-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NQ2lnhTcHTR+0+gPjltJH52ehFXL722LAM0zGGNse1zl1tsTk0+OVY0TAQtxchJZ hx6YMlVwixCL2l+NyebHxQ== 0000950137-99-001280.txt : 19990503 0000950137-99-001280.hdr.sgml : 19990503 ACCESSION NUMBER: 0000950137-99-001280 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WHITEHALL JEWELLERS INC CENTRAL INDEX KEY: 0000868984 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-JEWELRY STORES [5944] IRS NUMBER: 361433610 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28176 FILM NUMBER: 99606335 BUSINESS ADDRESS: STREET 1: 155 N WACKER DR STREET 2: SUITE 500 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3127826800 MAIL ADDRESS: STREET 1: 155 NORTH WACKER STREET 2: SUITE 500 CITY: CHICAGO STATE: IL ZIP: 60606 FORMER COMPANY: FORMER CONFORMED NAME: MARKS BROS JEWELERS INC DATE OF NAME CHANGE: 19960301 10-K 1 FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-028176 WHITEHALL JEWELLERS, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 36-1433610 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 155 N. WACKER DR., STE. 500, CHICAGO, IL 60606 (Address of principal executive offices, including zip code) (312) 782-6800 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.001 PER SHARE, INCLUDING ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of April 16, 1999 was $131,240,847.50, based on the closing price of $15.875 of the registrant's common stock on the NASDAQ Stock Market. This calculation does not reflect a determination that persons are affiliates for any other purposes. Number of shares of Common Stock outstanding as of April 16, 1999: 9,622,143 Number of shares of Class B Common Stock outstanding as of April 16, 1999: 101.298 Documents Incorporated by Reference: Part II - Portions of the registrant's annual report to stockholders for the registrant's fiscal year ended January 31, 1999 (the "1998 Annual Report"), as indicated herein. Part III - Portions of the registrant's definitive proxy statement to be distributed in conjunction with registrant's annual stockholders' meeting to be held in 1999 (the "Proxy Statement"), as indicated herein. ================================================================================ 2 PART I All statements, trend analysis and other information contained in this report relative to markets for the Company's products and trends in the Company's operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend" and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (1) the extent and results of the Company's store expansion strategy; (2) the seasonality of the Company's business; (3) economic conditions, the retail sales environment and the Company's ability to execute its business strategy and the related effects on comparable store sales and other results; (4) the success of the Company's marketing and promotional programs; (5) the extent to which the Company is able to retain and attract key personnel; (6) competition; (7) the availability and cost of consumer credit; (8) relationships with suppliers; (9) timely "Year 2000" compliance by the Company and third party suppliers and service providers; (10) the Company's ability to maintain adequate information systems capacity and infrastructure;(11) the efficient and successful integration of the Jewel Box locations and assets into the Company's existing operation;(12) the Company's leverage; (13) fluctuations in gem and gold prices; (14) regulation; and (15) the risk factors listed from time to time in the Company's filings with the Securities and Exchange Commission. ITEM 1. BUSINESS THE COMPANY General. Whitehall Jewellers, Inc. (formerly known as Marks Bros. Jewelers, Inc.) (the "Company") is a leading, national specialty retailer of fine jewelry (based on number of stores), operating 260 stores in 29 states as of April 16, 1999. Founded in 1895, the Company operates stores in regional and super-regional shopping malls under the names Whitehall Co. Jewellers (210 stores), Lundstrom Jewelers (47 stores) and Marks Bros. Jewelers (3 stores). On January 20, 1999, the Company changed its corporate name from Marks Bros. Jewelers, Inc. to Whitehall Jewellers, Inc. to align the corporate name with the Company's principal store brand. The Company offers at competitive prices an in-depth selection of fine jewelry in the following key categories: diamond, gold, precious and semi-precious jewelry. The Company's target customers are middle to upper middle income women over 25 years old. Central to the Company's growth in operating profits and its high store productivity are its small but flexible store format, the absence of recourse credit risk, its strong sales culture and its operating efficiencies at both the store and corporate levels. The Company operates on a fiscal year ending January 31. The year ended January 31, 1999 is referred to herein as fiscal 1998. From fiscal 1994 to fiscal 1998, the Company's net sales grew at a compound annual rate of 22.3% to $238.9 million, while income from operations grew at a compound annual rate of 23.6% to $27.3 million. The Company's growth during this period is attributable to (i) new store openings (including the 36 Jewel Box stores acquired in September 1998 as described below), which resulted in an increase in the number of stores from 131 to 250 stores, (ii) higher store productivity, as average annual sales per store increased from $836,000 to $1,100,000, and (iii) improved operating efficiencies resulting in an increase in the Company's operating margin from 11.0% to 11.4%. On September 10, 1998, the Company acquired substantially all of the Jewel Box chain consisting of 36 stores located in eight states in the southeastern United States. All of the acquired stores have been converted to Whitehall/Lundstrom merchandise assortments, credit programs, operating procedures and brand names. -2- 3 The Company believes it has significant opportunities to increase sales and profitability through an increased number of planned store openings, the implementation of new sales, marketing and merchandising programs designed to continue comparable store sales growth, and continued adherence to its strict standards regarding operating performance. Retailing Concepts. As of April 16, 1999, the Company's stores operated under the names Whitehall Co. Jewellers (210 stores), Lundstrom Jewelers (47 stores) and Marks Bros. Jewelers (3 stores). Each store concept is designed around an open, brightly-lit and inviting layout that encourages browsing by mall shoppers. The Company's multiple name format allows the Company to open additional stores in malls where it already has profitable locations. Whitehall Co. Jewellers is the Company's primary trademark and is positioned to be somewhat more upscale than the average mall-based jewelry store. As of April 16, 1999, the Company operated two stores in 44 malls and three stores in one mall. In most cases a Lundstrom store is added to a mall only after the Company has operated a successful Whitehall store in the same center. Generally, Lundstrom is positioned slightly more upscale than Whitehall, with slightly greater emphasis on more expensive diamond and gold merchandise. INDUSTRY Total retail sales by jewelry stores in the United States in 1998 were approximately $22.3 billion, and such sales grew between 1993 and 1998 at an annual rate of approximately 6.2%, according to the U.S. Department of Commerce. The jewelry market is generally divided into three segments: fine jewelry, costume jewelry, and guild jewelry. The broad "fine" jewelry market segment represents a majority of the jewelry market in terms of revenue, and it includes jewelry made from precious metals and gemstones, as well as finer watches. Fine jewelry is sold at a range of price points from middle to upper end, with the upper end consisting of luxury items such as unique design jewelry items and expensive time pieces. Except for a few designer label offerings, fine jewelry is generally not marketed under brand names. Costume jewelry consists of jewelry made of non-precious stones and rhinestones, as well as inexpensive watches. The "guild" market represents a small percentage of the total market. Jewelry is mainly distributed through jewelry stores (both independent stores and chains), general merchandise and discount stores, department stores, mail order and catalogs, apparel and accessories stores, and televised home shopping networks. General merchandisers, discount stores, and apparel and accessories stores generally sell costume jewelry and lower-priced "fine" jewelry. Mail order and home shopping distributors generally offer costume jewelry and fine jewelry at low to middle price points. Department stores generally offer a wider assortment of merchandise including a selection of costume, fine and some "guild" jewelry. Jewelry stores, including independent stores and jewelry chains, represent the largest distribution channel based on industry sales. Most jewelry stores cater to the broad fine jewelry market offering a variety of items at a range of price points. As of 1998, there were over 28,000 retail jewelry stores nationwide accounting for almost one-half of all jewelry sales. The retail jewelry industry is highly fragmented with no single chain accounting for a significant percentage of the fine jewelry market. The Company believes that the retail jewelry industry is consolidating due to a variety of factors, including (i) bad debt exposure, which has impacted jewelry stores that extend recourse credit to customers, (ii) over-expansion of stores and the failure to close unprofitable stores, and (iii) financial risk of high leverage. The Company believes that industry consolidation will continue as independent jewelers find it increasingly difficult to achieve economies of scale in merchandise purchasing and real estate site selection. -3- 4 OPERATING STRATEGIES The Company believes that its success is attributable in large measure to its business strategy which emphasizes adherence to the Company's strict operating standards regarding real estate selection, credit policies, performance of sales personnel, store profitability and cost control. The principal elements of the Company's operating strategies are as follows: Small, Flexible Store Format in Regional Malls. The Company believes it has a competitive advantage in obtaining high traffic, "center court" locations in desirable regional and super-regional malls due principally to (i) its small average store size of approximately 875 square feet, which, while considerably smaller than the average store size of most of the Company's competitors, generates comparable sales volumes, (ii) its ability to adapt its store design to various sizes and configurations, and (iii) its high average sales per square foot (approximately $1,323 in fiscal 1998). Over two-thirds of the Company's stores are located in high traffic, "center court" locations. The stores' small flexible format (which lowers the Company's fixed occupancy costs) and high productivity are desirable to mall owners. The stores' open, attractive design appeals to customers, while facilitating foot traffic and enhancing sales opportunities for the Company. Absence of Recourse Credit Risk. The Company operates based upon a "no credit risk" policy. When purchasing on credit, customers must use their personal credit cards, the Company's private label credit cards (which are available through a third party and are non-recourse to the Company), or other non-recourse third party credit arrangements. The Company's strict policy eliminates its credit risk associated with the customer's failure to pay. This policy also distinguishes the Company from most of its competitors, which not only bear such credit risk, but also rely on finance income in addition to merchandise sales. Motivated, Sales-Oriented Store Personnel. The primary responsibility of store sales personnel is selling to customers. To assist them in their selling efforts, store personnel are authorized to discount prices within certain limits and to choose from a variety of return/exchange options to offer the customer. Most non-sale activities are largely centralized. In addition, the absence of internal credit operations reduces the need for sales personnel to focus on many in-store credit activities. Compensation and bonus programs reinforce sales and margin goals on a daily, weekly and monthly basis. The Company continually seeks to enhance the selling skills of its sales associates through recruitment of experienced sales personnel and extensive, ongoing training programs. Differentiated Merchandising. The Company offers an in-depth selection of merchandise in several key categories of fine jewelry: diamond, gold, precious and semi-precious jewelry. This "key category" focus is oriented to the Company's target customer, the middle to upper middle income woman. Unlike many of its competitors, the Company carries only a limited selection of watches and virtually no costume jewelry or gift merchandise. In recent years, the Company has increased its average store inventory in an effort to expand the upper price points and add more depth to the merchandise mix. Strict Operating Controls. The Company emphasizes high performance standards, backed by strong incentive programs. Adherence to these standards in the areas of store site selection, sales targets, store profitability and cost control is fundamental to the Company's success. For example, the Company reduced central overhead as a percentage of net sales from 6.0% ($6.4 million) in fiscal 1994 to 5.1% ($12.2 million) in fiscal 1998 while continuing to build infrastructure to handle new store growth. During this same period, the Company's net sales increased by over 124% and the number of its stores increased by 91%. -4- 5 GROWTH STRATEGIES The Company believes that it has significant opportunities to increase sales and profits through continued execution of its store expansion strategy and continued comparable store sales gains. The key elements of the Company's growth strategies are as follows: Accelerated New Store Openings. The Company opened 64 stores during the last two fiscal years, acquired 36 stores in fiscal 1998 through the acquisition of the Jewel Box chain, and plans to open approximately 40 stores in calendar 1999. The Company anticipates opening a similar number of stores in 2000. The following table shows the Company's store expansion during the periods presented reflecting both store openings, acquisitions and closings for the respective periods:
YEAR ENDED JANUARY 31, 1995 1996 1997 1998 1999 Open at beginning of period 122 131 146 164 191 Opened during period 11 15 20 30 34 Acquired during period -- -- -- -- 36 Closed during period (2) -- (2) (3) (11) Open at end of period 131 146 164 191 250 ---- ---- ---- ---- ---- Net increase 9 15 18 27 59 ==== ==== ==== ==== ====
To reduce the Company's risk associated with entering new malls, the Company prefers to expand in established malls. In addition, the Company seeks to open additional stores in its existing markets where the Company believes it can obtain greater market penetration. The Company also seeks to identify new geographic markets where it can cluster stores for ease of supervision and increased name recognition. The Company entered the greater Los Angeles market in fiscal 1997 and now has nine stores with three more stores expected to open in fiscal 1999. The Company recently entered the Indianapolis market with two store openings and has entered the Seattle market. The Company plans to open two additional stores in the Seattle market, and plans to enter the Austin, Texas market with one store opening in fiscal 1999. The Company seeks to open new stores in key locations in regional and super-regional malls. The Company's national presence permits it to focus its new store openings on desirable malls throughout the country and often to obtain high traffic, "center court" locations in those malls to maximize exposure to mall shoppers. The Company uses its multiple name format to open additional stores in malls where it already has profitable locations. For example, as of April 16, 1999, the Company operated two stores in 44 malls and three stores in one mall. The Company continuously evaluates the performance of its stores and closes certain stores from time to time that do not continue to meet its strategic location profile or its performance requirements. -5- 6 MERCHANDISING The Company believes that an important element of its success is a focused merchandising strategy that reflects its upscale customer orientation and small store format. The Company seeks to provide a deep assortment of items across a broad range of price points in its key product categories: diamonds (such as diamond jewelry, diamond solitaires and bridal), gold, and precious and semi-precious jewelry. Unlike many of its competitors, the Company carries only a limited selection of watches and virtually no costume jewelry or gift merchandise. Each store offers approximately 2,600 individual items, including approximately 600 core jewelry items, which accounted for approximately 39% of net sales in fiscal 1998. In addition, the Company has expanded its merchandise assortment in higher price points. The Company's average price per merchandise sale has increased from $255 in fiscal 1996 to $273 in fiscal 1997 and $286 in fiscal 1998. In recent years, the Company has increased the average number of items available in its stores to broaden the appeal of its merchandise assortment and expand its product breadth in selected product categories, particularly bridal and other diamond jewelry. As of January 31, 1999, 1998, and 1997, the Company's average merchandise inventory per store (excluding consigned items) was approximately $467,000, $446,000, and $393,000, respectively. Higher inventory levels have, in combination with other factors, contributed to increases in comparable store sales. In fiscal 1998, the rate of growth in inventory levels declined to less than 5% as the Company reached its targeted inventory levels. The following table sets forth the Company's percentage of total merchandise sales by category for the following periods:
(%) YEAR ENDED JANUARY 31, -------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Diamonds 56.8 57.6 57.5 61.3 59.9 Gold 25.0 25.2 25.4 21.2 20.3 Precious/Semi-Precious 15.1 14.6 14.8 15.5 17.7 Watches 2.4 2.1 2.1 2.0 2.1 Other 0.7 0.5 0.2 --- --- ===== ===== ===== ===== ===== Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
All stores carry the Company's core items. The Company also customizes the merchandising of its stores based upon each store's sales volume, individual market preferences and historical selling patterns. The Company continually tests new items in its stores and monitors their sales performance to identify additional sales opportunities. Along with its broad product assortment, the Company also provides jewelry repair services to its customers (sales from which represented 3.5% of fiscal 1998 net sales). Actual repair work is performed by jewelers under independent contract. Approximately 140 of the Company's stores have independent jewelers located in the store to provide on-site repair services to the customer. Pricing Strategy. For purposes of pricing, the Company classifies its merchandise into several broad categories. Consistent with many fine jewelry retailers, a substantial portion of the Company's sales are made at prices discounted from listed reference prices. Company personnel are authorized to discount most merchandise prices within certain limits. -6- 7 CREDIT The Company operates based upon a "no credit risk" policy. When purchasing on credit, customers must use their personal credit cards (e.g., Visa, MasterCard, American Express and others), the Company's private label credit cards, which are available through a third party and are non-recourse to the Company, or other non-recourse third party credit arrangements. Because the Company's credit programs are non-recourse to the Company, the Company has no customer credit risk for non-payment by the customer associated with the sale. At the same time, the Company believes that its ability to offer credit through its "private label" credit cards and other non-recourse arrangements is attractive to many customers, including those who prefer not to have their jewelry purchases count towards their credit limits on their personal third party credit cards. The Company encourages sales on the Company's private label credit card or other non-recourse third-party credit arrangements because customer purchases on this type of credit tend to generate higher average sales. In fiscal 1998, the Company's average credit sale was approximately $780, versus approximately $100 for a purchase paid for with cash or by check. The Company believes that its success in building its non-recourse credit sales has been a significant factor in its improvement in comparable store sales. The Company's credit strategy and its focus on a more upscale clientele are interrelated. A substantial portion of the users of private label credit offered by most jewelers tend to be customers with more limited financial resources or a weaker credit history. In contrast, the Company's adherence to a "no credit risk" policy limits the Company's sales to such individuals. Thus, the Company has historically oriented its merchandising programs to appeal to a more affluent, less credit-reliant consumer. The Company established its 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 formed a private label credit joint venture called Monogram Credit Services, L.L.C. In January 1999, the Company consented to have its contract with Bank One assigned to Monogram Credit Services, L.L.C. Under these credit programs, the credit purveyors have no recourse against the Company based on the customer's failure to pay; recourse against the Company is restricted to those limited cases where the receivable itself is defective (such as incorrectly completed documentation or certain situations involving customer fraud). The Company's expense related to these limited cases was less than 0.5% of sales during fiscal 1998. The Company's 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, the Company's credit card discount expense is higher for its private label programs than for personal credit cards, such as Visa and MasterCard. Pursuant to the Company's relationship with Monogram Credit Services, L.L.C., the joint venture provides credit to the Company's customers using its own credit criteria and policies. The Company pays a fee to Monogram Credit Services, L.L.C. based primarily upon the volume of credit so extended. The Company has similar non-recourse arrangements with other credit purveyors, which it uses in addition to the Monogram Credit Services, L.L.C. program to assist customers in financing their purchases. In addition, the Company utilizes a check authorization company which guarantees payments on transactions involving certain personal checks. During the third quarter of fiscal 1997, the Company 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 the Company paid Bank One a significantly higher fee than it pays under its standard program. The Company used this program throughout fiscal 1998 and feels the usage of this program contributed to an increase in comparable store sales. The Company continues to offer this program through Monogram Credit Services, L.L.C. During recent periods, there has been an increase in consumer credit delinquencies generally which resulted in financial institutions reexamining their pending practices and procedures. Consequently, the availability or cost of third party credit offered by the Company could be adversely affected. -7- 8 STORE OPERATIONS Store Layout. Over two-thirds of the Company's stores are located in high traffic, "center court" locations. Nearly all of the stores have an open entrance rather than the more traditional single-doorway entrance. Stores 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. Store Management. Each of the Company's stores is operated under the direction of a store manager who is responsible for management of all store-level operations, including sales and personnel matters. Most non-sales related administrative functions are performed at the Company's corporate office in Chicago. A significant portion of the compensation of store managers is based on incentives which focus on sales productivity. The store managers are assisted by a staff that usually includes an assistant manager and four to eight sales associates, depending upon store operating hours and anticipated sales volume. The Company has approximately 35 supervisors who concentrate their efforts on store-focused sales strategies. Each supervisor is based in one store, but spends most of his or her time visiting other stores. The Company's senior officers spend a substantial percentage of their time visiting stores to reinforce the close communication between senior executives and store personnel. Operating Cost Controls. The Company's store operations are designed to maintain low operating costs at the store level. The Company's small average store size reduces fixed costs, and the lack of recourse credit eliminates the need for most overhead expenses normally associated with credit operations. The Company also seeks to reduce store-level operating costs through efficient sales staff utilization. To assist store personnel in their selling efforts, many of the administrative functions normally performed at the store level are performed at the corporate level. Due to computerization, more efficient use of personnel, and the elimination of certain non-essential functions, the Company 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, the Company's sales increased by over 123% and the number of stores increased by 91%. Store Employee Compensation. The Company seeks to hire experienced sales personnel and motivate its store employees by linking a substantial percentage of employee compensation to individual and store sales performance, as well as by offering opportunities for promotion within the Company. Employee Training. The Company believes that providing knowledgeable and responsive customer service is critical to the Company's success and, accordingly, has developed and implemented extensive employee training programs. In addition to training during the first weeks of employment and continuous on-the-job training provided by management, the Company has several training videos to supplement its written training materials for sales associates. Store managers complete a manager training and development program. ADVERTISING AND PROMOTIONS In the second quarter of fiscal 1997, the Company retained a full-service advertising and marketing firm which helped the Company implement expanded advertising campaigns and strategies. The Company improved the in-store and point-of-sale signage with a more upscale look which is a key element of its advertising strategy. The Company initiated a holiday season radio campaign in certain markets, and tested various direct mail campaigns as part of its new advertising initiatives. Frequent special promotions such as diamond remount events, clearance sales, "Vice President's Day Events," and similar promotions are designed to increase traffic through the Company's stores and generate an urgency -8- 9 for customers to make purchases. These events vary from year to year and among stores. Publicized events are an important part of the Company's marketing efforts, and the Company generates a significant portion of its revenues during such events. During fiscal 1998, the Company expanded its holiday radio advertising program and direct marketing campaign. The Company plans to continue its usage of certain direct mail and media advertising programs in fiscal 1999. The Company offers a 30-day return policy; however, for certain sales, store personnel may choose from a variety of return or exchange options to offer the customer, including, but not limited to, a 30-day return policy or a 90-day exchange policy. PURCHASING The Company does not manufacture its merchandise. The Company purchases substantially all of its inventory, including loose gems, directly from prime suppliers located in the United States and abroad. The Company purchases merchandise from approximately 144 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, the Company's largest supplier and five largest suppliers accounted for approximately 11% and 34%, respectively, of the merchandise purchased by the Company. The Company also has certain subcontracting arrangements with jewelry finishers to set loose diamonds and gemstones into rings and other jewelry, using styles established by the Company, or other companies. Management believes that the relationships the Company has established with its suppliers and subcontractors are good. The Company has not experienced any difficulty in obtaining satisfactory sources of supply and believes that adequate alternative sources of supply exist for substantially all types of merchandise sold in its stores. However, the loss of one or more of its major suppliers, particularly at certain critical times during the year could have a material adverse effect on the Company. The Company maintains a strict quality assurance program, with almost all shipments from suppliers being counted or weighed and visually inspected upon receipt at the Company's headquarters in Chicago, Illinois. During fiscal 1998, the Company's average net monthly investment in inventory (i.e., the total cost of inventory owned and paid for) was 61% of the total cost of the Company's on-hand merchandise. The amount of consignment merchandise has increased in recent years. For example, the average amount of consignment merchandise per store has increased from approximately $106,000 on January 31, 1997 to $151,000 on January 31, 1999. The Company is also often granted exchange privileges which permit it to return or exchange certain unsold merchandise for new products at any time. Those arrangements permit the Company to structure its relationships with vendors to encourage their participation in, and responsibility for, merchandise turnover and profitability. Those arrangements also permit the Company to have more merchandise available for sale in stores and reduce somewhat the Company's exposure to changes in fashion trends and inventory obsolescence. The Company and the jewelry industry in general are affected by fluctuations in the prices of diamonds and gold and, to a lesser extent, other precious and semi-precious metals and stones. During fiscal 1998, diamonds, gold, precious and semi-precious jewelry accounted for approximately 98% of the Company's 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 ("CSO"), a marketing arm of DeBeers Consolidated Mines Ltd. of South Africa. The CSO has traditionally controlled the marketing of a substantial majority of the world's supply of diamonds and sells rough diamonds to worldwide diamond cutters from its London office in quantities and at prices determined in its sole discretion. The availability of diamonds to the CSO and the Company's suppliers is to some extent dependent on the political situation in diamond producing countries, such as South Africa, Botswana, Zaire, republics of the former Soviet -9- 10 Union and Australia, and on continuation of the prevailing supply and marketing arrangements for raw diamonds. Until alternate sources could be developed, any sustained interruption in the supply of diamonds or any oversupply from the producing countries could adversely affect the Company and the retail jewelry industry as a whole. The Company has been increasing the amount of inventory (especially higher priced items) carried in its stores. Higher priced jewelry items tend to have a slower rate of turnover, thereby increasing the risks to the Company associated with price fluctuations and changes in fashion trends. MANAGEMENT INFORMATION SYSTEMS The Company utilizes customized management information systems throughout its business to facilitate the design and implementation of selling strategies and as an integral part of its financial and other operational controls. The Company's management information system utilizes an IBM AS400. The system incorporates point-of-sale computers in its stores with a merchandise management and purchase order management system and utilizes software specifically designed for the jewelry industry, which the Company has customized extensively to meet its needs. The information system has been upgraded to support the Company's needs and further upgrading is necessary to support the Company's growth. The Company uses the management information system to track each individual item of merchandise from receipt to ultimate sale or return to the vendor. As a result, management can closely monitor inventory by location, sales, gross margin, inventory levels and turnover statistics, reallocating inventory among stores when beneficial. This system also enables management to review each store's and each employee's productivity and performance. Based on the sales data, the Company tailors each store's inventory composition and plans the Company's purchasing requirements accordingly. The system enables the Company to manage its inventory at the store level, including the automatic replenishment of merchandise 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 the Company's accounting, merchandising, and other management information systems. The Company has implemented, through its point-of-sale system, the ability to capture and retain selected customer data from each sale (name, address, phone, birthday, anniversaries, historical purchases, etc.). The data is used by Company store managers and sales associates in their efforts to contact customers and anticipate and facilitate future add-on purchases by its customers. For example, a husband who buys a diamond necklace for his wife's birthday may receive a mailing approximately a year later suggesting a matching set of diamond earrings. The Company believes that additional sales volume can be achieved by utilizing such programming initiatives. The customer data is used by the Company in its 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. The Company's supervisors use laptop computers in the field to obtain up-to-date financial information on their stores and down-load it on an as-needed basis from the Company's central computer system. The information available via laptop includes, among other items, store sales, gross profit, personnel costs, and sales associates' productivity information. -10- 11 YEAR 2000 The "Year 2000" problem concerns the inability of information systems to properly recognize and process date-sensitive information beyond January 1, 2000. Like many companies, "Year 2000" computer hardware and software failures of internal systems and/or of third party systems could have a significant, adverse impact on all aspects of the Company's operations. Because of the range of possible issues and the large number of variables involved, it is impossible to quantify the potential cost of problems should the Company's remediation efforts or the efforts of third parties with whom the Company does business not be successful. The Company recognizes the need to address this problem in order to minimize the effects of the "Year 2000" issue on its operations and its relationships with vendors and other third parties. The Company is using both internal and external resources to complete its "Year 2000" project. The Company operates exclusively in one business segment, specialty retail jewelry. All stores are located within the United States. The Company's two principle mission-critical systems applications are the point-of-sale ("POS") terminals and software which control store transaction processing, and the centrally maintained information systems infrastructure which controls financial, merchandising and administrative systems. All stores use the same POS software that is licensed from a third-party vendor. In the fall of 1998, a "Year 2000" compliant version of the POS software was installed at all stores. Testing of the new software is complete. The Company has replaced approximately two-thirds of its POS desktop terminals with "Year 2000" compliant terminals. The remaining portion is expected to be replaced during the summer of 1999. The Company's financial management, information technology, merchandising and other administrative functions operate centrally from the Company's corporate office. The Company uses a mid-range computing platform which is complemented by various networks. The operating systems and hardware platforms were upgraded, tested and are currently "Year 2000" ready. The replacement or upgrading of financial management and various customized software packages is between approximately 50% and 70% complete. These systems upgrades, replacements, renovations, and testing thereof, are scheduled to be completed during the summer of 1999. Such completion is currently on schedule. With respect to systems that the Company is not upgrading, the Company is currently renovating those systems to be "Year 2000" compliant. The Company is developing contingency plans to address unforeseen system or environmental failures due to the "Year 2000" issue. The major focus of these plans is to have documented procedures to handle the mission-critical functions and to define the business tactics to identify and manage certain problems which may occur as a result of the "Year 2000" issue in as non-disruptive a manner as possible. The Company does not expect to be able to develop feasible contingency plans to address all "Year 2000" related failures and contingency plans which are developed will only mitigate the impact of "Year 2000" failures. The Company's total costs for making its mission-critical systems "Year 2000" compliant are not expected to be material to the Company's financial condition. The estimated total cost of the "Year 2000" project is expected to approximate $1.0 million. To date, the total amount expended on the project is approximately $500,000. The Company believes that the systems upgrades, replacements and renovations will be made on a timely basis, and that the "Year 2000" issue with respect to the Company's internal systems will not pose significant operational problems or result in costs that have a material adverse impact on the Company's business, financial condition or results of operations. A failure by the Company to timely address the "Year 2000" issue, or a failure by the Company to maintain adequate information systems -11- 12 capacity and infrastructure as it upgrades, replaces and renovates its information systems could have a material adverse impact on the Company's business, financial condition or results of operations. In addition to the Company's internal systems, certain systems of third party suppliers and service providers which are not currently "Year 2000" compliant could adversely impact the Company's operations. The Company has confirmed with its primary lenders and private-label and other credit suppliers that their systems are, or will on a timely basis be, "Year 2000" compliant. In addition, certain key vendors and service providers have confirmed orally that they are implementing plans to address the "Year 2000" issue. The Company will continue communicating with its key suppliers and key service providers to monitor their plans to address, and progress in addressing, the "Year 2000" issue and to evaluate any impact on the Company. However, there can be no assurance that the systems of third parties with whom the Company does business will be converted timely. A failure by any such third party to timely address the "Year 2000" issue could have a material adverse impact on the Company's business, financial condition or results of operations. INVENTORY LOSS PREVENTION AND INSURANCE The Company undertakes substantial efforts to safeguard its jewelry inventory from loss and theft, including the use of security alarm systems and safes at each store and the taking of daily inventory of higher value items. In addition, the Company's inventory management and control system, which tracks each item in the Company's inventory, provides a further check against loss or theft. During fiscal 1998, in-store inventory shrinkage amounted to approximately 1.0% of sales. The Company has a full-time manager who directs the Company's loss prevention efforts. The Company maintains insurance (subject to certain deductibles) covering the risk of loss of merchandise in transit and at store premises (whether owned or on consignment) in amounts that the Company believes are reasonable and adequate for the types and amounts of merchandise carried by the Company. COMPETITION The jewelry business is fragmented and highly competitive. The Company competes with national and regional jewelry chains and local independently owned jewelry stores, especially those that operate in malls, as well as with department stores, catalog showrooms, discounters, direct mail suppliers, televised home shopping networks and internet commerce. Certain of the Company's competitors are substantially larger and have greater financial resources than the Company and can take advantage of national advertising programs. The Company also believes that it competes for consumers' discretionary spending dollars with retailers that offer merchandise other than jewelry. Management believes that the primary competitive factors affecting its operations are store location and atmosphere, quality of sales personnel and service, breadth and depth of merchandise offered, pricing, credit and reputation. The Company emphasizes its merchandise selection, sales personnel, store location and design and pricing in competing in its target market, which is relatively less credit sensitive. TRADEMARKS Whitehall(R) Co. Jewellers, Lundstrom(R) Jewelers and Marks Bros.(R) Jewelers are registered trademarks in the United States. -12- 13 EMPLOYEES As of January 31, 1999 the Company had approximately 1,740 employees, including approximately 1,610 store level employees. The Company usually hires a limited number of temporary employees during each Christmas selling season. None of the Company's employees are represented by a union. The Company believes that its relations with its employees are good. REGULATION The Company's operations are affected by numerous federal and state laws that impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts, and limitations on the maximum amount of finance charges that may be charged by a credit provider. Although credit to the Company's customers is provided by third parties without recourse to the Company based upon a customer's failure to pay, any restrictive change in the regulation of credit, including the imposition of, or changes in, interest rate ceilings, could adversely affect the cost or availability of credit to the Company's customers and, consequently, the Company's results of operations or financial condition. The Company's operations are also affected by federal and state laws relating to marketing practices in the retail jewelry industry. In marketing to its customers, the Company compares many of its prices to "reference prices." The Company's literature indicates to customers that its reference price for an item is either the manufacturer's suggested retail price or the Company's determination of the non-discounted price at which comparable merchandise of like grade or quality is advertised or offered for sale by competitive retailers and is not the Company's current selling price or the price at which it formerly sold such item. Although the Company believes that pricing comparisons are common in the jewelry business and that the Company's practice is in compliance with applicable laws relating to trade practices, there can be no assurance that this position would be upheld. ITEM 2. PROPERTIES PROPERTIES As of April 16, 1999 the Company operated 260 stores in 29 states. All of these stores are leased and are located in regional or super-regional malls. The Company's 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 rent based on store sales and certain other occupancy charges. At January 31, 1999 the average remaining life of the leases for the Company's stores was approximately six years. While there can be no assurance, the Company expects to be generally able to renew these leases as they expire. The Company also leases approximately 28,400 square feet of office and administrative space in Chicago, Illinois in an office building housing its corporate headquarters, distribution functions and quality assurance operations. This lease expires on May 2, 2004. -13- 14 ITEM 3. LEGAL PROCEEDINGS LEGAL PROCEEDINGS The Company is involved in certain legal actions from time to time arising in the ordinary course of business, but management believes that none of these actions, either individually or in the aggregate, will have a material adverse effect on the Company's results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -14- 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated herein by reference to section entitled "Related Stockholder Matters and Market for the Company's Common Stock" in the Company's 1998 Annual Report, which is included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference to section entitled "Selected Historical Financial and Operating Data" in the Company's 1998 Annual Report, which is included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference to section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1998 Annual Report, which is included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated herein by reference to section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1998 Annual Report, which is included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated herein by reference to sections entitled "Statements of Operations," "Balance Sheets," "Statements of Stockholders' Equity (Deficit)," "Statements of Cash Flows" and "Notes to Financial Statements" in the Company's 1998 Annual Report, which is included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -15- 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained under the headings "Election of Directors" and "Executive Officers" in the Proxy Statement (which Proxy Statement will be filed with the Securities and Exchange Commission on or before May 10, 1999) is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Except for information referred to in Item 402(a)(8) of Regulation S-K, the information contained under the headings "Election of Directors" and "Executive Compensation and Other Information" in the Proxy Statement (which Proxy Statement will be filed with the Securities and Exchange Commission on or before May 10, 1999) is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement (which Proxy Statement will be filed with the Securities and Exchange Commission on or before May 10, 1999) is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the heading "Certain Relationships and Related Transactions" in the Proxy Statement (which Proxy Statement will be filed with the Securities and Exchange Commission on or before May 10, 1999) is incorporated herein by reference. -16- 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following financial statements are filed as part of this report: Report of Independent Public Accountants.* Balance Sheets of the Company as of January 31, 1999 and 1998.* Statements of Operations of the Company for the years ended January 31, 1999, 1998 and 1997.* Statements of Stockholders' Equity (Deficit) of the Company for the years ended January 31, 1999, 1998 and 1997.* Statements of Cash Flows of the Company for the years ended January 31, 1999, 1998 and 1997.* Notes to Financial Statements.* - ---------- * Incorporated herein by reference from the Company's 1998 Annual Report. (a)(2) Financial Statement Schedules Report of Independent Public Accountants on Financial Statement Schedule Page 20 Schedule II - Valuation and Qualifying Accounts Page 21 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a)(3) Exhibits The following Exhibits are filed herewith or incorporated herein: EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.1 Restated Certificate of Incorporation of the Company (1) 3.2 Amended and Restated By-Laws of the Company 4.1 Amended and Restated Stockholders Rights Plan (9) 4.2 Certificate of Designations of Series A Junior Participating Preferred Stock (1) 4.3 Indenture governing the Notes dated as of April 15, 1996 between the Company and Norwest Bank Minnesota, National Association, as Trustee (2) 4.4 Form of Series C Notes (included in Exhibit 4.3 to this Form 10-K) (2) 4.5 Form of Series D Notes (included in Exhibit 4.3 to this Form 10-K) (2) 4.6 First Supplemental Indenture to Indenture (2) 4.7 Second Supplemental Indenture to Indenture (3) 10.1 Second Amended and Restated Registration Agreement (2) -17- 18 10.2 Letter Agreements re: Incentive Stock Option dated September 28, 1995 between the Company and each of Hugh M. Patinkin, John R. Desjardins and Matthew M. Patinkin, respectively (1) (4) 10.3 Letter Agreements re: Restricted Stock Awards dated September 28, 1995 between the Company and each of Hugh M. Patinkin, John R. Desjardins and Matthew M. Patinkin (1) (4) 10.4 Letter Agreements re: Incentive Compensation dated September 28, 1995 between the Company and each of Hugh M. Patinkin, John R. Desjardins and Matthew M. Patinkin (1) (4) 10.5 Company's 1995 Executive Incentive Stock Option Plan (1) (4) 10.6 Letter Agreement re: Incentive Stock Option between the Company and Lynn D. Eisenheim (1) (4) 10.7 1996 Long-Term Incentive Plan, as amended (4) 10.8 Lease dated May 14, 1992 between the Company and New York Life Insurance Company relating to the Company's corporate headquarters (1) 10.9 Executive Severance Agreements each dated May 7, 1996, between the Company and each of Hugh M. Patinkin, John R. Desjardins, Matthew M. Patinkin and Lynn D. Eisenheim (2) (4) 10.10 ESOP Restructuring Agreement, dated as of March 29, 1996, between the Company and the Whitehall Jewellers, Inc. Employee Stock Ownership Trust (2) 10.11 Amended and Restated Employee Stock Ownership Plan (5) 10.12 1997 Long-Term Incentive Plan, as amended (4) 10.13 1998 Non-Employee Directors Stock Option Plan (4)(6) 10.14 Amendment Number One to the 1998 Non-Employee Directors Stock Option Plan (4) 10.15 Asset Purchase Agreement dated as of June 19, 1998 by and among Whitehall Jewellers, Inc. (f/k/a Marks Bros. Jewelers, Inc.), Carlyle & Co. Jewelers, Carlyle & Co. of Montgomery and J.E. Caldwell Co. (7) 10.16 Amended and Restated Revolving Credit, Term Loan and Gold Consignment Agreement dated as of September 10, 1998 by and among Whitehall Jewellers, Inc. (f/k/a Marks Bros. Jewelers, Inc.) the Banks (as defined therein), BankBoston, N.A. as Agents for the Banks, and LaSalle National Bank and ABN AMRO Bank, N.V. as Agents for the Banks (8) 10.17 First Amendment to Amended and Restated Revolving Credit, Term Loan and Gold Consignment Agreement dated as of November 17, 1998, by and among Whitehall Jewellers, Inc., the Banks (as defined therein), BankBoston, N.A. as Agents for the Banks, and LaSalle National Bank and ABN AMRO Bank, N.V. as Agents for the Banks 10.18 401(k) Plan (3)(4) 10.19 Amendment Number Two to 401(k) Plan (4)(10) 10.20 Amendment Number Three to 401(k) Plan (4) 10.21 Amendment Number Four to 401(k) Plan (4) 10.22 Employment and Severance Agreement dated March 17, 1997 between the Company and Manny A. Brown (4) 13 1998 Annual Report 23 Consent of PricewaterhouseCoopers, LLP 24 Powers of Attorney (included on signature page) 27 Financial Data Schedule - ------------------- (1) Incorporated herein by reference to the exhibits filed with the Company's Registration Statement on Form S-1, as amended (Registration No. 333-1794). (2) Incorporated herein by reference to the exhibits filed with the Company's Registration Statement on Form S-1, as amended (Registration No. 333-0403). (3) Incorporated herein by reference to the exhibits filed with the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998, file No. 0-028176. (4) Represents management contract or compensatory plan or arrangement. -18- 19 (5) Incorporated herein by reference to the exhibits filed with the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1997, file No. 0-028176. (6) Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-8 (Registration No. 333-5015). (7) Incorporated by reference to the exhibits filed with the Company's Current Report on Form 8-K dated September 10, 1998 and filed with the Securities and Exchange Commission on September 22, 1998, file No. 0-028176. (8) Incorporated by reference to the exhibits filed with the Company's Quarterly Report on Form 10-Q for the period ended October 31, 1998, file No. 0-028176. (9) Incorporated by reference to the exhibits filed with the Company's Registration Statement as amended on Form 8-A/A and filed with the Securities and Exchange Commission on April 28, 1999, file No. 0-028176. (10) There is no First Amendment to 401(k) Plan. (b) Reports on Form 8-K Current Report on Form 8-K dated January 20, 1999 and filed with the Securities and Exchange Commission on February 3, 1999 (reporting the change in the Company's corporate name), file No. 0-028176. -19- 20 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Whitehall Jewellers, Inc. Our report on the financial statements of Whitehall Jewellers, Inc. (formerly Marks Bros. Jewelers, Inc.) has been incorporated by reference in this Form 10-K from page 32 of the Annual Report of Whitehall Jewellers, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedule which is included on page 21 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ PricewaterhouseCoopers LLP Chicago, Illinois March 3, 1999 -20- 21 WHITEHALL JEWELLERS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS TWELVE MONTHS ENDED JANUARY 31, 1997, 1998 AND 1999 (DOLLARS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------------------------- -------- -------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTION OF PERIOD ----------- ---------- ---------- ----------- --------- ---------- Twelve months ended 1/31/97 Allowance for doubtful accounts...... $ 565 $1,037 -- $ 894(1) $ 708 ====== ====== ====== ====== Inventory allowance.................. 1,263 2,662 -- 2,214 1,711 ====== ====== ====== ====== Twelve months ended 1/31/98 allowance for doubtful accounts...... $ 708 $1,182 -- $1,197(1) $ 693 ====== ====== ====== ====== Inventory allowance.................. 1,711 3,764 -- 3,776 1,699 ====== ====== ====== ====== Twelve months ended 1/31/99 Allowance for doubtful accounts...... $ $693 $1,278 -- $ 944(1) $1,027 ====== ====== ====== ====== Inventory allowance.................. 1,699 4,634 2,000(2) 4,385 3,948 ====== ====== ===== ====== ======
Note: (1) Uncollectible items written off, less recoveries of items previously written off. (2) Charged to goodwill as part of the acquisition of the Jewel Box chain of jewelry stores. -21- 22 SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, this Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 16, 1999 WHITEHALL JEWELLERS, INC. By: /s/ John R. Desjardins ----------------------------------- John R. Desjardins Executive Vice President, Finance & Administration and Secretary POWER OF ATTORNEY AND SIGNATURES Each of the undersigned officers and directors of Whitehall Jewellers, Inc. hereby severally constitutes and appoints 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 amendments to this Annual Report on Form 10-K, 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 Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant and in the capacities indicated on this 16th day of April, 1999.
Name Capacity ---- -------- /s/ Hugh M. Patinkin Chairman, President and Chief Executive Officer - ------------------------------------ (principal executive officer) and Director Hugh M. Patinkin /s/ John R. Desjardins Executive Vice President, Finance & Administration - ------------------------------------ and Secretary (principal financial officer) and Director John R. Desjardins /s/ Matthew M. Patinkin Director - ------------------------------------ Matthew M. Patinkin /s/ Norman J. Patinkin Director - ------------------------------------ Norman J. Patinkin /s/ Jack A. Smith Director - ------------------------------------ Jack A. Smith /s/ Daniel H. Levy Director - ------------------------------------ Daniel H. Levy /s/ Richard Berkowitz Director - ------------------------------------ Richard Berkowitz
-22- EX-3.2 2 AMENDED AND RESTATED BY-LAWS OF THE COMPANY 1 EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF WHITEHALL JEWELLERS, INC. ARTICLE I STOCKHOLDERS MEETINGS SECTION 1.1 ANNUAL MEETINGS. An annual meeting of stockholders shall be held for the election of directors at such date, time and place as may be fixed by resolution of the Board of Directors from time to time. SECTION 1.2 SPECIAL MEETINGS. Special meetings of stockholders for any purpose or purposes may be called at any time only by the Chairman of the Board, if any, the President, the Board of Directors or by a majority of the Board of Directors, and by no other person. The business transacted at a special meeting of stockholders shall be limited to the purpose or purposes for which such meeting is called, except as otherwise determined by the Board of Directors or the chairman of the meeting. SECTION 1.3 NOTICE OF MEETINGS. A written notice of each annual or special meeting of stockholders shall be given stating the place, date and time of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the Certificate of Incorporation or these By-laws, as such may be amended or restated from time to time, such notice of meeting shall be given not less than ten nor more than 60 days before the date of the meeting to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the Corporation. SECTION 1.4 ADJOURNMENTS. Any annual or special meeting of stockholders may be adjourned from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the date, time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting in accordance with Section 1.3. SECTION 1.5 QUORUM. Except as otherwise provided by law, the Certificate of Incorporation or these By-laws, as such may be amended or restated from time to time, the presence in person or by proxy of the holders of stock having a majority of the votes which could be cast by the holders of all outstanding stock entitled to vote at the meeting shall constitute a quorum at each meeting of stockholders. In the absence of a quorum, the stockholders so present may, by the affirmative vote of the holders of stock having a majority of the votes which could be 2 cast by all such holders, adjourn the meeting from time to time in the manner provided in Section 1.4 of these By-laws until a quorum is present. If a quorum is present when a meeting is convened, the subsequent withdrawal of stockholders, even though less than a quorum remains, shall not affect the ability of the remaining stockholders lawfully to transact business. SECTION 1.6 ORGANIZATION. Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or if there is none or in his or her absence, by the President, or in his or her absence, by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his or her absence the chairman of the meeting may appoint any person to act as secretary of the meeting. SECTION 1.7 VOTING. (a) Except as otherwise provided by the Certificate of Incorporation, as such may be amended or restated from time to time, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by such stockholder which has voting power on the matter in question. (b) Voting at meetings of stockholders need not be by written ballot and need not be conducted by inspectors of election unless so required by Section 1.9 of these By-laws or so determined by the holders of stock having a majority of the votes which could be cast by the holders of all outstanding stock entitled to vote which are present in person or by proxy at such meeting. Unless otherwise provided in the Certificate of Incorporation, as such may be amended or restated from time to time, directors shall be elected by a plurality of the votes cast in the election of directors. Each other question shall, unless otherwise provided by law, the Certificate of Incorporation or these By-laws, as such may be amended or restated from time to time, be decided by the vote of the holders of stock having a majority of the votes which could be cast by the holders of all stock entitled to vote on such question which are present in person or by proxy at the meeting. (c) Stock of the Corporation standing in the name of another corporation and entitled to vote may be voted by such officer, agent or proxy as the by-laws or other internal regulations of such other corporation may prescribe or, in the absence of such provision, as the board of directors or comparable body of such other corporation may determine. (d) Stock of the Corporation standing in the name of a deceased person, a minor, an incompetent or a debtor in a case under Title 11, United States Code, and entitled to vote may be voted by an administrator, executor, guardian, conservator, debtor-in-possession or trustee, as the case may be, either in person or by proxy, without transfer of such shares into the name of the official or other person so voting. 3 (e) A stockholder whose voting stock of the Corporation is pledged shall be entitled to vote such stock unless on the transfer records of the Corporation the pledgor has expressly empowered the pledgee to vote such shares, in which case only the pledgee, or such pledgee's proxy, may represent such shares and vote thereon. (f) If voting stock is held of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or if two or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (i) if only one votes, such act binds all; (ii) if more than one vote, the act of the majority so voting binds all; and (iii) if more than one votes, but the vote is evenly split on any particular matter each faction may vote such stock proportionally, or any person voting the shares, or a beneficiary, if any, may apply to the Court of Chancery of the State of Delaware or such other court as may have jurisdiction to appoint an additional person to act with the persons so voting the stock, which shall then be voted as determined by a majority of such persons and the person appointed by the Court. If the instrument so filed shows that any such tenancy is held in unequal interests, a majority or even split for the purpose of this subsection shall be a majority or even split in interest. (g) Stock of the Corporation belonging to the Corporation, or to another corporation a majority of the shares entitled to vote in the election of directors of which are held by the Corporation, shall not be voted at any meeting of stockholders and shall not be counted in the total number of outstanding shares for the purpose of determining whether a quorum is present. Nothing in the Section 1.7 shall limit the right of the Corporation to vote shares of stock of the Corporation held by it in a fiduciary capacity. SECTION 1.8 PROXIES. (a) Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy filed with the Secretary before or at the time of the meeting. No such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing with the Secretary an instrument in writing revoking the proxy or another duly executed proxy bearing a later date. (b) A stockholder may authorize another person or persons to act for such stockholder as proxy (i) by executing a writing authorizing such person or persons to act as such, which execution may be accomplished by such stockholder or such stockholder's authorized officer, director, partner, employee or agent (or, if the stock is held in a trust or estate, by a trustee, executor or administrator thereof) signing such writing or causing his or her signature to be affixed to such writing by any reasonable means, including, but not limited to, facsimile signature, or (ii) by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission (a "Transmission") to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly 4 authorized by the person who will be the holder of the proxy to receive such Transmission; provided that any such Transmission must either set forth or be submitted with information from which it can be determined that such Transmission was authorized by such stockholder. (c) Any inspector or inspectors appointed pursuant to Section 1.9 of these By-Laws shall examine Transmissions to determine if they are valid. If no inspector or inspectors are so appointed, the Secretary or such other person or persons as shall be appointed from time to time by the Board of Directors shall examine Transmissions to determine if they are valid. If it is determined a Transmission is valid, the person or persons making that determination shall specify the information upon which such person or persons relied. Any copy, facsimile telecommunication or other reliable reproduction of such a writing or Transmission may be substituted or used in lieu of the original writing or Transmission for any and all purposes for which the original writing or Transmission could be used; provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or Transmission. SECTION 1.9 VOTING PROCEDURES AND INSPECTORS OF ELECTIONS. (a) If the Corporation has a class of voting stock that is (i) listed on a national securities exchange, (ii) authorized for quotation on an interdealer quotation system of a registered national securities association or (iii) held of record by more than 2,000 stockholders, the Board of Directors shall, in advance of any meeting of stockholders, appoint one or more inspectors (individually an "Inspector," and collectively the "Inspectors") to act at such meeting and make a written report thereof. The Board of Directors may designate one or more persons as alternate Inspectors to replace any Inspector who shall fail to act. If no Inspector or alternate is able to act at such meeting, the chairman of the meeting shall appoint one or more other persons to act as Inspectors. Each Inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of Inspector with strict impartiality and according to the best of his or her ability. (b) The Inspectors shall (i) ascertain the number of shares of stock of the Corporation outstanding and the voting power of each, (ii) determine the number of shares of stock of the Corporation present in person or by proxy at such meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the Inspectors and (v) certify their determination of the number of such shares present in person or by proxy at such meeting and their count of all votes and ballots. The Inspectors may appoint or retain other persons or entities to assist them in the performance of their duties. (c) The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at such meeting. No ballots, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the Inspectors after the closing of the polls unless the Court of Chancery of the State of Delaware upon application by any stockholder shall determine otherwise. (d) In determining the validity and counting of proxies and ballots, the Inspectors shall be limited to an examination of the proxies, any envelopes submitted with such 5 proxies, any information referred to in paragraphs (b) and (c) of Section 1.8 of these By-laws, ballots and the regular books and records of the Corporation, except that the Inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by a stockholder of record to cast or more votes than such stockholder holds of record. If the Inspectors consider other reliable information for the limited purpose permitted herein, the Inspectors, at the time they make their certification pursuant to paragraph (b) of this Section 1.9, shall specify the precise information considered by them, including the person or persons from whom such information was obtained, when and the means by which such information was obtained and the basis for the Inspectors' belief that such information is accurate and reliable. SECTION 1.10 FIXING DATE OF DETERMINATION OF STOCKHOLDERS OF RECORD. (a) In order that the corporation may determine the stockholders entitled (i) to notice of or to vote at any meeting of stockholders or any adjournment thereof, (ii) to receive payment of any dividend or other distribution or allotment of any rights, (iii) to exercise any rights in respect of any change, conversion or exchange of stock or (iv) to take, receive or participate in any other action, the Board of Directors may fix a record date, which shall not be earlier than the date upon which the resolution fixing the record date is adopted by the Board of Directors and which (1) in the case of a determination of stockholders entitled to notice of or to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, be not more than 60 nor less than ten days before the date of such meeting; (2) in the case of a determination of stockholders entitled to express consent to corporate action in writing without a meeting, shall be not more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors; and (3) in the case of any other action, shall be not more than 60 days before such action. (b) If no record date is fixed, (i) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (ii) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. (c) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting, but the Board of Directors may fix a new record date for the adjourned meeting. SECTION 1.11 LIST OF STOCKHOLDERS ENTITLED TO VOTE. The Secretary shall prepare, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at 6 the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of stockholders or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders. SECTION 1.12 STOCKHOLDER PROPOSALS AND BOARD NOMINATIONS. (a) At any annual meeting of the Corporation's stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a stockholder in accordance with these By-laws. Business may be properly brought before an annual meeting by a stockholder only if written notice of the stockholder's intent to propose such business has been delivered, either by personal delivery, United States mail, first class postage prepaid, or other similar means, to the Secretary of the Corporation not later than 90 calendar days in advance of the anniversary date of the release of the Corporation's proxy statement to stockholders in connection with the preceding year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, a stockholder proposal shall be received by the Corporation a reasonable time before the solicitation is made. (b) Each notice of new business must set forth: (i) the name and address of the stockholder who intends to raise the new business; (ii) the business desired to be brought forth at the meeting and the reasons for conducting such business at the meeting; (iii) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote with respect to such business and intends to appear in person or by proxy at the meeting to move the consideration of such business; (iv) such stockholder's total beneficial ownership of the Corporation's voting stock; and (v) such stockholder's interest in such business. The chairman of the meeting may refuse to acknowledge a motion to consider any business that he determines was not made in compliance with the foregoing procedures. (c) An adjourned meeting, if notice of the adjourned meeting is not required to be given to stockholders, shall be regarded as a continuation of the original meeting, and any notice of new business must meet the foregoing requirements based upon the date on which notice of the date of the original meeting was given. In the event of an adjourned meeting where notice of the adjourned meeting is required to be given to stockholders, any notice of new business made by a stockholder with respect to the adjourned meeting must meet the foregoing requirements based upon the date on which notice of the date of the adjourned meeting was given. (d) Nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of directors generally. However, any stockholder entitled to vote in the election of directors may nominate one or more persons for election as director(s) at a meeting only if written notice of such stockholder's intent to make such nomination or nominations has been delivered, either by personal delivery, United States mail, first class postage prepaid, or other 7 similar means, to the Secretary of the Corporation not later than (i) with respect to an election to be held at an annual meeting of stockholders, 90 calendar days in advance of the anniversary date of the release of the Corporation's proxy statement to stockholders in connection with the preceding year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, a nominee proposal shall be received by the Corporation a reasonable time before the solicitation is made, and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the 10th day following the date on which notice of such meeting is first given to stockholders. (e) Each such notice shall set forth: (i) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (iv) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (v) the consent of each nominee to serve as a director of the Corporation if so elected. ARTICLE II BOARD OF DIRECTORS SECTION 2.1 NUMBER. The Board of Directors shall consist of such number of directors as may be determined from time to time by resolution of the Board of Directors. SECTION 2.2 ELECTION; RESIGNATION; VACANCIES. (a) At each annual meeting at which the term of office of a class of directors expires, the stockholders shall elect directors of such class each to hold office until the annual meeting at which the terms of office of such class of directors expire and the election and qualification of his or her successor, or until his or her earlier death, resignation or removal. (b) Any director may resign at any time by giving written notice to the Chairman of the Board, if any, the President or the Secretary. Unless otherwise stated in a notice of resignation, it shall take effect when received by the officer to whom it is directed, without any need for its acceptance. (c) Any newly created directorship or any vacancy occurring in the Board of Directors for any reason may be filled by a majority of the remaining directors, although less than a quorum. Each director elected to replace a former director shall hold office until the expiration 8 of the term of office of the director whom he or she has replaced and the election and qualification of his or her successor, or until his or her earlier death, resignation or removal. A director elected to fill a newly created directorship shall serve until the annual meeting at which the term of office of the class of directors to which he or she is assigned expires, the election and qualification of his or her successor, or until his or her earlier death, resignation or removal. SECTION 2.3 REGULAR MEETINGS. A regular annual meeting of the Board of Directors shall be held, without call or notice, immediately after and at the same place as the annual meeting of stockholders, for the purpose of organizing the Board of Directors, electing officers and transacting any other business that may properly come before such meeting. Additional regular meetings of the Board of Directors may be held without call or notice at such times as shall be fixed by resolution of the Board of Directors. SECTION 2.4 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board, if any, the President, the Secretary, or by a majority of the Board of Directors. Notice of a special meeting of the Board of Directors shall be given by the person or persons calling the meeting at least twenty-four hours before the special meeting. The purpose or purposes of a special meeting need not be stated in the call or notice. SECTION 2.5 ORGANIZATION. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, if any, or if there is none or in his or her absence, by the President, or in his or her absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his or her absence the chairman of the meeting may appoint any person to act as secretary of the meeting. A majority of the directors present at a meeting, whether or not they constitute a quorum, may adjourn such meeting to any other date, time or place without notice other than announcement at the meeting. SECTION 2.6 QUORUM; VOTE REQUIRED FOR ACTION. At all meetings of the Board of Directors a majority of the whole Board of Directors shall constitute a quorum for the transaction of business. Unless the Certificate of Incorporation or these By-laws, as such may be amended or restated from time to time, otherwise provide, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. SECTION 2.7 COMPENSATION COMMITTEE. Two or more directors of the Corporation shall be appointed by the Board of Directors to act as a Compensation Committee, each of whom shall be a director who is not an employee of the Corporation or any subsidiary thereof. The Compensation Committee shall have the power and authority to set the compensation of the officers and other associates of the Corporation and shall possess the power and authority to act with respect to the compensation, option and other benefit plans of the Corporation. The Compensation Committee shall also recommend fees to be paid to members of the Board of Directors for services to the Corporation. SECTION 2.8 AUDIT COMMITTEE. Two or more directors of the Corporation shall be appointed by the Board of Directors to act as an Audit Committee, each of whom shall be a director who is not an employee of the Corporation or any subsidiary thereof. The Audit Committee shall have general oversight responsibility with respect to the Corporation's financial reporting. In performing its oversight responsibility, the Audit Committee shall make 9 recommendations to the Board of Directors as to the selection, retention, or change in the independent accountants of the Corporation, review with the independent accountants the scope of their examination and other matters (relating to both audit and non-audit activities), and review generally the internal auditing procedures of the Corporation. In undertaking the foregoing responsibilities, the Audit Committee shall have unrestricted access, if necessary, to the Corporation's personnel and documents and shall be provided with the resources and assistance necessary to discharge its responsibilities, including periodic reports from management assessing the impact of regulation, accounting, and reporting of other significant matters that may affect the Corporation. The Audit Committee shall review the financial reporting and adequacy of internal controls of the Corporation, consult with the internal auditors and certified public accountants, and from time to time, but not less than annually, report to the Board of Directors. SECTION 2.9 OTHER COMMITTEES. The Board of Directors may from time to time, in its discretion, by resolution passed by a majority of the entire Board of Directors, designate other committees of the Board of Directors (including, without limitation, a Nominating Committee) consisting of such number of directors as the Board of Directors shall determine, which shall have and may exercise such lawfully delegable powers and duties of the Board of Directors as shall be conferred or authorized by such resolution. The Board of Directors shall have the power to change at any time the members of any such committee, to fill vacancies and to dissolve any such committee. SECTION 2.10 ALTERNATES. The Board of Directors may from time to time designate from among the directors alternates to serve on any committee of the Board of Directors to replace any absent or disqualified member at any meeting of such committee. Whenever a quorum cannot be secured for any meeting of any committee from among the regular members thereof and designated alternates, the member or members of such committee present at such meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another director to act at such meeting in place of any absent or disqualified member. SECTION 2.11 QUORUM AND MANNER OF ACTING-COMMITTEES. A majority of the members of any committee of the Board of Directors shall constitute a quorum for the transaction of business at any meeting of such committee, and the act of a majority of the members present at any meeting at which a quorum is present shall be the act of such committee. SECTION 2.12 COMMITTEE CHAIRMAN, BOOKS AND RECORDS, ETC. The chairman of each committee of the Board of Directors shall be selected from among the members of such committee by the Board of Directors. Each committee shall keep a record of its acts and proceedings, and all actions of each committee shall be reported to the Board of Directors when required. Each committee shall fix its own rules of procedure not inconsistent with these By-laws or the resolution of the Board of Directors designating such committee and shall meet at such times and places and upon such call or notice as shall be provided by such rules. 10 SECTION 2.13 TELEPHONIC MEETINGS. Directors, or any committee of directors designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 2.8 shall constitute presence in person at such meeting. SECTION 2.14 INFORMAL ACTION BY DIRECTORS. Unless otherwise restricted by the Certificate of Incorporation or these By-laws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing (which may be in counterparts), and the written consent or consents are filed with the minutes of proceedings of the Board of Directors or such committee. SECTION 2.15 RELIANCE UPON RECORDS. Every director, and every member of any committee of the Board of Directors, shall, in the performance of his or her duties, be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors, or by any other person as to matters the director or member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation, including, but not limited to, such records, information, opinions, reports or statements as to the value and amount of the assets, liabilities and/or net profits of the Corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid, or with which the Corporation's capital stock might properly be purchased or redeemed. SECTION 2.16 INTERESTED DIRECTORS. A director who is directly or indirectly a party to a contract or transaction with the Corporation, or is a director or officer of or has a financial interest in any other corporation, partnership, association or other organization which is a party to a contract or transaction with the Corporation, may be counted in determining whether a quorum is present at any meeting of the Board of Directors or a committee thereof at which such contract or transaction is considered or authorized, and such director may participate in such meeting and vote on such authorization to the extent permitted by applicable law, including Section 144 of the General Corporation Law of the State of Delaware. SECTION 2.17 COMPENSATION. Unless otherwise restricted by the Certificate of Incorporation, as such may be amended or restated from time to time, the Board of Directors shall have the authority to fix the compensation of directors. The directors shall be paid their reasonable expenses, if any, of attendance at each meeting of the Board of Directors or a committee thereof and may be paid a fixed sum for attendance at each such meeting and an annual retainer or salary for services as a director or committee member. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 2.18 PRESUMPTION OF ASSENT. Unless otherwise provided by the laws of the State of Delaware, a director who is present at a meeting of the Board of Directors or a committee thereof at which action is taken on any matter shall be presumed to have assented to the action taken unless his or her dissent shall be entered in the minutes of such meeting or unless 11 he or she shall file his or her written dissent to such action with the person acting as secretary of such meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary immediately after the adjournment of such meeting. Such right to dissent shall not apply to a director who voted in favor of such action. ARTICLE III OFFICERS SECTION 3.1 NUMBER AND DESIGNATION. The officers of the Corporation shall be a Chairman of the Board, a President, one or more Vice Presidents, a Secretary and a Treasurer, and such Assistant Secretaries, Assistant Treasurers or other officers or agents as may be elected or appointed by the Board of Directors. Any two or more offices may be held by the same person unless the Certificate of Incorporation or these By-laws provide otherwise. SECTION 3.2 ELECTION AND TERM OF OFFICE. The officers of the Corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after the election of directors. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Vacancies may be filled or new offices created and filled at any meeting of the Board of Directors. Each officer shall hold office until his or her successor shall have been duly elected and shall have qualified or until his or her earlier death, resignation or removal. SECTION 3.3 REMOVAL AND RESIGNATION. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer or agent may resign at any time by giving written notice to the Board of Directors, to the Chairman of the Board or to the Secretary. Any such resignation shall take effect at the time of receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. SECTION 3.4 VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or otherwise may be filled by the Board of Directors for the unexpired portion of the term. SECTION 3.5 CHAIRMAN OF THE BOARD. The Chairman of the Board shall be the chief executive officer of the Corporation and shall in general supervise and control all of the business and affairs of the Corporation. The Chairman of the Board may execute, alone or with the Secretary or any other officer of the Corporation authorized by the Board of Directors, any deeds, mortgages, bonds, contracts or other instruments which the Board of Directors or a committee thereof has authorized to be executed, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or a committee thereof or by these By-laws to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed, and in general he or she shall perform all duties incident to the office of Chairman of the Board and such other duties as from time to time may be prescribed by the Board of Directors or 12 a committee thereof. When present, he or she shall preside at all meetings of the stockholders and of the Board of Directors. SECTION 3.6 PRESIDENT. The President shall be the chief operating officer of the Corporation, second only to the Chairman of the Board. In the absence of the Chairman of the Board or in the event of his or her inability to act as Chairman of the Board, the President shall perform the duties of the Chairman of the Board and, when so acting, shall have all the powers of, and be subject to all the restrictions placed upon the Chairman of the Board. He or she may execute, alone or with the Secretary or any other officer of the Corporation authorized by the Board of Directors, any deeds, mortgages, bonds, contracts or other instruments which the Board of Directors or a committee thereof has authorized to be executed, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or a committee thereof or by these By-laws to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed, and in general he or she shall perform all duties incident to the office of President and such other duties as from time to time may be prescribed by the Chairman of the Board, the Board of Directors or a committee thereof. SECTION 3.7 THE VICE PRESIDENTS. In the absence of the President or in the event of his or her inability to act, the Vice President (or in the event there shall be more than one Vice President, the Vice Presidents in the order determined by the Board of Directors or, if there shall have been no such determination, then in the order of their election) shall perform the duties of the President and, when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Board of Directors may also designate certain Vice Presidents as being in charge of designated divisions, plants or functions of the Corporation's business and add appropriate descriptions to their titles. In addition, any Vice President shall perform such duties as from time to time may be assigned to him or her by the Chairman of the Board, the President or the Board of Directors. SECTION 3.8 THE SECRETARY. The Secretary shall (a) keep the minutes of proceedings of the stockholders, the Board of Directors and any committee of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these By-laws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation; (d) affix the seal of the Corporation or a facsimile thereof, or cause it to be affixed, and, when so affixed, attest the seal by his or her signature, to all certificates for shares of capital stock of the Corporation prior to the issue thereof and to all other documents the execution of which on behalf of the Corporation under its seal is duly authorized by the Board of Directors or otherwise in accordance with the provisions of these By-laws; (e) keep a register of the post office address of each stockholder, director or committee member, which shall be furnished to the Secretary by such stockholder, director or member; (f) have general charge of the stock transfer books of the Corporation; and (g) in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him or her by the Chairman of the Board, the President or the Board of Directors. SECTION 3.9 THE TREASURER. The Treasurer shall have charge and custody of and be responsible for all funds and securities of the Corporation, receive and give receipts for moneys due and payable to the Corporation from any source whatsoever, deposit all such moneys in the name of the Corporation in such banks, trust companies or other depositories as shall be selected 13 in accordance with the provisions of Article IV of these By-laws, disburse the funds of the Corporation as ordered by the Board of Directors or the Chairman of the Board or as otherwise required in the conduct of the business of the Corporation and render to the Chairman of the Board, President or the Board of Directors, upon request, an accounting of all his or her transactions as Treasurer and a report on the financial condition of the Corporation. The Treasurer shall in general perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him or her by the Chairman of the Board, President or the Board of Directors. SECTION 3.10 ASSISTANT TREASURERS AND SECRETARIES. In the absence of the Secretary or the Treasurer, as the case may be, or in the event of his or her inability to act, the Assistant Secretaries and the Assistant Treasurers, respectively, in the order determined by the Board of Directors (or if there shall have been no such determination, then in the order of their election), shall perform the duties and exercise the powers of the Secretary or the Treasurer, as the case may be. In addition, the Assistant Secretaries and the Assistant Treasurers shall, in general, perform such duties as may be assigned to them by the Chairman of the Board, the President, the Secretary, the Treasurer or the Board of Directors. SECTION 3.11 SALARIES. The salaries of the officers and agents of the Corporation shall be fixed from time to time by the Board of Directors or by such officer as it shall designate for such purpose. No officer shall be prevented from receiving such salary by reason of the fact that he or she is also a director of the Corporation. SECTION 3.12 APPOINTMENTS. In addition to the elected officers described above, the Chairman of the Board may from time to time designate persons to be appointed Vice Presidents or bear such other title or titles as the Chairman of the Board shall specify. The powers and duties of each such appointed person shall be as prescribed by the Chairman of the Board from time to time. Such appointed persons shall not be deemed elected or executive officers of the Corporation. Each such appointed person shall serve until the successor thereof is appointed or until the earlier resignation or removal of such appointed person. ARTICLE IV STOCK CERTIFICATES AND TRANSFERS SECTION 4.1 CERTIFICATE. Every holder of stock shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman of the Board, if any, or the President or a Vice President, and by the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by such stockholder in the Corporation. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such officer, transfer agent, or registrar continued to be such at the date of issue. 14 SECTION 4.2 LOST, STOLEN OR DESTROYED CERTIFICATES; ISSUANCE OF NEW CERTIFICATES. The Corporation may issue a new certificate for stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such stockholder's legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. SECTION 4.3 TRANSFERS OF STOCK. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for stock of the Corporation duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer or, if the relevant stock certificate is claimed to have been lost, stolen or destroyed, upon compliance with the provisions of Section 4.2 of these By-laws, and upon payment of applicable taxes with respect to such transfer, and in compliance with any restrictions on transfer applicable to such stock certificate or the shares represented thereby of which the Corporation shall have notice and subject to such rules and regulations as the Board of Directors may from time to time deem advisable concerning the transfer and registration of stock certificates, the Corporation shall issue a new certificate or certificates for such stock to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Transfers of stock shall be made only on the books of the Corporation by the registered holder thereof or by such holder's attorney or successor duly authorized as evidenced by documents filed with the Secretary or transfer agent of the Corporation. Whenever any transfer of stock shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of transfer if, when the certificate or certificates representing such stock are presented to the Corporation for transfer, both the transferor and transferee request the Corporation to do so. SECTION 4.4 STOCKHOLDERS OF RECORD. The Corporation shall be entitled to treat the holder of record of any stock of the Corporation as the holder thereof and shall not be bound to recognize any equitable or other claim to or interest in such stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise required by the laws of the State of Delaware. ARTICLE V NOTICES SECTION 5.1 MANNER OF NOTICE. Except as otherwise provided by law, the Certificate of Incorporation or these By-laws, as such may be amended or restated from time to time, whenever notice is required to be given to any stockholder, director or member of any committee of the Board of Directors, such notice may be given by personal delivery or by depositing it, in a sealed envelope, in the United States mails, first class, postage prepaid, addressed, or by delivering it to a telegraph company, charges prepaid, for transmission, or by transmitting it via telecopier, to such stockholder, director or member, either at the address of such stockholder, director or member as it appears on the records of the Corporation or, in the case of such a director or member, at his or her business address; and such notice shall be deemed to be given at the time when it is thus personally delivered, deposited, delivered or transmitted, as 15 the case may be. Such requirement for notice shall also be deemed satisfied, except in the case of stockholder meetings, if actual notice is received orally or by other writing by the person entitled thereto as far in advance of the event with respect to which notice is being given as the minimum notice period required by law or these By-laws. SECTION 5.2 DISPENSATION WITH NOTICE. (a) Whenever notice is required to be given by law, the Certificate of Incorporation or these By-laws, as such may be amended or restated from time to time, to any stockholder to whom (i) notice of two consecutive annual meetings of stockholders, and all notices of meetings of stockholders or of the taking of action by stockholders by written consent without a meeting to such stockholder during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities of the Corporation during a 12-month period, have been mailed addressed to such stockholder at the address of such stockholder as shown on the records of the Corporation and have been returned undeliverable, the giving of such notice to such stockholder shall not be required. Any action or meeting which shall be taken or held without notice to such stockholder shall have the same force and effect as if such notice had been duly given. If any such stockholder shall deliver to the Corporation a written notice setting forth the then current address of such stockholder, the requirement that notice be given to such stockholder shall be reinstated. (b) Whenever notice is required to be given by law, the Certificate of Incorporation or these By-laws, as such may be amended or restated from time to time, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required, and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. SECTION 5.3 WAIVERS OF NOTICE. Any written waiver of notice, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of any regular special meeting of the stockholders, directors, or members of a committee or directors need be specified in any written waiver of notice. ARTICLE VI INDEMNIFICATION SECTION 6.1 RIGHT TO INDEMNIFICATION. (a) The Corporation shall indemnify and hold harmless, to the fullest extent permitted by law as in effect on the date of adoption of these By-laws or as they may thereafter be 16 amended or restated from time to time, any person who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (including any action by or in the right of the Corporation) (a "proceeding") by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture or other enterprise, against any and all liability and loss (including judgments, fines, penalties and amounts paid in settlement) suffered or incurred and expenses reasonably incurred by such person (including attorneys' fees and related expenses); provided that any standard of conduct applicable to whether a director or officer may be indemnified shall be equally applicable to an employee under this Article VI. The Corporation shall not be required to indemnify a person in connection with a proceeding initiated by such person, including a counterclaim or crossclaim, unless the proceeding was authorized by the Board of Directors. (b) For purposes of this Article VI: (i) any reference to "other enterprise" shall include all plans, programs, policies, agreements, contracts and payroll practices and related trusts for the benefit of or relating to employees of the Corporation and its related entities ("employee benefit plans"); (ii) any reference to "fines", "penalties", "liability" and "expenses" shall include any excise taxes, penalties, claims, liabilities and reasonable expenses (including reasonable legal fees and related expenses) assessed against or incurred by a person with respect to any employee benefit plan; (iii) any reference to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation or trustee or administrator of any employee benefit plan which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, beneficiaries, fiduciaries, administrators and service providers; (iv) any reference to serving at the request of the Corporation as a director, officer, employee or agent of a partnership or trust shall include service as a partner or trustee; and (v) a person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" for purposes of this Article VI. SECTION 6.2 PREPAYMENT OF EXPENSES. The Corporation may pay or reimburse the reasonable expenses incurred in defending any proceeding in advance of its final disposition if the Corporation has received in advance an undertaking by the person receiving such payment or reimbursement to repay all amounts advanced if it should be ultimately determined that he or she is not entitled to be indemnified under this Article VI or otherwise. The Corporation may require security for any such undertaking. SECTION 6.3 CLAIMS. If a claim for indemnification or payment of expenses under this Article VI is not paid in full within 30 days after a written claim therefor has been received by the Corporation, the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law. SECTION 6.4 INSURANCE. The Corporation may purchase and maintain insurance on its own behalf and on behalf of any person who is or was a director, officer or employee of the 17 Corporation or was serving at the request of the Corporation as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise (including service with respect to any employee benefit plan) against any liability asserted against him and incurred by him in any such capacity, whether or not the Corporation would have the power to indemnify such person against such liability under this Article VI. SECTION 6.5 NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Article VI shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation or these By-laws, as such may be amended or restated from time to time, agreement, vote of stockholders or disinterested directors or otherwise, and shall continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of the heirs, executors, administrators and personal representatives of such a person. SECTION 6.6 OTHER INDEMNIFICATION. The Corporation's obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee, partner or agent of another corporation, partnership, joint venture or other enterprise shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture or other enterprise. SECTION 6.7 AMENDMENT OR REPEAL. Any repeal or modification of the foregoing provisions of this Article VI shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. SECTION 6.8 MERGER OR CONSOLIDATION. For purposes of this Article VI, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees, so that any person who is or was a director, officer or employee of such a constituent corporation, or is or was serving at the request of such a constituent corporation as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise (including service with respect to any employee benefit plan), shall stand in the same position under this Article VI with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. SECTION 6.9 INDEMNIFICATION OF AGENTS. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any agent of the Corporation to the fullest extent of the provisions of this Article VI with respect to the indemnification and advancement of expenses of directors, officers and employees of the Corporation. 18 ARTICLE VII GENERAL SECTION 7.1 FISCAL YEAR. The fiscal year of the Corporation shall be determined by resolution of the Board of Directors. Absent such determination, the fiscal year of the Corporation shall end on January 1 of each year. SECTION 7.2 SEAL. The corporate seal shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors. SECTION 7.3 FORM OF RECORDS. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs, or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. SECTION 7.4 AMENDMENT OF BY-LAWS BY THE BOARD OF DIRECTORS. These By-Laws may be altered, amended or repealed, or new By-Laws may be adopted, by the affirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present. SECTION 7.5 AMENDMENT OF THE BY-LAWS BY THE STOCKHOLDERS. These By-laws may be altered, amended or repealed, or new By-Laws may be adopted, by the affirmative vote of the holders of seventy five percent (75%) of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote at any regular meeting of the stockholders or at any special meeting of the stockholders, provided notice of such alternation, amendment, repeal or adoption of new By-laws shall have been stated in the notice of such meeting. EX-10.7 3 1996 LONG-TERM INCENTIVE PLAN 1 EXHIBIT 10.7 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); 2 (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. -2- 3 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 wilful 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. -3- 4 "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 -4- 5 "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. -5- 6 "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 -6- 7 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. -7- 8 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 -8- 9 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 -9- 10 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. -10- 11 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 -11- 12 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 -12- 13 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. -13- 14 (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. 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. -14- 15 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 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 -15- 16 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. (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 -16- 17 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 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 -17- 18 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 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 -18- 19 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 -19- 20 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). 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 -20- 21 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, 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. -21- 22 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 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 -22- 23 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 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 -23- 24 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 -24- 25 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 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 -25- 26 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 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 -26- 27 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. 6.10 RIGHTS AS STOCKHOLDER. No person shall have any right as a stockholder of the Company with respect to any shares -27- 28 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. -28- EX-10.12 4 1997 LONG-TERM INCENTIVE PLAN 1 EXHIBIT 10.12 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); 2 (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. -2- 3 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 wilful 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. -3- 4 "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 -4- 5 "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. -5- 6 "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 -6- 7 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 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. -7- 8 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 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 -8- 9 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 -9- 10 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. -10- 11 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 -11- 12 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 -12- 13 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. -13- 14 (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. 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. -14- 15 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 -15- 16 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. (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 -16- 17 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 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 -17- 18 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. 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 -18- 19 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 -19- 20 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). 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 -20- 21 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. 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 -21- 22 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 connection with, the delivery of shares thereunder, such shares shall not be delivered unless such listing, registration, -22- 23 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 any) and to any outstanding Performance Share shall be -23- 24 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 -24- 25 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 directors (the "Outstanding Company Voting Securities"); excluding, however, the following: (A) any acquisition -25- 26 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 Corporate Transaction pursuant to which (1) all or substantially all of the individuals or entities who are the -26- 27 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 -27- 28 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. 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. -28- EX-10.14 5 AMDMT #1 TO 1998 NON-EMPLOYEE DIR. STOCK OP. PLAN 1 EXHIBIT 10.14 AMENDMENT NUMBER ONE TO MARKS BROS. JEWELERS, INC. 1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN WHEREAS, Whitehall Jewellers, Inc., a Delaware corporation (the "Company"), formerly known as Marks Bros. Jewelers, Inc., has adopted and maintains a stock option plan for the benefit of certain non-employee directors titled the "Marks Bros. Jewelers, Inc. 1998 Non-Employee Director Stock Option Plan" (the "Plan"); and WHEREAS, the Company desires to amend the Plan to reflect the change in the Company's name; NOW, THEREFORE, pursuant to the power of amendment contained in Section 3.2 of the Plan, the Plan is hereby amended effective as of January 20, 1999, as follows: 1. The Plan is hereby renamed the "Whitehall Jewellers, Inc. 1998 Non-Employee Director Stock Option Plan" and all references to the title of the Plan contained therein are hereby amended to reflect the change in the Plan's name. 2. Section 1.1 of the Plan is hereby amended by substituting the name "Whitehall Jewellers, Inc." for the name "Marks Bros. Jewelers, Inc." as it appears therein and all other 2 references to "Marks Bros. Jewelers, Inc." contained in the Plan are hereby changed to "Whitehall Jewellers, Inc.". IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its Chairman and attested by its Secretary on this 26th day of January, 1999. WHITEHALL JEWELLERS, INC. By: /s/ Hugh M. Patinkin ------------------------------ Chairman ATTEST: /s/ John R. Desjardins - ------------------------------ Secretary -2- EX-10.17 6 1ST AMDMT TO AMENDED & RESTATED CREDIT AGREEMENT 1 Exhibit 10.17 FIRST AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT, TERM LOAN AND GOLD CONSIGNMENT AGREEMENT First Amendment dated as of November 17, 1998 (the "Amendment") amending that certain Amended and Restated Revolving Credit, Term Loan and Gold Consignment Agreement dated as of September 10, 1998 (as amended and in effect from time to time, the "Credit Agreement"), by and among (a) Marks Bros. Jewelers, Inc., a Delaware corporation (the "Borrower"); (b) BankBoston, N.A., LaSalle National Bank, ABN AMRO Bank N.V. and the other lending institutions which are now parties thereto (collectively, the "Banks"); and (c) BankBoston, N.A., as Collateral Agent, Administrative Agent and Syndication Agent for the Agents as herein defined and the Banks and LaSalle National Bank and ABN AMRO Bank N.V., each as Syndication Agent for the Agents and the Banks (the Collateral Agent, Administrative Agent and Syndication Agents are collectively referred to as the "Agents"). Capitalized terms used herein and which are not otherwise defined shall have the respective meanings ascribed thereto in the Credit Agreement. WHEREAS, the Borrower and the Banks have agreed to modify certain terms and conditions of the Credit Agreement as specifically set forth in this Amendment; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SS.1. AMENDMENT TO SS.1.1 OF THE CREDIT AGREEMENT. Section 1.1 of the Credit Agreement is hereby amended by replacing the definition of "Borrowing Base" with the following definition: "Borrowing Base". At the relevant time of reference thereto, an amount determined by the Administrative Agent by reference to the most recent Borrowing Base Report delivered to the Banks and the Agents pursuant to ss.10.4(f), which is equal to (a) the lesser of (i) sixty-five percent (65%) of the net book value (determined on an average cost basis at lower of cost or market) of Eligible Inventory or (ii) the sum of (A) sixty percent (60%) of the difference between (I) the net book value (determined on an average cost basis at lower of cost or market) of Eligible Inventory, and (II) the Fair Market Value of Precious Metal contained in Eligible Inventory, plus (B) the Consignment Advance Rate Percentage multiplied by the Fair Market Value of Precious Metal contained in Eligible Inventory; minus (b) the 2 -2- Inventory Shrink Reserve; plus (c) 75% of Eligible Accounts Receivable; minus (d) Reserves; plus (e) the Discretionary Amount. The Administrative Agent may, in its discretion, from time to time, upon five (5) days' prior notice to the Borrower, (y) reduce the lending formula with respect to Eligible Accounts Receivable to the extent that the Administrative Agent determines that: (i) the dilution with respect of the Accounts Receivable for any period has increased in any material respect or may be reasonably anticipated to increase in any material respect above historical levels, or (ii) the general creditworthiness of account debtors or other obligors of the Borrower has declined or (z) reduce the lending formula(s) with respect to Eligible Inventory to the extent that the Administrative Agent determines that: (i) the number of days of the turnover of the inventory of the Borrower for any period has changed in any material adverse respect, (ii) the liquidation value of the Eligible Inventory, or any category thereof, has decreased, or (iii) the nature and quality of the inventory of the Borrower has deteriorated in any material respect or the mix of such inventory has changed materially. In determining whether to reduce the lending formula(s), the Administrative Agent may consider events, conditions, contingencies or risks which are also considered in determining Eligible Accounts Receivable, Eligible Inventory or in establishing the Reserves. In determining whether and how much to reduce the lending formula as provided above, the Administrative Agent shall do so in accordance with its reasonable credit judgment which shall be exercised in a manner that is not arbitrary or capricious and is consistent with the standards of eligibility and credit judgment applied by the Administrative Agent to the other borrowers. SS.2. CONDITIONS TO EFFECTIVENESS. This Amendment shall not become effective until the Administrative Agent receives the a counterpart of this Amendment, executed by the each of the Borrower, the Agents and the Banks. SS.3. REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Borrower contained in the Credit Agreement were true and correct when made and continue to be true and correct on and as of the date hereof as if made on the date hereof except to the extent of changes resulting from transactions contemplated or permitted by the Credit Agreement and to the extent that such representations and warranties relate expressly to an earlier date. No Default or Event of Default has occurred and is continuing. SS.4. RATIFICATION, ETC. Except as expressly amended hereby, the Credit Agreement and all documents, instruments and agreements related thereto, including, but not limited to the Security Documents, are hereby ratified and confirmed in all respects and shall continue in full force and effect. The Credit Agreement and this Amendment shall be read and construed as a single agreement. All references in the Credit Agreement or any related agreement or instrument to the Credit Agreement shall hereafter refer to the Credit Agreement as amended hereby. SS.5. NO WAIVER. Nothing contained herein shall constitute a waiver of, impair or otherwise affect any Obligations, any other obligation of the Borrower or any rights of the Agents or the Banks consequent thereon. 3 -3- SS.6. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original but which together shall constitute one and the same instrument. SS.7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICT OF LAWS). 4 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a document under seal as of the date first above written. MARKS BROS. JEWELERS, INC. By: /s/ John R. Desjardins ----------------------- Name: John R. Desjardins Title: Executive Vice President BANKBOSTON, N.A., individually and as Administrative Agent, as Collateral Agent and as Syndication Agent By: /s/ Ellen L. Heath ------------------ Name: Ellen L. Heath Title: Director LASALLE NATIONAL BANK, individually and as Syndication Agent By: /s/ Vanja L. St. Clair ---------------------- Name: Vanja L. St. Clair Title: Vice President ABN AMRO BANK N.V., individually and as Syndication Agent By: /s/ Jeffrey Sarfaty ------------------- Name: Jefferey Sarfaty Title: Vice President By: /s/ Ned Koppelson ----------------- Name: Ned Koppelson Title: Vice President THE CHASE MANHATTAN BANK By: /s/ Irene B. Spector -------------------- Name: Irene B. Spector Title: Vice President EX-10.19 7 AMENDMENT NUMBER TWO TO 401(K) PLAN 1 EXHIBIT 10.19 AMENDMENT NUMBER TWO TO MARKS BROS. JEWELERS 401(K) PLAN WHEREAS, Whitehall Jewellers, Inc., a Delaware corporation (the "Company"), formerly known as Marks Bros. Jewelers, Inc., has adopted and maintains a defined contribution plan for the benefit of certain employees titled the "Marks Bros. Jewelers 401(k) Plan" (the "Plan"); and WHEREAS, the Company desires to amend the Plan to reflect the change in the Company's name; NOW, THEREFORE, pursuant to the power of amendment contained in Section 14.1 of the Plan, the Plan is hereby amended effective as of January 20, 1999, as follows: 1. The Plan is hereby renamed the "Whitehall Jewellers, Inc. 401(k) Plan" and all references to the title of the Plan contained therein are hereby amended to reflect the change in the Plan's name. 2. The definition of "Company" that appears in subsection (7) of Article 2 is hereby amended by substituting the name "Whitehall Jewellers, Inc." for the name "Marks Bros. Jewelers, Inc." as it appears therein and all other references to 2 "Marks Bros. Jewelers, Inc." contained in the Plan are hereby changed to "Whitehall Jewellers, Inc.". IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its Chairman and attested by its Secretary on this 1st day of March, 1999. WHITEHALL JEWELLERS, INC. By: /s/ Hugh M. Patinkin ------------------------------ Chairman ATTEST: /s/ John R. Desjardins - -------------------------------- Secretary -2- EX-10.20 8 AMENDEMENT THREE TO 401(K) PLAN 1 EXHIBIT 10.20 AMENDMENT NUMBER THREE TO WHITEHALL JEWELLERS, INC. 401(k) PLAN WHEREAS, Whitehall Jewellers, Inc., a Delaware corporation (the "Company"), has heretofore adopted and maintains a defined contribution plan for the benefit of certain employees designated the "Whitehall Jewellers, Inc. 401(k) Plan" (the "Plan"); and WHEREAS, the Company desires to amend the Plan in certain respects; NOW, THEREFORE, pursuant to the power of amendment contained in Section 14.1 of the Plan, the Plan is hereby amended, effective March 11, 1999, by adding at the end thereof the Appendix A attached hereto. 2 IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its Chairman and attested by its Secretary on this 11th day of March, 1999. WHITEHALL JEWELLERS, INC. By: /s/ Hugh M. Patinkin ---------------------------- Chairman ATTEST: /s/ John R. Desjardins - ------------------------------- Secretary -2- 3 APPENDIX A TO WHITEHALL JEWELLERS, INC. 401(k) PLAN Special Rule for Employees Formerly Employed by Carlyle & Co. at Walnut Square, Dalton, Georgia, Carlyle & Co. at Lycoming Mall, Muncy, Pennsylvania or Jewel Box Solely for the purpose of determining whether an Employee has completed a Year of Service, all service completed by such individual while employed by any of (a) Carlyle & Co. at Walnut Square, Dalton, Georgia (the "Dalton Store"), (b) Carlyle & Co. at Lycoming Mall, Muncy, Pennsylvania (the "Muncy Store") or (c) Jewel Box ("Jewel Box") shall be included, provided that the individual satisfies the following conditions: 1. The individual was employed by the Dalton Store, the Muncy Store or Jewel Box on the day immediately preceding the date (the "Closing Date") of the completion of the transactions contemplated by the Agreement (the "Agreement") dated the 19th day of June, 1998, by and between Carlyle & Co. Jewelers, a Delaware corporation, Carlyle & Co. Montgomery, an Alabama corporation, and J.E. Caldwell Co., a Pennsylvania corporation and the Company; 2. The individual is offered employment by the Company in connection with the transaction contemplated by the Agreement; and 3. The individual accepts such offer of employment with Whitehall Jewellers, Inc. and on or about the Closing Date becomes an employee of the Company. -3- EX-10.21 9 AMENDMENT NUMBER FOUR TO 401(K) PLAN 1 EXHIBIT 10.21 AMENDMENT NUMBER FOUR TO WHITEHALL JEWELLERS, INC. 401(K) PLAN WHEREAS, Whitehall Jewellers, Inc., a Delaware corporation (the "Company"), has adopted and maintains a defined contribution plan for the benefit of certain employees titled the "Whitehall Jewellers, Inc. 401(k) Plan" (the "Plan"); and WHEREAS, the Company desires to amend the Plan as requested by the Internal Revenue Service in order to obtain from the Internal Revenue Service a favorable determination letter for the Plan; NOW, THEREFORE, pursuant to the power of amendment contained in Section 14.1 of the Plan, the Plan is hereby amended effective February 1, 1997, as follows: 1. The penultimate sentence contained in Section 4.2(b) of the Plan is hereby amended to read as follows: The amount of any income or loss allocable to such Excess Before-Tax Contributions shall equal the income earned with respect to the Participant's Account, if any, for the taxable year and the period (the "gap period") between the end of the taxable year and the 2 date of distribution of the Excess Before-Tax Contributions multiplied by a fraction, the numerator of which is the Excess Before-Tax Contributions and the denominator of which is the sum of (i) the Participant's total Account balance as of the beginning of the taxable year plus (ii) the Participant's Before-Tax Contributions for the taxable year and the gap period. 2. Paragraphs (1) and (2) of Section 4.3(a) of the Plan are hereby amended to read as follows: (1) The highly compensated average deferral percentage for such year does not exceed the product of the non-highly compensated average deferral percentage multiplied by 1.25. (2) The highly compensated average deferral percentage for such year (1) does not exceed the non-highly compensated average deferral percentage by more than two percentage points, and (ii) does not exceed the product of the non-highly compensated average deferral percentage multiplied by 2.0. 3. Paragraph (3) of Section 4.3(b) of the Plan is hereby amended to read as follows: (3) the term "highly compensated eligible employee" shall mean (and shall be determined in accordance with Section 414(q) of the Code and the regulations hereunder) any Eligible Employee or former employee who is a Participant, who performs service in the determination year and who (A) was, at any time during the current or preceding year, a 5-percent owner (as defined in Section 416(i)(1) of the Code) of the Employer and Affiliates, or (B) had, for the preceding year, compensation (as defined in Section 415(c)(3) of the Code, except that for Plan Years beginning before January 1, 1998, compensation shall be determined without regard to Section 125, 402(e)(3) or 402(h)(1) of the Code) from the Employer and Affiliates in excess -2- 3 of $80,000 (as adjusted from time to time pursuant to Section 415(d) of the Code); 4. The penultimate sentence of the last paragraph contained in Section 4.3(c) of the Plan is hereby amended to read as follows: The amount of any income or loss allocable to any such reductions to be so distributed shall be determined in the same manner as income or loss allocable to Excess Before-Tax Contributions is determined under Section 4.2(b), except that, if different, the Plan Year shall be used instead of the taxable year. 5. Section 6.4 of the Plan is hereby amended by inserting the following parenthetical phrase after the word "$30,000" that appears therein: (for the Plan Year beginning February 1, 1997, $30,000 multiplied by 11/12) 6. Paragraph (2) of Section 7.2 of the Plan is hereby amended by adding the following new sentence at the end thereof: In the case of any Participant who is not a "five percent owner," a lump sum distribution paid during the Participant's lifetime shall be made not later than the April 1 of the calendar year following the later of the calendar year in which the Participant terminates -3- 4 employment and the calendar year in which the Participant attains age 70-1/2. 7. The first sentence of Section 13.3 of the Plan is hereby amended to read as follows: Notwithstanding any provision of the Plan to the contrary, during any Plan Year for which the Plan is a top-heavy plan, the Employer of each Participant who is not a key Employee shall make a contribution for such Participant for the Plan Year which in no event shall be less than the lesser of (i) three percent of such Participant's compensation during such Plan Year and (ii) the highest percentage at which contributions are made under Article 4 on behalf of any key Employee for such Plan Year. -4- 5 IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its Chairman and attested by its Secretary on this 28th day of April, 1999. WHITEHALL JEWELLERS, INC. By: /s/ Hugh M. Patinkin ------------------------------ Chairman ATTEST: /s/ John R. Desjardins - ------------------------------- Secretary -5- EX-10.22 10 EMPLOYMENT AND SEVERANCE AGREEMENT 1 EXHIBIT 10.22 EMPLOYMENT AND SEVERANCE AGREEMENT THIS AGREEMENT is entered into as of the 17th day of March, 1997 by and between Marks Bros. Jewelers, Inc., a Delaware corporation, and Manny A. Brown ("Executive"). W I T N E S S E T H WHEREAS, the Company desires to employ the Executive as its Executive Vice President - Store Operations, and the Executive desires to accept such employment, upon the conditions set forth herein; WHEREAS, in this capacity Executive will be a key employee of the Company and his services and knowledge are valuable to the Company; 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 wilful malfeasance. (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 2 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 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, -2- 3 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 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) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Company" means Marks Bros. Jewelers, Inc., a Delaware corporation. -3- 4 (f) "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 12 or (2) if Executive's employment by the Company terminates by reason of death, the date of death of Executive. (g) "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. (h) "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 materially lower in responsibility than Executive's responsibilities with the Company as of the date Executive commences employment with the Company 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; (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 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 as of the commencement of employment or, if a Change in Control has occurred, -4- 5 prior to such Change in Control, unless Executive is permitted to participate in other plans providing Executive with substantially comparable benefits in the aggregate, 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 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 11(b). -5- 6 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. (i) "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. (j) "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. (k) "Window Period" means the 30-day period commencing six months after the date of a Change in Control. 2. Position; Responsibilities. The Company shall employ Executive initially as its Executive Vice President -- Store Operations, commencing March 17, 1997 (the "Commencement Date"). Executive shall perform such executive and administrative duties as the chief executive officer of the Company (the "Company CEO") or Board may assign to Executive from time to time. While an employee of the Company Executive shall perform faithfully the duties assigned Executive to the best of Executive's abilities and devote Executive's full and undivided business time and attention to the transaction of the Company's business and not engage in any other business activities except with the approval of the Company CEO. The Company or Executive may terminate Executive's employment at any time. 3. Compensation; Options. (a) Base Salary. As compensation for Executive's services hereunder, the Company shall pay to Executive salary at an annual rate of $200,000 or such higher salary as may be established by the Company from time to time. (b) Bonus. Executive shall be entitled to participate in the Company's Management Bonus Plan or other bonus plan made available to elected officers of the Company generally. For the Company's fiscal year ending January 31, 1998 Executive -6- 7 shall receive a cash bonus as a percentage of salary paid equal to the percentage of salary paid to the Company CEO. (c) Benefits. Executive shall be entitled to all fringe benefits made available to elected officers of the Company generally (currently including vacation days, health benefits, life insurance coverage, automobile benefits and reimbursement of expenses) from time to time. (d) Options. (i) Executive shall be granted stock options under on or more of the Company's stock option plans effective as of the Commencement Date for 100,000 shares of the Company's common stock at an exercise price per share equal to the closing sale price of such common stock on the Nasdaq National Market on the Commencement Date (the "Exercise Price"). Such options (the "Options") shall vest 25% per year on each of the first, second, third and fourth anniversaries of such Commencement Date. Options for the ISO Number of shares of the Company's common stock shall be incentive stock options for purposes of Section 422 of the Code; provided that, if the Company's stockholders do not approve the Company's 1997 Long-Term Incentive Plan (the "1997 Plan") within the time required under Code for incentive stock option treatment, any of such Options granted under the 1997 Plan shall be nonqualified options. All of the Options other than those that are incentive stock options shall be nonqualified stock options. The ISO Number shall be 400,000, divided by the Exercise Price, and then, unless such resulting number is evenly divisible by four, rounded to the nearest lower whole number that is evenly divisible by 4. (ii) If Executive exercises all or any portion of the Options at a time or in a manner which results in all or any portion of the compensation relating thereto for Federal income tax purposes to be nondeductible pursuant to Section 162(m) of the Code or any successor provision, Executive shall pay the Company, concurrently with and as a condition to the exercise of such Options, an amount in cash equal to 40% of such nondeductible compensation. Furthermore, if any time Executive disposes of any shares acquired pursuant to the Options at a time or in a manner which results in any portion of the compensation relating to the Options to be so nondeductible, Executive shall immediately pay the Company an amount in cash equal to 40% of such nondeductible compensation. -7- 8 4. Payments Upon Termination of Employment. (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 -8- 9 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. 5. 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 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 -9- 10 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 5(c), all determinations required to be made under this Section 5, 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 5, 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 5(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. (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 -10- 11 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 5(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 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 -11- 12 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 5(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 5(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 5(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. 6. 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. 7. 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 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 7; 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. 8. Termination of Agreement. This Agreement shall be effective on the date hereof and shall terminate upon the first to occur of (i) Executive's 70th birthday and (ii) Executive's death. -12- 13 9. Scope of Agreement. Nothing in this Agreement shall be deemed to entitle Executive to continued employment with the Company or its subsidiaries. 10. 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. 11. 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 paragraph (a) of this Section 11, 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. -13- 14 (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. 12. 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 184 Oak Knoll Terrace, Highland Park, Illinois 60035, and if to the Company, to Marks Bros. Jewelers, 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 Company from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. 13. 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 -14- 15 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 5, 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 4 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. 14. 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. 15. 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. 16. 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. -15- 16 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. MARKS BROS. JEWELERS, INC. By: /s/ Hugh M. Patinkin ----------------------------- Hugh M. Patinkin Chairman, President and Chief Executive Officer By: /s/ Manny A. Brown ----------------------------- Manny A. Brown -16- EX-13 11 1998 ANNUAL REPORT 1 WHITEHALL(R) WHITEHALL JEWELERS, INC. [GRAPHIC} 1998 Annual Report 2 --------------------- Company Profile --------------------- Whitehall Jewellers, Inc. (formerly Marks Bros. Jewelers, Inc.) is a leading national specialty retailer of fine jewelry operating 250 stores in 28 states as of January 31, 1999. Founded in 1895, the Company operates stores in regional and superregional shopping malls under the names Whitehall Co. Jewellers, Lundstrom Jewelers, and Marks Bros. Jewelers. Whitehall Jewellers, Inc.'s Common Stock is traded on the NASDAQ National Market System under the symbol "WHJI." [MAP GRAPHIC]
FISCAL Fiscal Fiscal (in thousands, except per share data) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Net sales ............................................. $238,942 $188,898 $155,474 Income from operations ................................ $ 27,313 $ 22,216 $ 19,031 Pro forma net income(1) ............................... $ 14,262 $ 11,230 $ 7,343 Pro forma net income per share(1)...................... $ 1.38 $ 1.10 $ 0.89 Return on equity(2).................................... 25.9% 26.3% N/A - ----------------------------------------------------------------------------------------------
(1) Pro forma results exclude the extraordinary gain on the extinguishment of debt in the second quarter of fiscal 1996 and the extraordinary loss on the extinguishment of debt in the fourth quarters of fiscal 1997 and 1996. The effects of the Company's IPO, recapitalization and follow-on equity offering in fiscal 1996 are reflected as of the date they occurred. (2) Return on equity is calculated by dividing pro forma net income by average shareholders' equity. 3 - ------------------- TO OUR SHAREHOLDERS - ------------------- There's a new name on the cover of this year's annual report. On January 20, 1999, we changed our corporate name from Marks Bros. Jewelers, Inc. to Whitehall Jewellers, Inc. to align our corporate name with our principal store brand -- and the commitment to quality, service and convenience that stands behind it. Fiscal 1998 was an exceptional year for our Company. We strengthened our position in today's consolidating jewelry industry by opening 34 new stores and acquiring a chain of 36 stores in the southeastern United States. With 250 stores in 28 states, we have the market presence and the operating scale to take better advantage of an economic climate that favors discretionary purchases. These factors, plus our efforts to expand our marketing programs and credit promotions, produced impressive gains in comparable store sales and propelled us to our seventh consecutive year of record sales and earnings. This performance demonstrates that our proven operating strategy of growing our store base and optimizing sales through upscale merchandising and well-timed promotions can produce the strong, sustained growth our shareholders expect. RECORD RESULTS Whitehall Jewellers continued its track record of delivering strong growth in sales and earnings. Net sales for the fiscal year ended January 31, 1999 increased 26.5% over the prior fiscal year to $238.9 million. This increase reflects a 5.8% increase in comparable store sales, plus sales from acquired stores and new stores opened during the year. Income from operations rose nearly 23% to $27.3 million from $22.2 million in fiscal 1997. Income before extraordinary items rose to $14.3 million, or $1.38 per diluted share, versus $11.2 million, or $1.10 per diluted share, for fiscal 1997. Over the past five years our operating strategy has produced a compounded annual growth rate in operating income of about 26%. Recognizing that our stock price does not fully reflect our sustained earnings performance, in February 1999 our Board of Directors authorized the purchase of up to $10 million of the Company's shares. "WE ACCELERATED OUR GROWTH BY OPENING 34 NEW STORES AND ACQUIRING A CHAIN OF 36 STORES IN THE SOUTHEAST." [PHOTO] OUR OPEN-STORE FORMAT PROVIDES AN ATTRACTIVE AND INVITING SHOPPING EXPERIENCE. ============ STORE GROWTH (Dollars in millions) [BAR GRAPH] 1998 Annual Report 1 4 A PROVEN FORMULA FOR GROWTH The cornerstone of our growth strategy has been to open immediately productive new stores and to increase the productivity of existing stores. In 1998 we developed a third avenue for growth when we successfully completed a significant acquisition that gives us a strong presence in a dynamic, fast growing market. Opening New Stores. In fiscal 1998 we opened 34 new stores -- compared to 30 stores in fiscal 1997 -- and entered several new markets including Los Angeles, Philadelphia and Portland, Oregon. We followed our proven operating strategy of opening small, center court stores in well-established, upscale malls. Our small store format gives us a distinct advantage by limiting the competition we face for prime store locations. And because we spread most of our new store openings throughout our current markets, we can effectively leverage our supervisory personnel and certain media advertising. By combining outstanding real estate with extensive jewelry assortments, we ensure that our new stores quickly achieve impressive sales results and generate strong returns on investment. Whitehall's average store generates about $1.1 million in sales, up from $990,000 in fiscal 1996. In fact, within twelve months of opening, our new stores typically achieve about 90% of the sales volume of a mature store. Our average sales per square foot of $1,323 is among the highest in the industry, making Whitehall Jewellers a desirable tenant. Improving Store Productivity. The second key element of Whitehall's operating strategy is to continually increase the sales productivity of our stores. The Company has increased comparable store sales for 21 consecutive quarters. We also increased the size of our average merchandise sale from $273 in fiscal 1997 to $286 in fiscal 1998. Our growth in sales is in some measure due to our successful private label credit program which offers our customers the convenience of instant credit. Our non-recourse arrangement with a third-party source avoids credit risk to the Company and helps us maintain the quality of our earnings. It also allows our sales associates to focus on selling jewelry rather than on numerous credit functions. "OUR 26% RETURN ON EQUITY PLACES US AT THE TOP OF OUR INDUSTRY." [PHOTO] OPERATING TWO STORE CONCEPTS WITHIN A MALL ALLOWS US A SAFER, EASIER FORM OF EXPANSION. ============ SALES GROWTH (Dollars in millions) [BAR GRAPH] 2 Whitehall Jewellers, Inc. 5 The decision to expand our marketing initiatives also directly impacts our sales growth. Marketing will play an increasingly important role in the years to come as we continue to expand our store base and build our brand identity. Our marketing database now contains valuable demographic and purchase-related information on over one million customers. With our greater operating scale, we are now well-positioned to leverage our marketing campaigns to cover more stores and reach more customers. In 1997, we initiated our first Christmas radio campaign that promoted about 30% of our stores. During 1998, our holiday radio campaign extended to nearly 50% of our stores. Along with our successful direct marketing campaign, radio advertising helped drive a fourth quarter comparable store sales increase of 8.3%. Growing Through Acquisition. In September 1998, the Company made its first large-scale acquisition when we purchased the 36-store Jewel Box chain. These stores, located primarily in North Carolina and several surrounding states, have enabled Whitehall to quickly develop operating scale in a growing market where we had no significant presence. Like our existing stores, most have attractive, open storefronts and occupy prime corner locations in established malls. We have converted all of these stores to Whitehall/Lundstrom merchandise assortments, credit programs, operating procedures and nameplates. These stores have posted solid sales increases since the acquisition and should contribute to Whitehall's ongoing earnings momentum. THE RIGHT PEOPLE Every successful organization must know its customers and exceed their expectations. We serve our customers during special times in their lives -- often when they are giving a meaningful gift to a loved one. And these occasions require the special attention customers experience at Whitehall. We hire highly talented and motivated people and give them the tools they need to provide our customers with a wonderful shopping experience. We attract and retain sales associates through incentive programs that provide them bonus opportunities throughout the year. In 1998, we continued to build our infrastructure -- and provide our sales associates additional guidance and support -- by adding 10 new field-based supervisors. "WE'VE INCREASED COMPARABLE STORE SALES FOR 21 CONSECUTIVE QUARTERS." [PHOTO] OUR SMALL STORE FORMAT LIMITS COMPETITION FOR PRIME "CENTER COURT" LOCATIONS. ======================= OPERATING INCOME GROWTH (Dollars in millions) [BAR CHART] 1998 Annual Report 3 6 OUTLOOK As a leader in the fine jewelry industry, Whitehall Jewellers has achieved consistent long-term success by responding to changing demographics and customer preferences. We cater to the more upscale baby boom generation that is characterized by above-average household incomes and greater spending on discretionary purchases. To better serve these customers, we have expanded our selection of upscale merchandise. Sales of big-ticket items over $3,000 now comprise over 15% of total sales, and many of our most popular items sell for $1,000 or more. In 1998, we continued our track record of posting strong growth in operating income. We did so by adhering to our proven operating strategy that combines new store expansion with upscale merchandising and attractive marketing campaigns that target our prosperous customer base. We also augmented this growth strategy when we completed a significant acquisition. We will consider similar opportunities in the future as today's large but fragmented jewelry industry continues to consolidate. In 1999, we will expand our operations further by opening approximately 40 new stores. We have reached agreement with developers to open stores in almost all of the locations we have targeted, and already have opened a number of stores since the beginning of fiscal 1999. While most of our growth will be concentrated in existing markets, we plan to enter the Indianapolis, Seattle and Austin, Texas markets this year. We are enthusiastic about our future growth opportunities. The investments we have made in new stores, marketing, infrastructure and talented people have produced impressive results. As we look ahead, we believe we have the operating and growth strategies to continue to capture additional market share and build shareholder value. /s/ HUGH M. PATINKIN HUGH M. PATINKIN Chairman of the Board, Chief Executive Officer and President "OUR STOCK REPURCHASE PROGRAM REFLECTS OUR CONFIDENCE IN THE COMPANY'S PROSPECTS FOR LONG-TERM GROWTH AND PROFITABILITY." [PHOTO] Executive Management (left to right): MANNY A. BROWN Executive Vice President - Store Operations JOHN R. DESJARDINS Executive Vice President - Finance and Administration, Secretary MATTHEW M. PATINKIN Executive Vice President - Store Operations HUGH M. PATINKIN Chairman of the Board, Chief Executive Officer, President LYNN EISENHEIM Executive Vice President - Merchandising 4 Whitehall Jewellers, Inc. 7 - -------------------------------------------------------------------------------- SELECTED HISTORICAL FINANCIAL AND OPERATING DATA The following table sets forth certain financial and operating data of the Company. The selected statement of operations data and balance sheet data as of and for the fiscal year ended January 31, 1999 (fiscal 1998) and each of the four prior fiscal years are derived from audited financial statements of the Company. The selected financial information set forth below should be read in conjunction with"Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's audited financial statements appearing elsewhere herein.
(in thousands, except per share and selected operating data) FISCAL 1998 Fiscal 1997 Fiscal 1996 Fiscal 1995 Fiscal 1994 - ------------------------------------------------------------------------------------------------------------------------------------ STATEMENT OF OPERATIONS DATA: Net sales $ 238,942 $ 188,898 $155,474 $131,022 $106,683 Cost of sales (including buying and occupancy expenses) 139,368 110,873 91,134 77,722 64,223 - ------------------------------------------------------------------------------------------------------------------------------------ Gross profit 99,574 78,025 64,340 53,300 42,460 Selling, general and administrative expenses 72,261 55,809 45,309 37,887 30,748 - ------------------------------------------------------------------------------------------------------------------------------------ Income from operations 27,313 22,216 19,031 15,413 11,712 Interest expense 4,123 3,806 6,993 12,314 10,594 Stock award expense -- -- -- 461 -- ESOP compensation expense -- -- -- 590 547 - ------------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations before income taxes 23,190 18,410 12,038 2,048) 571 Income tax expense (benefit)(1) 8,928 7,180 4,695 (14,924) -- - ------------------------------------------------------------------------------------------------------------------------------------ Net income before extraordinary items 14,262 11,230 7,343 16,972 571 Extraordinary item, net(2) -- (1,035) 10,057 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 14,262 $ 10,195 $ 17,400 $ 16,972 $ 571 ==================================================================================================================================== DILUTED EARNINGS PER SHARE: Net income before extraordinary items $ 1.38 $ 1.10 $ 0.89 $ 3.49 $ 0.11 SELECTED OPERATING DATA: Stores open at end of period 250 191 164 146 131 Average net sales per store(3) $1,100,000 $1,045,000 $990,000 $936,000 $836,000 Average net sales per gross square foot(4) $ 1,323 $ 1,325 $ 1,247 $ 1,187 $ 1,068 Average merchandise sale $ 286 $ 273 $ 255 $ 245 $ 229 Comparable store sales increase(5) 5.8% 4.8% 7.9% 11.0% 7.6% BALANCE SHEET DATA (AT END OF PERIOD): Working capital $ 38,478 $ 34,967 $ 25,824 $ 21,512 $ 20,460 Total assets 169,606 118,003 93,533 87,403 61,512 Total debt 49,526 28,907 21,267 107,891 110,806 Stockholders' equity (deficit) 62,168 47,803 37,507 (47,858) (66,578)
(1) Income tax benefit in the year ended January 31, 1996 (fiscal 1995) resulted from the reversal of the Company's deferred tax valuation allowance and corresponding recognition of a deferred tax asset. (2) Reflects net extraordinary gain (loss) in connection with the extinguishment of debt (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Background" and Note 9 of Notes to Financial Statements). (3) Average net sales per store represents the total net sales for stores open for a full fiscal year divided by the total number of such stores. (4) 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. (5) 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. 1998 Annual Report 5 8 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's financial statements, including the notes thereto. BACKGROUND The Company is a leading, national specialty retailer of fine jewelry operating 250 stores in 28 states as of January 31, 1999. The Company's 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 Company stores grew to 250 from 111, and the Company's average annual store sales increased to $1,100,000 from $784,000. To strengthen its capital structure and provide greater financial flexibility for new store openings, in May 1996, the Company completed an initial public offering and a concurrent restructuring of outstanding indebtedness which substantially reduced the Company's indebtedness and ongoing interest expense. In November 1996, the Company completed a second public offering that further strengthened the Company's capital structure, reduced indebtedness and enabled the Company to accelerate the pace of new store openings. A portion of the proceeds from the common stock offerings in fiscal 1996 were used to extinguish outstanding indebtedness prior to the stated maturity dates, and resulted in extraordinary gains and charges. In the fourth quarter of fiscal 1997, the Company completed a tender offer to purchase a portion of its subordinated debt, resulting in an extraordinary charge to earnings. The growth of the Company's net sales and earnings will depend to a significant degree on the Company's ability to successfully expand its operations through the opening of new stores. The Company plans to open approximately 40 stores in calendar 1999, and a similar number of stores in 2000. The Company's policy is to charge as incurred pre-opening costs associated with new stores. In September 1998, the Company acquired substantially all of the Jewel Box chain consisting of 36 jewelry stores located in eight states in the southeastern United States. The Company financed the 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. A variety of factors affect the sales results for the Company's stores, including economic conditions, the retail sales environment, the availability and cost of credit from third party credit providers, the results of the Company's merchandising and marketing strategies, and the Company's ability to otherwise execute its business strategy. The Company experienced a 5.8% comparable store sales increase in fiscal 1998 (which includes sales from October 1998 through January 1999 from the Jewel Box stores acquired in September 1998). There can be no assurance that the Company will achieve comparable store sales increases in future reporting periods. The Company's business is highly seasonal, with a significant portion of its sales and most of its income generated during the fourth fiscal quarter ending January 31. The Company has historically experienced lower net sales in each of its first three fiscal quarters and expects this 6 Whitehall Jewellers, Inc. 9 - -------------------------------------------------------------------------------- trend to continue. The Company has experienced net losses from time to time in one or more of its first three fiscal quarters. The Company's quarterly and annual results of operations may fluctuate significantly as a result of factors including the timing of new store openings; net sales contributed by new stores; increases or decreases in comparable store sales; timing of certain holidays; changes in the Company's merchandise, marketing, or credit programs; general economic, industry and weather conditions that affect consumer spending; and pricing, merchandising, marketing, credit and other programs of competitors. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain information derived from the statements of operations of the Company expressed as a percentage of net sales for such periods.
Percentage of Net Sales FISCAL 1998 Fiscal 1997 Fiscal 1996 - -------------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales (including buying and occupancy expenses) 58.3 58.7 58.6 - -------------------------------------------------------------------------------------------------- Gross profit 41.7 41.3 41.4 Selling, general and administrative expenses 30.3 29.5 29.2 - -------------------------------------------------------------------------------------------------- Income from operations 11.4 11.8 12.2 Interest expense 1.7 2.0 4.5 - -------------------------------------------------------------------------------------------------- Income before income taxes 9.7 9.8 7.7 Income tax expense 3.7 3.8 3.0 - -------------------------------------------------------------------------------------------------- Net income before extraordinary items 6.0 6.0 4.7 Extraordinary item, net -- (0.6) 6.5 - -------------------------------------------------------------------------------------------------- Net income 6.0% 5.4% 11.2% ==================================================================================================
FISCAL 1998 COMPARED TO FISCAL 1997 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 the Company's store-based personnel. The Company opened 70 new stores (including the 36 acquired stores) and closed 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. 1998 Annual Report 7 10 - -------------------------------------------------------------------------------- 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 the Company's larger store base and increased net sales. 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 the Company's 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 usage of private label credit contributed to an increase in the average price per merchandise sale and higher total sales. 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 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. FISCAL 1997 COMPARED TO FISCAL 1996 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 average number of units sold per store 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, 8 Whitehall Jewellers, Inc. 11 - -------------------------------------------------------------------------------- and improvements in the quality of the Company's 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. The Company 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 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 the Company's larger store base and increased net sales. 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 the Company's 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, the Company used a one-year no-interest credit program which resulted in increased private label credit sales. These private 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. 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 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. LIQUIDITY AND CAPITAL RESOURCES Over the last three fiscal years, the Company's ongoing capital requirements have been to fund 1998 Annual Report 9 12 - -------------------------------------------------------------------------------- increases in inventory at existing stores, to fund capital expenditures and working capital (primarily inventory) associated with the Company's new stores, and in fiscal 1998, to acquire stores from a third party. During the same period, the Company's primary sources of liquidity have been cash flow from operations and bank borrowings under the Company's credit facility. The Company's 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 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 included (i) proceeds from the term loan under the new credit facility ($20.0 million), (ii) an increase in revolver borrowings under the new credit facility ($12.0 million), (iii) proceeds from gold consigned under the gold consignment facility ($6.0 million), and (iv) proceeds from the exercise of stock options ($0.1 million). The Company increased its 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). The Company 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. The Company's 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 include 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 (i) proceeds from the term loan ($11.4 million), (ii) an increase in revolver borrowings under the current revolving credit facility ($6.1 million), (iii) proceeds from the exercise of stock options ($0.1 million), and (iv) an increase in the net amount of outstanding checks ($2.4 million). The Company 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, the Company amended and expanded its credit facility to a total of $110 million. The Company has 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 revolving credit facility. Interest rates and commitment fees charged on the unused facility float in a grid based on the Company's quarterly performance. Since these interest rates are determined by reference to Eurodollar or prime rates, changes in market interest rates can materially affect the Company's 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 the Company's revolver during fiscal 1998 and 1997 were $45.5 million and $32.5 million, respectively. The unused facility was $44.1 million as of January 31, 1999. The Company has a gold consignment facility with a lending institution pursuant to which the Company accepts as consignee, and is responsible to return at some future date, a fixed number of 10 Whitehall Jewellers, Inc. 13 - -------------------------------------------------------------------------------- ounces of gold. The periodic charges paid by the Company are computed based on a percentage of the value of the gold consigned. Therefore, an increase in the price of gold could increase substantially the annual costs to the Company of the gold consignment and the eventual cost to the Company upon the termination of this arrangement. During fiscal 1996 and 1998, the Company sold and simultaneously consigned 39,000 and 20,000 troy ounces of gold for $15.3 and $6.0 million, respectively. During fiscal 1997, the Company did not sell and consign any gold. On March 3, 1999, the Company sold and simultaneously consigned 10,500 troy ounces of gold for $3.0 million under its gold consignment facility. With the addition of the newly consigned gold, on September 10, 2003, the Company is 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 be renewed. A substantial portion of the merchandise sold by the Company is carried on a consignment basis prior to sale or is otherwise financed by vendors, thereby reducing the Company's direct capital investment in inventory. The 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, the financial condition of the Company and a number of economic or competitive conditions in the jewelry business or the economy generally. Any change in these relationships could have a material adverse effect on the Company's results of operations or financial condition. 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. The repurchase program authorizes the Company to purchase shares over an 18 month period in the open market or through privately negotiated transactions. The program will be financed using the Company's revolving credit facility. As of March 31, 1999, the Company had repurchased 565,500 shares at a total cost of approximately $9.3 million. During 1999, the Company plans to open approximately 40 stores. New stores on average require inventory of approximately $450,000 and capital expenditures of approximately $250,000. Pre-opening expenses for each new store average approximately $20,000. The Company anticipates capital expenditures of approximately $16 million for new store openings and other fixed assets to be placed in service during fiscal 1999. Also, the Company intends to modify and upgrade its existing computer systems to be year 2000 compliant. The Company's inventory levels and working capital requirements historically have been highest in advance of the Christmas season. The Company has funded these seasonal working capital needs through borrowings under the Company's revolver and increases in trade payables and accrued expenses. Management expects that cash flow from operating activities and funds available under its revolving credit facility should be sufficient to support the Company's current new store expansion program and seasonal working capital needs for the foreseeable future. INTEREST RATE RISK The Company's exposure to changes in interest rates relates primarily to its borrowing activities to fund business operations. The Company principally uses floating rate borrowings under its revolving credit and term loan facilities. The Company does not use derivative financial instruments. 1998 Annual Report 11 14 - -------------------------------------------------------------------------------- The information below summarizes the Company's interest rate risk associated with debt obligations outstanding as of January 31, 1999. The table presents principal cash flows and related interest rates by fiscal year of maturity or repricing date.
Expected Fiscal Year of Maturity/Repricing (in thousands) 1999 2000 2001 2002 Thereafter Total - ------------------------------------------------------------------------------------------------- Variable rate (a) $48,886 $48,886 Average interest rate 7.19% 7.19% Fixed rate $ 640 $ 640 Average interest rate 12.15% 12.15%
(a) Includes $20.0 million of term debt with scheduled principal payments due between January 1999 and September 2003. All term loans are variable rate which reprice within 1999. As of January 31, 1999, interest rates for borrowings under the revolving loan and term loan facility are, at the Company's option, Eurodollar rates plus 175 and 225 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 the Company's quarterly financial performance. GOLD PRICE RISK The Company's exposure to changes in the price of gold relates to its borrowing activities under its gold consignment facility. The Company accepts as consignee, and is responsible to return at some future date, a fixed number of ounces of gold. The periodic charges paid by the Company are computed based on a percentage of the value of the gold consigned. An increase in the price of gold could substantially increase the annual costs to the Company of the gold consigned and the eventual costs to the Company upon the termination of this arrangement. The information below summarizes the Company's 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.
Expected Fiscal Year of Maturity 1999 2000 2001 2002 Thereafter Total - ----------------------------------------------------------------------------------------------- Troy ounces of gold consigned 59,000 59,000 Average gold price $290 $290
INFLATION The Company believes that inflation generally has not had a material effect on the results of its operations. There is no assurance, however, that inflation will not materially affect the Company in the future. YEAR 2000 The "Year 2000" problem concerns the inability of information systems to properly recognize and process date-sensitive information beyond January 1, 2000. Like many companies, "Year 2000" computer hardware and software failures of internal systems and/or of third party systems could have a significant, adverse impact on all aspects of the Company's operations. Because of the range 12 Whitehall Jewellers, Inc. 15 - -------------------------------------------------------------------------------- of possible issues and the large number of variables involved, it is impossible to quantify the potential cost of problems should the Company's remediation efforts or the efforts of third parties with whom the Company does business not be successful. The Company recognizes the need to address this problem in order to minimize the effects of the "Year 2000" issue on its operations and its relationships with vendors and other third parties. The Company is using both internal and external resources to complete its "Year 2000" project. The Company operates exclusively in one business segment, specialty retail jewelry. All stores are located within the United States. The Company's two principle mission-critical systems applications are the point-of-sale ("POS") terminals and software which control store transaction processing, and the centrally maintained information systems infrastructure which controls financial, merchandising and administrative systems. All stores use the same POS software which is licensed from a third-party vendor. In the fall of 1998, a "Year 2000" compliant version of the POS software was installed at all stores. Testing of the new software is complete. The Company has replaced approximately two-thirds of its POS desktop terminals with "Year 2000" compliant terminals. The remaining portion is expected to be replaced during the summer of 1999. The Company's financial management, information technology, merchandising and other administrative functions operate centrally from the Company's corporate office. The Company uses a mid-range computing platform which is complemented by various networks. The operating systems and hardware platforms were upgraded, tested and are currently "Year 2000" ready. The replacement or upgrading of financial management and various customized software packages is between approximately 50% and 70% complete. These systems upgrades, replacements, renovations, and testing thereof, are scheduled to be completed during the summer of 1999. Such completion is currently on schedule. With respect to systems that the Company is not upgrading, the Company is currently renovating those systems to be "Year 2000" compliant. The Company is developing contingency plans to address unforeseen system or environmental failures due to the "Year 2000" issue. The major focus of these plans is to have documented procedures to handle the mission-critical functions and to define the business tactics to identify and manage certain problems which may occur as a result of the "Year 2000" issue in as non-disruptive a manner as possible. The Company does not expect to be able to develop feasible contingency plans to address all "Year 2000" related failures; and contingency plans which are developed will only mitigate the impact of "Year 2000" failures. The Company's total costs for making its mission-critical systems "Year 2000" compliant are not expected to be material to the Company's financial condition. The estimated total cost of the "Year 2000" project is expected to approximate $1.0 million. To date, the total amount expended on the project is approximately $500,000. The Company believes that the systems upgrades, replacements and renovations will be made on a timely basis, and that the "Year 2000" issue with respect to the Company's internal systems will not pose significant operational problems or result in costs that have a material adverse impact on the Company's business, financial condition or results of operations. A failure by the Company to timely address the "Year 2000" issue, or a failure by the Company to maintain adequate information systems capacity and infrastructure as it upgrades, replaces and renovates its information 1998 Annual Report 13 16 - -------------------------------------------------------------------------------- systems could have a material adverse impact on the Company's business, financial condition or results of operations. In addition to the Company's internal systems, certain systems of third party suppliers and service providers which are not currently "Year 2000" compliant could adversely impact the Company's operations. The Company has confirmed with its primary lenders and private-label and other credit suppliers that their systems are, or will on a timely basis be, "Year 2000" compliant. In addition, certain key vendors and service providers have confirmed orally that they are implementing plans to address the "Year 2000" issue. The Company will continue communicating with its key suppliers and key service providers to monitor their plans to address, and progress in addressing, the "Year 2000" issue and to evaluate any impact on the Company. However, there can be no assurance that the systems of third parties with whom the Company does business will be converted timely. A failure by any such third party to timely address the "Year 2000" issue could have a material adverse impact on the Company's business, financial condition or results of operations. FORWARD-LOOKING STATEMENTS All statements, trend analysis and other information contained in this report relative to markets for the Company's products and trends in the Company's operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend" and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (1) the extent and results of the Company's store expansion strategy; (2) the seasonality of the Company's business; (3) economic conditions, the retail sales environment and the Company's ability to execute its business strategy and the related effects on comparable store sales and other results; (4) the success of the Company's marketing and promotional programs; (5) the extent to which the Company is able to retain and attract key personnel; (6) competition; (7) the availability and cost of consumer credit; (8) relationships with suppliers; (9) timely "Year 2000" compliance by the Company and third party suppliers and service providers; (10) the Company's ability to maintain adequate information systems capacity and infrastructure; (11) the efficient and successful integration of the Jewel Box locations and assets into the Company's existing operations; (12) the Company's leverage; (13) fluctuations in gem and gold prices; (14) regulation; and (15) the risk factors listed from time to time in the Company's filings with the Securities and Exchange Commission. 14 Whitehall Jewellers, Inc. 17
- ---------------------------------------------------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997 (in thousands, except for per share data) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Net sales $238,942 $188,898 $155,474 Cost of sales (including buying and occupancy expenses) 139,368 110,873 91,134 - ---------------------------------------------------------------------------------------------------------------------------- Gross profit 99,574 78,025 64,340 Selling, general and administrative expenses 72,261 55,809 45,309 - ---------------------------------------------------------------------------------------------------------------------------- Income from operations 27,313 22,216 19,031 Interest expense 4,123 3,806 6,993 - ---------------------------------------------------------------------------------------------------------------------------- Income before income taxes 23,190 18,410 12,038 Income tax expense 8,928 7,180 4,695 - ---------------------------------------------------------------------------------------------------------------------------- Income before extraordinary items 14,262 11,230 7,343 Extraordinary item, net -- (1,035) 10,057 - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 14,262 $ 10,195 $ 17,400 ============================================================================================================================ Basic earnings per share: Income before extraordinary items $ 1.40 $ 1.11 $ 0.93 Extraordinary item, net -- (0.10) 1.28 - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 1.40 $ 1.01 $ 2.21 ============================================================================================================================ Weighted average common share and common share equivalents 10,183 10,093 7,868 Diluted earnings per share: Income before extraordinary items $ 1.38 $ 1.10 $ 0.89 Extraordinary item, net -- (0.10) 1.22 - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 1.38 $ 1.00 $ 2.11 ============================================================================================================================ Weighted average common share and common share equivalents 10,330 10,225 8,216
The accompanying notes are an integral part of the financial statements. 1998 Annual Report 15 18 - ------------------------------------------------------------------------------- BALANCE SHEETS AS OF JANUARY 31, 1999 AND JANUARY 31, 1998
(in thousands, except for share amounts) 1999 1998 - -------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Accounts receivable, net $ 3,147 $ 2,532 Layaway receivables, net 3,514 2,636 Merchandise inventories 116,748 85,053 Other current assets 1,329 996 Deferred income taxes, net 1,518 1,257 Deferred financing costs 143 240 - -------------------------------------------------------------------------------------------------------------- Total current assets 126,399 92,714 Property and equipment, net 34,304 22,701 Goodwill, net 6,448 -- Deferred income taxes, net 926 1,953 Deferred financing costs 1,529 635 - -------------------------------------------------------------------------------------------------------------- Total assets $ 169,606 $ 118,003 ============================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Outstanding checks, net $ 7,853 $ 9,608 Revolver loans 28,886 16,841 Current portion of long-term debt 2,750 1,000 Accounts payable 25,601 16,525 Income taxes 5,226 1,419 Accrued payroll 4,174 2,906 Other accrued expenses 13,431 9,448 - -------------------------------------------------------------------------------------------------------------- Total current liabilities 87,921 57,747 Total long-term debt, net of current portion 17,890 11,066 Other long-term liabilities 1,627 1,387 - -------------------------------------------------------------------------------------------------------------- Total liabilities 107,438 70,200 Commitments and contingencies Stockholders' equity: Common Stock ($.001 par value; 60,000,000 shares authorized; 10,185,842 shares, 10,149,019 shares issued and outstanding, respectively) 10 10 Class B Common Stock ($1.00 par value; 29,567 shares authorized; 101 shares issued and outstanding) -- -- Class C Common Stock ($.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 60,008 59,905 Accumulated earnings (deficit) 2,150 (12,112) Treasury stock, 17 shares at cost -- -- - -------------------------------------------------------------------------------------------------------------- Total stockholders' equity 62,168 47,803 - -------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 169,606 $ 118,003 ==============================================================================================================
The accompanying notes are an integral part of the financial statements. 16 Whitehall Jewellers, Inc. 19 - ------------------------------------------------------------------------------- STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
(in thousands, Common Class B Additional Accumulated Treasury Deferred ESOP except for share amounts) Stock Common Stock Paid-In Capital Earnings/(Deficit) Stock Compensation - ------------------------------------------------------------------------------------------------------------------------ Balance at January 31, 1996 $-- $ 30 $ 8,766 $(14,673) $(20,333) $(21,648) Net income -- -- -- 17,400) -- -- Issued 3,269,500 shares in initial public offering 3 -- 40,413 -- -- -- Conversion of stock 6 (24) 18 -- -- -- Restructuring of ESOP -- -- (15,609) (3,027) (3,012) 21,648 Cancellation of treasury stock (1) (6) (5) (23,333) 23,345 -- Issued 1,265,000 shares in secondary public offering 1 -- 25,697 -- -- -- Exercise of options 1 -- 524 -- -- -- Tax effect of the disqualifying disposition of stock options -- -- -- 1,326 -- -- - ------------------------------------------------------------------------------------------------------------------------ Balance at January 31, 1997 10 -- 59,804 (22,307) -- -- Net income -- -- -- 10,195 -- -- Exercise of options -- -- 101 -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Balance at January 31, 1998 10 -- 59,905 (12,112) -- -- Net income -- -- -- 14,262 -- -- Exercise of options -- -- 103 -- -- -- - ------------------------------------------------------------------------------------------------------------------------ BALANCE AT JANUARY 31, 1999 $ 10 $ -- $60,008 $ 2,150 -- -- ========================================================================================================================
The accompanying notes are an integral part of the financial statements. 1998 Annual Report 17 20 - -------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
(in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 14,262 $ 10,195 $ 17,400 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 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 Proceeds from accounts receivables sold, net 4,041 -- -- Changes in assets and liabilities, net of effects of acquisition: (Increase) in accounts receivable, net (754) (1,178) (185) (Increase) in layaway receivables, net (878) (595) (465) (Increase) in merchandise inventories, net of gold consignment (28,476) (20,571) (24,376) (Increase) decrease in other current assets (216) (358) 76 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 Increase in accrued liabilities and long-term liabilities 9,193 2,712 3,869 - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities 11,009 388 (3,580) Cash flows from investing activities: Capital expenditures (14,667) (10,495) (7,041) Payment for acquired jewelry stores (21,760) -- -- Proceeds from assets sold, net 467 -- 8 - ------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (35,960) (10,495) (7,033) 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 Repayment of new revolver loan (261,885) (493,435) (214,088) Repayment of term loan -- -- (15,000) Repayment of old term loan (11,426) -- (26,600) 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 Proceeds from subordinated debt -- -- 20,000 Proceeds from gold consignment 5,984 -- 15,295 Proceeds from stock issuance, net -- -- 66,114 Proceeds from exercise of stock options 103 101 525 Increase (decrease) in outstanding checks, net (1,755) 2,366 (749) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 24,951 10,107 10,613 - ------------------------------------------------------------------------------------------------------------------------ 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
The accompanying notes are an integral part of the financial statements. 18 Whitehall Jewellers, Inc. 21 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 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: (in thousands) - ------------------------------------------------------------------ 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 - ------------------------------------------------------------------ - -------------------------------------------------------------------------------- 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 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. 1998 Annual Report 19 22 - -------------------------------------------------------------------------------- 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. 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 20 Whitehall Jewellers, Inc. 23 - -------------------------------------------------------------------------------- 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.
(in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------- Accounts receivable 4,174 $3,225 Less: allowance for doubtful accounts (1,027) (693) - ------------------------------------------------------------------------------------------------- Accounts receivable, net $3,147 $2,532 =================================================================================================
- -------------------------------------------------------------------------------- 5. INVENTORY As of January 31, 1999 and January 31, 1998, merchandise inventories consisted of:
(in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------- Raw materials $ 4,177 $ 3,504 Finished goods inventory 112,571 81,549 - ------------------------------------------------------------------------------------------------- Merchandise inventories $116,748 $85,053 =================================================================================================
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 for the years ended January 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. In addition, gold consignments of $21,279,000 and $15,295,000 are not included in the Company's balance sheet at 1998 Annual Report 21 24 - -------------------------------------------------------------------------------- January 31, 1999 and 1998, respectively (see Note 8, Financing Arrangements). 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:
(in thousands) 1999 1998 - -------------------------------------------------------------------------------------------------- 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 ==================================================================================================
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. - -------------------------------------------------------------------------------- 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. 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 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 22 Whitehall Jewellers, Inc. 25 - -------------------------------------------------------------------------------- $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. TERM LOANS The term loan facility under the Credit Agreement is available up to a maximum of $20.0 million. 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. 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. 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. 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. 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. 1998 Annual Report 23 26 - -------------------------------------------------------------------------------- As of January 31, 1999 and 1998, the current portion and noncurrent portion of long-term debt consisted of the following:
(in thousands) 1999 1998 - -------------------------------------------------------------------------------------------------- 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 ==================================================================================================
Future scheduled maturities under the loan agreements, excluding the revolver for January 31, 1999, are as follows:
Subordinated (in thousands) Term Notes Total - -------------------------------------------------------------------------------------------------- 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 ==================================================================================================
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. 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 24 Whitehall Jewellers, Inc 27 - -------------------------------------------------------------------------------- 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:
1999 1998 ----------------------------------------------------------- TEMPORARY TAX Temporary Tax (in thousands) DIFFERENCE EFFECT Difference Effect - -------------------------------------------------------------------------------------------------- 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 ==================================================================================================
The net current and non-current components of deferred income taxes recognized in the balance sheet at January 31 are as follows:
(in thousands) 1999 1998 - -------------------------------------------------------------------------------------------------- Net current assets $1,518 $1,257 Net non-current assets 926 1,953 - -------------------------------------------------------------------------------------------------- $2,444 $3,210 ==================================================================================================
The income tax expense for the years ended January 31, consists of the following:
(in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------- 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 ==================================================================================================
1998 Annual Report 25 28 - -------------------------------------------------------------------------------- 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.
(in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------- 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 ==================================================================================================
- -------------------------------------------------------------------------------- 11. COMMON STOCK Following are the number of shares issued for each of the Company's classes of Common Stock as of January 31:
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) - ----------------------------------------------------------------------------------------------------------- Balance at January 31, 1995 3,450,411 29,567 39,370 -- Issuance of Stock Awards 506,147 -- -- -- - ----------------------------------------------------------------------------------------------------------- Balance at January 31, 1996 3,956,558 29,567 39,370 -- - ----------------------------------------------------------------------------------------------------------- Exercise of Warrants 177,887 -- -- -- Conversion of Class C Shares to Common 1,394,521 -- (39,370) -- Conversion of Class B Shares to Common 918,270 (25,915) -- -- Cancellation of Shares Received from ESOP (74,384) -- -- -- Cancellation of Treasury Shares (1,396,785) (3,551) -- -- Initial Offering 3,269,500 -- -- -- Secondary Offering 1,265,000 -- -- -- Exercise of Options 550,592 -- -- -- - ----------------------------------------------------------------------------------------------------------- Balance at January 31, 1997 10,061,159 101 -- -- - ----------------------------------------------------------------------------------------------------------- Exercise of Options 87,877 -- -- -- - ----------------------------------------------------------------------------------------------------------- Balance at January 31, 1998 10,149,036 101 -- - ----------------------------------------------------------------------------------------------------------- Exercise of Options 36,823 -- -- -- - ----------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 31, 1999 10,185,859 101 -- -- ===========================================================================================================
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. 26 Whitehall Jewellers, Inc. 29 - -------------------------------------------------------------------------------- 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:
1999 1998 1997 - ------------------------------------------------------------------------------------------------------ BASIC DILUTED Basic Diluted Basic Diluted - ------------------------------------------------------------------------------------------------------ EPS Numerator: Income before extraordinary item $14,262 $14,262 $11,230 $11,230 $7,343 $7,343 EPS Denominator: Average common shares outstanding: 10,183 10,183 10,093 10,093 7,868 7,868 Effect of dilutive securities: Stock options -- 147 -- 132 -- 348 - ------------------------------------------------------------------------------------------------------ Total shares 10,183 10,330 10,093 10,225 7,868 8,216 ====================================================================================================== Earnings per share before extraordinary item $ 1.40 $ 1.38 $ 1.11 $ 1.10 $ 0.93 $ 0.89 ======================================================================================================
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 565,500 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. 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 693,098 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 688,228 were issued at exercise prices ranging from $0.90 to $0.99 per share. These prices are greater than or equal to the fair market value at the date of grant, as determined by an independent third party valuation. The options allow the holders to purchase Common Stock within a period ranging from five years to five years and eight months, 1998 Annual Report 27 30 - -------------------------------------------------------------------------------- at a fixed price. No expense was recorded in connection with these options. On September 28, 1995, the Company granted the equivalent of 506,148 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 771,189 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 57,176 options that had been granted earlier in the year. These options were granted at various dates at current market prices ranging from $14.00 to $27.00, with a weighted-average exercise price of $19.57. These options were reissued at terms equal to the originally issued options with reduced exercise prices ranging from $10.13 to $10.75 and a weighted-average exercise price of $10.53. 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 400,000 shares of Common Stock have been reserved for issuance under the 1997 Plan. 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 25,000 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, 10,223 options had been granted under the 1998 Plan. 28 WHITEHALL JEWELLERS, INC. 31 - -------------------------------------------------------------------------------- Option activity for the years ended January 31, 1997, 1998 and 1999 was as follows:
Weighted-Average Options Shares Exercise Price Exercisable - --------------------------------------------------------------------------------------------------- Balance at January 31, 1996 680,470 0.94 680,470 - --------------------------------------------------------------------------------------------------- Options granted 761,716 14.30 Options exercised (550,602) 0.95 - --------------------------------------------------------------------------------------------------- Balance at January 31, 1997 891,584 11.78 129,868 - --------------------------------------------------------------------------------------------------- Options granted 189,150 11.55 Options exercised (87,877) 0.94 Options canceled (11,150) 9.68 - --------------------------------------------------------------------------------------------------- Balance at January 31, 1998 981,707 $12.73 232,424 - --------------------------------------------------------------------------------------------------- Options granted 114,093 17.05 Options exercised (36,823) 3.20 Options canceled (21,575) 14.18 - --------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 31, 1999 1,037,402 $13.52 439,371 ===================================================================================================
For years ended January 31, 1999, 1998, and 1997, respectively, the weighted-average fair value of 114,093, 189,150, and 761,716 options at the date of grant with an exercise price equal to market price was $8.01, $6.27, and $7.65, respectively. The following table summarizes the status of outstanding stock options as of January 31, 1999:
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 - --------------------------------------------------------------------------------------------------- $ 0.90 - $ 0.90 13,700 6.66 $ 0.90 13,700 $ 0.90 $10.13 - $13.94 239,672 8.12 $11.26 75,443 $11.17 $14.00 - $14.00 684,540 7.26 $14.00 342,272 $14.00 $14.13 - $20.00 99,490 9.31 $17.34 7,956 $17.64 - --------------------------------------------------------------------------------------------------- $ 0.90 - $20.00 1,037,402 7.65 $13.51 439,371 $13.16 ===================================================================================================
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 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:
(in thousands, except per share amounts) 1999 1998 1997 - -------------------------------------------------------------------------------- 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 1.38 1.00 2.11 Pro forma earnings per share 1.22 0.86 2.01
1998 Annual Report 29 32 - -------------------------------------------------------------------------------- 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:
1999 1998 1997 - -------------------------------------------------------------------------------------------------- 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%
- -------------------------------------------------------------------------------- 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:
(in thousands) Years ending January 31, Amount - -------------------------------------------------------------------------------- 2000 $ 16,033 2001 15,836 2002 15,233 2003 14,303 2004 13,753 thereafter 47,564 --------------------------------------- $122,722 =======================================
Total rental expense for all operating leases is as follows, for the years ended January 31:
1999 1998 1997 - ------------------------------------------------------------------------------------------------- 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 =================================================================================================
30 Whitehall Jewellers, Inc. 33 - -------------------------------------------------------------------------------- 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 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.
1998 QUARTERS ENDED (in thousands, -------------------------------------------------------------------- except per share amounts) APRIL 30, 1998 JULY 31, 1998 OCTOBER 31, 1998 JANUARY 31, 1999 - ------------------------------------------------------------------------------------------------- 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 $ 0.0 $ 0.16 $ 0.06 $ 1.10 =================================================================================================
1997 Quarters Ended (in thousands, -------------------------------------------------------------------- except per share amounts) April 30, 1997 July 31, 1997 October 31, 1997 January 31, 1998 - ------------------------------------------------------------------------------------------------- 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 2,501 4,035 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 $ 0.05 $ 0.17 $ 0.09 $ 0.78 =================================================================================================
(1) Reflects extraordinary loss on extinguishment of debt in the fourth quarter of fiscal 1997 (See Note 9, Extraordinary Items). 1998 Annual Report 31 34 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS PRICEWATERHOUSECOOPERS [LOGO] 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 flow, 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. /s/ PRICEWATERHOUSECOOPERS LLP Chicago, Illinois March 3, 1999 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's stock began trading on the NASDAQ National Market System under the symbol MBJI on May 2, 1996. On January 20, 1999, the Company changed its corporate name to Whitehall Jewellers, Inc., and began trading under the symbol "WHJI." At April 16, 1999, there were 105 holders of Class B stock and 165 holders of Common Stock for a total of 270 registered shareholders.
1999 1998 -------------------------------------------------- HIGH LOW High Low - -------------------------------------------------------------------------- First Quarter $20.50 $17.125 $12.25 $ 9.00 Second Quarter 19.875 15.25 13.875 10.500 Third Quarter 18.50 9.50 18.125 10.875 Fourth Quarter 18.625 10.625 17.75 14.00
The Company has not declared any dividends in fiscal 1998 and 1997, and intends to retain its earnings to finance future growth. Therefore, the Company does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of dividends, if any, is subject to the discretion of the Board of Directors of the Company and to certain limitations under the General Corporation Law of the State of Delaware. In addition, the Company's Credit Agreement contains restrictions of the Company's ability to pay dividends. The timing, amount and form of dividends, if any, will depend, among other things, on the Company's results of operations, financial condition, cash requirements and other factors deemed relevant by the Board of Directors. 32 Whitehall Jewellers, Inc. 35 - --------------------- CORPORATE INFORMATION - --------------------- BOARD OF DIRECTORS Left to right: MATTHEW M. PATINKIN Executive Vice President- Store Operations JACK A. SMITH(2) DANIEL H. LEVY(1,2) [PHOTO] HUGH M. PATINKIN Chairman of the Board, Chief Executive Officer, President NORMAN PATINKIN (1,2) United Marketing Group, L.L.C. JOHN R. DESJARDINS Executive Vice President - Finance and Administration, Secretary RICHARD BERKOWITZ(1) (1) Audit Committee (2) Compensation Committee - -------------------------------------------------------------------------------- CORPORATE OFFICERS INDEPENDENT AUDITORS SHAREHOLDER INQUIRIES PricewaterhouseCoopers, LLP John R. Desjardins HUGH M. PATINKIN 200 East Randolph Street Executive Vice President - Chairman of the Board, Chicago, IL 60601 Finance and Administration Chief Executive Officer, 312-782-6800, extension 151 President TRANSFER AGENT Boston EquiServ COMMON STOCK LISTING JOHN R. DESJARDINS 150 Royall Street Shares of Common Stock of Executive Vice President - Canton, MA 02021 Whitehall Jewellers, Inc. Finance and Administration, are listed and traded Secretary CORPORATE HEADQUARTERS on the NASDAQ National 155 North Wacker Drive Market System (WHJI). MATTHEW M. PATINKIN Chicago, IL 60606 Executive Vice President - Store Operations ANNUAL MEETING The Annual Meeting of LYNN EISENHEIM Shareholders will be held Executive Vice President - June 8, 1999 at 10:00 a.m. Merchandising GENERAL COUNSEL MANNY A. BROWN Sidley & Austin Executive Vice President - One First National Plaza Store Operations Chicago, IL 60603
36 WHITEHALL WHITEHALL JEWELERS, INC. 155 NORTH WACKER DRIVE CHICAGO, IL 60606 312-782-6800 EX-23 12 CONSENT OF PRICEWATERHOUSECOOPERS, LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Whitehall Jewellers, Inc. (formerly Marks Bros. Jewelers, Inc.) on Form S-8 (File no. 333-50159, 333-47601 and 333-14895) of our reports dated March 3, 1999, on our audits of the financial statements and financial statement schedule of Whitehall Jewellers, Inc. as of January 31, 1999 and 1998, and for the years ended January 31, 1999, and 1998 and 1997, which reports are included in the Whitehall Jewellers, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 1999. /s/ PricewaterhouseCoopers LLP Chicago, Illinois April 30, 1999 EX-27 13 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS JAN-31-1999 FEB-01-1998 JAN-31-1999 1 0 0 6,661 1,027 116,748 126,399 61,586 (27,282) 169,606 87,921 17,890 0 0 10 62,158 62,168 238,942 238,942 139,368 139,368 72,261 1,278 4,123 23,190 8,928 14,262 0 0 0 14,262 1.40 1.38
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