectives may
include one or more of the following: the attainment by a share of Common Stock
of a specified Fair Market Value for a specified period of time, earnings per
share, return to stockholders (including dividends), return on equity, earnings
of the Company, revenues, market share, cash flows or cost reduction goals, or
any combination of the foregoing. If the Committee desires that compensation
payable pursuant to any award subject to Performance Measures be "qualified
performance-based compensation" within the meaning of section 162(m) of the
Code, the Performance Measures shall be established by the Committee no later
than the end of the first quarter of the Performance Period or Restriction
Period, as applicable (or such other time designated by the Internal Revenue
Service).
"PERFORMANCE PERIOD" shall mean any period designated by the
Committee during which the Performance Measures applicable to a Performance
Share Award shall be measured.
"PERFORMANCE SHARE" shall mean a right, contingent upon the
attainment of specified Performance Measures within a specified Performance
Period, to receive one share of Common Stock, which may be Restricted Stock, or
in lieu thereof, the Fair Market Value of such Performance Share in cash.
"PERFORMANCE SHARE AWARD" shall mean an award of Performance
Shares under this Plan.
"PERMANENT AND TOTAL DISABILITY" shall have the meaning set
forth in Section 22(e)(3) of the Code or any successor thereto.
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<PAGE> 5
"PERSON" shall mean any individual, firm, corporation,
partnership or other entity, and shall include any successor (by merger or
otherwise) of any of the forgoing.
"RESTRICTED STOCK" shall mean shares of Common Stock which are
subject to a Restriction Period.
"RESTRICTED STOCK AWARD" shall mean an award of Restricted
Stock under this Plan.
"RESTRICTION PERIOD" shall mean any period designated by the
Committee during which the Common Stock subject to a Restricted Stock Award may
not be sold, transferred, assigned, pledged, hypothecated or otherwise
encumbered or disposed of, except as provided in this Plan or the Agreement
relating to such award.
"SAR" shall mean a stock appreciation right which may be a
Free-Standing SAR or a Tandem SAR.
"STOCK AWARD" shall mean a Restricted Stock Award or a Bonus
Stock Award.
"TANDEM SAR" shall mean an SAR which is granted in tandem
with, or by reference to, an option (including a Non-Statutory Stock Option
granted prior to the date of grant of the SAR), which entitles the holder
thereof to receive, upon exercise of such SAR and surrender for cancellation of
all or a portion of such option, shares of Common Stock (which may be Restricted
Stock), cash or a combination thereof with an aggregate value equal to the
excess of the Fair Market Value of one share of Common Stock on the date of
exercise over the base price of such SAR, multiplied by the number of shares of
Common Stock subject to such option, or portion thereof, which is surrendered.
"TAX DATE" shall have the meaning set forth in Section 6.5.
"TEN PERCENT HOLDER" shall have the meaning set forth in
Section 2.1(a).
1.3 ADMINISTRATION. This Plan shall be administered by the
Committee. Subject to Section 6.1, any one or a combination of the following
awards may be made under this Plan to eligible persons: (a) options to purchase
shares of Common Stock in the form of Incentive Stock Options or Non-Statutory
Stock Options, (b) in the form of Tandem SARs or Free-Standing SARs, (c) Stock
Awards in the form of Restricted Stock or Bonus Stock and (d) Performance
Shares. The Committee shall, subject to the terms of this Plan, select eligible
persons for participation in this Plan and determine the form, amount and timing
of each award to such persons and, if applicable, the number of shares of Common
Stock, the number of SARs and the number of Performance Shares subject to such
an award, the exercise price or base price associated with the award, the time
and conditions of exercise or settlement of the award and all other terms and
conditions of the award, including, without limitation, the form of the
Agreement evidencing the award. The Committee shall, subject to the terms of
this Plan, interpret this Plan and the application thereof, establish rules and
regulations it deems necessary or desirable for the administration of this Plan
and may impose, incidental to the grant of an award, conditions with respect to
the award, such as limiting competitive employment or other
5
<PAGE> 6
activities. All such interpretations, rules, regulations and conditions shall be
conclusive and binding on all parties.
The Committee may delegate some or all of its power and
authority hereunder to the Chief Executive Officer or other executive officer of
the Company as the Committee deems appropriate; provided, however, that the
Committee may not delegate its power and authority with regard to (a) the grant
of an award under this Plan to any person who is a "covered employee" within the
meaning of Section 162(m) of the Code or who, in the Committee's judgment, is
likely to be a covered employee at any time during the period an award hereunder
to such employee would be outstanding or (b) the selection for participation in
this Plan of an officer or other person subject to Section 16 of the Exchange
Act or decisions concerning the timing, pricing or amount of an award to such an
officer or other person.
No member of the Board of Directors or Committee, and neither
the Chief Executive Officer nor any other executive officer to whom the
Committee delegates any of its power and authority hereunder, shall be liable
for any act, omission, interpretation, construction or determination made in
connection with this Plan in good faith, and the members of the Board of
Directors and the Committee and the President and Chief Executive Officer or
other executive officer shall be entitled to indemnification and reimbursement
by the Company in respect of any claim, loss, damage or expense (including
attorneys' fees) arising therefrom to the full extent permitted by law, except
as otherwise may be provided in the Company's Certificate of Incorporation
and/or By-laws, as the same may be amended or restated from time to time, and
under any directors' and officers' liability insurance that may be in effect
from time to time.
A majority of the Committee shall constitute a quorum. The
acts of the Committee shall be either (a) acts of a majority of the members of
the Committee present at any meeting at which a quorum is present or (b) acts
approved in writing by a majority of the members of the Committee without a
meeting.
Notwithstanding anything to the contrary herein, any grant of
awards to a Non-Employee Director shall require the approval of the Board.
1.4 ELIGIBILITY. Participants in this Plan shall consist of
such directors, officers or other key employees of the Company and its
Subsidiaries as the Committee, in its sole discretion, may select from time to
time. The Committee's selection of a person to participate in this Plan at any
time shall not require the Committee to select such person to participate in
this Plan at any other time. Non-Employee Directors shall also be eligible to
participate in this Plan in accordance with Article V.
1.5 SHARES AVAILABLE. Subject to adjustment as provided in
Sections 6.7 and 6.8, 1,000,000 shares of Common Stock shall be available under
this Plan, reduced by the sum of the aggregate number of shares of Common Stock
(a) that are issued upon the grant of a Stock Award and (b) which become subject
to outstanding options, including Directors' Options, outstanding Free-Standing
SARs and outstanding Performance Shares. To the extent that shares of Common
Stock subject to an outstanding option (other than in connection with the
exercise of a Tandem SAR), Free-Standing SAR or Performance Share are not issued
or delivered by reason of the expiration, termination, cancellation or
forfeiture of such award or by reason of the
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<PAGE> 7
delivery or withholding of shares of Common Stock to pay all or a portion of the
exercise price of an award, if any, or to satisfy all or a portion of the tax
withholding obligations relating to an award, then such shares of Common Stock
shall again be available under this Plan.
Shares of Common Stock to be delivered under this Plan shall
be made available from authorized and unissued shares of Common Stock, or
authorized and issued shares of Common Stock reacquired and held as treasury
shares or otherwise or a combination thereof.
To the extent required by Section 162(m) of the Code and the
rules and regulations thereunder, the maximum number of shares of Common Stock
with respect to which options or SARs, Stock Awards or Performance Share Awards,
or a combination thereof may be granted during any calendar year to any person
shall be 200,000 subject to adjustment as provided in Section 6.7.
II. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
2.1 STOCK OPTIONS. The Committee may, in its discretion, grant
options to purchase shares of Common Stock to such eligible persons as may be
selected by the Committee. Each option, or portion thereof, that is not an
Incentive Stock Option, shall be a Non-Statutory Stock Option. Each Incentive
Stock Option shall be granted within ten years of the effective date of this
Plan. To the extent that the aggregate Fair Market Value (determined as of the
date of grant) of shares of Common Stock with respect to which options
designated as Incentive Stock Options are exercisable for the first time by a
participant during any calendar year (under this Plan or any other plan of the
Company, or any parent or Subsidiary) exceeds the amount (currently $100,000)
established by the Code, such options shall constitute Non-Statutory Stock
Options.
Options shall be subject to the following terms and conditions
and shall contain such additional terms and conditions, not inconsistent with
the terms of this Plan, as the Committee shall deem advisable:
(a) Number of Shares and Purchase Price. To the extent
required, the number of shares of Common Stock subject to an option shall be
determined by the Committee. The purchase price per share of Common Stock
purchasable upon exercise of the option shall be determined by the Committee;
provided, however, that the purchase price per share of Common Stock purchasable
upon exercise of an Option shall not be less than 100% of the Fair Market Value
of a share of Common Stock on the date of grant of such option; provided
further, that if an Incentive Stock Option shall be granted to any person who,
at the time such option is granted, owns capital stock possessing more than ten
percent of the total combined voting power of all classes of capital stock of
the Company (or of any parent or Subsidiary) (a "Ten Percent Holder"), the
purchase price per share of Common Stock shall be the price (currently 110% of
Fair Market Value) required by the Code in order to constitute an Incentive
Stock Option.
(b) Option Period and Exercisability. The period during which
an option may be exercised shall be determined by the Committee; provided,
however, that no Incentive Stock Option shall be exercised later than ten years
after its date of grant; provided further, that if an Incentive Stock Option
shall be granted to a Ten Percent Holder, such option shall not be
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<PAGE> 8
exercised later than five years after its date of grant. The Committee may, in
its discretion, establish Performance Measures which shall be satisfied or met
as a condition to the grant of an option or to the exercisability of all or a
portion of an option. The Committee shall determine whether an option shall
become exercisable in cumulative or non-cumulative installments and in part or
in full at any time. An exercisable option, or portion thereof, may be exercised
only with respect to whole shares of Common Stock, except that if the remaining
option then exercisable is for less than a whole share, such remaining amount
may be exercised.
(c) Method of Exercise. An option may be exercised (i) by
giving written notice to the Company specifying the number of whole shares of
Common Stock to be purchased and accompanied by payment therefor in full (or
arrangement made for such payment to the Company's satisfaction) either (1) in
cash, (2) by delivery of Mature Shares having a Fair Market Value, determined as
of the date of exercise, equal to the aggregate purchase price payable by reason
of such exercise, (3) by authorizing the Company to withhold whole shares of
Common Stock which would otherwise be delivered upon exercise of the option
having a Fair Market Value, determined as of the date of exercise, equal to the
aggregate purchase price payable by reason of such exercise, (4) in cash by a
broker-dealer acceptable to the Company to whom the optionee has submitted an
irrevocable notice of exercise or (5) a combination of (1), (2) and (3), in each
case to the extent set forth in the Agreement relating to the option, (ii) if
applicable, by surrendering to the Company any Tandem SARs which are canceled by
reason of the exercise of the option and (iii) by executing such documents as
the Company may reasonably request. The Committee shall have sole discretion to
disapprove of an election pursuant to any of clauses (2)-(5). Any fraction of a
share of Common Stock which would be required to pay such purchase price shall
be disregarded and the remaining amount due shall be paid in cash by the
optionee. No certificate representing Common Stock shall be delivered until the
full purchase price therefor has been paid.
(d) Additional Options. The Committee shall have the authority
to include in any Agreement relating to an option a provision entitling the
optionee to an additional option in the event such optionee exercises the option
represented by such option agreement, in whole or in part, by delivering
previously owned whole shares of Common Stock in payment of the purchase price
in accordance with this Plan and such Agreement. Any such additional option
shall be for a number of shares of Common Stock equal to the number of delivered
shares, shall have a purchase price determined by the Committee in accordance
with this Plan, shall be exercisable on the terms and subject to the conditions
set forth in the Agreement relating to such additional option.
2.2 STOCK APPRECIATION RIGHTS. The Committee may, in its
discretion, grant SARs to such eligible persons as may be selected by the
Committee. The Agreement relating to an SAR shall specify whether the SAR is a
Tandem SAR or a Free-Standing SAR.
SARs shall be subject to the following terms and conditions
and shall contain such additional terms and conditions, not inconsistent with
the terms of this Plan, as the Committee shall deem advisable:
(a) Number of SARs and Base Price. The number of SARs subject
to an award shall be determined by the Committee. Any Tandem SAR related to an
Incentive Stock
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<PAGE> 9
Option shall be granted at the same time that such Incentive Stock Option is
granted. The base price of a Tandem SAR shall be the purchase price per share of
Common Stock of the related option. The base price of a Free-Standing SAR shall
be determined by the Committee; provided, however, that such base price shall
not be less than 100% of the Fair Market Value of a share of Common Stock on the
date of grant of such SAR.
(b) Exercise Period and Exercisability. The Agreement relating
to an award of SARs shall specify whether such award may be settled in shares of
Common Stock (including shares of Restricted Stock) or cash or a combination
thereof. The period for the exercise of an SAR shall be determined by the
Committee; provided, however, that no Tandem SAR shall be exercised later than
the expiration, cancellation, forfeiture or other termination of the related
option. The Committee may, in its discretion, establish Performance Measures
which shall be satisfied or met as a condition to the exercisability of an SAR.
The Committee shall determine whether an SAR may be exercised in cumulative or
non-cumulative installments and in part or in full at any time. An exercisable
SAR, or portion thereof, may be exercised, in the case of a Tandem SAR, only
with respect to whole shares of Common Stock and, in the case of a Free-Standing
SAR, only with respect to a whole number of SARs. If an SAR is exercised for
shares of Restricted Stock, a certificate or certificates representing such
Restricted Stock shall be issued in accordance with Section 3.2(c) and the
holder of such Restricted Stock shall have such rights of a stockholder of the
Company as determined pursuant to Section 3.2(d). Prior to the exercise of an
SAR for shares of Common Stock, including Restricted Stock, the holder of such
SAR shall have no rights as a stockholder of the Company with respect to the
shares of Common Stock subject to such SAR.
(c) Method of Exercise. A Tandem SAR may be exercised (i) by
giving written notice to the Company specifying the number of whole SARs which
are being exercised, (ii) by surrendering to the Company any options which are
canceled by reason of the exercise of the Tandem SAR and (iii) by executing such
documents as the Company may reasonably request. A Free-Standing SAR may be
exercised (i) by giving written notice to the Company specifying the whole
number (or if the remaining SAR then exercisable is for less then one whole
share, such remaining amount) of SARs which are being exercised and (ii) by
executing such documents as the Company may reasonably request.
2.3 TERMINATION OF EMPLOYMENT OR SERVICE WITH THE COMPANY.
(a) Disability. Subject to paragraph (f) below and Section
6.8, and unless otherwise specified in the Agreement relating to an option or
SAR, as the case may be, if the employment or service with the Company of the
holder of an option or SAR terminates by reason of Disability, each option and
SAR held by such holder shall be exercisable only to the extent that such option
or SAR, as the case may be, is exercisable on the effective date of such
holder's termination of employment or service and may thereafter be exercised by
such holder (or such holder's legal representative or similar person) until and
including the earliest to occur of (i) the date which is three months (or such
other period as set forth in the Agreement relating to such option or SAR) after
the effective date of such holder's termination of employment or service and
(ii) the expiration date of the term of such option or SAR.
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<PAGE> 10
(b) Retirement. Subject to paragraph (f) below and Section
6.8, and unless otherwise specified in the Agreement relating to an option or
SAR, as the case may be, if the employment or service with the Company of the
holder of an option or SAR terminates by reason of retirement on or after age 65
with the consent of the Company, each option and SAR held by such holder shall
be exercisable only to the extent that such option or SAR, as the case may be,
is exercisable on the effective date of such holder's termination of employment
or service and may thereafter be exercised by such holder (or such holder's
legal representative or similar person) until and including the earliest to
occur of (i) the date which is six months (or such other period as set forth in
the Agreement relating to such option or SAR) after the effective date of such
holder's termination of employment or service and (ii) the expiration date of
the term of such option or SAR.
(c) Death. Subject to paragraph (f) below and Section 6.8, and
unless otherwise specified in the Agreement relating to an option or SAR, as the
case may be, if the employment or service with the Company of the holder of an
option or SAR terminates by reason of death, each option and SAR held by such
holder shall be exercisable only to the extent that such option or SAR, as the
case may be, is exercisable on the date of such holder's death, and may
thereafter be exercised by such holder's executor, administrator, legal
representative, beneficiary or similar person, as the case may be, until and
including the earliest to occur of (i) the date which is one year (or such other
period as set forth in the Agreement relating to such option or SAR) after the
date of death and (ii) the expiration date of the term of such option or SAR.
(d) Other Termination. If the employment or service with the
Company of the holder of an option or SAR is terminated by the Company for
Cause, each option and SAR held by such holder shall terminate automatically on
the effective date of such holder's termination of employment or service.
Subject to paragraph (f) below and Section 6.8, and unless
specified in the Agreement relating to an option or SAR, as the case may be, if
the employment or service with the Company of the holder of an option or SAR
terminates for any reason other than Disability, retirement on or after age 65
with the consent of the Company, death or Cause, each option and SAR held by
such holder shall be exercisable only to the extent that such option or SAR is
exercisable on the effective date of such holder's termination of employment or
service and may thereafter be exercised by such holder (or such holder's legal
representative or similar person) until and including the earliest to occur of
(i) the date which is three months (or such other period as set forth in the
Agreement relating to such option or SAR) after the effective date of such
holder's termination of employment or service and (ii) the expiration date of
the term of such option or SAR.
(e) Death Following Termination of Employment or Service.
Subject to paragraph (f) below and Section 6.8, and unless otherwise specified
in the Agreement relating to an option or SAR, as the case may be, if the holder
of an option or SAR dies during the three-month period following termination of
employment or service by reason of Disability, or if the holder of an option or
SAR dies during the three-month period following termination of employment or
service by reason of retirement on or after age 65 with the consent of the
Company, or if the holder of an option or SAR dies during the three-month period
following
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termination of employment or service for any reason other than Disability or
retirement on or after age 65 with the consent of the Company (or, in each case,
such other period as set forth in the Agreement relating to such option or SAR),
each option and SAR held by such holder shall be fully exercisable and may
thereafter be exercised by the holder's executor, administrator, legal
representative, beneficiary or similar person, as the case may be, until and
including the earliest to occur of (i) the date which is one year (or such other
period as set forth in the Agreement relating to such option or SAR) after the
date of death and (ii) the expiration date of the term of such option or SAR.
(f) Termination of Employment or Service - Incentive Stock
Options. Subject to Section 6.8 and unless otherwise specified in the Agreement
relating to the option, if the employment or service with the Company of a
holder of an incentive stock option terminates by reason of Permanent and Total
Disability (as defined in Section 22(e)(3) of the Code), each incentive stock
option held by such optionee shall be exercisable only to the extent that such
option is exercisable on the effective date of such optionee's termination of
employment or service by reason of Permanent and Total Disability, and may
thereafter be exercised by such optionee (or such optionee's legal
representative or similar person) until and including the earliest to occur of
(i) the date which is three months (or such other period no longer than one year
as set forth in the Agreement relating to such option) after the effective date
of such optionee's termination of employment or service by reason of Permanent
and Total Disability and (ii) the expiration date of the term of such option.
Subject to Section 6.8 and unless otherwise specified in the
Agreement relating to the option, if the employment or service with the Company
of a holder of an Incentive Stock Option terminates by reason of death, each
Incentive Stock Option held by such optionee shall be exercisable only to the
extent that such option is exercisable on the date of such optionee's death and
may thereafter be exercised by such optionee's executor, administrator, legal
representative, beneficiary or similar person until and including the earliest
to occur of (i) the date which is one year (or such shorter period as set forth
in the Agreement relating to such option) after the date of death and (ii) the
expiration date of the term of such option.
If the employment or service with the Company of the optionee
of an Incentive Stock Option is terminated by the Company for Cause, each
Incentive Stock Option held by such optionee shall terminate automatically on
the effective date of such optionee's termination of employment or service.
Subject to Section 6.8 and unless otherwise specified in the
Agreement relating to the option, if the employment or service with the Company
of a holder of an Incentive Stock Option terminates for any reason other than
Permanent and Total Disability, death or Cause, each Incentive Stock Option held
by such optionee shall be exercisable only to the extent such option is
exercisable on the effective date of such optionee's termination of employment
or service, and may thereafter be exercised by such holder (or such holder's
legal representative or similar person) until and including the earliest to
occur of (i) the date which is three months after the effective date of such
optionee's termination of employment or service and (ii) the expiration date of
the term of such option.
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If the holder of an Incentive Stock Option dies during the
three-month period following termination of employment or service by reason of
Permanent and Total Disability (or such shorter period as set forth in the
Agreement relating to such option), or if the holder of an Incentive Stock
Option dies during the three-month period following termination of employment or
service for any reason other than Permanent and Total Disability, death or
Cause, each Incentive Stock Option held by such optionee shall be exercisable
only to the extent such option is exercisable on the date of the optionee's
death and may thereafter be exercised by the optionee's executor, administrator,
legal representative, beneficiary or similar person until and including the
earliest to occur of (i) the date which is one year (or such shorter period as
set forth in the Agreement relating to such option) after the date of death and
(ii) the expiration date of the term of such option.
III. STOCK AWARDS
3.1 STOCK AWARDS. The Committee may, in its discretion, grant
Stock Awards to such eligible persons as may be selected by the Committee.
Subject to adjustment as provided in Sections 6.7 and 6.8 of this Plan, the
aggregate number of shares of Common Stock available under this Plan pursuant to
all Stock Awards shall not exceed 100,000 of the aggregate number of shares of
Common Stock available under this Plan. The Agreement relating to a Stock Award
shall specify whether the Stock Award is a Restricted Stock Award or Bonus Stock
Award.
3.2 TERMS OF STOCK AWARDS. Stock Awards shall be subject to
the following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of this Plan, as the Committee shall
deem advisable.
(a) Number of Shares and Other Terms. The number of shares of
Common Stock subject to a Restricted Stock Award or Bonus Stock Award and the
Performance Measures (if any) and Restriction Period applicable to a Restricted
Stock Award shall be determined by the Committee.
(b) Vesting and Forfeiture. The Agreement relating to a
Restricted Stock Award shall provide, in the manner determined by the Committee,
in its discretion, and subject to the provisions of this Plan, for the vesting
of the shares of Common Stock subject to such award (i) if specified Performance
Measures are satisfied or met during the specified Restriction Period or (ii) if
the holder of such award remains continuously in the employment or service of
the Company during the specified Restricted Period and for the forfeiture of the
shares of Common Stock subject to such award (x) if specified Performance
Measures are not satisfied or met during the specified Restriction Period or (y)
if the holder of such award does not remain continuously in the employment or
service of the Company during the specified Restriction Period.
Bonus Stock Awards shall not be subject to any Performance
Measures or Restriction Periods.
(c) Share Certificates. During the Restriction Period, a
certificate or certificates representing a Restricted Stock Award shall be
registered in the holder's name and
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may bear a legend, in addition to any legend which may be required pursuant to
Section 6.6, indicating that the ownership of the shares of Common Stock
represented by such certificate is subject to the restrictions, terms and
conditions of this Plan and the Agreement relating to the Restricted Stock
Award. All such certificates shall be deposited with the Company, together with
stock powers or other instruments of assignment (including a power of attorney),
each endorsed in blank with a guarantee of signature if deemed necessary or
appropriate, which would permit transfer to the Company of all or a portion of
the shares of Common Stock subject to the Restricted Stock Award in the event
such award is forfeited in whole or in part. Upon termination of any applicable
Restriction Period (and the satisfaction or attainment of applicable Performance
Measures), or upon the grant of a Bonus Stock Award, in each case subject to the
Company's right to require payment of any taxes in accordance with Section 6.5,
a certificate or certificates evidencing ownership of the requisite number of
shares of Common Stock shall be delivered to the holder of such award.
(d) Rights with Respect to Restricted Stock Awards. Unless
otherwise set forth in the Agreement relating to a Restricted Stock Award, and
subject to the terms and conditions of a Restricted Stock Award, the holder of
such award shall have all rights as a stockholder of the Company, including, but
not limited to, voting rights, the right to receive dividends and the right to
participate in any capital adjustment applicable to all holders of Common Stock;
provided, however, that a distribution with respect to shares of Common Stock,
other than a distribution in cash, shall be deposited with the Company and shall
be subject to the same restrictions as the shares of Common Stock with respect
to which such distribution was made.
(e) Awards to Certain Executive Officers. Notwithstanding any
other provision of this Article III, and only to the extent necessary to ensure
the deductibility of the award to the Company, the Fair Market Value of the
number of shares of Common Stock subject to a Stock Award granted to a "covered
employee" within the meaning of Section 162(m) of the Code shall not exceed
$2,000,000 (i) at the time of grant in the case of a Stock Award granted upon
the attainment of Performance Measures or (ii) in the case of a Restricted Stock
Award with Performance measures which shall be satisfied or met as a condition
to the holder's receipt of the shares of Common Stock subject to such award, on
the earlier of (x) the date on which the Performance Measures are satisfied or
met and (y) the date the holder makes an election under Section 83(b) of the
Code.
3.3 TERMINATION OF EMPLOYMENT OR SERVICE. Subject to Section
6.8 and unless otherwise set forth in the Agreement relating to a Restricted
Stock Award, if the employment or service with the Company of the holder of such
award terminates, the portion of such award which is subject to a Restriction
Period shall terminate as of the effective date of such holder's termination of
employment or service shall be forfeited and such portion shall be canceled by
the Company.
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IV. PERFORMANCE SHARE AWARDS
4.1 PERFORMANCE SHARE AWARDS. The Committee may, in its
discretion, grant Performance Share Awards to such eligible persons as may be
selected by the Committee.
4.2 TERMS OF PERFORMANCE SHARE AWARDS. Performance Share
Awards shall be subject to the following terms and conditions and shall contain
such additional terms and conditions, not inconsistent with the terms of this
Plan, as the Committee shall deem advisable.
(a) Number of Performance Shares and Performance Measures. The
number of Performance Shares subject to any award and the Performance Measures
and Performance Period applicable to such award shall be determined by the
Committee.
(b) Vesting and Forfeiture. The Agreement relating to a
Performance Share Award shall provide, in the manner determined by the
Committee, in its discretion, and subject to the provisions of this Plan, for
the vesting of such award, if specified Performance Measures are satisfied or
met during the specified Performance Period, and for the forfeiture of such
award, if specified Performance Measures are not satisfied or met during the
specified Performance Period.
(c) Settlement of Vested Performance Share Awards. The
Agreement relating to a Performance Share Award (i) shall specify whether such
award may be settled in shares of Common Stock (including shares of Restricted
Stock) or cash or a combination thereof and (ii) may specify whether the holder
thereof shall be entitled to receive, on a current or deferred basis, dividend
equivalents, and, if determined by the Committee, interest on any deferred
dividend equivalents, with respect to the number of shares of Common Stock
subject to such award. If a Performance Share Award is settled in shares of
Restricted Stock, a certificate or certificates representing such Restricted
Stock shall be issued in accordance with Section 3.2(c) and the holder of such
Restricted Stock shall have such rights of a stockholder of the Company as
determined pursuant to Section 3.2(d). Prior to the settlement of a Performance
Share Award in shares of Common Stock, including Restricted Stock, the holder of
such award shall have no rights as a stockholder of the Company with respect to
the shares of Common Stock subject to such award.
4.3 TERMINATION OF EMPLOYMENT OR SERVICE. Subject to Section
6.8 and unless otherwise set forth in the Agreement relating to a Performance
Share Award, if the employment or service with the Company of the holder of such
award terminates, the portion of such award which is subject to a Performance
Period on the effective date of such holder's termination of employment or
service shall be forfeited and such portion shall be canceled by the Company.
V. PROVISIONS RELATING TO NON-EMPLOYEE DIRECTORS
5.1 ELIGIBILITY. Each Non-Employee Director shall be granted
options to purchase shares of Common Stock in accordance with this Article V
(collectively "Directors Options"). All options granted under this Article V
shall constitute Non-Statutory Stock Options.
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5.2 GRANTS OF STOCK OPTIONS. Each Non-Employee Director may be
granted Non-Statutory Stock Options in the discretion of the Committee (subject
to approval by the Board).
5.3 TERMINATION OF DIRECTORSHIP.
(a) Disability. Subject to Section 6.8, if the holder of an
option granted pursuant to this Article V ceases to be a director of the Company
by reason of Disability, each such option held by such holder shall be
exercisable only to the extent that such option is exercisable on the effective
date of such holder's ceasing to be a director and may thereafter be exercised
by such holder (or such holder's guardian, legal representative or similar
person) until the earliest to occur of the (i) date which is three months after
the effective date of such holder's ceasing to be a director and (ii) the
expiration date of the term of such option.
(b) Retirement. Subject to Section 6.8, if the holder of an
option granted pursuant to this Article V ceases to be a director of the Company
on or after age 65, each such option held by such holder shall be exercisable
only to the extent that such option is exercisable on the effective date of such
holder's ceasing to be a director and may thereafter be exercised by such holder
(or such holder's legal representative or similar person) until the earliest to
occur of the (i) date which is three months after the effective date of such
holder's ceasing to be a director and (ii) the expiration date of the term of
such option.
(c) Death. Subject to Section 6.8, if the holder of an option
granted pursuant to this Article V ceases to be a director of the Company by
reason of death, each such option held by such holder shall be fully exercisable
and may thereafter be exercised by such holder's executor, administrator, legal
representative, beneficiary or similar person, as the case may be, until the
earliest to occur of the (i) date which is one year after the date of death and
(ii) the expiration date of the term of such option.
(d) Other Termination. Subject to Section 6.8, if the holder
of an option granted pursuant to this Article V ceases to be a director of the
Company for any reason other than Disability, retirement on or after age 65 or
death, each such option held by such holder shall be exercisable only to the
extent such option is exercisable on the effective date of such holder's ceasing
to be a director and may thereafter be exercised by such holder (or such
holder's legal representative or similar person) until the earliest to occur of
the (i) date which is three months after the effective date of such holder's
ceasing to be a director and (ii) the expiration date of the term of such
option.
(e) Death Following Termination of Directorship. Subject to
Section 6.8, if the holder of an option granted pursuant to this Article V dies
during the three-month period following such holder's ceasing to be a director
of the Company by reason of Disability, or if such a holder dies during the
three-month period following such holder's ceasing to be a director of the
Company on or after age 65, or if such a holder dies during the three-month
period following such holder's ceasing to be a director for any reason other
than by reason of Disability or retirement on or after age 65, each such option
held by such holder shall be exercisable only to the extent that such option is
exercisable on the date of the holder's death and may thereafter be exercised by
the holder's executor, administrator, legal representative, beneficiary or
similar
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person, as the case may be, until the earliest to occur of the (i) date one year
after the date of death and (ii) the expiration date of the term of such option.
5.4 DIRECTORS OPTIONS. Each Directors Option shall be subject
to the following terms and conditions and shall contain such additional terms
and conditions, not inconsistent with the terms of this Plan, as the Committee
shall deem advisable:
(a) Option Period and Exercisability. If at any time prior to
the time that a Directors Option becomes exercisable, a Non-Employee Director
shall no longer be a member of the Board, such Directors Option shall become
void and of no further force or effect.
(b) Purchase Price. The purchase price for the shares of
Common Stock subject to any Directors Option shall be equal to 100% of the Fair
Market Value of a share of Common Stock on the date of grant of such Directors
Option. Such Directors Options shall be exercisable in accordance with Section
2.1(c).
(c) Restrictions on Transfer. Directors Options shall be
subject to the transfer restrictions and other provisions of Section 6.4.
(d) Expiration. Each Directors Option which has become
exercisable pursuant to Section 5.4(a), to the extent not theretofore exercised,
shall expire on the first to occur of (i) the date which is three months after
the first date on which the Non-Employee Director shall no longer be a member of
the Board or the Board of Directors of a Subsidiary and (ii) the tenth
anniversary of the date of grant of such option; provided, however, that if the
Non-Employee Director shall die within such three-month period following the
date on which he shall have ceased to serve as such a director, such option may
be exercised at any time within the one-year period following the date of death
to the extent not theretofore exercised (but in no event later than the tenth
anniversary of the date of grant).
VI. GENERAL
6.1 EFFECTIVE DATE AND TERM OF PLAN; SUBMISSION TO
STOCKHOLDERS. This Plan became effective immediately upon its approval by the
Board. This Plan shall terminate ten years after its effective date unless
terminated earlier by the Board. Termination of this Plan shall not affect the
terms or conditions of any award granted prior to termination. Awards hereunder
may be made at any time prior to the termination of this Plan, provided that no
award may be made later than ten years after the effective date of this Plan.
This Plan, as amended to increase the available shares from
400,000 to 1,000,000, shall be submitted to the stockholders of the Company for
approval. Unless the Plan is approved, as so amended, by the affirmative vote of
a majority of the voting power of the shares of capital stock of the Company
represented at a meeting in which the Plan is considered for approval, no
further awards may be made under the Plan to any director or officer of the
Company; provided that awards may be made to a person not previously employed by
the Company as an inducement essential to such person's entering into an
employment contract with the Company.
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6.2 AMENDMENTS. The Board may amend this Plan as it shall deem
advisable, subject to any requirement of stockholder approval required by
applicable law, rule or regulation including Section 162(m) of the Code;
provided, however, that no amendment shall be made without stockholder approval
if such amendment would (a) reduce the minimum purchase price in the case of an
option or the base price in the case of an SAR, (b) effect any change
inconsistent with Section 422 of the Code, (c) extend the term of this Plan or
(d) eliminate or have the effect of eliminating the provision set forth in
Section 6.12. No amendment may impair the rights of a holder of an outstanding
award without the consent of such holder.
6.3 AGREEMENT. Each award under this Plan shall be evidenced
by an Agreement setting forth the terms and conditions applicable to such award.
No award shall be valid until an Agreement is executed by the Company and the
recipient of such award and, upon execution by each party and delivery of the
Agreement to the Company, such award shall be effective as of the effective date
set forth in the Agreement.
6.4 NON-TRANSFERABILITY OF STOCK OPTIONS, SARS AND PERFORMANCE
SHARES. No option, SAR or Performance Share shall be transferable other than (i)
by will, the laws of descent and distribution or pursuant to beneficiary
designation procedures approved by the Company or (ii) as otherwise set forth in
the Agreement relating to such award. Each option, SAR or Performance Share may
be exercised or settled during the participant's lifetime only by the holder or
the holder's legal representative or similar person. Except as permitted by the
second preceding sentence, no option, SAR or Performance Share may be sold,
transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed
of (whether by operation of law or otherwise) or be subject to execution,
attachment or similar process. Upon any attempt to so sell, transfer, assign,
pledge, hypothecate, encumber or otherwise dispose of any option, SAR or
Performance Share, such award and all rights thereunder shall immediately become
null and void.
6.5 TAX WITHHOLDING. The Company shall have the right to
require, prior to the issuance or delivery of any shares of Common Stock or the
payment of any cash pursuant to an award made hereunder, payment by the holder
of such award of any Federal, state, local or other taxes which may be required
to be withheld or paid in connection with such award. An Agreement may provide
that (i) the Company shall withhold whole shares of Common Stock which would
otherwise be delivered to a holder, having an aggregate Fair Market Value
determined as of the date the obligation to withhold or pay taxes arises in
connection with an award (the "Tax Date"), or withhold an amount of cash which
would otherwise be payable to a holder, in the amount necessary to satisfy any
such obligation or (ii) the holder may satisfy any such obligation by any of the
following means: (1) a cash payment to the Company, (2) delivery to the Company
of Mature Shares having an aggregate Fair Market Value, determined as of the Tax
Date, equal to the amount necessary to satisfy any such obligation, (3)
authorizing the Company to withhold whole shares of Common Stock which would
otherwise be delivered having an aggregate Fair Market Value, determined as of
the Tax Date, or withhold an amount of cash which would otherwise be payable to
a holder, equal to the amount necessary to satisfy any such obligation, (4) in
the case of the exercise of an option, a cash payment by a broker-dealer
acceptable to the Company to whom the optionee has submitted an irrevocable
notice of exercise or (5) any combination of (1), (2) and (3), in each case to
the extent set forth in the Agreement relating to the award; provided, however,
that the Committee shall have sole discretion to
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disapprove of an election pursuant to any of clauses (2)-(5). An Agreement may
provide for shares of Common Stock to be delivered or withheld having an
aggregate Fair Market Value in excess of the minimum amount required to be
withheld. Any fraction of a share of Common Stock which would be required to
satisfy such an obligation shall be disregarded and the remaining amount due
shall be paid in cash by the holder.
6.6 RESTRICTIONS ON SHARES. Each award made hereunder shall be
subject to the requirement that if at any time the Company determines that the
listing, registration or qualification of the shares of Common Stock subject to
such award upon any securities exchange or under any law, or the consent or
approval of any governmental body, or the taking of any other action is
necessary or desirable as a condition of, or in connection with, the delivery of
shares thereunder, such shares shall not be delivered unless such listing,
registration, qualification, consent, approval or other action shall have been
effected or obtained, free of any conditions not acceptable to the Company. The
Company may require that certificates evidencing shares of Common Stock
delivered pursuant to any award made hereunder bear a legend indicating that the
sale, transfer or other disposition thereof by the holder is prohibited except
in compliance with the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
6.7 ADJUSTMENT. Except as provided in Section 6.8, in the
event of any stock split, stock dividend, recapitalization, reorganization,
merger, consolidation, combination, exchange of shares, liquidation, spin-off or
other similar change in capitalization or event, or any distribution to holders
of Common Stock other than a regular cash dividend, the number and class of
securities available under this Plan, the number and class of securities subject
to each outstanding option and the purchase price per security, the number of
securities subject to each option to be granted to Non-Employee Directors
pursuant to Article V, the terms of each outstanding SAR, the number and class
of securities subject to each outstanding Stock Award, and the terms of each
outstanding Performance Share shall be appropriately adjusted by the Committee,
such adjustments to be made in the case of outstanding options and SARs without
an increase in the aggregate purchase price or base price. The decision of the
Committee regarding any such adjustment shall be final, binding and conclusive.
If any such adjustment would result in a fractional security being (a) available
under this Plan, such fractional security shall be disregarded, or (b) subject
to an award under this Plan, the Company shall pay the holder of such award, in
connection with the first vesting, exercise or settlement of such award, in
whole or in part, occurring after such adjustment, an amount in cash determined
by multiplying (i) the fraction of such security (rounded to the nearest
hundredth) by (ii) the excess, if any, of (1) the Fair Market Value on the
vesting, exercise or settlement date over (2) the exercise or base price, if
any, of such award.
6.8 CHANGE IN CONTROL.
(a) (i) Notwithstanding any provision in this Plan or any
Agreement, in the event of a Change in Control pursuant to Section
(b)(iii) or (iv) below, (1) all outstanding options and SARS shall
immediately become exercisable in full, (2) the Restriction Period
applicable to any outstanding Restricted Stock Award shall lapse, (3)
the Performance Period applicable to any outstanding Performance Share
shall lapse and (4) the Performance Measures applicable to any
outstanding Restricted Stock Award (if
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any) and to any outstanding Performance Share shall be deemed to be
satisfied at the maximum level. If, in connection with such Change in
Control, holders of Common Stock receive solely shares of common stock
that are registered under Section 12 of the Exchange Act, there shall
be substituted for each share of Common Stock available under this
Plan, whether or not then subject to an outstanding award, the number
and class of shares into which each outstanding share of Common Stock
shall be converted pursuant to such Change in Control. If, in
connection with such Change in Control, holders of Common Stock receive
solely cash and shares of common stock that are registered under
Section 12 of the Exchange Act, each outstanding award shall be
surrendered to and canceled by the Company, and the holder shall
receive, within ten days of the occurrence of such Change in Control, a
proportionate amount of cash in the manner provided in Section (a)(ii)
below, and there shall be substituted for the award surrendered a
similar award reflecting a proportionate number of the class of shares
into which each outstanding share of Common Stock shall be converted to
such Change in Control. In the event of any such substitution, the
proportion of cash and common stock, the purchase price per share in
the case of an option and the base price in the case of an SAR, and any
other terms of outstanding awards shall be appropriately adjusted by
the Committee, such adjustments to be made in the case of outstanding
options and SARs without an increase in the aggregate purchase price or
base price; provided, that the proportion of cash and common stock
substituted for outstanding awards shall reflect the approximate
proportion of cash and common stock received by holders of Common Stock
in such Change in Control. If, in connection with a Change in Control,
holders of Common Stock receive any portion of the consideration in a
form other than cash or shares of common stock that are registered
under Section 12 of the Exchange Act, each share of Common Stock
available under this Plan, whether or not then subject to an
outstanding award, shall be substituted or surrendered for such
proportion of common stock, cash or other consideration as shall be
determined by the Committee pursuant to Section 6.7.
(ii) Notwithstanding any provision in this Plan or any
Agreement, in the event of a Change in Control pursuant to Section
(b)(i) or (ii) below, or in the event of a Change in Control pursuant
to Section (b)(iii) or (iv) below in connection with which the holders
of Common Stock receive cash, each outstanding award shall be
surrendered to the Company by the holder thereof, and each such award
shall immediately be canceled by the Company, and the holder shall
receive, within ten days of the occurrence of a Change in Control
pursuant to Section (b)(i) or (ii) below or within ten days of the
approval of the stockholders of the Company contemplated by Section
(b)(iii) or (iv) below, a cash payment from the Company in an amount
equal to (1) in the case of an option, the number of shares of Common
Stock then subject to such option, multiplied by the excess, if any, of
the greater of (A) the highest per share price offered to stockholders
of the Company in any transaction whereby the Change in Control takes
place or (B) the Fair Market Value of a share of Common Stock on the
date of occurrence of the Change in Control, over the purchase price
per share of Common Stock subject to the option; (2) in the case of a
Free-Standing SAR, the number of shares of Common Stock then subject to
such SAR, multiplied by the excess, if any, of the greater of (A) the
highest per share price offered to stockholders of the Company in any
transaction whereby the Change in Control takes place or (B) the Fair
Market Value of a share of Common Stock on the date of occurrence of
the Change in Control, over the base price of the SAR; and (3) in the
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case of a Restricted Stock Award or Performance Share Award, the number
of shares of Common Stock or the number of Performance Shares, as the
case may be, then subject to such award, multiplied by the greater of
(A) the highest per share price offered to stockholders of the Company
in any transaction whereby the Change in Control takes place or (B) the
Fair Market Value of a share of Common Stock on the date of occurrence
of the Change in Control. In the event of a Change in Control, each
Tandem SAR shall be surrendered by the holder thereof and shall be
canceled simultaneously with the cancellation of the related option.
Except as may be provided in an agreement relating to an award, the
Company may, but is not required to, cooperate with any person who is
subject to Section 16 of the Exchange Act to assure that any cash
payment in accordance with the foregoing to such person is made in
compliance with Section 16 and the rules and regulations thereunder.
(b) "Change in Control" shall mean:
(i) the acquisition by any individual, entity or group (a
"Person"), including any "person" within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act, of Beneficial Ownership of
25% or more of either (1) the then outstanding shares of common stock
of the Company (the "Outstanding Company Common Stock") or (2) the
combined voting power of the then outstanding securities of the Company
entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); excluding, however, the
following: (A) any acquisition directly from the Company (excluding any
acquisition resulting from the exercise of an exercise, conversion or
exchange privilege unless the security being so exercised, converted or
exchanged was acquired directly from the Company), (B) any acquisition
by the Company, (C) any acquisition by an employee benefit plan (or
related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, (D) any acquisition by an Exempt
Person or (E) any acquisition by any corporation pursuant to a
transaction which complies with clauses (1), (2) and (3) of subsection
(iii) of this Section 6.8(b); provided further, that for purposes of
clause (2), if any Person (other than an Exempt Person, the Company or
any employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company) shall become
the Beneficial Owner of 50% or more of the Outstanding Company Common
Stock or 50% or more of the Outstanding Company Voting Securities by
reason of an acquisition by the Company, and such Person shall, after
such acquisition by the Company, become the Beneficial Owner of any
additional shares of the Outstanding Company Common Stock or any
additional Outstanding Company Voting Securities and such Beneficial
Ownership is publicly announced, such additional Beneficial Ownership
shall constitute a Change in Control;
(ii) individuals who, as of the effective date hereof,
constitute the Board of Directors (the "Incumbent Board") cease for any
reason to constitute at least a majority of such Board; provided that
any individual who becomes a director of the Company subsequent to the
effective date hereof whose election, or nomination for election by the
Company's stockholders, was approved by the vote of at least a majority
of the directors then comprising the Incumbent Board shall be deemed a
member of the Incumbent Board; and provided further, that any
individual who was initially elected as a director of
20
<PAGE> 21
the Company as a result of an actual or threatened election contest, as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under
the Exchange Act, or any other actual or threatened solicitation of
proxies or consents by or on behalf of any Person other than the Board
shall not be deemed a member of the Incumbent Board;
(iii) approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of
all or substantially all of the assets of the Company (a "Corporate
Transaction"); excluding, however, a Corporate Transaction pursuant to
which (1) all or substantially all of the individuals or entities who
are the Beneficial Owners, respectively, of the Outstanding Company
Common Stock and the Outstanding Company Voting Securities immediately
prior to such Corporate Transaction will Beneficially Own, directly or
indirectly, more than 50% of, respectively, the outstanding shares of
common stock, and the combined voting power of the outstanding
securities of such corporation entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Corporate Transaction (including, without limitation, a
corporation which as a result of such transaction owns the Company or
all or substantially all of the Company's assets either directly or
indirectly) in substantially the same proportions relative to each
other as their Beneficial Ownership, immediately prior to such
Corporate Transaction, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities, as the case may be, (2) no
Person (other than an Exempt Person; the Company; any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company; the corporation resulting from
such Corporate Transaction; and any Person which Beneficially Owned,
immediately prior to such Corporate Transaction, directly or
indirectly, 50% or more of the Outstanding Company Common Stock or the
Outstanding Company Voting Securities, as the case may be) will
Beneficially Own, directly or indirectly, 50% or more of, respectively,
the outstanding shares of common stock of the corporation resulting
from such Corporate Transaction or the combined voting power of the
outstanding securities of such corporation entitled to vote generally
in the election of directors and (3) individuals who were members of
the Incumbent Board will constitute at least a majority of the members
of the board of directors of the corporation resulting from such
Corporate Transaction; or
(iv) approval by the stockholders of the Company of a plan of
complete liquidation or dissolution of the Company.
Notwithstanding anything to the contrary herein, no Change of
Control shall be deemed to have taken place as a result of the issuance of
shares of Common Stock by the Company or the sale of shares of Common Stock by
its stockholders in connection with the Company's initial public offering.
6.9 NO RIGHT OF PARTICIPATION OR EMPLOYMENT/SERVICE. No person
shall have any right to participate in this Plan. Neither this Plan nor any
award made hereunder shall confer upon any person any right to continued
employment or service by the Company, any Subsidiary or any affiliate of the
Company or affect in any manner the right of the Company, any Subsidiary or any
affiliate of the Company to terminate the employment or service of any person at
any time without liability hereunder.
21
<PAGE> 22
6.10 RIGHTS AS STOCKHOLDER. No person shall have any right as
a stockholder of the Company with respect to any shares of Common Stock or other
equity security of the Company which is subject to an award hereunder unless and
until such person becomes a stockholder of record with respect to such shares of
Common Stock or equity security.
6.11 GOVERNING LAW. This Plan, each award hereunder and the
related Agreement, and all determinations made and actions taken pursuant
thereto, to the extent not otherwise governed by the Code or the laws of the
United States, shall be governed by the laws of the State of Delaware and
construed in accordance therewith without giving effect to principles of
conflicts of laws.
6.12 REPRICING AWARDS. The exercise price or base price, as
the case may be, of any award granted hereunder shall not be changed after the
date of grant of such award without the affirmative vote of a majority of the
voting power of the shares of capital stock of the Company represented at a
meeting in which the change to such exercise price or base price is considered
for approval.
22
<PAGE> 1
EXHIBIT 10.3
[Executive Officer Form]
SEVERANCE AGREEMENT
THIS AGREEMENT is entered into as of the ___ day of
__________, 1996 by and between Whitehall Jewellers, Inc., a
Delaware corporation, and _______________ ("Executive").
W I T N E S S E T H
WHEREAS, Executive currently serves as a key employee of the
Company (as defined in Section 1) and his or her services and knowledge are
valuable to the Company in connection with the management of one or more of the
Company's principal operating facilities, divisions, departments or
subsidiaries;
WHEREAS, concurrently with the execution hereof Executive and
the Company are terminating Executive's employment agreement with the Company,
which employment agreement provided for substantial benefits (including
severance); and
WHEREAS, the Board (as defined in Section 1) has determined
that it is in the best interests of the Company and its stockholders to secure
Executive's continued services, and to encourage Executive's full attention and
dedication to the Company, the Board has authorized the Company to enter into
this Agreement.
NOW, THEREFORE, for and in consideration of the premises and
the mutual covenants and agreements herein contained, the Company and Executive
hereby agree as follows:
1. Definitions. As used in this Agreement, the following
terms shall have the respective meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause means (1) the commission by Executive of a felony
involving moral turpitude or (2) any material breach of any statutory or common
law duty to the Company or any subsidiary involving willful malfeasance.
Activities undertaken by Executive in accordance with the letter from the
Company to Executive dated February 12, 1996 and the related amendment of such
date to Executive's prior Employment Agreement dated August 30, 1995 (as
amended) with the Company (notwithstanding the fact that such
<PAGE> 2
Employment Agreement was terminated) shall not constitute "Cause."
(c) "Change in Control" means:
(1) the acquisition by any individual, entity or group (a
"Person"), including any "person" within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated
under the Exchange Act, of 25% or more of either (i) the then outstanding shares
of common stock of the Company (the "Outstanding Company Common Stock") or (ii)
the combined voting power of the then outstanding securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Company Voting Securities"); provided, however, that the following acquisitions
shall not constitute a Change in Control: (A) any acquisition directly from the
Company (excluding any acquisition resulting from the exercise of a conversion
or exchange privilege in respect of outstanding convertible or exchangeable
securities), (B) any acquisition by an employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company, (C) any acquisition by an Exempt Person, or (D) any acquisition by any
corporation pursuant to a reorganization, merger or consolidation involving the
Company, if, immediately after such reorganization, merger or consolidation,
each of the conditions described in clauses (i), (ii) and (iii) of subsection
(3) of this Section (1)(c) shall be satisfied;
(2) individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of such Board; provided, however, that any individual who becomes a
director of the Company subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by the vote
of at least a majority of the directors then comprising the Incumbent Board
shall be deemed to have been a member of the Incumbent Board; and provided
further, that no individual who was initially elected as a director of the
Company as a result of an actual or threatened election contest, as such terms
are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or
any other actual or threatened solicitation of proxies or consents by or on
behalf of any Person other than the Board shall be deemed to have been a member
of the Incumbent Board;
(3) approval by the stockholders of the Company of a
reorganization, merger or consolidation unless, in any such case, immediately
after such reorganization, merger or consolidation, (i) more than 60% of the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or
<PAGE> 3
consolidation and more than 60% of the combined voting power of the then
outstanding securities of such corporation entitled to vote generally in the
election of directors is then beneficially owned, directly or indirectly, by all
or substantially all of the individuals or entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities immediately prior to such reorganization,
merger or consolidation and in substantially the same proportions relative to
each other as their ownership, immediately prior to such reorganization, merger
or consolidation, of the Outstanding Company Common Stock and the Outstanding
Company Voting Securities, as the case may be, (ii) no Person (other than the
Company, any employee benefit plan (or related trust) sponsored or maintained by
the Company or the corporation resulting from such reorganization, merger or
consolidation (or any corporation controlled by the Company) and any Person
which beneficially owned, immediately prior to such reorganization, merger or
consolidation, directly or indirectly, 25% or more of the Outstanding Company
Common Stock or the Outstanding Company Voting Securities, as the case may be)
beneficially owns, directly or indirectly, 25% or more of the then outstanding
shares of common stock of such corporation or 25% or more of the combined voting
power of the then outstanding securities of such corporation entitled to vote
generally in the election of directors and (iii) at least a majority of the
members of the board of directors of the corporation resulting from such
reorganization, merger or consolidation were members of the Incumbent Board at
the time of the execution of the initial agreement or action of the Board
providing for such reorganization, merger or consolidation; or
(4) approval by the stockholders of the Company of (i) a plan
of complete liquidation or dissolution of the Company or (ii) the sale or other
disposition of all or substantially all of the assets of the Company other than
to a corporation with respect to which, immediately after such sale or other
disposition, (A) more than 60% of the then outstanding shares of common stock
thereof and more than 60% of the combined voting power of the then outstanding
securities thereof entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and the Outstanding Company Voting
Securities immediately prior to such sale or other disposition and in
substantially the same proportions relative to each other as their ownership,
immediately prior to such sale or other disposition, of the Outstanding Company
Common Stock and the Outstanding Company Voting Securities, as the case may be,
(B) no Person (other than the Company, any employee benefit plan (or related
trust) sponsored or maintained by the Company or such corporation (or
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<PAGE> 4
any corporation controlled by the Company) and any Person which beneficially
owned, immediately prior to such sale or other disposition, directly or
indirectly, 25% or more of the Outstanding Company Common Stock or the
Outstanding Company Voting Securities, as the case may be) beneficially owns,
directly or indirectly, 25% or more of the then outstanding shares of common
stock thereof or 25% or more of the combined voting power of the then
outstanding securities thereof entitled to vote generally in the election of
directors and (C) at least a majority of the members of the board of directors
thereof were members of the Incumbent Board at the time of the execution of the
initial agreement or action of the Board providing for such sale or other
disposition.
(d) "Company" means Whitehall Jewellers, Inc., a Delaware
corporation.
(e) "Date of Termination" means (1) the effective date on
which Executive's employment by the Company terminates as specified in a prior
written notice by the Company or Executive, as the case may be, to the other,
delivered pursuant to Section 11 or (2) if Executive's employment by the Company
terminates by reason of death, the date of death of Executive.
(f) "Exempt Person" means each of Hugh M. Patinkin, John R.
Desjardins, Matthew M. Patinkin and any Affiliate (as such term is defined in
Rule 12b-1 under the Securities Exchange Act of 1934, as in effect on the date
hereof, "Affiliate) thereof and, until consummation of the Company's initial
public offering, Frontenac Company and any Affiliate thereof.
(g) "Good Reason" means, without Executive's express written
consent, the occurrence of any of the following events:
(1) any of (i) the assignment to Executive of any duties
inconsistent in any material respect with Executive's position(s), duties,
responsibilities or status with the Company as of the date of this Agreement or,
if a Change in Control has occurred, immediately prior to such Change in
Control, (ii) a change in Executive's reporting responsibilities, titles or
offices with the Company as in effect on the date of this Agreement or, if a
Change in Control has occurred, immediately prior to such Change in Control or
(iii) any removal or involuntary termination of Executive from the Company
otherwise than as expressly permitted by this Agreement or any failure to
re-elect Executive to any position with the Company held by Executive on the
date of this Agreement or, if a Change in Control has occurred, immediately
prior to such Change in Control;
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<PAGE> 5
(2) a reduction by the Company in Executive's rate of annual
base salary as in effect on the date of this Agreement or, if a Change in
Control has occurred, immediately prior to such Change in Control or as the same
may be increased from time to time thereafter;
(3) any requirement of the Company that Executive (i) be based
anywhere other than at the facility where the Executive is located on the date
of this Agreement (or a new headquarters facility [in downtown Chicago] [within
a 30-mile radius of the Company's current headquarters]) or (ii) travel on
Company business to an extent substantially more burdensome than the travel
obligations of Executive immediately prior to the date hereof or, if a Change in
Control has occurred, immediately prior to such Change in Control;
(4) the failure of the Company to (i) continue in effect any
employee benefit plan or compensation plan in which Executive is participating
immediately prior to the date of this Agreement or, if a Change in Control has
occurred, prior to such Change in Control, unless Executive is permitted to
participate in other plans providing Executive with substantially comparable
benefits, or the taking of any action by the Company which would adversely
affect Executive's participation in or materially reduce Executive's benefits
under any such plan, (ii) provide Executive and Executive's dependents welfare
benefits (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for Executive immediately prior to the date of
this Agreement or, if a Change in Control has occurred, prior to such Change in
Control or, if more favorable to Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies, (iii) provide fringe benefits in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for Executive immediately prior to the date of
this Agreement or, if a Change in Control has occurred, prior to such Change in
Control or, if more favorable to Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies, (iv) provide an office or offices of a size and with
furnishings and other appointments, together with personal secretarial and other
assistance, at least equal to the most favorable of the foregoing provided to
Executive by the Company and its affiliated companies immediately prior to the
date of this Agreement or, if a Change in Control has occurred, prior to such
Change in Control or, if more favorable to Executive, as provided generally at
any time thereafter with respect to other peer executives of the Company
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<PAGE> 6
and its affiliated companies, (v) provide Executive with paid vacation in
accordance with the most favorable plans, policies, programs and practices of
the Company and its affiliated companies as in effect for Executive immediately
prior to the date of this Agreement or, if a Change in Control has occurred,
prior to such Change in Control or, if more favorable to Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies, or (vi) reimburse Executive promptly for
all reasonable employment expenses incurred by Executive in accordance with the
most favorable policies, practices and procedures of the Company and its
affiliated companies in effect for Executive immediately prior to the date of
this Agreement or, if a Change in Control has occurred, prior to such Change in
Control, or if more favorable to Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies; or
(5) the failure of the Company to obtain the assumption
agreement from any successor as contemplated in Section 9(b).
For purposes of this Agreement, any good faith determination
of Good Reason made by Executive shall be conclusive; provided, however, that an
isolated, insubstantial and inadvertent action taken in good faith and which is
remedied by the Company promptly after receipt of notice thereof given by
Executive shall not constitute Good Reason.
(h) "Nonqualifying Termination" means a termination of
Executive's employment (1) by the Company for Cause, (2) by Executive for any
reason other than a Good Reason, (3) as a result of Executive's death or (4) by
the Company due to Executive's absence from his duties with the Company on a
full- time basis for at least 180 consecutive days as a result of Executive's
incapacity due to physical or mental illness; provided, however, that a
termination of Executive's employment for any reason whatsoever during the
"Window Period" (hereinafter defined) shall not constitute a Nonqualifying
Termination.
(i) "Termination Period" means the period of time beginning
with the date hereof and ending on the earliest to occur of (1) Executive's 70th
birthday, (2) Executive's death and (3) three years following a Change in
Control.
(j) "Window Period" means the 30-day period commencing six
months after the date of a Change in Control.
2. Payments Upon Termination of Employment.
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<PAGE> 7
(a) If during the Termination Period the employment of
Executive shall terminate, other than by reason of a Nonqualifying Termination,
then the Company shall pay to Executive (or Executive's beneficiary or estate)
within 30 days following the Date of Termination, as compensation for services
rendered to the Company:
(1) a lump sum cash amount equal to the sum of (i)
Executive's full annual base salary from the Company and its affiliated
companies through the Date of Termination, to the extent not theretofore paid,
(ii) Executive's annual bonus in an amount at least equal to the higher of (x)
one-half of the maximum bonus the Executive could earn during the fiscal year
during which such Change in Control occurs and (y) the average of the
Executive's annual bonus (annualized for any fiscal year consisting of less than
12 full months) with respect to which bonus paid or payable, including by reason
of any deferral, to Executive by the Company and its affiliated companies in
respect of the two fiscal years of the Company (or such portion thereof during
which Executive performed services for the Company if Executive shall have been
employed by the Company for less than such two fiscal year period) immediately
preceding the fiscal year in which the Change in Control occurs, multiplied by a
fraction, the numerator of which is the number of days in the fiscal year in
which the Change in Control occurs through the Date of Termination and the
denominator of which is 365 or 366, as applicable, and (iii) any compensation
previously deferred by Executive (together with any interest and earnings
thereon) and any accrued vacation pay, in each case to the extent not
theretofore paid; plus
(2) a lump-sum cash amount (subject to any applicable payroll
or other taxes required to be withheld pursuant to Section 4) in an amount equal
to (i) 2.5 times (1.5 times if a Change in Control has not occurred) Executive's
highest annual base salary from the Company and its affiliated companies in
effect during the 12-month period prior to the Date of Termination plus (ii) 2.5
times (1.5 times if a Change in Control has not occurred) Executive's highest
annualized (for any fiscal year consisting of less than 12 full months or with
respect to which Executive has been employed by the Company for less than 12
full months), bonus paid or payable, including by reason of any deferral, to
Executive by the Company and its affiliated companies in respect of the five
fiscal years of the Company (or such portion thereof during which Executive
performed services for the Company if Executive shall have been employed by the
Company for less than such five fiscal year period) immediately preceding the
fiscal year in which the Change in Control occurs, provided, however, that in
the event there are fewer than 30 whole months (18 whole months if a Change in
Control has not occurred) remaining from the Date of Termination to the date of
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<PAGE> 8
Executive's 70th birthday, the amount calculated in accordance with this Section
3(a)(2) shall be reduced by multiplying such amount by a fraction the numerator
of which is the number of months, including a partial month (with a partial
month being expressed as a fraction the numerator of which is the number of days
remaining in such month and the denominator of which is the number of days in
such month), so remaining and the denominator of which is 30 (18 if a Change in
Control has not occurred); provided further, that any amount paid pursuant to
this Section 3(a)(2) shall be paid in lieu of any other amount of severance
relating to salary or bonus continuation to be received by Executive upon
termination of employment of Executive under any severance plan, policy or
arrangement of the Company.
(b) For a period of 2.5 years (18 months if a Change in
Control has not occurred) commencing on the Date of Termination, the Company
shall continue to keep in full force and effect all policies of medical,
accident, disability and life insurance with respect to Executive and his
dependents with the same level of coverage, upon the same terms and otherwise to
the same extent as such policies shall have been in effect immediately prior to
the Date of Termination or, if more favorable to Executive, as provided
generally with respect to other peer executives of the Company and its
affiliated companies, and the Company and Executive shall share the costs of the
continuation of such insurance coverage in the same proportion as such costs
were shared immediately prior to the Date of Termination.
(c) If during the Termination Period the employment of
Executive shall terminate by reason of a Nonqualifying Termination, then the
Company shall pay to Executive within 30 days following the Date of Termination,
a cash amount equal to the sum of (1) Executive's full annual base salary from
the Company through the Date of Termination, to the extent not theretofore paid
and (2) any compensation previously deferred by Executive (together with any
interest and earnings thereon) and any accrued vacation pay, in each case to the
extent not theretofore paid.
3. Certain Additional Payments by the Company. (a) Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, benefit or distribution by the Company or its
affiliated companies to or for the benefit of Executive (whether paid or payable
or distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 3) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the Code, or any successor provision, or any interest or
penalties are incurred by Executive with respect to such excise tax (such
-8-
<PAGE> 9
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then Executive shall be entitled
to receive an additional payment (a "Gross-Up Payment") in an amount such that
after payment by Executive of all taxes (including any interest or penalties
imposed with respect to such taxes), including, without limitation, any income
taxes (and any interest and penalties imposed with respect thereto) and Excise
Tax imposed upon the Gross-Up Payment, Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 3(c), all
determinations required to be made under this Section 3, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the Company's public accounting firm (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Company and Executive
within 15 business days of the receipt of notice from Executive that there has
been a Payment, or such earlier time as is requested by the Company. In the
event that the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting the Change in Control, Executive shall
appoint another nationally recognized public accounting firm to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross- Up Payment, as determined
pursuant to this Section 3, shall be paid by the Company to Executive within
five days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by Executive, it shall
furnish Executive with a written opinion that failure to report the Excise Tax
on Executive's applicable federal income tax return would not result in the
imposition of a negligence or similar penalty. Any determination by the
Accounting Firm shall be binding upon the Company and Executive. As a result of
the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should have been
made, including subsequent interest and penalties ("Underpayment"), consistent
with the calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 3(c) and Executive thereafter
is required to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Executive.
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<PAGE> 10
(c) Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than 10 business days after Executive is informed in
writing of such claim and shall apprise the Company of the nature of such claim
and the date on which such claim is requested to be paid. Executive shall not
pay such claim prior to the expiration of the 30-day period following the date
on which Executive gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies Executive in writing prior to the expiration of such
period that it desires to contest such claim, Executive shall:
(1) give the Company any information reasonably
requested by the Company relating to such claim,
(2) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(3) cooperate with the Company in good faith in order
effectively to contest such claim, and
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 3(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
Executive to pay the tax claimed and sue for a refund or contest the claim in
any permissible manner, and Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided further, that if the Company directs Executive to pay such
claim and sue for a refund, the Company shall advance the amount of such payment
to Executive on an interest-free basis and shall indemnify and hold Executive
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<PAGE> 11
harmless, on an after-tax basis, from any Excise Tax or income tax (including
interest or penalties with respect thereto) imposed with respect to such advance
or with respect to any imputed income with respect to such advance; and provided
further, that any extension of the statute of limitations relating to payment of
taxes for the taxable year of Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced
by the Company pursuant to Section 3(c), Executive becomes entitled to receive,
and receives, any refund with respect to such claim, Executive shall (subject to
the Company's complying with the requirements of Section 3(c)) promptly pay to
the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by
Executive of an amount advanced by the Company pursuant to Section 3(c), a
determination is made that Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify Executive in writing of
its intent to contest such denial of refund prior to the expiration of 30 days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
4. Withholding Taxes. The Company may withhold from all
payments due to Executive (or his beneficiary or estate) hereunder all taxes
which, by applicable federal, state, local or other law, the Company is required
to withhold therefrom.
5. Reimbursement of Expenses. If any contest or dispute shall
arise under this Agreement involving termination of Executive's employment with
the Company (which shall be deemed to include, without limitation, issues
relating to Executive's stock options) or involving the failure or refusal of
the Company to perform fully in accordance with the terms hereof, the Company
shall reimburse Executive, on a current basis, for all legal fees and expenses,
if any, incurred by Executive in connection with such contest or dispute,
together with interest in an amount equal to the base rate of The First National
Bank of Boston from time to time in effect, but in no event higher than the
maximum legal rate permissible under applicable law, such interest to accrue
from the date the Company receives Executive's statement for such fees and
expenses through the date of payment thereof; provided, however, that in the
event the resolution of any such
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contest or dispute includes a finding denying, in total, Executive's claims in
such contest or dispute, Executive shall be required to reimburse the Company,
over a period of 12 months from the date of such resolution, for all sums
advanced to Executive pursuant to this Section 5; provided, further, that no
such reimbursement shall be required if Executive had a reasonable basis for the
position taken by Executive with respect to such claims.
6. Intentionally Omitted.
7. Scope of Agreement. Nothing in this Agreement
shall be deemed to entitle Executive to continued employment with
the Company or its subsidiaries.
8. Directors and Officers Liability Insurance;
Indemnification. The Company agrees that, notwithstanding a Termination of
Executive's employment with the Company, the Company shall, for at least three
years after the Date of Termination, use all reasonable efforts to have
Executive included as a named insured or otherwise covered for actions or
failures to act by Executive in his capacity as a director or officer of the
Company to at least the same extent as other executive officers or directors, as
the case may be, of the Company under any directors and officers liability
insurance policies maintained by the Company; provided that the additional cost
of providing coverage with a retroactive date including Executive's period of
service or with an extended reporting period or a combination of both does not
materially increase the cost of the Company's directors and officers insurance.
The Company agrees that it will not alter the indemnification provisions in its
charter or by-laws so as to give Executive less protection thereunder with
respect to periods during which Executive serves or served the Company as an
executive officer or other employee as is afforded other executive officers or
peer employees, as the case may be, with respect to periods during which they
serve the Company.
9. Successors; Binding Agreement.
(a) This Agreement shall not be terminated by any merger or
consolidation of the Company whereby the Company is or is not the surviving or
resulting corporation or as a result of any transfer of all or substantially all
of the assets of the Company. In the event of any such merger, consolidation or
transfer of assets, the provisions of this Agreement shall be binding upon the
surviving or resulting corporation or the person or entity to which such assets
are transferred.
(b) The Company agrees that concurrently with any merger,
consolidation or transfer of assets referred to in
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paragraph (a) of this Section 10, it will cause any successor or transferee
unconditionally to assume, by written instrument delivered to Executive (or his
beneficiary or estate), all of the obligations of the Company hereunder. Failure
of the Company to obtain such assumption prior to the effectiveness of any such
merger, consolidation or transfer of assets shall be a breach of this Agreement
and shall entitle Executive to compensation and other benefits from the Company
in the same amount and on the same terms as Executive would be entitled
hereunder if Executive's employment were terminated following a Change in
Control other than by reason of a Nonqualifying Termination. For purposes of
implementing the foregoing, the date on which any such merger, consolidation or
transfer becomes effective shall be deemed the Date of Termination.
(c) This Agreement shall inure to the benefit of and be
enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive shall die while any amounts would be payable to Executive hereunder
had Executive continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to such
person or persons appointed in writing by Executive to receive such amounts or,
if no person is so appointed, to Executive's estate.
10. Notice. (a) For purposes of this Agreement, all notices
and other communications required or permitted hereunder shall be in writing and
shall be deemed to have been duly given when delivered or five days after
deposit in the United States mail, certified and return receipt requested,
postage prepaid, addressed (1) if to the Executive, to ________________________,
and if to the Company, to Whitehall Jewellers, Inc., 155 N. Wacker Drive,
Chicago, Illinois 60606, attention: Secretary, or (2) to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notices of change of address shall be effective only upon receipt.
(b) A written notice of Executive's Date of Termination by the
Company or Executive, as the case may be, to the other, shall (i) indicate the
specific termination provision in this Agreement relied upon, (ii) to the extent
applicable, set forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of Executive's employment under the provision
so indicated and (iii) specify the termination date (which date shall be not
less than 15 days after the giving of such notice). The failure by Executive or
the Company to set forth in such notice any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right of
Executive or the Company hereunder or preclude Executive or the
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Company from asserting such fact or circumstance in enforcing Executive's or the
Company's rights hereunder.
11. Full Settlement; Resolution of Disputes. (a) The Company's
obligation to make any payments provided for in this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any set-off,
counterclaim, recoupment, defense or other claim, right or action which the
Company may have against Executive or others. In no event shall Executive be
obligated to seek other employment or take any other action by way of mitigation
of the amounts payable to Executive under any of the provisions of this
Agreement and, such amounts shall not be reduced whether or not Executive
obtains other employment.
(b) If there shall be any dispute between the Company and
Executive in the event of any termination of Executive's employment (which shall
be deemed to include, without limitation, issues relating to Executive's
options), then, unless and until there is a final, nonappealable judgment by a
court of competent jurisdiction declaring that such termination was for Cause,
that the determination by Executive of the existence of Good Reason was not made
in good faith, or that the Company is not otherwise obligated to pay any amount
or provide any benefit to Executive and his dependents or other beneficiaries,
as the case may be, under paragraphs (a) and (b) of Section 3, the Company shall
pay all amounts, and provide all benefits, to Executive and his dependents or
other beneficiaries, as the case may be, that the Company would be required to
pay or provide pursuant to paragraphs (a) and (b) of Section 3 as though such
termination were by the Company without Cause or by Executive with Good Reason;
provided, however, that the Company shall not be required to pay any disputed
amounts pursuant to this paragraph except upon receipt of an undertaking by or
on behalf of Executive to repay all such amounts to which Executive is
ultimately adjudged by such court not to be entitled.
12. Governing Law; Validity. The interpretation, construction
and performance of this Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of Illinois without
regard to the principle of conflicts of laws. The invalidity or unenforceability
of any provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which other provisions
shall remain in full force and effect.
13. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original and all of
which together shall constitute one and the same instrument.
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14. Miscellaneous. No provision of this Agreement may be
modified or waived unless such modification or waiver is agreed to in writing
and signed by Executive and by a duly authorized officer of the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. Failure by Executive or the Company to insist upon strict compliance with
any provision of this Agreement or to assert any right Executive or the Company
may have hereunder, including, without limitation, the right of Executive to
terminate employment for Good Reason, shall not be deemed to be a waiver of such
provision or right or any other provision or right of this Agreement. The rights
of, and benefits payable to, Executive, his estate or his beneficiaries pursuant
to this Agreement are in addition to any rights of, or benefits payable to,
Executive, his estate or his beneficiaries under any other employee benefit plan
or compensation program of the Company.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by a duly authorized officer of the Company and Executive has
executed this Agreement as of the day and year first above written.
WHITEHALL JEWELLERS, INC.
By:
-----------------------------
---------------------------------
[Executive's Name] [Title]
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Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in this Registration Statement on Form S-3
of our report dated March 3, 1999, except as to Footnote 17 which is as of
January 24, 2000 relating to the financial statements. We also consent to the
incorporation by reference of our report dated March 3, 1999 relating to the
financial statement schedule, which appears in such Annual Report on Form 10-K.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
February 7, 2000
