NEWCASTLE PARTNERS, L.P.
300 Crescent Court, Suite 1110
Dallas, Texas 75201
(214) 661-7474 o Fax (214) 661-7475
December 20, 2005
VIA FACSIMILE AND FEDERAL EXPRESS
Mr. Daniel H. Levy
Chairman of the Special Committee of the Board of Directors
Whitehall Jewellers, Inc.
155 North Wacker Drive
Chicago, Illinois 60606
Dear Dan:
Thank you for your December 16, 2005 letter. Newcastle Partners, L.P.
("Newcastle") is disappointed that the Board of Directors (the "Board") persists
in failing to acknowledge that Newcastle's proposal is a superior proposal for
Whitehall Jewellers, Inc. (the "Company" or "Whitehall") and its stockholders.
As stated in our letter dated December 9, 2005, Newcastle has been ready and
waiting to meet with the Board and its representatives to address any legitimate
concerns regarding our offer. Instead, your letter of December 16, 2005
conditions the Board's willingness to enter into serious discussions on two
preconditions: (1) Newcastle enter into a confidentiality agreement and (2)
Newcastle provide information regarding six (6) areas identified in your
December 16, 2005 letter.
With regard to the confidentiality agreement, the Board is well aware
that Newcastle entered into a confidentiality agreement dated July 10, 2005,
which remains in effect until July 10, 2006. Obviously there is no need for a
new confidentiality agreement. That being said, to move things along, if the
Board is concerned about the duration of the existing confidentiality agreement,
Newcastle will agree that such provisions relating to the expiration period
under Paragraph 12(a) will remain in effect for two (2) years from the date of
this letter.
With respect to the Board's request for additional information on the
six points raised in your letter, we have received a proposal from a national
lender to provide a $140 million asset-based credit facility which would be
collateralized by collateral substantially equivalent to the Company's existing
senior credit facility. With regard to your question on key covenants, we are
prepared to try to finalize key covenant terms to accommodate the Company's
request, and in order to do so, we request that the Company provide the
information set forth in attachment "A." We will be prepared promptly upon
receipt of such information to finalize the proposed terms of the senior credit
facility proposal to address the Company's concerns. For your information,
Newcastle has also been contacted by other national bank lenders who are ready
and willing to provide an asset-based senior credit facility.
With regard to the subordinate portion of the credit facility,
Newcastle would replace the facility on substantially the same terms as enjoyed
by current lenders, or would pay it off as part of Newcastle's permanent
financing. Closing would be conditional on and occur simultaneously with the
closing of Newcastle's tender offer. No upfront fees would be charged.
As you know, Newcastle is a privately-held partnership. We can confirm
to you that Newcastle has sufficient cash on hand to fund all of its financial
obligations under our offer. Further, there are no restrictions under
Newcastle's partnership agreements which would limit our ability to fund and
close our offer. We would be prepared, subject to the Company entering into an
appropriate confidentiality agreement, to provide documentation to the Company's
advisors so that they can confirm the foregoing.
With regard to the Company's trade vendors, Newcastle is well aware of
the Company's agreements with the trade and is prepared to honor the terms of
such agreements. Upon receipt of the information requested in attachment "A", we
can further address with specificity the request to advise on terms for future
merchandise shipments. We believe, however, upon the closing of Newcastle's
proposed merger, Whitehall will be well capitalized and would anticipate vendor
financing on normal credit terms.
We are confused by the final two points of your December 16, 2005
letter. First, if Newcastle replaces the existing senior credit facility, then
the additional $20 million Prentice financing characterized as being integral to
current senior lenders would be irrelevant. On the other hand, if the current
senior lenders wish to remain in place, Newcastle would provide the additional
$20 million financing on substantially the same terms and conditions as the
Prentice financing without the conversion features.
Second, with regard to Newcastle's strategic plans for the Company, we
do not understand why it is relevant that the Board opine on our strategic plans
regarding issues such as merchandising and inventory management that will
pertain to the post-transaction period. Newcastle has offered (i) to acquire and
intends to acquire, upon and subject to the satisfaction of the conditions in
our offer and the back-end merger, all of the Company's outstanding capital
stock, (ii) to replace in full or pay off the Prentice bridge facility, (iii) to
replace the Company's senior credit and subordinate credit facility or obtain
the consent of the senior lenders thereto and (iv) to honor the Company's
agreements with the trade and its other contractual obligations. Therefore, we
believe the topic of strategic plans is yet another attempt by the Board to
confuse the real issue, whether this transaction is in the best interests of the
Company's stockholders and any other constituents to whom the Board owes a
fiduciary duty. Given the capitalization proposed by both Prentice and
Newcastle, that duty, as you are aware, should be primarily to the Company's
stockholders.
In conclusion, we do not view any of the points raised in your letter
of December 16, 2005 as an obstacle to the Board determining that our offer is
fair to, advisable and in the best interests of the Company and its
stockholders. I will be contacting you immediately to see if we can open up a
meaningful dialogue and initiate serious discussions to further address the
Board's concerns. We also hope that you will immediately provide us with the
requested information so that we can fully and properly respond to the request
to address at the present time our future strategic plans for the Company.
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Very truly yours,
NEWCASTLE PARTNERS, L.P.
By: Newcastle Capital Management, L.P.,
its general partner
By: Newcastle Capital Group, L.L.C.,
its general partner
By: /s/ Mark Schwarz
----------------------------------
Mark Schwarz, Managing Member
cc: Mr. Robert L. Baumgardner,
Chief Executive Officer
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ATTACHMENT A
Provide the following information in electronic Excel format when possible:
1. Detailed monthly results for September, October, and November 2005
i. Income, cash flow, and balance sheet statements
ii. Comparable store sales
iii. Merchandise margins by product type
iv. Store-level expenses
v. Ending availability under the company's lending agreements
vi. Advisor fees and other transaction expenses
vii. Termination payments to management or other payments to
management that were not in the normal course 2. Weekly sales
and merchandise margin results by product type for the past 16
weeks (including the most recently completed week)
3. Sales and store-level profit for each store for the past 16 weeks
i. Note those stores that are among the 77 stores to be closed
4. Inventory and payable balances at the end of each of the past 16 weeks
i. New merchandise received from vendors during the week
ii. Payments made to vendors during the week
5. Most recent working capital and debt balances (preferably within the past week)
i. Debt outstanding
ii. Cash on hand
iii. Outstanding trade and other payables, with aging schedule
iv. Inventory on hand in stores and in transit
v. Inventory balance by merchandise type, including "ESC" inventory
vi. Consignment inventory balance
6. Outstanding merchandise orders to vendors and expected date of receipt
7. Definitive agreements or draft agreements with the vendors regarding
past-due payable balances and terms of new merchandise orders
8. The most recent borrowing base certificate issued by the company to its
bank group 9. The most recent appraisal of the company's inventory
10. Any substantive communication to or from the company's bank group or
amendments to lending agreements within the past three months that is
not publicly available
11. Summary of outstanding engagement agreements with advisors and schedule
of payables due to advisors for services performed
i. Include calculation of contingent fees that may be paid
if the proposed transaction with Newcastle is completed
12. Presentations or memoranda produced by the current management team that
describe potential operating turnaround plans for the company
i. Include proposed marketing, merchandising, real estate,
and store operations strategies
13. Current status of any on-going recruiting searches for senior
management positions
14. Monthly projection model for the next three years produced by
management that reflects actual results of the most recently completed
week
i. Income, cash flow, and balance sheet statements
ii. Comparable store sales
iii. Sales and cost of goods break-out by consignment and asset
merchandise
iv. Merchandise purchases
v. Merchandise margin
vi. Store-level expenses
vii. Advisor fees and other transaction expenses
viii. Projected availability under the company's lending agreements
ix. Number of stores to be opened or closed in each month
x. Include projection scenarios that the company has discussed
with the board of directors
15. Overview of the expected liquidation proceeds from the 77 stored to be closed
i. The projected book value and net liquidation proceeds for the
inventory in each store
ii. The entire agreements with third-party liquidators
iii. Any other reports received by the company from third-parties
regarding the liquidation process
16. Overview of lease terms for each of the 77 stores to be closed
i. Name of landlord
ii. Term and rent expense
iii. Ability to sub-lease
iv. Liability if lease is terminated at the end of January
v. The company's estimate for the likely negotiated cost of
terminating the lease
vi. Status of negotiations with landlord
vii. Any reports received by the company from third-parties
regarding the lease termination process 17. Projected
post-Christmas balance sheet, including sources and uses
reconciling to the October 31, 2005 balance sheet and
including all fees, expenses and termination payments that
would be triggered by the proposed Newcastle financing.
Newcastle Partners L P
Filed: 20 Dec 05, 12:00am