The following table summarizes the status of outstanding stock options as of January 31, 2006:
As a result of the Offer for the Common Shares and related transactions, as described in Note 4, a change of control of the Company occurred for purposes of the Company’s Plans. The Plans provided that, upon certain changes in the ownership or control of the Company, outstanding stock options were automatically cancelled in exchange for a cash payment for each Common Share still covered by the options equal to the excess, if any, of (A) the greater of (i) the highest price per share of the Common Shares offered to shareholders of the Company in connection with the change in control or (ii) the fair market per share of the Common Shares on the date of the change in control, over (B) the exercise price per Common Share under the options. The amount offered for Common Shares (and the fair market value of such stock) on the date of the change in control was $1.60 per share. This amount was less than the exercise price per share for the outstanding stock options, and all outstanding stock options under the Company’s Plans were cancelled as of March 15, 2006.
The Merger Agreement provides that at the effective time of the Merger, each then-outstanding option to purchase Common Shares under the Company’s 1998 Non-Employee Director Stock Option Plan will be cancelled and each holder of such option will have no further rights thereto except to receive a cash payment, subject to any required withholding of taxes, equal to the product of (i) the total number of Common Shares otherwise issuable upon exercise of such option and (ii) the amount, if any, by which $1.60 per Common Share exceeds the applicable exercise price per Common Share otherwise issuable upon exercise of such option. The $1.60 amount is less than the exercise price per Common Share for all these options, so all such options will be cancelled without payment at the effective time of the Merger.
Outstanding options held by Robert L. Baumgardner, the Company’s Chief Executive Officer, are treated in accordance with the terms of his employment agreement and were cancelled effective as of March 15, 2006. Compensatory arrangements with Mr. Baumgardner relating to the cancellation of these options are still in the process of being finalized. Under Mr. Baumgardner’s employment agreement dated October 31, 2005, Mr. Baumgardner would have been entitled to receive options on the closing of the sale of the convertible notes under the October 3, 2005 Purchase Agreement for a number of shares equal to 2% of the number of Common Shares for which the notes would then be convertible. Since the Purchase Agreement was terminated upon the execution of the Merger Agreement, Mr. Baumgardner will not receive such options. There is no similar agreement, arrangement or understanding in connection with the Merger.
On February 17, 2004, a putative class action complaint, captioned Michael Radigan v. Whitehall Jewellers, Inc., Case No. 04 C 1196, was filed in the U.S. District Court for the Northern District of Illinois against the Company and certain of the Company’s current and former officers. The factual allegations and claims of this complaint are similar to those made in the Greater Pennsylvania Carpenters Pension Fund complaint described above.
On February 19, 2004, a putative class action complaint, captioned Milton Pfeiffer v. Whitehall Jewellers, Inc., Case No. 04 C 1285, was filed in the U.S. District Court for the Northern District of Illinois against the Company and certain of the Company’s current and former officers. The factual allegations and claims of this complaint are similar to those made in the Greater Pennsylvania Carpenters Pension Fund complaint described above.
On April 6, 2004, the District Court in the Greater Pennsylvania Carpenters case, No. 04 C 1107, consolidated the Pfeiffer and Radigan complaints with the Greater Pennsylvania Carpenters action, and dismissed the Radigan and Pfeiffer actions as separate actions. On April 14, 2004, the court designated the Greater Pennsylvania Carpenters Pension Fund as the lead plaintiff in the action and designated Greater Pennsylvania’s counsel as lead counsel.
On June 10, 2004, a putative class action complaint, captioned Joshua Kaplan v. Whitehall Jewellers, Inc., Case No. 04 C 3971, was filed in the U.S. District Court for the Northern District of Illinois against the Company and certain of the Company’s current and former officers. The factual allegations and claims of this complaint are similar to those made in the Greater Pennsylvania Carpenters Pension Fund complaint described above.
On June 14, 2004, lead plaintiff Greater Pennsylvania Carpenters Pension Fund in Case No. 04C 1107 filed a consolidated amended complaint. On July 14, 2004, the District Court in the Greater Pennsylvania Carpenters action consolidated the Kaplan complaint with the Greater Pennsylvania Carpenters action, and dismissed the Kaplan action as a separate action. On August 2, 2004, the Company filed a motion to dismiss the consolidated amended complaint. On January 7, 2005, the motion to dismiss was granted in part and denied in part, with plaintiffs granted leave to file an amended complaint by February 10, 2005. On February 10, 2005, the lead plaintiff filed a first amended consolidated complaint. On March 2, 2005, the Company filed a motion to dismiss the amended complaint. On June 30, 2005, the Court denied Defendants’ motions to dismiss. On July 28, 2005, Defendants filed their Answers to the First Amended Consolidated Complaint. On September 23, 2005, lead plaintiff filed its motion for class certification. After conducting certain class certification and merits discovery, the parties jointly moved for a stay of discovery and stay of briefing on lead plaintiff’s motion for class certification during the resumption of mediation efforts. By order dated January 24, 2006, the court granted the joint motion. By that same order, the court dismissed lead plaintiff’s motion for class certification without prejudice and with leave to refile on or before February 23, 2006. Lead plaintiff refiled its motion for class certification on February 23, 2006. By order dated March 16, 2006, the court dismissed Plaintiff’s Motion for Class Certification without prejudice pursuant to pending settlement discussions. By that same order, the court set a status hearing for April 24, 2006, at which time a revised discovery and briefing schedule on lead plaintiff’s motion for class certification will be set, if appropriate. While the settlement process is ongoing, the parties have reached agreement in substance to settle all claims in the First Amended Complaint, subject to a final, written agreement and court approval. The Company has not recorded any loss contingency associated with a possible settlement as the Company expects any settlement to be subject to an insurance claim.
State Derivative Complaints
On June 17, 2004, a stockholder derivative action complaint captioned Richard Cusack v. Hugh Patinkin, Case No. 04 CH 09705, was filed in the Circuit Court of Cook County, Illinois, for the alleged benefit of the Company against certain of the Company’s officers and directors. The complaint asserts claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, breach of fiduciary duties for insider selling and misappropriation of information, and contribution and indemnification. The factual allegations of the complaint are similar to those made in the Greater Pennsylvania Carpenters Pension Fund complaint described above.
On April 19, 2005, a stockholder derivative action complaint captioned Marilyn Perles v. Executor of the Estate of Hugh M. Patinkin, Case No. 05 CH 06926, was filed in the Circuit Court of Cook County, Illinois, for the alleged benefit of the Company against, inter alia, certain of the Company’s officers and directors. The complaint asserts claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, breach of fiduciary duties for insider selling and misappropriation of information, and contribution and indemnification. The factual allegations of the complaint are similar to those made in the Cusack complaint described above. The Perles complaint also purports to assert claims on behalf of the Company against PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm.
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On June 13, 2005, a stockholder derivative action complaint captioned Carey Lynch v. Berkowitz, Case No. 05CH09913, was filed in the Circuit Court of Cook County, Illinois, for the alleged benefit of the Company against certain of the Company’s officers and directors. The complaint asserts, inter alia, a claim for breach of fiduciary duty. The factual allegations of the complaint are similar to those made in the Cusack and Perles complaints described above.
On July 18, 2005, the Circuit Court of Cook County consolidated the Cusack, Perles and Lynch actions. On August 26, 2005, plaintiffs filed a consolidated amended derivative complaint against certain of the Company’s current and former officers and directors and PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm. On October 3, 2005, defendants, other than PricewaterhouseCoopers LLP, filed their motion to dismiss the consolidated amended derivative complaint based, inter alia, on the failure of plaintiffs to make a pre-suit demand upon the Company’s Board of Directors and failure to state a claim.
Federal Derivative Complaints
On February 22, 2005, a verified derivative complaint captioned Myra Cureton v. Richard K. Berkowitz, Case No. 05 C 1050, was filed in the United States District Court, Northern District of Illinois, Eastern Division, for the alleged benefit of the Company against certain of the Company’s officers and directors. The complaint asserts a claim for breach of fiduciary duty. The factual allegations of the complaint are similar to those made in the Cusack and Greater Pennsylvania Carpenters Pension Fund complaints described above.
On March 16, 2006, the court held a status conference, at which time it directed that the Defendants file a responsive pleading by April 17, 2006, absent an indication from Plaintiffs on or before April 3, 2006, that they intend to file an Amended Complaint. By order dated March 15, 2006, the court also set a status conference for April 19, 2006.
On April 13, 2005, a verified derivative complaint captioned Tai Vu v. Richard Berkowitz, Case No. 05 C 2197, was filed in the United States District Court, Northern District of Illinois, Eastern Division, for the alleged benefit of the Company against certain of the Company’s officers and directors. The complaint asserts a claim for breach of fiduciary duty. The factual allegations of the complaint are similar to those made in the Cusack and Greater Pennsylvania Carpenters Pension Fund complaints described above. On May 11, 2005, plaintiffs in the Cureton and Vu actions filed an unopposed motion to consolidate those two actions, and these cases were consolidated on May 25, 2005. On June 20, 2005, plaintiffs filed a consolidated amended derivative complaint asserting claims for breach of fiduciary duty of good faith, breach of duty of loyalty, unjust enrichment, a derivative Rule 10(b)-5 claim, and a claim against Browne for reimbursement of compensation under Section 304 of the Sarbanes-Oxley Act. On July 15, 2005, defendants moved to stay the consolidated action under the Colorado River doctrine pending the outcome of the state derivative actions. On February 27, 2006, the motion was denied. A status hearing was held on March 13, 2006. At the status hearing the Judge ordered that Defendants have until April 17, 2006 to file a responsive pleading on the pending complaint, absent an indication from Plaintiffs on or before April 3, 2006 that they intend to file an Amended Complaint.
Subject to the potential settlement of the Class Action lawsuits described above, the Company intends to contest vigorously these putative class actions and the stockholder derivative suits and exercise all of its available rights and remedies. Given that these cases may not be resolved for some time, it is not possible to evaluate the likelihood of an unfavorable outcome in any of these matters, or to estimate the amount or range of potential loss, if any. While there are many potential outcomes, an adverse outcome in any of these actions could have a material adverse effect on the Company’s results of operations, financial condition and/or liquidity.
Newcastle Partners, L.P., et al. v. Whitehall Jewellers, Inc. et al.
On January 5, 2006, Newcastle filed a complaint with the United States District Court for the Southern District of New York against the Company, Prentice and Holtzman, as disclosed in Newcastle’s Amendment No. 5 to its Schedule TO. In general, the complaint alleged that the Company, Prentice and Holtzman had engaged in a series of violations of the federal securities laws, including violations of tender offer rules and regulations. The complaint was amended on January 31, 2006. The amended complaint withdrew all allegations against the Company except an allegation that the proposed voting requirements of a simple majority under the reverse stock split was inconsistent with the Company’s charter. On February 24, 2006, the parties to the litigation held a conference with the court, at which time counsel for all parties in the litigation acknowledged that the claims against Whitehall were moot, and counsel for Newcastle and the Company agreed and consented to dismissal of the amended complaint as to the Company. Holtzman and Prentice did not object to the dismissal. On March 17, 2006, the court signed an order dismissing the matter as to Whitehall without prejudice.
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Other
As previously disclosed, in September 2003 the Securities and Exchange Commission (the “SEC”) initiated a formal inquiry of the Company with respect to matters that were the subject of the consolidated Capital Factors actions. The Company has fully cooperated with the SEC in connection with this formal investigation.
By letter from counsel dated October 26, 2004, A.L.A. Casting Company, Inc. (“ALA”), a supplier and creditor of Cosmopolitan Gem Corporation (“Cosmopolitan”), informed the Company that it had been defrauded by Cosmopolitan and was owed $506,081.55 for goods shipped to Cosmopolitan for which payment was never received. ALA claimed that the Company is jointly and severally liable for the full amount of $506,081.55 owed by Cosmopolitan because the Company aided and abetted Cosmopolitan’s fraud and participated in, induced or aided and abetted breaches of fiduciary duty owed to ALA by Cosmopolitan. ALA has indicated its intention to pursue its claim, but the Company has not received notice that litigation has been filed. The Company intends to vigorously contest this claim and exercise all of its available rights and remedies.
On August 12, 2005, the Company announced that Ms. Beryl Raff was named Chief Executive Officer and would join the Company’s Board of Directors. On September 8, 2005, the Company announced that Ms. Raff had resigned all positions with the Company. On September 27, 2005, the Company filed an arbitration proceeding, as required under the Beryl Raff employment agreement, seeking damages and to enforce the non-competition provision. On October 21, 2005, the Company was served with a declaratory judgment action, filed by J.C. Penney (Ms. Raff’s employer), in the 380th Judicial District in Collin County, Texas seeking a declaration of rights, that among other things, J.C. Penney has not violated any of the rights of the Company with respect to Ms. Raff’s employment. The Company has reached a complete settlement with J.C. Penney and Ms. Raff of all matters arising in connection with Ms. Beryl Raff’s employment. The net proceeds from such settlement are not material. The details of the settlement are confidential.
The Company is also involved from time to time in certain other legal actions and regulatory investigations arising in the ordinary course of business. Although there can be no certainty, it is the opinion of management that none of these other actions or investigations will have a material adverse effect on the Company’s results of operations or financial condition.
Lease Obligations
The Company leases the premises for its office facilities and all of its retail stores, and certain office and computer equipment generally under noncancelable agreements for periods ranging from two 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, 2006 are as follows:
Years ending January 31 (in thousands) | | Amount | |
| |
|
| |
2007 | | $ | 30,516 | |
2008 | | | 28,538 | |
2009 | | | 25,242 | |
2010 | | | 21,552 | |
2011 | | | 17,487 | |
Thereafter | | | 33,587 | |
| |
|
| |
Total future minimum rent obligations | | $ | 156,922 | |
| |
|
| |
The future minimum rental amounts above, include future minimum rents of $27,433,000 related to the planned closing of the 77 stores. Management is currently negotiating with its landlords to exit these leases. In accordance with FASB Statement No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities,” the Company as of January 31, 2006, recorded a charge of $3,686,000 for estimated lease termination costs associated with the planned store closures, of which $1,096,000 is classified as discontinued operations. This charge represents management’s current estimate of such lease termination costs based on negotiations with the respective landlords. Additional charges for lease terminations costs may be required in future periods to the extent that actual costs are greater than management’s current estimate, which may be material to the financial statements. The Company has not reached written agreements regarding lease terminations with any landlords. Leases for all closed stores are or will be in default. The Company continues to work with its landlords to reach consensual agreements on the terms of such lease terminations. There is no assurance that such agreements will be reached which could have a negative effect on the Company’s financial statements.
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Total rental expense for all operating leases for the years ended January 31, is as follows:
(in thousands) | | 2006 | | 2005 | | 2004 | |
| |
|
| |
|
| |
|
| |
Rental expense: | | | | | | | | | | |
Minimum | | $ | 31,385 | | $ | 30,736 | | $ | 29,750 | |
Rentals based on sales | | | 576 | | | 570 | | | 761 | |
Other | | | 140 | | | 151 | | | 387 | |
| |
|
| |
|
| |
|
| |
Total rental expense | | $ | 32,101 | | $ | 31,457 | | $ | 30,898 | |
| |
|
| |
|
| |
|
| |
The total rental expense included in discontinued operations is $1,644,000, $1,931,000, and $1,742,000 for fiscal years ending January 31, 2006, 2005 and 2004, respectively.
In December 2005, the Company entered into an agreement with a vendor conditioned on certain future events to return $3.3 million of diamonds for credit at the Company’s full cost in exchange for a commitment to purchase approximately $6.0 million of existing consignment inventory and $1.0 million of new products. The total purchase commitment as of January 31, 2006 was $6.3 million. The Company amended the agreement and consummated the transaction in February 2006.
21. | Related Party Transactions |
At the end of fiscal year 2004, Mr. Hugh Patinkin, Mr. Desjardins and Mr. Matthew Patinkin owned a 52% equity interest in Double P Corporation, PDP Limited Liability Company and CBN Limited Liability Company, which own and operate primarily mall-based snack food stores. On March 30, 2005, Mr. Hugh Patinkin died and his ownership passed to his estate. As of January 31, 2006, Messrs. Matthew Patinkin and Desjardins owned a 26% equity interest in these enterprises. A substantial portion of the remaining equity interest is owned by the adult children and other family members of Norman Patinkin, a member of the Board of Directors. One of Norman Patinkin’s adult children is a director and chief executive officer of Double P Corporation. During fiscal year 2005, Messrs. Hugh Patinkin, Desjardins and Matthew Patinkin spent a limited amount of time providing services to Double P Corporation, PDP Limited Liability Company and CBN Limited Liability Company, and such services were provided in accordance with the Company’s Code of Conduct. Messrs. Hugh Patinkin, Desjardins and Matthew Patinkin received no remuneration for these services other than reimbursement of expenses incurred. In the past, the Company and Double P Corporation agreed to divide and separately lease contiguous mall space. The Company and Double P Corporation concurrently negotiated separately with each landlord (“Simultaneous Negotiations”) to reach agreements for their separate locations. Since the Company’s initial public offering, its policy had required that the terms of any such leases must be approved by a majority of the Company’s outside directors. The Company had conducted such negotiations in less than ten situations, since the Company’s initial public offering in 1996. The Company’s current policy is that it will no longer enter into such Simultaneous Negotiations.
The Company offers health insurance coverage to the members of its Board of Directors. The health insurance policy options and related policy cost available to the Directors are similar to those available to the Company’s senior level employees.
The Company operated a program under which executive officers and directors, and parties introduced to the Company by its executive officers and directors, were permitted to purchase most Company merchandise at approximately ten percent above the Company’s cost. No such purchases were made under this program during fiscal year 2004 and this program was discontinued during the third quarter of fiscal year 2004. Executive officers and directors, and parties introduced to the Company by its executive officers and directors are now permitted to purchase Company merchandise at the same level of discount that is offered to the Company’s support office employees, field supervisors and store managers, which is less favorable in comparison to the discount that was offered under the discontinued program.
22. | 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 2005 and 2004. 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
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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.
| | 2005 Quarters Ended | |
| |
| |
(in thousands, except per share data) | | April 30, 2005 | | July 31, 2005 | | October 31, 2005 | | January 31, 2006 | |
| |
|
| |
|
| |
|
| |
|
| |
Net sales | | $ | 68,168 | | $ | 65,811 | | $ | 56,924 | | $ | 128,722 | |
Gross profit | | | 22,056 | | | 18,026 | | | (6,704 | ) | | 40,704 | |
Loss from operations | | | (5,585 | ) | | (15,499 | ) | | (35,681 | ) | | (4,709 | ) |
Net loss from continuing operations | | | (4,178 | ) | | (22,746 | ) | | (39,377 | ) | | (10,184 | ) |
Net loss from discontinued operations | | | (771 | ) | | (1,340 | ) | | (3,483 | ) | | (2,278 | ) |
Net loss | | | (4,949 | ) | | (24,086 | ) | | (42,860 | ) | | (12,462 | ) |
Diluted earnings per share: | | | | | | | | | | | | | |
Net loss | | $ | (0.35 | ) | $ | (1.69 | ) | $ | (3.02 | ) | $ | (0.88 | ) |
| |
|
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|
| |
|
| |
|
| |
| | 2004 Quarters Ended | |
| |
| |
(in thousands, except per share data) | | April 30, 2004 | | July 31, 2004 | | October 31, 2004 | | January 31, 2005 | |
| |
|
| |
|
| |
|
| |
|
| |
Net sales | | $ | 69,918 | | $ | 69,287 | | $ | 60,810 | | $ | 120,878 | |
Gross profit | | | 23,445 | | | 23,346 | | | 17,163 | | | 45,932 | |
Income (loss) from operations | | | (5,062 | ) | | (3,961 | ) | | (9,784 | ) | | 11,376 | |
Net income (loss) from continuing operations | | | (3,452 | ) | | (2,773 | ) | | (7,746 | ) | | 5,782 | |
Net loss from discontinued operations | | | (244 | ) | | (410 | ) | | (562 | ) | | (478 | ) |
Net income (loss) | | | (3,696 | ) | | (3,183 | ) | | (8,308 | ) | | 5,304 | |
Diluted earnings per share: | | | | | | | | | | | | | |
Net income (loss) | | $ | (0.27 | ) | $ | (0.23 | ) | $ | (0.59 | ) | $ | 0.38 | |
| |
|
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|
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|
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23. | Sales by Merchandise Category |
The following table sets forth the Company’s percentage of total merchandise sales by category for the years ended January 31:
| | | 2006 | | | 2005 | | | 2004 | |
| |
|
| |
|
| |
|
| |
Diamonds | | | 66.6 | % | | 65.6 | % | | 65.3 | % |
Gold | | | 15.7 | | | 15.6 | | | 15.6 | |
Precious/Semi-Precious | | | 12.3 | | | 13.1 | | | 14.6 | |
Watches | | | 5.4 | | | 5.7 | | | 4.5 | |
| |
|
| |
|
| |
|
| |
Total Merchandise Sales | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| |
|
| |
|
| |
|
| |
Along with the Company’s merchandise assortments, the Company provides jewelry repair services to its customers (sales from which represented 2.5%, 2.5%, and 2.4% of net sales in the fiscal years ended January 31, 2006, 2005 and 2004, respectively) and jewelry service plans provided through a third party provider (sales from which represented 3.1%, 2.9% and 2.4% in the fiscal years ended January 31, 2006, 2005 and 2004, respectively). Jewelry repair services are provided through independent jewelers under contract.
In the near term the Company plans to call a Special Meeting of Stockholders at which stockholders of the Company will be asked to consider and vote upon the adoption of the Merger Agreement. The Merger is the second and final step in the acquisition of the Company by Holtzman and Prentice. The first step was the Offer by Purchaser for all of the Company’s outstanding Common Shares at a price of $1.60 per Common Share. In connection with the Merger Agreement, the parties terminated the Purchase Agreement that the Company had previously entered into with Prentice and Holtzman (see Note 3).
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Also, the January 31, 2006 maturity of the Company’s Bridge Loan Agreement was extended for three years. In connection with the Merger Agreement, on February 1, 2006, the Lenders made an additional $20 million loan to the Company for working capital and general corporate purposes.
Pursuant to the Merger Agreement, Purchaser will be merged with and into the Company with the Company continuing as the surviving corporation. Holtzman and Prentice and their respective affiliates own a sufficient number of Common Shares to assure adoption of the Merger Agreement at the Special Meeting of Stockholders and they are required by the Merger Agreement to vote all of their Common Shares in favor of adoption of the Merger Agreement. As a result, the Merger Agreement will be adopted even if no stockholders other than the Holtzman and Prentice and their respective affiliates vote to adopt it. As a result of the Merger, the Company will become a wholly-owned subsidiary of Holdco and the public will not have any continuing equity interest in, and will not share in future earnings, dividends or growth, if any, of the Company.
Robert Baumgardner, Edward Dayoob, Jonathan Duskin, Seymour Holtzman and Charles Phillips were appointed to the Company’s Board of Directors effective March 15, 2006 and shall serve, together with the remaining four independent directors until the consummation of the Merger, in accordance with the Merger Agreement. On April 14, 2006, Daniel Levy advised the Company that he is resigning effective May 1, 2006.
Based on information provided by Continental Stock Transfer & Trust Company, the depositary for the Offer, a total of 8,432,249 Common Shares, representing approximately 50.3% of the outstanding Common Shares, were validly tendered pursuant to the Offer, including the subsequent offering period. Together with Common Shares beneficially owned by the Investors, WJ Acquisition Corp. owns an aggregate of 12,716,044 Common Shares, representing approximately 76% of the outstanding Common Shares.
Since January 31, 2006, the Company closed 36 stores (as described in Note 7) and opened 1 store as of March 31, 2006.
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Report of Independent Registered Public Accounting Firm
on
Financial Statement Schedule
To the Board of Directors
of Whitehall Jewellers, Inc.:
Our audits of the Whitehall Jewellers, Inc. financial statements referred to in our report dated April 17, 2006 (such report included an explanatory paragraph related to the Company’s ability to continue as a going concern) appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
April 17, 2006
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WHITEHALL JEWELLERS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Twelve months ended January 31, 2004, 2005 and 2006
(Dollars in thousands)
Column A | | Column B | | Column C | | Column D | | Column E | |
| |
| |
| |
| |
| |
Description | | Balance at
Beginning of
Period | | | Charged to
Costs and
Expenses | | Deduction | | Balance at
End of
Period | |
| |
| |
|
| |
| |
| |
Twelve months ended 1/31/04 | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 544 | | $ | 973 | | $ | 979 | | $ | 538 | |
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|
| |
|
| |
|
| |
|
| |
Inventory allowance | | | 3,567 | | | 5,987 | | | 5,823 | | | 3,731 | |
| |
|
| |
|
| |
|
| |
|
| |
Deferred tax valuation allowance | | | — | | | 769 | | | — | | | 769 | |
| |
|
| |
|
| |
|
| |
|
| |
Twelve months ended 1/31/05 | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 538 | | $ | 517 | | $ | 660 | | $ | 395 | |
| |
|
| |
|
| |
|
| |
|
| |
Inventory allowance | | | 3,731 | | | 7,878 | | | 7,352 | | | 4,257 | |
| |
|
| |
|
| |
|
| |
|
| |
Deferred tax valuation allowance | | | 769 | | | 599 | | | — | | | 1,368 | |
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|
| |
|
| |
|
| |
|
| |
Twelve months ended 1/31/06 | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 395 | | $ | 293 | | $ | 313 | | $ | 375 | |
| |
|
| |
|
| |
|
| |
|
| |
Inventory allowance | | | 4,257 | | | 27,005 | | | 11,352 | | | 19,910 | |
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| |
Deferred tax valuation allowance | | | 1,368 | | | 34,787 | | | 22 | | | 36,133 | |
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
As previously disclosed, on March 27, 2006, PricewaterhouseCoopers LLP, the independent registered public accounting firm for the Company, informed the Company and the Audit Committee of the Company’s Board of Directors that it will resign upon the completion of PricewaterhouseCoopers LLP’s audit procedures regarding the financial statements of the Company as of and for the fiscal year ended January 31, 2006 and this Annual Report on Form 10-K.
The Audit Committee has not yet engaged a new independent registered public accountant.
ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The Company has established disclosure controls and procedures to ensure that material information relating to the Company is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors.
Based on their evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of January 31, 2006, the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) of the Company have concluded that such disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
The Company intends to review and evaluate the design and effectiveness of its disclosure controls and procedures on an ongoing basis, to improve its controls and procedures over time and to correct any deficiencies that may be discovered in the future in order to ensure that senior management has timely access to all material financial and non-financial information concerning the Company’s business. While the present design of the Company’s disclosure controls and procedures is effective to achieve these results, future events affecting the Company’s business may cause management to modify its disclosure controls and procedures.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company’s evaluation under the framework in Internal Control - Integrated Framework, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of January 31, 2006.
The Company’s management’s evaluation of the effectiveness of the Company’s internal control over financial reporting as of January 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes In Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended January 31, 2006 that have materially affected or are reasonably likely to materially affect internal control over financial reporting.
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting is set forth in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 9B. | OTHER INFORMATION |
None.
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PART III
ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
Board of Directors
Daniel H. Levy, age 62, served as the interim Chief Executive Officer of the Company from October 11, 2005 until November 9, 2005 and has served as Chairman of the Board since November 10, 2005 and as a director of the Company since January 7, 1997. Mr. Levy also served as a director from March 1996 until May 1996. He was most recently the Chief Executive Officer of Donnkenny, LLC, a designer, manufacturer and marketer of women’s apparel, and, immediately prior to that, was Chief Executive Officer and Chairman of the Board of Donnkenny, Inc. from January 1, 2000 until April 6, 2005. On February 8, 2005, Donnkenny, Inc. filed for voluntary Chapter 11 bankruptcy protection. Mr. Levy served as Chairman and Chief Executive Officer of Best Products Co. Inc., a large discount retailer of jewelry and brand name hardline merchandise from April 1996 until January 1997. Prior to such time, Mr. Levy was a Principal for LBK Consulting from 1994 until 1996. Mr. Levy served as Chairman and Chief Executive Officer of Conran’s during 1993. Prior to such time, Mr. Levy was Vice Chairman and Chief Operating Officer for Montgomery Ward & Co. from 1991 until 1993. Mr. Levy is the Chairman of the Company’s Compensation Committee and a member of the Audit Committee. On April 14, 2006 Mr. Levy advised the Company that he is resigning effective May 1, 2006.
Richard K. Berkowitz, age 64, has served as a director of the Company since 1998. He retired from Arthur Andersen, L.L.P. in August 1998 after serving 21 years as a partner. Prior to his retirement, Mr. Berkowitz served as head of Arthur Andersen’s tax division in Miami, Florida. Mr. Berkowitz has been associated with Entente Investment, Inc. and was a member of the Advisory Board of Security Plastics, Inc. Mr. Berkowitz is Chairman of the Company’s Audit Committee.
Robert L. Baumgardner, age 59, joined the Company in November 2005 as Chief Executive Officer. He was appointed to the Board of Directors of the Company on March 15, 2006 pursuant to the Merger Agreement. Mr. Baumgardner, prior to joining the Company, was President and Chief Executive Officer of Little Switzerland, Inc., a Caribbean-based duty free retailer and wholly-owned subsidiary of Tiffany & Co., from 1999 through November 2005. Mr. Baumgardner is a 34-year veteran of the jewelry industry with prior affiliations with Bailey Banks & Biddle, Mayors Jewelers and Tiffany & Co.
Edward Dayoob, age 66, was appointed to the Board of Directors of the Company on March 15, 2006 pursuant to the Merger Agreement. He is the former President and Chief Executive Officer of Fred Meyer Jewelers, Inc., and former Senior Vice President of Fred Meyer, Inc. Fred Meyer Jewelers is the nation’s fourth largest fine jewelry company. Fred Meyer Jewelers is a wholly-owned subsidiary of Fred Meyer, Inc. Mr. Dayoob started in the jewelry business in 1959 with White Front Stores in California, where he served as Vice President of Operations. Mr. Dayoob joined Weisfield Jewelers in Seattle, Washington in 1972. In 1973, Mr. Dayoob founded Fred Meyer Jewelers.
Jonathan Duskin, age 38, was appointed to the Board of Directors of the Company on March 15, 2006 pursuant to the Merger Agreement. He is a managing director of Prentice Capital Management, LP, a private investment limited partnership, which he joined at the beginning of 2005. Prior to joining Prentice, Mr. Duskin was employed by an affiliate of S.A.C. Capital (“S.A.C.”), beginning in 2002. Prior to joining S.A.C., Mr. Duskin was a managing director at Lehman Brothers Inc., a financial services company, from 1998 to 2002, where he served as Head of Product Management and Chairman of the Investment Policy Committee within the Research Department. He currently serves on the boards of directors of The Wet Seal, Inc. and several private companies. Mr. Duskin is a member of the Company’s Compensation Committee and the Governance and Nominating Committee.
Seymour Holtzman, age 70, was appointed to the Board of Directors of the Company on March 15, 2006 pursuant to the Merger Agreement. He is the President and Chief Executive Officer of Jewelcor, Inc., a former New York Stock Exchange listed company that operated a chain of retail stores and other businesses. Mr. Holtzman currently serves as Chairman and Chief Executive Officer of each of Jewelcor Management, Inc., a company primarily involved in investment and management services; C.D. Peacock, Inc., a Chicago, Illinois retail jewelry establishment; and S.A. Peck & Company, a retail and mail order jewelry company based in Chicago, Illinois. From 1986 to 1988, Mr. Holtzman was Chairman of the Board and Chief Executive Officer of Gruen Marketing Corporation, an American Stock Exchange listed company involved in the nationwide distribution of watches. Mr. Holtzman is currently Co-Chairman of the Board of Directors of George Foreman Enterprises, Inc. (“GFME”, formerly known as MM Companies, Inc.), a publicly traded company. He has held the position of Chairman, and now Co-Chairman, since January 2001 and he was appointed Chief Executive Officer of GFME in June 2004. Mr. Holtzman has been a director of Casual Male Retail Group, Inc. (“CMRG”), a publicly traded men’s apparel retailer, since
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April 7, 2000. On May 25, 2001 the Board of Directors of CMRG hired Mr. Holtzman as an officer and an employee. Mr. Holtzman has been Chairman of the Board of Web.com, Inc., a publicly traded company, since August 2005. Mr. Holtzman has over 40 years of business and management experience. Mr. Holtzman is a member of the Company’s Compensation Committee and the Governance and Nominating Committee.
Norman J. Patinkin, age 79, has served as a director of the Company since 1989. In 2001, he retired as the Chief Executive Officer of United Marketing Group, L.L.C., but remains on its Board of Directors. United Marketing Group, L.L.C. operates telemarketing services, motorclubs, travel clubs and direct response merchandise programs for large corporations. Norman J. Patinkin is a first cousin, once removed, of Matthew M. Patinkin, an executive officer of the Company.
Charles G. Phillips, age 57, was appointed to the Board of Directors of the Company on March 15, 2006 pursuant to the Merger Agreement. He joined Prentice Capital Management, LP as Chief Operating Officer and as a member of the investment team in 2005. Prior to joining Prentice, Mr. Phillips was a member of the Investment Banking Operating Committee and the founder of the Retail Coverage and High Yield Bond Departments at Morgan Stanley during the 1980s. He was the President of Gleacher & Co., an investment banking and management firm, where he worked from 1991 until his retirement in 2003. In that capacity he had extensive involvement in the firm’s M&A, private investment, leverage finance and restructuring activities. Mr. Phillips currently serves on the boards of directors of California Pizza Kitchen, Inc. and Champps Entertainment, Inc. Mr. Phillips is a member of the Company’s Compensation Committee and the Governance and Nominating Committee.
Sanford Shkolnik, age 66, was appointed to the Board of Directors of the Company on April 15, 2003. In 1972, he co-founded Equity Properties and Development Co., which operated a substantial retail real estate portfolio, and served as its Chairman and Chief Executive Officer from 1972 to 1996. Since 1997, Mr. Shkolnik has independently pursued opportunities in real estate and other business ventures. Mr. Shkolnik is the Chairman of the Company’s Governance and Nominating Committee and a member of the Audit Committee.
Executive Officers
Robert L. Baumgardner, age 59, joined the Company in November 2005 as Chief Executive Officer and President. He was appointed to the Board of Directors of the Company on March 15, 2006. Mr. Baumgardner, prior to joining the Company, was President and Chief Executive Officer of Little Switzerland, Inc., a Caribbean-based duty free retailer and wholly-owned subsidiary of Tiffany & Co., from 1999 through November 2005. Mr. Baumgardner is a 34-year veteran of the jewelry industry with prior affiliations with Bailey Banks & Biddle, Mayors Jewelers and Tiffany & Co.
John R. Desjardins, age 55, joined the Company in 1979 and serves as Executive Vice President and Chief Financial Officer. He also has served as Treasurer of the Company from 2003 to present, and from 1989 through October 1998 and as a member of the Board of Directors of the Company from 1989 to January 2004. Previously, he worked as a certified public accountant with Deloitte & Touche L.L.P.
Robert W. Evans, age 52, joined the Company in January 2003 as Vice President — Merchandise Control. Mr. Evans was promoted to Senior Vice President — Merchandise Control in January 2004 and to Executive Vice President, Administration and Chief Information Officer in June 2005. From May 2001 to December 2002, Mr. Evans was an independent retail consultant specializing in process improvement and profit recovery. Mr. Evans was a Director of Consulting with Answerthink, Inc., a business and technology consulting firm, from 1999 to 2001. Prior to joining Answerthink, Mr. Evans served in senior financial and technology positions in the retail industry.
Jean K. FitzSimon, age 55, joined the Company in July 2005 as Senior Vice President and General Counsel. Ms. FitzSimon joined the Company after Bridge Associates, LLC, a corporate financial and operational consulting firm where she served as General Counsel and consulted on corporate compliance matters. Previously, she served as Chief Compliance Officer and Vice President — Law for Sears, Roebuck and Co., a multiline retail company. Ms. FitzSimon was in the private practice of law for several years, specializing in corporate turnarounds and restructurings. She began her career with the U.S. Department of Justice. Ms. FitzSimon has advised the Company that she is resigning her position, but will remain with the Company until the end of April 2006.
Debbie Nicodemus-Volker, age 52, joined the Company in June 2004 as its Executive Vice President of Merchandise. Ms. Nicodemus-Volker joined the Company after a fourteen-year tenure with Duty Free Shoppers, a duty-free retailer. Most recently, Ms. Nicodemus-Volker was a Vice President of Merchandising and Planning for Donna Karan International, based in
69
New York. Donna Karan International and Duty Free Shoppers are divisions of Louis Vuitton Moet Hennessey. At Duty Free Shoppers, Ms. Nicodemus-Volker was Vice President for Merchandise Planning and Procurement for European Brands, including responsibility for fine jewelry and watches. For the six years before that, Ms. Nicodemus-Volker was Vice President for Merchandising — Fine Jewelry at Duty Free Shoppers.
Matthew M. Patinkin, age 48, joined the Company in 1979 and has served as its Executive Vice President, Operations since July 2000. He also served as Executive Vice President, Store Operations, from 1989 through July 2000 and as a member of the Board of Directors of the Company from 1989 to January 2004. Mr. Patinkin is a first cousin, once removed, of Norman J. Patinkin, a director of the Company.
The Audit Committee
The Audit Committee presently consists of Richard K. Berkowitz (Chairman), Daniel H. Levy and Sanford Shkolnik. The Audit Committee held 10 meetings in fiscal year 2005.
The Board of Directors has determined that all of the members of the Audit Committee meet the requirements for independence under NYSE listing standards and applicable federal securities laws. The Board of Directors also has determined that Mr. Berkowitz is an “Audit Committee financial expert” under federal securities laws.
The Audit Committee operates under a written charter adopted by the Board of Directors, a current copy of which is available on the Company’s website at www.whitehalljewellers.com. The Company will provide a copy of the charter without charge to any stockholder upon written or verbal request of such person.
The functions of the Audit Committee include assisting the Board in monitoring the integrity of the Company’s financial statements, the independent registered public accounting firm’s qualifications and independence, the performance of the Company’s internal audit function and independent registered public accounting firm and the compliance by the Company with legal and regulatory requirements. The Audit Committee has the sole authority to appoint or replace the Company’s independent registered public accounting firm, which reports directly to the Audit Committee. The Audit Committee pre-approves all auditing services and permitted non-audit services (including the fees and terms associated with such services) to be provided by the independent registered public accounting firm. The Audit Committee has the authority to retain independent legal, accounting and other advisors and the Company is required to provide adequate funding and the compensation of any such advisors.
The Audit Committee is also responsible for preparing a report for inclusion in the Company’s proxy statement stating among other things, whether the Company’s audited financial statements should be included in the Company’s Annual Report on Form 10-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act and the rules and regulations thereunder require the Company’s directors and executive officers and persons who are deemed to own more than ten percent of the Company’s common stock, to file certain reports with the Commission with respect to their beneficial ownership of the common stock.
Based upon a review of filings with the Commission and written representations from certain reporting persons that other filings were required to be made, the Company believes that all of its directors and executive officers complied during fiscal year 2005 with the reporting requirements of Section 16(a) except that John R. Desjardins, Chief Financial Officer of the Company, filed a Form 4 on November 28, 2005, which was required to be filed by September 6, 2005. The common stock sold were held in a family trust. Mr. Desjardins does not exercise investment control over the trust assets and was not made aware that the sale had occurred until November 15, 2005, and despite repeated requests did not receive the sale details necessary to file his Form 4 until November 22, 2005.
Code of Conduct
The Company has adopted a Code of Conduct that applies to all of the Company’s employees, officers and directors, including its principal executive officer and principal financial officer. The Company’s Code of Conduct covers a variety of areas of professional conduct including conflicts of interest, disclosure obligations, insider trading, confidential information, as well as compliance with all laws, rules and regulations applicable to the Company’s business.
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A copy of the Company’s Code of Conduct is posted on its website at www.whitehalljewellers.com. In the event that an amendment to, or a waiver from, a provision of the Company’s Code of Conduct that applies to any of the Company’s executive officers or directors occurs, the Company intends to post such information on its website. The Company undertakes to provide without charge to any person, upon written or verbal request of such person, a copy of the Company’s Code of Conduct. Requests for a copy should be directed in writing to Whitehall Jewellers, Inc., 155 North Wacker Drive, Suite 500, Chicago, Illinois 60606, Attention: John R. Desjardins or by telephone to (312) 782-6800.
ITEM 11. | EXECUTIVE COMPENSATION |
Summary Compensation
The following summary compensation table sets forth certain information concerning compensation for services rendered in all capacities awarded to, earned by or paid to the Company’s Chief Executive Officer, others who served as Chief Executive Officer during the year ended January 31, 2006 and the Company’s four most highly compensated executive officers (other than the Chief Executive Officer) (the “Named Executive Officers”) during the year ended January 31, 2006.
| | Year
Ended
Jan. 31 | | Annual Compensation | | Other
Annual
Compensation(1) | | Long-Term
Compensation Awards | | All Other
Compensation(4) | |
| | |
| | |
| | |
Name and Principal Position | | | Salary | | Bonus | | | Restricted
Stock
Awards(2) | | Shares
Underlying
Options/SARs(3) | | |
| |
| |
| |
| |
| |
| |
| |
| |
Current Executive Officers | | | | | | | | | | | | | | | | | | | | | | |
Robert L. Baumgardner | | | 2006 | | $ | 101,923 | | $ | 500,000 | | $ | — | | $ | — | | | 325,235 | | $ | — | |
Chief Executive Officer and President(5) | | | | | | | | | | | | | | | | | | | | | | |
John R. Desjardins | | | 2006 | | $ | 305,000 | | $ | 125,000 | | $ | — | | $ | — | | | — | | $ | 52,999 | |
Executive Vice President and Chief Financial Officer | | | 2005 | | $ | 305,000 | | $ | — | | $ | — | | $ | — | | | — | | $ | 12,796 | |
| | | 2004 | | $ | 305,000 | | $ | 45,700 | | $ | — | | $ | — | | | — | | $ | 24,932 | |
Debbie Nicodemus-Volker | | | 2006 | | $ | 300,000 | | $ | — | | $ | — | | $ | — | | | — | | $ | 250 | |
Executive Vice President of Merchandise(6) | | | 2005 | | $ | 190,385 | | $ | 25,000 | | $ | 91,731 | | $ | 162,400 | | | — | | $ | 125 | |
Matthew M. Patinkin | | | 2006 | | $ | 280,000 | | $ | — | | $ | — | | $ | — | | | — | | $ | 17,709 | |
Executive Vice President, Operations | | | 2005 | | $ | 280,000 | | $ | 40,500 | | $ | — | | $ | — | | | — | | $ | 9,457 | |
| | | 2004 | | $ | 280,000 | | $ | — | | $ | — | | $ | — | | | 20,000 | | $ | 5,577 | |
Robert W. Evans | | | 2006 | | $ | 200,000 | | $ | 10,000 | | $ | — | | $ | — | | | 30,000 | | $ | 3,148 | |
Executive Vice President, Administration(7) | | | | | | | | | | | | | | | | | | | | | | |
71
| | | | | Annual Compensation | | | | | Long-Term
Compensation Awards | | | | |
| | | | |
| | | | |
| | | | |
Name and Principal Position | | Year
Ended
Jan. 31 | | Salary | | Bonus | | Other
Annual
Compensation(1) | | Restricted
Stock
Awards(2) | | Shares
Underlying
Options/SARs(3) | | All Other
Compensation(4) | |
| |
| |
| |
| |
| |
| |
| |
| |
Former Executive Officers | | | | | | | | | | | | | | | | | | | | | | |
Daniel H. Levy | | | 2006 | | $ | 126,465 | | $ | — | | $ | — | | $ | — | | | — | | $ | — | |
Former Chief Executive Officer(8) | | | | | | | | | | | | | | | | | | | | | | |
Beryl Raff | | | 2006 | | $ | — | | $ | 990,000 | | $ | — | | $ | — | | | 325,000 | | $ | — | |
Former Chief Executive Officer(9) | | | | | | | | | | | | | | | | | | | | | | |
Lucinda M. Baier | | | 2006 | | $ | 338,541 | | $ | 100,000 | | $ | 59,124 | | $ | — | | | — | | $ | 500,616 | |
Former Chief Executive Officer, President and Chief Operating Officer(10) | | | 2005 | | $ | 63,750 | | $ | — | | $ | — | | $ | — | | | — | | $ | — | |
Hugh M. Patinkin | | | 2006 | | $ | 100,962 | | $ | — | | $ | — | | $ | — | | | — | | $ | 8,590 | |
Former Chairman, Chief Executive Officer and President(11) | | | 2005 | | $ | 525,000 | | $ | — | | $ | — | | $ | — | | | — | | $ | 20,654 | |
| | | 2004 | | $ | 520,000 | | $ | 75,000 | | $ | — | | $ | — | | | — | | $ | 21,188 | |
|
(1) | Except where indicated, perquisites and personal benefits are less than the lesser of $50,000 or 10% of the salary and bonus for each Named Executive Officer. Ms. Nicodemus-Volker received $91,731 from the Company during fiscal year 2004 for the payment or reimbursement of residential relocation expenses and taxes related thereto. Payments from the Company to Ms. Baier during the year ended January 31, 2006 include $47,874 for residential relocation expenses and $11,250 for automobile expenses. |
(2) | On January 28, 2003, the Company’s then Chief Executive Officer, Mr. Hugh Patinkin, received an award of 10,000 shares of restricted stock as an incentive award with respect to services to be rendered during the fiscal year ended January 31, 2004. The restrictions on the award to Mr. Hugh Patinkin vested in full upon his death. As of January 31, 2006, the number and value of the aggregate restricted stock holdings of the Named Executive Officers were: Mr. Baumgardner, 0 shares ($0); Mr. Desjardins, 0 shares ($0); Ms. Nicodemus-Volker, 13,333 shares ($19,600); Mr. Matthew Patinkin, 0 shares ($0); Mr. Evans, 333 shares ($490); Mr. Levy, 3,064 shares ($4,504); Ms. Raff, 0 shares ($0); Ms. Baier, 0 shares ($0); and Mr. Hugh Patinkin, 0 shares ($0). Under the terms of the Company’s 1996 Long-Term Incentive Plan and 1997 Long-Term Incentive Plan, all outstanding shares of restricted stock were vested and cancelled upon the consummation of the Offer that constituted the first step of the Merger and the holders became entitled to payments from the Company of $1.60 per share. |
(3) | On January 28, 2003, as an incentive award with respect to services to be rendered during the fiscal year ending January 31, 2004, each of the Company’s then Chief Executive Officer, Mr. Hugh Patinkin, and other Named Executive Officers were granted options to purchase shares of the Company’s common stock in the following amounts: Mr. Hugh Patinkin, 50,000; Mr. Desjardins, 5,000; and Mr. Matthew Patinkin, 10,000. Prior to the date of Mr. Hugh Patinkin’s death, 16,666 of his options remained unvested. Pursuant to his stock option agreement, 5,555 of the unvested options became exercisable effective March 30, 2005 until March 30, 2006. Under the terms of the Company’s |
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| 1996 Long-Term Incentive Plan and 1997 Long-Term Incentive Plan, all of the stock options held by executive officers (other than options held by Mr. Baumgardner) were cancelled without payment by the Company upon consummation of the Offer. Mr. Baumgardner’s stock options were cancelled effective as of March 15, 2006. Compensatory arrangements with Mr. Baumgardner relating to the cancellation of these options are still in the process of being finalized. |
(4) | Payments in these amounts for fiscal year 2005 consist of (i) executive medical benefits, (ii) payments or reimbursements for life insurance premiums and (iii) employment agreement termination payments (see footnote 10 below). The foregoing amounts were as follows: |
Name | | Executive
Medical
Benefits | | Life
Insurance
Premium | | Employment
Agreement
Termination
Payment | | Total | |
| |
| |
| |
| |
| |
Robert L. Baumgardner | | $ | — | | $ | — | | $ | — | | $ | — | |
John R. Desjardins | | $ | 50,796 | | $ | 2,203 | | $ | — | | $ | 52,999 | |
Debbie Nicodemus-Volker | | $ | 250 | | $ | — | | $ | — | | $ | 250 | |
Matthew M. Patinkin | | $ | 17,056 | | $ | 653 | | $ | — | | $ | 17,709 | |
Robert W. Evans | | $ | 3,148 | | $ | — | | $ | — | | $ | 3,148 | |
| | | | | | | | | | | | | |
Former Executive Officers | | | | | | | | | | | | | |
Daniel H. Levy | | $ | — | | $ | — | | $ | — | | $ | — | |
Beryl Raff | | $ | — | | $ | — | | $ | — | | $ | — | |
Lucinda M. Baier | | $ | 616 | | $ | — | | $ | 500,000 | | $ | 500,616 | |
Hugh M. Patinkin | | $ | 8,590 | | $ | — | | $ | — | | $ | 8,590 | |
(5) | Mr. Baumgardner commenced employment with the Company on November 9, 2005. Mr. Baumgardner’s annual base salary is $500,000. Mr. Baumgardner received a signing bonus of $500,000 in November 2005, per the terms of his employment agreement. |
(6) | Ms. Nicodemus-Volker commenced employment with the Company on June 1, 2004. |
(7) | Mr. Evans became an executive officer during the year ended January 31, 2006. |
(8) | Mr. Levy served as interim Chief Executive Officer of the Company from October 11, 2005 until November 8, 2005. Mr. Levy did not receive any compensation for his services as interim Chief Executive Officer and he did not have an employment agreement with the Company when serving in that capacity. All compensation amounts for Mr. Levy reflect compensation for his services as a director and committee member. |
(9) | Ms. Raff entered into an employment agreement with the Company on August 10, 2005 with respect to her service as Chief Executive Officer of the Company. Ms. Raff received two cash payments of $487,500 each in August 2005, which were to be the first two of a number of transition compensation payments totaling $1,950,000 in the aggregate. In addition, Ms. Raff received an additional transition payment of $15,000 on August 12, 2005. On September 7, 2005, the Company received a letter from Ms. Raff, advising that she had resigned all positions with the Company. She also indicated in the letter that she would be returning compensation previously paid to her by the Company. Ms. Raff delivered a check to the Company for $593,865 in respect of compensation previously paid, less withholding taxes. Pursuant to her employment agreement, Ms. Raff’s employment inducement stock option award of 325,000 was forfeited upon her resignation. For information regarding Ms. Raff’s employment agreement, see “—Severance and Employment Agreements—Employment Agreements with Named Executive Officers—Employment Agreements with Former Executive Officers—Employment Agreement with Beryl Raff”. |
(10) | Ms. Baier commenced employment with the Company on November 30, 2004. Ms. Baier tendered her resignation effective as of October 13, 2005. Pursuant to her employment agreement, dated November 30, 2004 and as amended on August 11, 2005, Ms. Baier forfeited all of her shares of restricted common stock. Ms. Baier commenced her employment with the Company on November 30, 2004 as President and Chief Operating Officer. Ms. Baier’s annual base salary in such position was $425,000 during fiscal year 2004. Ms. Baier also received $2,469 for amounts reimbursed during fiscal year 2004 for the payment of taxes related to relocation expenses. Effective April 13, 2005, Ms. Baier’s annual base salary was increased to $500,000 in connection with her being named Chief Executive Officer. Ms. Baier will continue to be paid her base salary for a period of one year from her resignation date or until she finds other employment. For information regarding Ms. Baier’s employment agreement, see “—Severance and Employment Agreements—Employment Agreements with Named Executive Officers—Employment Agreements with Former Executive Officers—Employment Agreement with Lucinda M. Baier”. |
(11) | Mr. Hugh Patinkin passed away on March 30, 2005. |
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General Information Regarding Options
The following tables show information regarding stock options granted to, exercised by and held by the executive officers named in the summary compensation table.
Option Grants in Fiscal Year 2005
| | | | | | | | | | | | | | | | |
Name | | Number of
Securities
Underlying
Options
Granted(1) | | % of
Total Options
Granted To
Employees | | Exercise
Price | | Expiration
Date | | Grant Date
Present
Value(2) | |
| |
| |
| |
| |
| |
| |
Robert L. Baumgardner | | | 325,235 | | | 30.3 | % | $ | 1.00 | | | 11/9/15 | | $ | 208,573 | |
John R. Desjardins | | | — | | | — | | | — | | | — | | | — | |
Debbie Nicodemus-Volker | | | — | | | — | | | — | | | — | | | — | |
Matthew M. Patinkin | | | — | | | — | | | — | | | — | | | — | |
Robert W. Evans | | | 30,000 | | | 2.8 | % | $ | 7.12 | | | 6/10/15 | | $ | 112,371 | |
| | | | | | | | | | | | | | | | |
Former Executive Officers | | | | | | | | | | | | | | | | |
Daniel H. Levy | | | — | | | — | | | — | | | — | | | — | |
Beryl Raff(3) | | | 325,000 | | | 30.3 | % | $ | 6.63 | | | 8/10/15 | | $ | 1,256,060 | |
Lucinda M. Baier | | | — | | | — | | | — | | | — | | | — | |
Hugh M. Patinkin | | | 391,970 | | | 36.6 | % | $ | 9.33 | | | 9/9/15 | | $ | 2,311,251 | |
|
(1) | Under the terms of the Company’s 1996 Long-Term Incentive Plan and 1997 Long-Term Incentive Plan, all of the stock options held by executive officers (other than options held by Mr. Baumgardner) were cancelled without payment by the Company upon consummation of the Offer. Mr. Baumgardner’s stock options were cancelled effective as of March 15, 2006. Compensatory arrangements with Mr. Baumgardner relating to the cancellation of these options are still in the process of being finalized. |
(2) | The Black-Scholes option pricing model was chosen to estimate the Grant Date Present Value of the options set forth in this table. The Company’s use of this model should not be construed as an endorsement of its accuracy of valuing options. All stock option valuation models, including the Black-Scholes model, require a prediction about the future movement of the stock price. The following assumptions were made for purposes of calculating the Grant Date Present Value: risk-free interest rate of 4.64% for grants made on November 9, 2005 (Mr. Baumgardner), 3.67% for grants made on June 10, 2005 (Mr. Evans), 4.09% for grants made on August 10, 2005 (Ms. Raff) and 3.94% for grants made on September 9, 2005 (Mr. Hugh Patinkin); expected dividend yield of 0%; expected option life of 5.5 years; and expected stock price volatility of 71% for grants made on November 9, 2005, 54% for grants made on June 10, 2005, 70% for grants made on August 10, 2005 and 70% for grants made on September 9, 2005. The real value of the options in this table depends upon the actual performance of the Company’s common stock during the applicable period. |
(3) | On September 7, 2005, the Company received a letter from Ms. Raff, advising that she had resigned all positions with the Company. Pursuant to her employment agreement, Ms. Raff’s employment inducement stock option award of 325,000 was forfeited upon her resignation. |
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Option Exercises in Fiscal Year 2005 and Fiscal Year End Option Values
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | Number of Securities
Underlying Unexercised
Options as of
January 31, 2006(1) | | Value of Unexercised
in the Money
Options as of
January 31, 2006(1) | |
| |
| |
| |
| |
Name | | Shares
Acquired
on Exercise | | Value
Realized | | Exercisable | | Unexercisable | | Exercisable | | Unexercisable | |
| |
| |
| |
| |
| |
| |
| |
Robert L. Baumgardner | | | — | | $ | — | | | — | | | 325,235 | | $ | — | | $ | 154,487 | |
John R. Desjardins | | | — | | $ | — | | | 397,825 | | | — | | $ | — | | $ | — | |
Debbie Nicodemus-Volker | | | — | | $ | — | | | — | | | — | | $ | — | | $ | — | |
Matthew M. Patinkin | | | — | | $ | — | | | 384,535 | | | — | | $ | — | | $ | — | |
Robert W. Evans | | | — | | $ | — | | | 3,750 | | | 31,250 | | $ | — | | $ | — | |
| | | | | | | | | | | | | | | | | | | |
Former Executive Officers | | | | | | | | | | | | | | | | | | | |
Daniel H. Levy | | | — | | $ | — | | | 51,110 | | | — | | $ | — | | $ | — | |
Beryl Raff | | | — | | $ | — | | | — | | | — | | $ | — | | $ | — | |
Lucinda M. Baier | | | — | | $ | — | | | — | | | — | | $ | — | | $ | — | |
Hugh M. Patinkin(2) | | | — | | $ | — | | | 591,970 | | | — | | $ | — | | $ | — | |
|
(1) | Under the terms of the Company’s 1996 Long-Term Incentive Plan and 1997 Long-Term Incentive Plan, all of the stock options held by executive officers (other than options held by Mr. Baumgardner) were cancelled without payment by the Company upon consummation of the Offer. Mr. Baumgardner’s stock options were cancelled effective as of March 15, 2006. Compensatory arrangements with Mr. Baumgardner relating to the cancellation of these options are still in the process of being finalized. |
(2) | Mr. Hugh Patinkin passed away on March 30, 2005. Prior to Mr. Hugh Patinkin’s death, only 16,666 of his options remained unvested. Pursuant to his stock option agreement, 5,555 of the unvested options became exercisable by his estate effective March 30, 2005 until March 30, 2006. On October 9, 2005, a total of 776,233 of these options were forfeited. |
Severance and Employment Agreements
Severance Agreements with Named Executive Officers
As described below, the Company entered into severance agreements with each of Mr. Desjardins, dated May 7, 1996, and Mr. Matthew Patinkin, dated May 7, 1996.
The agreements provide for certain payments after a “change in control.” A “change in control” is defined under the agreements to include (i) an acquisition by a third party (excluding certain affiliates of the Company) of beneficial ownership of at least 25% of the outstanding shares of common stock, (ii) a change in a majority of the incumbent Board of Directors and (iii) merger, consolidation or sale of substantially all of the Company’s assets if the Company’s stockholders do not continue to own at least sixty percent (60%) of the equity of the surviving or resulting entity. The consummation of the Offer constituted a “change in control” under the agreements as of March 15, 2006. Pursuant to these agreements, the employees will receive certain payments and benefits if they terminate employment voluntarily six months after a “change in control,” or if, during a three-year period following a change in control (i) they terminate for “good reason,” as defined in the agreements (such as certain changes in duties, titles, compensation, benefits or work locations) or (ii) if they are terminated by the Company, other than for “cause,” as so defined.
The severance agreements also provide for certain payments absent a change in control if the applicable employee terminates employment for “good reason” or if they are terminated by the Company, other than for “cause.” Their payment will equal 2.5 times (1.5 times if a change in control has not occurred) their highest salary plus bonus over the five years preceding the change in control (which payment would equal approximately $1.1 million in the case of Mr. Desjardins and $1.0 million in the case of Mr. Matthew Patinkin) together with continuation of health and other insurance benefits for 30 months (18 months if a change in control has not occurred). The severance agreements also provide for payment of bonus for any partial year worked at termination of employment equal to the higher of (x) the employee’s average bonus for the immediately preceding two years and (y) fifty percent (50%) of the maximum bonus the employee could have earned in the
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year employment terminates, pro rated for the portion of the year completed. To the extent any payments to either of these two senior executives under these agreements would constitute an “excess parachute payment” under section 280G(b)(1) of the Internal Revenue Code (the “Code”), the payments will be “grossed up” for any excise tax payable under such section, so that the amount retained after paying all federal income taxes due would be the same as such person would have retained if such section had not been applicable.
Employment Agreements with Named Executive Officers
Employment Agreements with Current Executive Officers
As described below, the Company entered into employment agreements with Mr. Baumgardner, dated October 31, 2005, Mr. Evans, dated June 10, 2005, and Ms. Nicodemus-Volker, dated June 1, 2004.
Employment Agreement with Robert L. Baumgardner. Under the terms of the employment agreement, dated October 31, 2005, between the Company and Mr. Baumgardner, Mr. Baumgardner is entitled to receive an annual base salary of not less than $500,000. He also received a one-time, lump sum payment of $500,000 as a signing bonus. Mr. Baumgardner is also eligible to participate in the Company’s management cash bonus plan. Under the plan, he is eligible to receive an annual bonus of up to fifty percent (50%) of his base salary. Pursuant to the employment agreement and notwithstanding the foregoing, he will receive an annual bonus for the fiscal year ending January 31, 2007 of no less than $125,000.
Under the terms of the employment agreement, Mr. Baumgardner is entitled to receive an employment inducement stock option award for the purchase of 325,235 shares of common stock of the Company at a purchase price equal to the higher of the fair market value (as defined in the Company’s 1997 Long-Term Incentive Plan) on Mr. Baumgardner’s first day of work or $0.75. This award (i) provides for vesting in three equal annual installments commencing on the first anniversary of the date of grant (but will vest fully, if not already vested, upon a change in control), (ii) expires on the tenth anniversary of the date of grant and (iii) is subject to the same terms and conditions (subject to limited exceptions with respect to vesting upon a change in control) as if granted under the Company’s 1997 Long-Term Incentive Plan.
The employment agreement is for an initial term of three years, subject to earlier termination, and will be automatically extended for one additional year unless either party gives written notice of termination at least 60 days prior to the expiration of the term.
The employment agreement provides that if Mr. Baumgardner’s employment is terminated without “cause” (as defined in the employment agreement) during the employment period and prior to a change in control of the Company, he will continue to receive his base salary, target annual bonus payments and health and dental coverage for a period of twelve months. If Mr. Baumgardner terminates his employment with “good reason” (as defined in the employment agreement), he will receive his base salary and, if he executes a mutual release and non-disparagement agreement, target annual bonus payments and health and dental insurance for a period of twelve months. The severance payments described above will be reduced by the amount of any compensation that Mr. Baumgardner receives from a subsequent employer or from self-employment.
The employment agreement also provides Mr. Baumgardner with certain benefits, including participation in the Company’s employee benefit plans generally available to executives of the Company and relocation assistance. The Company also agreed to provide Mr. Baumgardner with an automobile allowance and to pay premiums related to his life insurance policy. The employment agreement contains confidentiality, noncompete and nonsolicitation covenants from Mr. Baumgardner.
Mr. Baumgardner’s stock options were cancelled effective as of March 15, 2006. Compensatory arrangements with Mr. Baumgardner relating to the cancellation of these options are still in the process of being finalized.
Employment Agreement with Robert Evans. Under the terms of the employment agreement, dated June 10, 2005, between the Company and Mr. Evans, Mr. Evans is entitled to receive an initial annual base salary of $200,000. In addition, in the sole discretion of the Compensation Committee of the Company’s Board of Directors, Mr. Evans will have an opportunity to participate in the Company’s Management Bonus Plan. Mr. Evans is entitled to a minimum bonus of $10,000 for the fiscal year ending January 31, 2006.
Mr. Evans shall, in the sole discretion of the Compensation Committee, be eligible during his employment with the Company to be granted stock options, restricted stock and/or other equity-based compensation awards. Pursuant to the
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employment agreement, Mr. Evans was awarded an initial grant of an option to purchase 30,000 shares of the Company’s common stock pursuant to the terms of the Company’s 1997 Long-Term Incentive Plan, as amended.
The employment agreement is for an initial term of one year, subject to earlier termination, and will be automatically extended for one additional year unless either party gives written notice of termination at least 60 days prior to the expiration of the term.
The employment agreement provides that if Mr. Evans’s employment is terminated without “cause” (as defined in the employment agreement), Mr. Evans will receive a severance payment equal to his base salary for a period of twelve months following termination, any accrued but unpaid salary and annual bonus through and including the effective date of the termination of his employment (determined on a pro rata basis for the number of days of the fiscal year for which he was employed by the Company). Such annual bonus will be paid following the Compensation Committee’s determination of his annual bonus, if any, for the fiscal year in which the termination of employment occurs, and other employee benefits to which he was entitled on the date of the termination of his employment in accordance with the terms of the applicable plans.
The employment agreement also provides Mr. Evans with certain benefits, including participation in the Company’s employee benefit plans generally available to executive officers of the Company. The employment agreement also contains, among other things, confidentiality, noncompete and nonsolicitation covenants from Mr. Evans.
Employment Agreement with Debbie Nicodemus-Volker. Under the terms of Ms. Nicodemus-Volker’s employment agreement dated June 1, 2004, Ms. Nicodemus-Volker was entitled to receive an initial annual base salary of $300,000. In addition, beginning for the fiscal year ending January 31, 2005 and in the sole discretion of the Compensation Committee of the Company’s Board of Directors, Ms. Nicodemus-Volker has the opportunity to participate in the Company’s Management Cash Bonus Plan, with the same percentage bonus opportunity as the Company’s other Executive Vice Presidents. Furthermore, Ms. Nicodemus-Volker shall, in the sole discretion of the Compensation Committee, be eligible during her employment with the Company to be granted stock options, restricted stock and/or other equity-based compensation awards.
Ms. Nicodemus-Volker’s employment agreement is for an initial term of one year, subject to earlier termination, and is automatically extendable for one additional year unless either party to the employment agreement gives written notice of termination at least 60 days prior to the expiration of the term.
The employment agreement also provides that if Ms. Nicodemus-Volker’s employment is terminated without “cause” (as defined in the employment agreement), she will receive a severance payment equal to her base salary for a period of twelve months following termination, any accrued but unpaid salary and annual bonus through and including the effective date of the termination of her employment (determined on a pro rata basis for the number of days of the fiscal year for which she was employed by the Company), such annual bonus to be paid following the Compensation Committee’s determination of her annual bonus, if any, for the fiscal year in which the termination of employment occurred, and other employee benefits to which she is entitled on the date of the termination of her employment in accordance with the terms of the applicable plans.
The employment agreement also provides Ms. Nicodemus-Volker with certain benefits, including participation in the Company’s employee benefit plans generally available to executives of the company (currently including health insurance, life insurance, and participation in the Company’s 401(k) plan, automobile benefits and reimbursement for business expenses) and relocation assistance. The employment agreement also contains confidentiality, noncompete and nonsolicitation covenants from Ms. Nicodemus-Volker.
Employment Agreements with Former Executive Officers
The Company entered into employment agreements with Ms. Raff, dated August 10, 2005, and Ms. Baier, dated November 30, 2004 (the latter of which was amended on August 11, 2005). Ms. Raff resigned on September 8, 2005. Ms. Baier resigned on October 13, 2005.
Employment Agreement with Beryl Raff. Under the terms of Ms. Raff’s employment agreement, Ms. Raff was entitled to receive an initial annual base salary of $500,000. She also received two cash payments of $487,500 each in August 2005, which were to be the first two of a number of transition compensation payments totaling $1,950,000 in the aggregate. In addition, Ms. Raff received an additional transition payment of $15,000 on August 12, 2005. Ms. Raff also received an
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employment inducement stock option award for the purchase of 325,000 shares of the Company’s common stock at a purchase price of $6.63 per share which was to vest in three equal annual installments commencing August 10, 2006.
In addition, in the sole discretion of the Compensation Committee, Ms. Raff was to be eligible during her employment with the Company to be granted stock options, restricted stock and/or other equity-based compensation awards. The employment agreement also provided Ms. Raff with certain benefits, including participation in the Company’s employee benefit plans generally available to executives of the Company, and relocation assistance. The employment agreement also contains confidentiality, noncompete and nonsolicitation covenants from Ms. Raff.
On September 7, 2005, the Company received a letter from Ms. Raff, advising that she had resigned all positions with the Company. She also indicated in the letter that she would be returning compensation previously paid to her by the Company. Ms. Raff delivered a check to the Company for $593,865 in respect of compensation previously paid, less withholding taxes. See footnote (9) to “Item 11. Executive Compensation—Summary Compensation.” Pursuant to her employment agreement, Ms. Raff’s employment inducement stock option award was forfeited upon her resignation.
The Company commenced arbitration proceedings with respect to this matter on September 27, 2005 and subsequently reached a complete settlement with J.C. Penney and Ms. Raff of all matters arising in connection with Ms. Beryl Raff’s employment. For more information, see “Item 3. Legal Proceedings—Other”.
Employment Agreement with Lucinda M. Baier. Under the terms of Ms. Baier’s employment agreement, dated November 3, 2004, Ms. Baier was entitled to receive an initial annual base salary of $425,000. Pursuant to her employment agreement, Ms. Baier received a one-time “sign-on” bonus payment of $100,000, subject to required withholdings, on January 7, 2005. This “sign-on” bonus was to be credited against any bonus earned by Ms. Baier for the fiscal year ending January 31, 2006. In addition, beginning for the fiscal year ending January 31, 2006 and in the sole discretion of the Compensation Committee of the Company’s Board of Directors, Ms. Baier had the opportunity to participate in the Company’s Management Cash Bonus Plan. Furthermore, in the sole discretion of the Compensation Committee, Ms. Baier was to be eligible during her employment with the Company to be granted stock options, restricted stock and/or other equity-based compensation awards.
Ms. Baier was named Chief Executive Officer of the Company on April 13, 2005 and her annual base salary was increased to $500,000. In connection with the subsequent appointment of Beryl Raff as Chief Executive Officer of the Company, Ms. Baier stepped down as Chief Executive Officer of the Company effective August 11, 2005, but agreed to continue to serve as President and Chief Operating Officer of the Company. In connection with these events, the Company and Ms. Baier entered into an amendment, effective August 11, 2005, to the employment agreement.
The employment agreement also provided Ms. Baier with certain benefits, including participation in the Company’s employee benefit plans generally available to executives of the Company (including health insurance, life insurance, and participation in the Company’s 401(k) plan, automobile benefits and reimbursement for business expenses) and relocation assistance. The employment agreement also contained confidentiality, noncompete and nonsolicitation covenants from Ms. Baier.
Ms. Baier tendered her resignation effective as of October 13, 2005. Pursuant to the employment agreement, as amended, Ms. Baier forfeited all shares of the Company’s restricted common stock held by her. Ms. Baier will continue to be paid her base salary for a period of one year from her resignation date or until she finds other employment. See footnote (10) to “Item 11. Executive Compensation—Summary Compensation.”
Compensation of Directors
Directors who are officers or employees of the Company generally receive no compensation for serving as directors. In fiscal year 2005, Mr. Levy, who served as the Company’s interim Chief Executive Officer from October 11, 2005 until November 9, 2005, was compensated for his services as a director and committee member in accordance with the standard arrangements discussed below. Mr. Levy did not receive any compensation for his services as interim Chief Executive Officer.
Currently, all members of the Board of Directors are non-employee directors, except for Mr. Baumgardner. All directors are reimbursed for out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors, meetings of committees of the Board of Directors and other Board of Directors related matters.
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In fiscal year 2005, non-employee directors were entitled to receive compensation of $6,250 per fiscal quarter. In addition, non-employee directors were entitled to receive $1,250 for each meeting of the Board of Directors attended and committee members were entitled to receive $400 for each committee meeting attended. From and after August 4, 2005, the Chairman of the Board was entitled to receive an annual cash retainer of $10,000, paid in four equal installments at the beginning of each fiscal quarter. The Chairman of the Audit Committee was entitled to receive an annual cash retainer of $25,000, which was reduced to $10,000 on August 4, 2005, paid in four equal installments at the beginning of each fiscal quarter. The Chairman of each other committee was entitled to receive an annual cash retainer of $5,000, paid in four equal installments at the beginning of each fiscal quarter. Each non-employee director of the Company has the option to receive shares of restricted common stock at the beginning of each fiscal quarter in lieu of receiving the quarterly directors’ fees of $6,250 described above. The fair market value of the common stock on the date of issuance, and the restriction period (that is, the period in which the common stock subject to the award may not be sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or disposed of) relating to each such award lapses at the end of the fiscal quarter in which the shares of restricted common stock were issued. Shares of restricted stock are subject to forfeiture if the non-employee director ceases to serve as a director of the Company during the restriction period.
Each of the 1996 Long-Term Incentive Plan and the 1997 Long-Term Incentive Plan provides that non-employee directors may be granted stock-based awards at the discretion of the Company’s Compensation Committee, with the approval of the Board of Directors, to advance the interests of the Company by attracting and retaining well-qualified directors. Accordingly, the Company has granted such awards from time to time for such purpose. The non-employee directors have received such additional awards with respect to each of the past seven fiscal years of the Company. Under the terms of such plans, all outstanding stock options held by directors were cancelled without payment by the Company upon the consummation of the Offer.
As permitted under the Company’s 1997 Long-Term Incentive Plan, each non-employee director was granted a restricted stock award each year as of the Audit Certification Date (as defined below). Such award entitled each non-employee director to receive an amount of the Company’s restricted common stock equal to $10,000 divided by the fair market value of such common stock on the applicable Audit Certification Date, rounded down to the nearest whole share. The restriction period relating to each such award is one year from the date of grant. Shares of restricted stock are subject to forfeiture if the non-employee director ceases to serve as a director of the Company during the restriction period. The “Audit Certification Date” is the date each year on which the Company’s independent public accountants deliver an opinion to the Company as to its yearly audit of the financial statements of the Company. Under the terms of the plan, all outstanding shares of restricted stock were vested and cancelled upon the consummation of the Offer and the holders became entitled to payments from the Company of $1.60 per share. In addition, in accordance with the terms of the Merger Agreement, the Company will terminate the 1996 Long-Term Incentive Plan and 1997 Long-Term Incentive Plan at the effective time of the Merger.
The Company offers health insurance coverage to the members of its Board of Directors. The health insurance policy options and related policy cost available to the directors are the same as those available to the Company’s senior level employees.
Compensation Committee Interlocks and Insider Participation
During the year ended January 31, 2006, Daniel H. Levy (Chairman), Richard K. Berkowitz, Sanford Shkolnik and Steven J. Pully served on the Compensation Committee of the Board of Directors. Mr. Pully served on the Compensation Committee from August 4, 2005 until his resignation from the Board of Directors on November 29, 2005. From October 11, 2005 until November 9, 2005, Mr. Levy served as interim Chief Executive Officer of the Company.
Executive Officer Compensation Report By the Compensation Committee
All compensation decisions for the Chief Executive Officer and each of the other executive officers named in the summary compensation table (other than those whose employment with the Company as executive officers has been terminated, and Hugh Patinkin, who passed away on March 30, 2005) are currently made by the Compensation Committee of the Board of Directors.
Executive compensation consists of both annual and long-term compensation. Annual compensation consists of a base salary and bonus. Long-term compensation is generally provided through awards under the 1996 Long-Term Incentive Plan and the 1997 Long-Term Incentive Plan. Pursuant to the Merger Agreement, however, the 1996 Long-Term Incentive Plan and the 1997 Long-Term Incentive Plan will be cancelled as of the time the Merger becomes effective.
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The Compensation Committee’s approach to annual base salary is to offer competitive salaries in comparison with market practices. The base salary of each officer is set at a level considered to be appropriate in the judgment of the Compensation Committee based on an assessment of the particular responsibilities and performance of the officer, taking into account the performance of the Company, other comparable companies, the retail jewelry industry, the economy in general and such other factors as the Compensation Committee may deem relevant. The comparable companies considered by the Compensation Committee may include companies included in the peer group index discussed below and/or other companies in the sole discretion of the Compensation Committee. No specific measures of the Company’s performance or other factors are considered determinative in the base salary decisions of the Compensation Committee. Instead, substantial judgment is used and all of the facts and circumstances are taken into consideration by the Compensation Committee in its executive compensation decisions.
In addition to base salary, each of the executive officers named in the summary compensation table above were eligible to participate in the Company’s Management Bonus Program during fiscal year 2005. Under this bonus program, each executive officer was entitled to receive a cash bonus (not to exceed 125% of base salary in the case of the Chief Executive Officer and up to 100% of base salary in the case of the other executive officers named in the summary compensation table above) and a restricted stock bonus (not to exceed 25% of the cash bonus paid) based on the net income of the Company before extraordinary items. Based on the Company’s performance during fiscal year 2005, no bonuses were paid pursuant to the Management Bonus Program to the executive officers named in the summary compensation table above.
The executive officers have been eligible to participate in the 1996 Long-Term Incentive Plan and the 1997 Long-Term Incentive Plan. Each of the 1996 Long-Term Incentive Plan and the 1997 Long-Term Incentive Plan is administered by the Compensation Committee. Subject to the terms of the plans, the Compensation Committee (and the Chief Executive Officer with respect to non-executive officer employees) is authorized to select eligible directors, officers and other key employees for participation in the plans and to determine the number of shares of common stock subject to the awards granted thereunder, the exercise price, if any, the time and conditions of exercise, and all other terms and conditions of the awards. The purposes of the plans have been to align the interests of the Company’s stockholders and the recipients of grants under the plans by increasing the proprietary interest of the recipients in the Company’s growth and success and to advance the interests of the Company by attracting and retaining officers and other key employees. The terms and the size of the option grants to each executive officer vary from individual to individual in the discretion of the Compensation Committee. No specific factors are considered determinative in the grants of options to executive officers by the Compensation Committee. Instead, all of the facts and circumstances are taken into consideration by the Compensation Committee in its executive compensation decisions. Grants of options are based on the judgment of the members of the Compensation Committee considering the total mix of information. As discussed above, pursuant to the Merger Agreement the 1996 Long-Term Incentive Plan and the 1997 Long-Term Incentive Plan will be cancelled as of the time the Merger becomes effective
Section 162(m) of the Code
Section 162(m) of the Code generally limits to $1 million the amount that a publicly held corporation is allowed each year to deduct for the compensation paid to each of the corporation’s chief executive officer and the corporation’s four most highly compensated officers other than the chief executive officer, subject to certain exceptions. One such exception is “qualified performance-based compensation.” Compensation attributable to stock options granted to executives is intended to constitute “qualified performance-based compensation.” The Company does not believe that the $1 million deduction limitation should have any effect on it in the near future. If the $1 million deduction limitation is expected to have any effect on the Company in the future, the Company will consider ways to maximize the deductibility of executive compensation, while retaining the discretion it deems necessary to compensate executive officers in a manner commensurate with performance and the competitive environment for executive talent.
| THE COMPENSATION COMMITTEE OF |
| THE BOARD OF DIRECTORS |
| |
| Daniel H. Levy (Chairman) |
| Richard K. Berkowitz |
| Sanford Shkolnik |
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Note: | Steven J. Pully served on the Compensation Committee from August 4, 2005 until his resignation from the Board of Directors on November 29, 2005. Messrs. Duskin, Holtzman and Phillips, current members of the Compensation Committee with Mr. Levy, did not serve on the Compensation Committee during fiscal 2005. |
Performance Graph
The rules of the SEC require each public company to include a performance graph comparing the cumulative total stockholder return on the company’s common stock for the five preceding fiscal years, or such shorter period as the registrant’s class of securities has been registered with the SEC, with the cumulative total returns of a broad equity market index and a peer group or similar index.
Until October 28, 2005, the Company’s common stock was listed for trading on the NYSE under the symbol ‘‘JWL,’’ at which time the common stock was suspended from trading on the NYSE due to the Company having an average market capitalization of less than $25 million for 30 consecutive business days. The common stock is now listed and principally traded on the Pink Sheets electronic quotation system under the symbol ‘‘JWLR.PK.’’ The performance graph included in this report shows the period from January 31, 2001 through the last trading day of the fiscal year, which was January 31, 2006.
The following chart graphs the performance of the cumulative total return to stockholders (stock price appreciation plus dividends) between January 31, 2001 and January 31, 2006 in comparison to the New York Stock Exchange Market Index and the Jewelry Stores Peer Group Index. The retail jewelry store companies comprising the Jewelry Stores Peer Group Index are companies traded on The Nasdaq Stock Market, the NYSE , The American Stock Exchange or over-the-counter who have listed their companies’ SIC code as 5944—Jewelry Store. These companies include the Company, Birks & Mayors Inc., Blue Nile, Inc., DGSE Companies, Inc., Diamond One, Inc., Finlay Enterprises, Inc., Gift Liquidators, Inc., Lion-Gri International, Odimo Incorporated, Reeds Jewelers, Inc., Signet Group plc, Tiffany & Co. and Zale Corporation.
Comparison of Cumulative Total Return
Among Whitehall Jewellers, Inc., the NYSE Market Index and the Jewelry Stores Peer Group Index
Assumes $100 invested on January 31, 2001 in the Company’s common stock, the New York Stock Exchange Market Index and the Jewelry Stores Peer Group Index. Cumulative total return assumes reinvestment of dividends.
| | 1/31/01 | | 1/31/02 | | 1/31/03 | | 1/31/04 | | 1/31/05 | | 1/31/06 | |
| |
| |
| |
| |
| |
| |
| |
Whitehall Jewellers, Inc. | | | 100.00 | | | 186.83 | | | 120.60 | | | 110.66 | | | 86.47 | | | 17.60 | |
Jewelry Stores Peer Group Index | | | 100.00 | | | 108.04 | | | 77.42 | | | 123.20 | | | 117.79 | | | 123.56 | |
NYSE Market Index | | | 100.00 | | | 88.55 | | | 71.71 | | | 97.42 | | | 105.60 | | | 121.11 | |
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ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial ownership of the Company’s common stock as of March 31, 2006, by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of common stock, (ii) each of the Named Executive Officers for fiscal 2005, (iii) each director of the Company, and (iv) all directors and executive officers of the Company as a group.
Name of Beneficial Owner(1) | | Amount of
Beneficial
Ownership | | Percent of
Class(2) | |
| |
| |
| |
5% Stockholders | | | | | | | |
Prentice Capital Management, LP(3)
623 Fifth Avenue, 32nd Floor
New York, NY 10020 | | | 11,660,328 | | | 69.5 | % |
Holtzman Opportunity Fund, L.P.(4)
c/o Jewelcor Companies
100 N. Wilkes Barre Blvd., 4th Floor
Wilkes Barre, Pennsylvania 18707 | | | 9,487,965 | | | 56.6 | % |
Newcastle Partners, L.P.(5)
300 Crescent Court, Suite 1110
Dallas, TX 75201 | | | 2,018,400 | | | 12.0 | % |
Named Executive Officers | | | | | | | |
Robert L. Baumgardner(6) | | | — | | | * | |
John R. Desjardins(7) | | | — | | | — | |
Debbie Nicodemus-Volker(8) | | | — | | | — | |
Matthew M. Patinkin(9) | | | — | | | — | |
Robert W. Evans(10) | | | — | | | — | |
Daniel H. Levy(11) | | | 51,110 | | | * | |
Beryl Raff(12) | | | — | | | — | |
Lucinda M. Baier(13) | | | — | | | — | |
Hugh M. Patinkin(14) | | | — | | | — | |
Directors | | | | | | | |
Richard K. Berkowitz(15) | | | 47,972 | | | * | |
Edward Dayoob(16) | | | — | | | — | |
Jonathan Duskin(17) | | | — | | | — | |
Seymour Holtzman(18) | | | 9,487,965 | | | 56.6 | % |
Norman J. Patinkin(19) | | | 49,032 | | | * | |
Charles G. Phillips(20) | | | — | | | — | |
Sanford Shkolnik(21) | | | 7,668 | | | * | |
| | | | | | | |
All executive officers and directors as a group(22) | | | 9,968,982 | | | 59.4 | % |
|
* | Less than 1%. |
(1) | Except as set forth in the footnotes to this table, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them. |
(2) | Amount and applicable percentage of ownership is based on 16,768,947 shares of the Company’s common stock outstanding on March 31, 2006. Where indicated in the footnotes, this table also includes the Company’s common stock issuable pursuant to stock options granted under the Non-Employee Directors Plan exercisable within 60 days. However, this table excludes common stock subject to options or restricted stock awards under the Company’s 1996 Long-Term Incentive Plan and the Company’s 1997 Long-Term Incentive Plan. Under such plans, upon a change in control of the Company, as determined under such plans, any options and/or restricted stock awards granted under such plans are cancelled and a holder thereof is entitled to receive a cash payment from the Company based upon the price per Common Share paid in the change in control transaction, as determined pursuant to the terms of such plans. (The holder of an |
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| option is entitled to a payment net of the exercise price.) Such a change in control occurred upon the acquisition by Purchaser of the Company’s common stock pursuant to the terms of the Offer. |
| |
(3) | Share information based solely on information contained on a Form 4-A, dated March 24, 2006, filed with the SEC, as amended from time to time. WJ Acquisition Corp. beneficially owns 8,432,249 shares of the Company’s common stock. PWJ Lending beneficially owns 2,094,346 shares of the Company’s common stock. PWJ Funding LLC (“PWJ Funding”) beneficially owns an aggregate of 1,133,733 shares of the Company’s common stock. Certain of the shares of the Company’s common stock held by PWJ Lending and PWJ Funding are held by various investment funds including Prentice Capital Partners, LP, Prentice Capital Partners QP, LP, Prentice Capital Offshore, Ltd., PEC I LLC and managed accounts managed by Prentice and Michael Zimmerman, in each case, as nominee for PWJ Lending and PWJ Funding. Neither Prentice nor Mr. Zimmerman directly owns any of the Company’s common stock. Each of Prentice, Holdco and Mr. Zimmerman disclaims any beneficial ownership of the Company’s common stock referred to in this note to the extent such beneficial ownership exceeds such person’s pecuniary interest therein. |
(4) | Share information based solely on information contained on a Form 4-A, dated March 24, 2006, filed with the SEC, as amended from time to time. Holtzman beneficially owns 1,055,716 shares of the Company’s common stock. Holtzman disclaims any beneficial ownership of the Company’s common stock beneficially owned by entities related to Prentice and of the common stock beneficially owned by WJ Holding Corp. except to the extent, if any, that Holtzman may be deemed to beneficially own a proportionate share thereof. |
(5) | Share information based solely on information contained in a Schedule 13D, dated January 27, 2006, filed with the SEC, as amended from time to time. This Schedule 13D indicates that Newcastle Partners, L.P. beneficially owns 2,018,400 shares of the Company’s common stock and has sole voting and investment power with respect to the reported shares. Newcastle Capital Management, L.P., as the general partner of Newcastle Partners, L.P., may also be deemed to beneficially own the 2,018,400 shares of the Company’s common stock beneficially owned by Newcastle Partners, L.P. Newcastle Capital Group, L.L.C., as the general partner of Newcastle Capital Management, L.P., which in turn is the general partner of Newcastle Partners, L.P., may also be deemed to beneficially own the 2,018,400 shares of the Company’s common stock beneficially owned by Newcastle Partners, L.P. Mark E. Schwarz, as the managing member of Newcastle Capital Group, L.L.C., the general partner of Newcastle Capital Management, L.P., which in turn is the general partner of Newcastle Partners, L.P., may also be deemed to beneficially own the 2,018,400 shares of the Company’s common stock beneficially owned by Newcastle Partners, L.P. Steven J. Pully, as President of Newcastle Capital Management, L.P., which is the general partner of Newcastle Partners, L.P., may also be deemed to beneficially own the 2,018,400 shares of the Company’s common stock beneficially owned by Newcastle Partners, L.P. According to the Schedule 13D, Newcastle Capital Management, L.P., Newcastle Capital Group, L.L.C., Mr. Schwarz and Mr. Pully disclaim beneficial ownership of the Company’s common stock held by Newcastle Partners, L.P., except to the extent of their pecuniary interest therein. By virtue of his position with Newcastle Partners, L.P., Newcastle Capital Management, L.P. and Newcastle Capital Group, L.L.C., Mark E. Schwarz has the sole power to vote and dispose of the Company’s common stock owned by Newcastle Partners, L.P. |
(6) | The mailing address of Robert L. Baumgardner is c/o Whitehall Jewellers, Inc., 155 North Wacker Drive, Suite 500, Chicago, IL 60606. |
(7) | The mailing address of John R. Desjardins is c/o Whitehall Jewellers, Inc., 155 North Wacker Drive, Suite 500, Chicago, Illinois 60606. |
(8) | The mailing address of Debbie Nicodemus-Volker is c/o Whitehall Jewellers, Inc., 155 North Wacker Drive, Suite 500, Chicago, Illinois 60606. |
(9) | The mailing address of Matthew M. Patinkin is c/o Whitehall Jewellers, Inc., 155 North Wacker Drive, Suite 500, Chicago, Illinois 60606. |
(10) | The mailing address of Robert W. Evans is c/o Whitehall Jewellers, Inc., 155 N. Wacker Drive, Suite 500, Chicago, IL 60606. |
(11) | Includes 49,444 shares of the Company’s common stock issuable pursuant to presently exercisable stock options or stock options which will become exercisable within 60 days. The mailing address for Daniel H. Levy is c/o Whitehall Jewellers, Inc., 155 North Wacker Drive, Suite 500, Chicago, Illinois 60606. |
(12) | The mailing address of Beryl Raff is c/o J. C. Penney Company, Inc. 6501 Legacy Drive, Plano, Texas 75024-36. |
(13) | Ms. Baier tendered her resignation on October 11, 2005. Pursuant to her employment agreement, dated November 30, 2004 and as amended on August 11, 2005, Ms. Baier has forfeited all of her common stock. |
(14) | Mr. Hugh M. Patinkin passed away prior to the date as of which the table speaks. Mr. Patinkin served as Chairman and Chief Executive Officer of Whitehall until the time of his death. |
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(15) | Includes 51,110 shares of the Company’s common stock issuable pursuant to presently exercisable stock options or stock options which will become exercisable within 60 days. The mailing address for Richard K. Berkowitz is 6000 Island Blvd. #2006, Aventura, Florida 33160. |
(16) | The mailing address of Edward Dayoob is 623 Fifth Avenue, 32nd Floor, New York, NY 10020. |
(17) | The mailing address of Jonathan Duskin is 623 Fifth Avenue, 32nd Floor, New York, NY 10020. |
(18) | Share information based solely on information contained on a Form 4-A, dated March 24, 2006, filed with the SEC, as amended from time to time. Mr. Holtzman disclaims any beneficial ownership of the Company’s common stock beneficially owned by entities related to Prentice. Mr. Holtzman further disclaims any beneficial ownership of the Company’s common stock owned by Holtzman, including, without limitation, those shares that Holtzman may be deemed to beneficially own as set forth in footnote (4), except to the extent of his pecuniary interest therein. The mailing address of Seymour Holtzman is 100 N. Wilkes Barre Blvd., 4th Floor, Wilkes Barre, PA 18702. |
(19) | Includes 49,032 shares of the Company’s common stock issuable pursuant to presently exercisable stock options or stock options which will become exercisable within 60 days. The mailing address of Norman J. Patinkin is c/o United Marketing Group, L.L.C., 5724 North Pulaski, Chicago, Illinois 60647. |
(20) | The mailing address of Charles G. Phillips is 623 Fifth Avenue, 32nd Floor, New York, NY 10020. |
(21) | Includes 7,668 shares of the Company’s common stock issuable pursuant to presently exercisable stock options. The mailing address of Sanford Shkolnik is c/o Encore Investments, LLC, 101 West Grand Avenue, Chicago, Illinois 60610. |
(22) | Includes current executive officers and directors only. |
Equity Compensation Plan Information Table
The following table provides information as of January 31, 2006 regarding the number of shares of the Company’s common stock that may be issued under its equity compensation plans.
| | (a) | | (b) | | (c) | |
| |
| |
| |
| |
Plan Category | | Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights | | Weighted-average
exercise price of
outstanding options,
warrants and rights | | Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a)) | |
| |
| |
| |
| |
Equity compensation plans approved by security holders | | | 2,232,408 | | | $8.64 | | | 865,698 | |
For more current information regarding the Company’s equity compensation plans, see Note 19 to the financial statements.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
At the end of fiscal year 2004, Mr. Hugh Patinkin, Mr. Desjardins and Mr. Matthew Patinkin owned a 52% equity interest in Double P Corporation, PDP Limited Liability Company and CBN Limited Liability Company, which own and operate primarily mall-based snack food stores. On March 30, 2005, Mr. Hugh Patinkin died and his ownership passed to his estate. As of January 31, 2006, Messrs. Matthew Patinkin and Desjardins owned a 26% equity interest in these enterprises. A substantial portion of the remaining equity interest is owned by the adult children and other family members of Norman Patinkin, a member of the Board of Directors. One of Norman Patinkin’s adult children is a director and chief executive officer of Double P Corporation. During fiscal year 2005, Messrs. Hugh Patinkin, Desjardins and Matthew Patinkin spent a limited amount of time providing services to Double P Corporation, PDP Limited Liability Company and CBN Limited Liability Company, and such services were provided in accordance with the Company’s Code of Conduct. Messrs. Hugh Patinkin, Desjardins and Matthew Patinkin received no remuneration for these services other than reimbursement of expenses incurred. In the past, the Company and Double P Corporation agreed to divide and separately lease contiguous mall space. The Company and Double P Corporation concurrently negotiated separately with each landlord (“Simultaneous Negotiations”) to reach agreements for their separate locations. Since the Company’s initial public offering, its policy had required that the terms of any such leases must be approved by a majority of the Company’s outside directors. The Company had conducted such negotiations in less than ten situations, since the Company’s initial public offering in 1996. The Company’s current policy is that it will no longer enter into such Simultaneous Negotiations.
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The Company offers health insurance coverage to the members of its Board of Directors. The health insurance policy options and related policy cost available to the Directors are the same as those available to the Company’s senior level employees.
The Company operated a program under which executive officers and directors, and parties introduced to the Company by its executive officers and directors, were permitted to purchase most Company merchandise at approximately ten percent above the Company’s cost. No such purchases were made under this program during fiscal year 2004 and this program was discontinued during the third quarter of fiscal year 2004. Executive officers and directors, and parties introduced to the Company by its executive officers and directors are now permitted to purchase Company merchandise at the same level of discount that is offered to the Company’s support office employees, field supervisors and store managers, which is less favorable in comparison to the discount that was offered under the discontinued program.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Audit and Non-Audit Fees
The following table sets forth the fees billed for each of fiscal years 2005 and 2004 for professional services rendered by PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm. As previously disclosed, on March 27, 2006, PricewaterhouseCoopers LLP informed the Company and the Audit Committee of the Company’s Board of Directors that it will resign upon the completion of PricewaterhouseCoopers LLP’s audit procedures regarding the financial statements of the Company as of and for the fiscal year ended January 31, 2006 and this Annual Report on Form 10-K. For more information, see “Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure”.
| | 2005 | | 2004 | |
| |
| |
| |
Audit Fees (1) | | $ | 835,000 | | $ | 1,102,224 | |
Audit-Related Fees (2) | | $ | 32,000 | | $ | 28,844 | |
Tax Fees (3) | | $ | 233,732 | | $ | 83,076 | |
All Other Fees (4) | | $ | 168,000 | | $ | 5,000 | |
| |
|
| |
|
| |
Total | | $ | 1,268,732 | | $ | 1,219,144 | |
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|
| |
|
| |
|
(1) | Audit fees related to professional services rendered for the audit of the Company’s annual financial statements and quarterly review of financial statements included in the Company’s quarterly reports on Form 10-Q. |
(2) | Audit-related fees include professional services related to the audit of the Company’s financial statements, consultation on accounting standards or transactions and audits of employee benefit plans. |
(3) | Tax fees relate to professional services rendered for tax compliance, tax advice and tax planning. |
(4) | All other fees for fiscal year 2005 relate primarily to professional fees associated with the proxy statement filed with the SEC on December 27, 2005. |
Approval of Independent Registered Public Accounting Firm Services and Fees
Under the Company’s policy approved by the Audit Committee, the Audit Committee must pre-approve all services provided by the Company’s independent registered public accounting firm and fees charged. The Audit Committee will consider annually the provision of audit services and, if appropriate, pre-approve certain defined audit fees, audit related fees, tax fees and other fees with specific dollar value limits for each category of service. During the year, the Audit Committee will periodically monitor the levels of fees against the pre-approved limits. The Audit Committee will also consider on a case by case basis and, if appropriate, approve specific engagements that are not otherwise pre-approved. Any proposed engagement that does not fit within the definition of a pre-approved service may be presented to the Audit Committee for approval. All fiscal year 2005 audit and non-audit services provided by the independent registered public accounting firm were pre-approved.
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PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)(1) Financial Statements
See financial statements commencing on page 36 hereof.
(a)(2) Financial Statement Schedules
See financial statement schedule on page 65 hereof.
The following consolidated financial statement schedule of the Company and subsidiaries is attached pursuant to Item 15(d):
Schedule II Valuation and Qualifying Accounts for the Fiscal Years Ended January 31, 2006; January 31, 2005; and January 31, 2004
All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(a)(3) Exhibits
Exhibits marked with an asterisk (*) are incorporated by reference to documents previously filed by the Company with the SEC, as indicated. All other documents listed are filed with this report.
EXHIBIT NO. | | DESCRIPTION |
| |
|
*2.1 | | Agreement and Plan of Merger, dated as of February 1, 2006, by and among the Company, Prentice Capital Management, LP, Holtzman Opportunity Fund, L.P., WJ Holding Corp. and WJ Acquisition Corp. Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on February 3, 2006, File No. 1-15615. |
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*3.1 | | Second Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the period ended April 30, 2002, File No. 1-15615. |
| | |
*3.2 | | Second Amended and Restated By-Laws of the Company. Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on April 4, 2005, File No. 1-15615. |
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*4.1 | | Amended and Restated Stockholders Rights Plan. Incorporated by reference to Exhibit 99.2 of the Company’s Registration Statement as amended on Form 8-A/A and filed on April 28, 1999, File No. 0-028176. |
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*4.2 | | First Amendment to Amended and Restated Stockholders Rights Agreement, dated as of October 3, 2005, by and between the Company and La Salle Bank, as rights agent. Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 6, 2005, File No. 1-15615. |
| | |
*4.3 | | Second Amendment to Amended and Restated Stockholders Rights Agreement, dated as of February 1, 2006, by and between the Company and La Salle Bank, as rights agent. Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 3, 2006, File No. 1-15615. |
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*4.4 | | Certificate of Designations of Series A Junior Participating Preferred Stock. Incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-1, as amended, originally filed on February 29, 1996 (Registration No. 333-1794). |
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*10.1 | | Second Amended and Restated Registration Agreement. Incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement on Form S-1 originally filed on May 17, 1996 (Registration No. 333-04043). |
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*10.2 | | Registration Rights Agreement, dated as of October 3, 2005, by and among the Company, PWJ Funding LLC, PWJ Lending LLC and Holtzman Opportunity Fund, L.P. Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed on October 6, 2005, File No. 1-15615. |
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*10.3 | | 1996 Long-Term Incentive Plan, as amended. Incorporated by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2001, File No. 1-15615.(1) |
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*10.4 | | Lease, dated May 14, 1992, between the Company and New York Life Insurance Company relating to the Company’s corporate headquarters. Incorporated by reference to Exhibit 10.9 of the Company’s Registration Statement on Form S-1, as amended, originally filed on February 29, 1996 (Registration No. 333-1794). |
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*10.5 | | ESOP Restructuring Agreement, dated as of March 29, 1996, between the Company and the Whitehall Jewellers, Inc. Employee Stock Ownership Trust. Incorporated by reference to Exhibit 10.12 of the Company’s Registration Statement on Form S-1 originally filed on May 17, 1996 (Registration No. 333-04043). |
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*10.6 | | Amended and Restated Employee Stock Ownership Plan. Incorporated herein by reference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 1997, File No. 0-028176. |
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*10.7 | | Form of Executive Severance Agreements, as amended, each dated May 7, 1996, between the Company and each of Hugh M. Patinkin, John R. Desjardins and Matthew M. Patinkin. Incorporated by reference to Exhibit 10.3 of the Company’s Registration Statement on Form S-3 as originally filed on January 27, 2000 (Registration No. 333-95465).(1) |
| | |
*10.8 | | Executive Severance Agreement, dated November 1, 2000, between the Company, WH Inc. of Illinois, a wholly owned subsidiary of the Company, and Lynn D. Eisenheim. Incorporated by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2001, File No. 1-15615.(1) |
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*10.9 | | Executive Severance and Release Agreement, dated May 18, 2005, between the Company, WH Inc. of Illinois, a wholly owned subsidiary of the Company, and Lynn D. Eisenheim. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 24, 2005, File No. 1-15615.(1) |
| | |
*10.10 | | Employment Agreement, dated June 1, 2004, between the Company and Debbie Nicodemus-Volker. Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the period ended April 30, 2004, File No. 1-15615.(1) |
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*10.11 | | Employment Agreement, dated November 30, 2004, between the Company and Lucinda M. Baier. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 1, 2004, File No. 1-15615.(1) |
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*10.12 | | Amendment to Employment Agreement, dated November 30, 2004, between the Company and Lucinda M. Baier. Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed on August 15, 2005, File No. 1-15615.(1) |
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*10.13 | | Employment Agreement, dated June 10, 2005, between the Company and Robert Evans. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on June 13, 2005, File No. 1-15615.(1) |
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*10.14 | | Employment Agreement, dated as of August 10, 2005, between the Company and Beryl Raff. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on August 15, 2005, File No. 1-15615.(1) |
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*10.15 | | Non-Qualified Stock Option Agreement, dated as of August 10, 2005, between the Company and Beryl Raff. Incorporated by reference to Exhibit 10.3 of Company’s Current Report on Form 8-K filed August 15, 2005, File No. 1-15615.(1) |
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*10.16 | | Indemnification Agreement, dated as of August 10, 2005, between the Company and Steven J. Pully and Beryl Raff. Incorporated by reference to Exhibit 10.2 of Company’s Current Report on Form 8-K filed August 15, 2005, File No. 1-15615.(1) |
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*10.17 | | Employment Agreement, dated October 31, 2005, between the Company and Robert L. Baumgardner. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 2, 2005, File No. 1-15615.(1) |
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*10.18 | | 1997 Long-Term Incentive Plan, as amended. Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the period ended April 30, 2002, File No. 1-15615.(1) |
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*10.19 | | Form of Stock Option Agreement for Employees under the 1997 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2001, File No. 1-15615.(1) |
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*10.20 | | Performance Based Incentive Stock Option Agreements, each dated March 18, 1999 and June 8, 1999, with each of Hugh M. Patinkin, Matthew M. Patinkin, John R. Desjardins, Manny A. Brown and Lynn D. Eisenheim, under the 1997 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10.17 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2001, File No. 1-15615.(1) |
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*10.21 | | Form of Non-Qualified Stock Option Agreement under the 1997 Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2001, File No. 1-15615.(1) |
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*10.22 | | Form of Restricted Stock Award Agreement for Executive Officers under the 1997 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2001, File No. 1-15615.(1) |
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*10.23 | | Form of Restricted Stock Award Agreement for Non-Employee Directors under the 1997 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10.21 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2001, File No. 1-15615.(1) |
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*10.24 | | Form of Restricted Stock Award Agreement for Non-Employee Directors pursuant to the 1997 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on March 9, 2005, File No. 1-15615. |
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*10.25 | | 1998 Non-Employee Directors Stock Option Plan. Incorporated by reference to Exhibit 99.1 of the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on April 15, 1998 (Registration No. 333-50159).(1) |
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*10.26 | | Amendment Number One to the 1998 Non-Employee Directors Stock Option Plan, dated January 26, 1999. Incorporated by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 1999, File No. 1-15615.(1) |
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*10.27 | | Form of Non-Qualified Stock Option Agreement under the 1998 Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit 10.24 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2001, File No. 0-028176.(1) |
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*10.28 | | Second Amended and Restated Revolving Credit and Gold Consignment Agreement, dated as of July 29, 2003, among the Company, LaSalle Bank National Association, as administrative agent for the banks party thereto (“Banks”), the Banks, ABN AMRO Bank N.V., as syndication agent, and JP Morgan Chase Bank, as documentation agent. Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the period ended July 31, 2003, File No. 1-15615. |
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*10.29 | | First Amendment, dated as of March 23, 2004, to the Second Amended and Restated Revolving Credit and Gold Consignment Agreement dated as of July 29, 2003 by and among the Company, LaSalle Bank National Association, as administrative agent for the Banks, the Banks, ABN AMRO Bank, N.V., as syndication agent, and JP Morgan Chase Bank, as documentation agent. Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on March 23, 2004, File No. 1-15615. |
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*10.30 | | Second Amendment, dated as of January 31, 2005, to the Second Amendment and Restated Revolving Credit and Gold Consignment Agreement dated as of July 29, 2003 by and among the Company, LaSalle Bank National Association, as administrative agent for the Banks, the Banks, ABN AMRO Bank N.V., as syndication agent, and JP Morgan Chase Bank, as documentation agent. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 31, 2005, File No. 1-15615. |
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*10.31 | | Third Amendment, dated as of April 6, 2005, to the Second Amended and Restated Revolving Credit and Gold Consignment Agreement dated as of July 29, 2003 by and among the Company, LaSalle Bank National Association, as administrative agent for the Banks, the Banks, ABN AMRO Bank N.V., as syndication agent, and JP Morgan Chase Bank, as documentation agent. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on April 8, 2005, File No. 1-15615. |
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*10.32 | | Fourth Amendment, dated as of October 3, 2005, to the Second Amendment and Restated Revolving Credit and Gold Consignment Agreement dated as of July 29, 2003 by and among the Company, LaSalle Bank National Association, as administrative agent and collateral agent for the Banks, the Banks, ABN AMRO Bank N.A., as managing agent, and Back Bay Capital Funding LLC, as accommodation facility agent. Incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K filed on October 6, 2005, File No. 1-15615. |
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*10.33 | | Letter Agreement, dated December 15, 2003, relating to the Second Amended and Restated Revolving Credit and Gold Consignment Agreement dated as of July 29, 2003 by and among the Company, LaSalle Bank National Association, as administrative agent for the Banks, the Banks, ABN AMRO Bank N.V., as syndication agent and JP Morgan Chase Bank, as documentation agent. Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the period ended October 31, 2003, File No. 1-15615. |
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*10.34 | | Letter Agreement, dated March 23, 2004, to the Second Amended and Restated Revolving Credit and Gold Consignment Agreement dated as of July 29, 2003 by and among the Company, LaSalle Bank National Association, as administrative agent for the Banks party thereto, the Banks, ABN AMRO Bank, N.V., as syndication agent and JP Morgan Chase Bank, as documentation agent. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on March 23, 2004, File No. 1-15615. |
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*10.35 | | Letter Agreement, dated September 14, 2005, relating to the Second Amended and Restated Revolving Credit and Gold Consignment Agreement dated as of July 29, 2003 by and among the Company, LaSalle Bank National Association, as administrative agent and collateral agent, ABN AMRO Bank N.V., as syndication agent, JP Morgan Chase Bank, National Association, as documentation agent, Back Bay Capital Funding, LLC, as an Accommodation Bank and the Banks. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 20, 2005, File No. 1-15615. |
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*10.36 | | 401(k) Plan. Incorporated by reference to Exhibit 10.17 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 1998, File No. 0-028176.(1) |
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*10.37 | | Second Amendment to 401(k) Plan. Incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 1999, File No. 0-028176.(1) (2) |
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*10.38 | | Third Amendment to 401(k) Plan. Incorporated by reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 1999, File No. 0-028176.(1) |
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*10.39 | | Fourth Amendment to 401(k) Plan. Incorporated by reference to Exhibit 10.21 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 1999, File No. 0-028176.(1) |
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*10.40 | | Whitehall Jewellers, Inc. Employee Stock Purchase Plan. Incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on September 28, 2001 (Registration No. 333-70510).(1) |
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*10.41 | | Separation and Release Agreement, dated March 3, 2004, between Jon H. Browne and the Company. Incorporated by reference to Exhibit 10.33 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004, File No. 1-15615.(1) |
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*10.42 | | Separation and Release Agreement, dated December 13, 2004, between the Company and Manny A. Brown. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 15, 2004, File No. 1-15615. |
| | |
*10.43 | | Non-Prosecution Agreement, dated as of September 28, 2004, between the Company and the United States Attorney’s Office for the Eastern District of New York. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 28, 2004, File No. 1-15615. |
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*10.44 | | Letter to the United States Attorney for the Eastern District of New York, dated September 28, 2004. Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on September 28, 2004, File No. 1-15615. |
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*10.45 | | Bridge Term Loan Credit Agreement, dated as of October 3, 2005, among the Company, PWJ Lending LLC and the lending institutions from time to time party thereto (the “Lenders”). Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on October 6, 2005, File No. 1-15615. |
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*10.46 | | Securities Purchase Agreement, dated as of October 3, 2005, among the Company, PWJ Funding LLC, PWJ Lending LLC and Holtzman Opportunity Fund, L.P. Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on October 6, 2005, File No. 1-15615. |
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*10.47 | | Form of Warrant to purchase shares of Common Stock of the Company. Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on October 6, 2005, File No. 1-15615. |
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*10.48 | | Term Sheet among the Company, Prentice Capital Management, LP and certain vendors as set forth therein. Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on October 6, 2005, File No. 1-15615. |
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*10.49 | | Amended and Restated Term Loan Credit Agreement, dated as of February 1, 2006, by and among the Company, the Bridge Loan Lenders and PWJ Lending LLC. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on February 3, 2006, File No. 1-15615. |
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21 | | Subsidiaries of the Company. |
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23 | | Consent of Independent Registered Public Accounting Firm. |
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24 | | Powers of Attorney (included on signature page). |
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31.1 | | Certificate Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of the Principal Executive Officer. |
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31.2 | | Certificate Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of the Principal Financial Officer. |
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32.1 | | Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer. |
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32.2 | | Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer. |
|
(1) | Represents management contract or compensatory plan or arrangement. |
(2) | There is no First Amendment to 401(k) Plan. |
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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 17, 2006 | | WHITEHALL JEWELLERS, INC. |
| | (Registrant) |
| | |
| By: | /s/ John R. Desjardins |
| |
|
| | John R. Desjardins |
| | Executive Vice President, |
| | Chief Financial Officer, Treasurer and Secretary |
| | (Principal financial and accounting officer) |
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POWER OF ATTORNEY AND SIGNATURES
Each of the undersigned officers and directors of Whitehall Jewellers, Inc. hereby severally constitutes and appoints Robert L. Baumgardner 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 below by the following persons on behalf of the registrant and in the capacities indicated on this 17th day of April, 2006.
Name | | Capacity |
| |
|
| | |
/s/Robert L. Baumgardner | | Chief Executive Officer and President |
| | |
Robert L. Baumgardner | | |
| | |
/s/ Richard K. Berkowitz | | Director |
| | |
Richard K. Berkowitz | | |
| | |
/s/ Edward Dayoob | | Director |
| | |
Edward Dayoob | | |
| | |
/s/ Jonathan Duskin | | Director |
| | |
Jonathan Duskin | | |
| | |
/s/ Seymour Holtzman | | Director |
| | |
Seymour Holtzman | | |
| | |
/s/ Daniel H. Levy | | Chairman and Director |
| | |
Daniel H. Levy | | |
| | |
/s/ Norman J. Patinkin | | Director |
| | |
Norman J. Patinkin | | |
| | |
/s/ Charles G. Phillips | | Director |
| | |
Charles G. Phillips | | |
| | |
/s/ Sanford Shkolnik | | Director |
| | |
Sanford Shkolnik | | |
| | |
/s/ John R. Desjardins | | Executive Vice President, Chief Financial Officer, Treasurer and Secretary (Principal financial and accounting officer) |
| |
John R. Desjardins | |
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