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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: APRIL 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _____________________
Commission File number: 0-028176
Whitehall Jewellers, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-1433610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 N. Wacker Drive, Suite 500, Chicago, IL 60606
(Address of principal executive offices) (zip code)
312/782-6800
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
The number of shares of the Registrant's common stock, $.001 par value
per share, outstanding as of June 6, 2003 was 14,206,561 and the number of
shares of the Registrant's Class B common stock, $1.00 par value per share,
outstanding as of June 6, 2003 was 142.
WHITEHALL JEWELLERS, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2003
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three months ended April 30,
2003 and 2002 (unaudited)
Balance Sheets - April 30, 2003, January 31, 2003 and April
30, 2002 (unaudited)
Statements of Cash Flows for the three months ended April 30,
2003 and 2002(unaudited)
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Whitehall Jewellers, Inc.
Statements of Operations
for the three months ended April 30, 2003 and 2002
(unaudited)
(in thousands, except for per share data)
Three months ended
-------------------
April 30, 2003 April 30, 2002
-------------- --------------
Net sales $ 69,149 $ 74,588
Cost of sales (including buying and occupancy
expenses) 46,052 47,376
---------- ----------
Gross profit 23,097 27,212
Selling, general and administrative expenses 26,692 25,627
---------- ----------
Income (loss) from operations (3,595) 1,585
Interest expense 908 1,012
---------- ----------
Income (loss) before income taxes (4,503) 573
Income tax expense (benefit) (1,755) 204
---------- ----------
Net income (loss) $ (2,748) $ 369
========== ==========
Basic earnings per share:
Net income (loss) $ (0.19) $ 0.03
========== ==========
Weighted average common shares and common
share equivalents 14,206 14,667
========== ==========
Diluted earnings per share:
Net income (loss) $ (0.19) $ 0.02
========== ==========
Weighted average common shares and common
share equivalents 14,206 15,382
========== ==========
The accompanying notes are an integral part of the financial statements.
3
Whitehall Jewellers, Inc.
Balance Sheets
As of April 30, 2003, January 31, 2003 and April 30, 2002
(unaudited, in thousands, except share data)
April 30, 2003 January 31, 2003 April 30, 2002
--------------------------------------------------------
ASSETS
Current Assets:
Cash $ 1,302 $ 2,048 $ 2,131
Accounts receivable, net 719 1,621 1,811
Merchandise inventories 206,276 197,859 175,882
Prepaid income taxes 2,293 --- 438
Other current assets 2,049 1,239 1,109
Deferred financing costs 510 510 511
Deferred income taxes 2,158 2,172 2,370
--------------------------------------------------------
Total current assets 215,307 205,449 184,252
Property and equipment, net 63,628 61,634 64,097
Goodwill 5,662 5,662 5,662
Deferred financing costs 161 213 595
--------------------------------------------------------
Total assets $ 284,758 $ 272,958 $ 254,606
========================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolver loan $ 88,559 $ 94,490 $ 52,627
Current portion of long-term debt 3,000 4,500 5,500
Accounts payable 46,492 24,726 50,251
Customer deposits 3,635 3,454 4,077
Accrued payroll 4,583 3,282 4,313
Income taxes --- 3,261 ---
Other accrued expenses 14,945 13,207 14,564
--------------------------------------------------------
Total current liabilities 161,214 146,920 131,332
Term loan --- --- 3,000
Subordinated debt 640 640 640
Deferred income taxes, net 3,753 3,607 1,901
Other long-term liabilities 3,216 3,138 2,784
--------------------------------------------------------
Total liabilities 168,823 154,305 139,657
Commitments and contingencies
Stockholders' equity:
Common stock 18 18 17
Class B common stock --- --- ---
Additional paid-in capital 105,755 105,795 104,653
Accumulated earnings 46,029 48,777 39,239
--------------------------------------------------------
151,802 154,590 143,909
Less:
Treasury stock, at cost (3,817,742, 3,822,637 and
3,199,628 shares, respectively) (35,867) (35,937) (28,960)
--------------------------------------------------------
Total stockholders' equity, net 115,935 118,653 114,949
--------------------------------------------------------
Total liabilities and stockholders' equity $ 284,758 $ 272,958 $ 254,606
========================================================
The accompanying notes are an integral part of the financial statements.
4
Whitehall Jewellers, Inc.
Statements of Cash Flows
for the three months ended April 30, 2003 and 2002
(unaudited, in thousands)
Three months ended
------------------
April 30, 2003 April 30, 2002
-----------------------------------
Cash flows from operating activities:
Net income(loss) $ (2,748) $ 369
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 2,945 2,744
Loss on disposition of assets 18 15
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net 902 (622)
(Increase) in merchandise inventories, net of
gold consignment (8,417) (1,951)
(Increase) decrease in other current assets (810) (136)
(Increase) in prepaid taxes (2,133) (215)
Increase (decrease) in accounts payable 19,101 (7,216)
Decrease in income taxes payable (3,261) (3,226)
Increase in customer deposits 181 114
Increase (decrease) in accrued liabilities 3,117 (5,440)
-----------------------------------
Net cash provided by (used in) operating activities 8,895 (15,564)
Cash flows from investing activities:
Capital expenditures (4,831) (2,814)
-----------------------------------
Net cash (used in) investing activities (4,831) (2,814)
Cash flows from financing activities:
Borrowing on revolver loan 166,804 168,318
Repayment of revolver loan (172,735) (150,968)
Outstanding checks decrease 2,666 772
Repayment of term loan (1,500) (1,250)
Financing costs (75) ---
Proceeds from employee stock purchase plan 30 10
Proceeds from exercise of stock options --- 886
-----------------------------------
Net cash (used in) provided by financing activities (4,810) 17,768
-----------------------------------
Net change in cash and cash equivalents (746) (610)
Cash and cash equivalents at beginning of period 2,048 2,741
-----------------------------------
Cash and cash equivalents at end of period $ 1,302 $ 2,131
===================================
The accompanying notes are an integral part of the financial statements.
5
Whitehall Jewellers, Inc.
Notes to Financial Statements
1. DESCRIPTION OF OPERATIONS
The financial statements of Whitehall Jewellers, Inc. (the "Company")
include the results of the Company's chain of specialty retail fine jewelry
stores. The Company operates exclusively in one business segment, specialty
retail jewelry. The Company has a national presence with 385 stores as of April
30, 2003, located in 38 states, operating in regional or superregional shopping
malls. The consolidated financial statements include the accounts and
transactions of the Company and its subsidiaries. Intercompany accounts and
transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis for Presentation
The accompanying Balance Sheet as of January 31, 2003 was derived from
the audited financial statements for the year ended January 31, 2003. The
accompanying unaudited Balance Sheets as of April 30, 2003 and 2002 and the
Statements of Income and Cash Flows for the three months ended April 30, 2003
and 2002 have been prepared in accordance with generally accepted accounting
principles for interim financial information. The interim financial statements
reflect all adjustments (consisting only of normal recurring accruals) which
are, in the opinion of management, necessary for a fair presentation of
financial position, results of operations and cash flows for the interim periods
presented. The interim financial statements should be read in the context of the
Financial Statements and footnotes thereto included in the Whitehall Jewellers,
Inc. Annual Report on Form 10K for the fiscal year ended January 31, 2003.
References in the following notes to years and quarters are references to fiscal
years and fiscal quarters.
Merchandise Inventories
Merchandise inventories are stated principally at the lower of weighted
average cost or market. Cost is reduced to reflect certain allowances and
discounts received from vendors. Periodic payments from vendors in the form of
buydowns, volume or other purchase discounts that are evidenced by signed
agreements are reflected in the carrying value of the inventory when earned and
as a component of cost of sales, buying and occupancy as the merchandise is
sold. To the extent the Company's agreements with vendors specify co-op
advertising, the Company has historically classified such credits as a reduction
to advertising expense in selling, general and administrative expenses. Emerging
Issues Task Force Issue No. 02-16, "Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"),
which was effective for all arrangements entered into after December 31, 2002,
requires vendor allowances to be classified as a reduction to inventory cost
unless evidence exists supporting an alternative classification. The Company has
recorded such vendor allowances earned pursuant to its 2003 vendor trade
agreements as a reduction of inventory cost. The total amount of these
allowances earned during the quarter ended April 30, 2003 was approximately
$1,000,000, of which approximately $500,000 represents co-op advertising
allowances.
The Company also obtains merchandise from vendors under various
consignment agreements. The consigned inventory and related contingent
obligations associated with holding and safekeeping such consigned inventory are
not reflected in the Company's financial statements. At the time of sale of
consigned merchandise to customers, the Company records the purchase liability
and the related consignor cost of such merchandise in cost of sales.
6
Stock-Based Compensation
The Financial Accounting Standards Board issued Statement No. 148
("SFAS 148"), "Accounting for Stock-Based Compensation-Transition and
Disclosure," during 2002. SFAS 148 amends Statement No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation and amends the disclosure requirements to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted the
disclosure requirements of SFAS 148 as of January 31, 2003.
The Company accounts for stock-based compensation according to
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," which results in no charge to earnings when options are issued at
fair market value.
The following table illustrates the effect on net income and earnings
per share for the three months ended April 30, 2003 and 2002, if the Company had
applied the fair value recognition provisions of SFAS 123, as amended by SFAS
148, to stock-based employee compensation.
April 30, 2003 April 30, 2002
Net income (loss), as reported $ (2,748) $ 369
Deduct: Total stock-based employee
compensation expense determined under
fair value based method, net of
related tax effects 267 558
-------------- --------------
Pro forma net (loss) $ (3,015) $ (189)
============== ==============
Earnings per share:
============== ==============
Basic-as reported $ (0.19) $ 0.03
============== ==============
Basic-pro forma $ (0.21) $ (0.01)
============== ==============
============== ==============
Diluted-as reported $ (0.19) $ 0.02
============== ==============
Diluted-pro forma $ (0.21) $ (0.01)
============== ==============
For purposes of pro forma net income and earnings per share calculation
in accordance with SFAS 123, for each option granted during the three months
ended April 30, 2003 and 2002 the fair value is estimated using the
Black-Scholes option-pricing model. The assumptions used are as follows:
April 30, 2003 April 30, 2002
Risk-free interest rate 3.0% 4.7%
Dividend yield 0 0
Option life 5.5 years 5.5 years
Volatility 61% 62%
7
Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the Financial Accounting Standards Board issued Statement
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 requires that costs associated with disposal or exit
activities after December 31, 2002 be recorded at fair value in the period the
liability is incurred. The Company adopted SFAS 146 effective January 1, 2003,
which had no impact on its financial statements.
Accounting for Guarantees
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," an interpretation of FASB Statements No. 5, 57 and 107 and rescission
of FASB Interpretation No. 34. The Company has adopted the guidance of FIN 45
and has reflected the required disclosures in its financial statements
commencing with the financial statements for the year ended January 31, 2003.
3. ACCOUNTS RECEIVABLE, NET
As of April 30, 2003, January 31, 2003 and April 30, 2002, accounts
receivable consisted of (in thousands):
April 30, 2003 January 31, 2003 April 30, 2002
-------------- ---------------- --------------
Accounts receivable $ 1,366 $ 2,165 $ 2,431
Less: allowance for
doubtful accounts (647) (544) (620)
-------------- ---------------- --------------
Accounts receivable, net $ 719 $ 1,621 $ 1,811
============== ================ ==============
4. INVENTORY
As of April 30, 2003, January 31, 2003 and April 30, 2002,
merchandising inventories consisted of (in thousands):
April 30, 2003 January 31, 2003 April 30, 2002
Raw Materials $ 6,514 $ 7,657 $ 7,746
Finished Goods 199,762 190,202 168,136
-------------- ---------------- --------------
Inventory $ 206,276 $ 197,859 $ 175,882
============== ================ ==============
Raw materials primarily consist of diamonds, precious gems,
semi-precious gems and gold. Included within finished goods inventory are
allowances for inventory shrink, scrap, and miscellaneous costs of $1,827,000,
8
$3,150,000 and $2,839,000 as of April 30, 2003, January 31, 2003 and April 30,
2002, respectively. The reduction in inventory reserves resulted from the timing
of physical inventory adjustments and lower inventory balances of merchandise
that gives rise to a scrap charge. This reduction did not result in a
significant impact on earnings. As of April 30, 2003, January 31, 2003 and April
30, 2002, consignment inventories held by the Company that are not included in
the balance sheets total $72,991,000, $74,924,000, and $80,967,000,
respectively.
In addition, gold consignments of $23,298,000 are not included in the
Company's balance sheets as of April 30, 2002 (see Note 6, Financing
Arrangements) as the title to such gold has passed to the consignor and is
subject to the same risk of physical loss as other inventory held on consignment
by the Company. On August 22, 2002, the Company purchased 66,500 troy ounces of
gold at an average gold price of $307.56 per ounce for a total of approximately
$20.5 million. The Company delivered the gold to its banks and extinguished all
existing Company gold consignment obligations to the banks under the Credit
Agreement (See Note 6). The purchase had the effect of increasing the weighted
average cost of gold available for retail sale by the Company and will result in
a higher weighted average cost of sales in future periods. The Company estimated
subsequent cost of sales as a result of this transaction to be approximately
$1.5 million greater based on the effect of the transaction on the weighted
average cost of gold product in its inventory prior to this purchase.
Approximately $300,000 of this increase in cost of sales is reflected in the
three months ended April, 2003. This purchase increased the Company's inventory
by $20.5 million and was funded by revolver loan borrowings. The total amount
available to borrow under the Company's Credit Agreement is unchanged.
Certain merchandise procurement, distribution and warehousing costs are
allocated to inventory. As of April 30, 2003, January 31, 2003 and April 30,
2003, the amounts included in inventory are $3,572,000, $3,364,000 and
$3,328,000, respectively.
5. ACCOUNTS PAYABLE
Accounts payable includes outstanding checks, which were $9,178,000,
$6,512,000 and $7,912,000 as of April 30, 2003, January 31, 2003 and April 30,
2002, respectively.
6. FINANCING ARRANGEMENTS
Effective January 31, 2003, the Company amended certain terms and
conditions within its Amended and Restated Revolving Credit, Term Loan and Gold
Consignment Agreement (the "Credit Agreement") with its bank group which
provides for a total facility of $166.5 million through June 30, 2004. Interest
rates and the commitment fee charged on the unused portion of the facility float
based upon the Company's quarterly financial performance.
Under the Credit Agreement, the banks have a collateral security
interest in substantially all of the assets of the Company. The Credit Agreement
contains certain restrictions on capital expenditures, investments, payment of
dividends, assumption of additional debt, acquisitions and divestitures, among
others, and requires the Company to maintain certain financial ratios based on
levels of funded debt, capital expenditures and earnings before interest, taxes,
depreciation and amortization. As of April 30, 2003, the most restrictive
financial covenant was total funded debt to earnings before interest, taxes,
depreciation and amortization as defined in the Credit Agreement. This financial
9
covenant was set at a ratio of 2.95 to 1.00, as amended, and is calculated
based on the daily outstanding average of all debt outstanding for the trailing
four quarters including borrowing under the Credit Agreement, senior
subordinated debt, capital leases and other indebtedness divided by earnings
before interest, taxes, deprecation and amortization for the trailing four
quarters.
Revolver Loan
The revolving loan facility under the Credit Agreement is available up
to a maximum of $150.0 million, including amounts, if any, consigned under the
gold consignment facility, and is limited by a borrowing base computed based on
the value of the Company's inventory and accounts receivable. Availability under
the revolver is based on amounts outstanding there under, including the value of
consigned gold which fluctuates based on gold prices. Interest rates and
commitment fees on the unused facility float based on the Company's quarterly
financial performance.
The interest rates for borrowings under this agreement are, at the
Company's option, based on Eurodollar rates or the banks' prime rate. Interest
is payable monthly for prime borrowings and upon maturity for Eurodollar
borrowings.
Term Loans
The term loan under the Credit Agreement is available up to a maximum
of $3.0 million ($16.5 million, less principal repayments). The interest rates
for these borrowings are, at the Company's option, based on Eurodollar rates or
the banks' prime rate. Interest is payable monthly for prime borrowings and upon
maturity for Eurodollar borrowings. Interest rates and the commitment fee
charged on the unused facility float based on the Company's quarterly financial
performance.
Gold Consignment Facility
The Company has the opportunity to enter into gold consignments with
certain third party financial institutions. The Company provides the third party
financial institution with title to a certain number of troy ounces of gold held
in the Company's existing merchandise inventory in exchange for cash at the
current market price of gold. The Company then consigns the gold from the third
party financial institution, pursuant to a gold consignment agreement. This
agreement entitles the Company to use the gold in the ordinary course of its
business. The Gold Consignment Facility is a transfer of title in specified
quantities of the gold content of the Company's inventory (a non-financial
asset) to a financial institution in exchange for cash. The Company continues to
bear responsibility for damage to the inventory, as is the case in all of its
consigned inventory arrangements with its other vendors.
The Company has accounted for the transaction as a reduction in its
inventories, as it has transferred title to the gold to the financial
institution. Similar to other consigned inventories in the possession of the
Company (for which the Company bears risk of loss but does not possess title),
the value of the inventory is not included in the assets of the Company. The
terms of the Gold Consignment Agreement require the Company to deliver the
specified quantities of consigned gold back to the third party financial
institution at the end of the facility (which currently expires in 2004).
Physical delivery can be made from the Company's inventory or from gold acquired
by the Company in the open market. As an alternative to physical delivery of
these specific troy ounces of gold, the Company can elect to purchase the
consigned quantities at the end of the consignment facility at the current
market price for gold on that date.
10
As of April 30, 2002, the Company sold and simultaneously consigned
66,500 troy ounces of gold for $23.3 million under the gold consignment
facility. The facility provides for the sale of a maximum 115,000 troy ounces or
$40.0 million. Under the agreement, the Company pays consignment fees based on
the London Interbank Bullion Rates payable monthly. Consignment rates and
commitment fees on the unused portion of the gold consignment facility float
based upon the Company's quarterly financial performance. On August 22, 2002,
the Company purchased 66,500 troy ounces of gold at an average gold price of
$307.56 per ounce for a total of $20.5 million. The Company delivered gold to
its banks and extinguished all existing Company gold obligations under the
Credit Agreement.
7. DILUTIVE SHARES THAT WERE OUTSTANDING DURING THE PERIOD
The following table summarizes the reconciliation of the numerators and
denominators for the basic and diluted EPS computations at April 30, 2003 and
2002.
Three months ended
April 30, 2003 April 30, 2002
-------------- --------------
(in thousands, except share amounts)
Net income (loss) $ (2,748) $ 369
Weighted average shares for basic EPS 14,206 14,667
Incremental shares upon conversions:
Stock options ---- 715
Weighted average shares for diluted EPS 14,206 15,382
Stock options excluded from the calculation of diluted earnings per
share for the three months ended April 30, 2003 and 2002, were 2,434,263, and
362,845 respectively, due to their antidilutive effect on the calculations.
8. RECLASSIFICATION
Certain Balance Sheet amounts from prior periods were reclassified to
conform to the current year presentation. These reclassifications had no impact
on earnings.
9. COMMITMENT AND CONTINGENCIES
On July 25, 2002, the Company was named a defendant in a wage hour
class action suit filed in California by three former store managers. The case
is based principally upon the allegation that store managers employed by the
Company in California should have been classified as non-exempt for overtime
purposes. The plaintiffs seek recovery of allegedly unpaid overtime wages for
the four-year period preceding the filing date, along with certain penalties,
interest and attorneys fees. The purported class includes all current and former
store managers employed by the Company in California for the four-year period
preceding the filing of the complaint. The Company denied liability and asserted
that its managers were properly classified. In April 2003, the parties reached a
preliminary agreement to settle the matter resulting in a pre-tax charge of
11
$1,000,000, inclusive of the plaintiffs' attorneys' fees, interest, penalties,
administrative costs and other Company costs. This settlement covers the period
from July 25, 1998 through the date of settlement approval. Completion of the
settlement is subject to, among other things, the successful negotiation and
execution of a written settlement agreement, opt out and other potential
contingencies in the settlement agreement, court approval and administration of
the claims process. The parties are in the process of negotiating the specific
settlement terms.
10. SUBSEQUENT EVENTS
a. The Company was named a defendant in a wage hour suit filed in
California by a former employee on May 6, 2003. The case is based
principally upon the allegation that the amount of overtime paid to
certain California employees was less than the amount actually
earned. The suit asserts a claim for $1,000,000. The Company
intends to defend the case vigorously. However, due to the recency
of the suit, the Company is unable to predict the outcome or
potential exposure, if any, at this time. An adverse outcome of
this contingency could have a material adverse impact on a future
period.
b. The Company has received and accepted a proposal from LaSalle Bank,
N.A. and ABN/AMRO Bank N.V. to lead a transaction that will
refinance the Company's credit facility. The proposed facility
would be a revolving credit and gold consignment agreement totaling
$125 million. The Company expects this facility will be in place in
the second quarter resulting in a charge for unamortized deferred
financing fees of approximately $550,000 at that time.
12
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net sales for the first quarter of fiscal 2003 decreased $5.4 million,
or 7.3%, to $69.1 million from $74.6 million in the first quarter of fiscal
2002. New store sales accounted for an increase in sales of $2.4 million.
Comparable store sales decreased $6.3 million, or 8.7%, in the first quarter of
fiscal 2003 from the first quarter of fiscal 2002. These sales changes were
impacted by a sales decrease of $1.5 million related to closed stores.
Comparable store sales were significantly affected by the economy and, more
particularly, a dramatic sales drop off in late February and throughout March
which management believes related in large measure to the War in Iraq and the
heightened concerns about terrorism. The total number of merchandise units sold
increased by approximately 3.4% in the first quarter of fiscal 2003 from the
first quarter of fiscal 2002, while the average price per merchandise sale
decreased to $277 in the first quarter of fiscal 2003 from $309 in the first
quarter of fiscal 2002. Credit sales as a percentage of net sales remained
constant at 40.5% in the first quarter of fiscal 2003 compared to the first
quarter of fiscal 2002. The Company opened 16 new stores and closed one store in
the first quarter of fiscal 2003, increasing the number of stores to 385 as of
April 30, 2003 compared to 373 as of April 30, 2002.
Gross profit decreased $4.1 million, or 15.1%, to $23.1 million from
$27.2 million in the first quarter of fiscal 2003 compared to the same period in
fiscal 2002. Gross profit as a percentage of sales decreased to 33.4% in the
first quarter of fiscal 2003 compared to 36.5% in the first quarter of fiscal
2002. The decrease in gross profit rate was driven by price promotions,
principally on diamond merchandise, and the de-leveraging of occupancy and
buying expenses as a result of lower sales. The decrease was partially offset by
the cost of goods sold impact of the turnover of benefit from vendor discounts
and co-op allowances recorded in compliance with the adoption of EITF 02-16.
Selling, general and administrative expenses increased $1.1 million, or
4.2%, to $26.7 million from $25.6 million in the first quarter of fiscal 2003
compared to the same period in fiscal 2002. Selling, general and administrative
expense as a percent of sales increased to 38.6% versus 34.4% in first quarter
2002. The dollar increase primarily related to higher other expense ($0.4
million), higher advertising expense ($0.3 million) and higher personnel expense
($0.5 million) which were partially offset by lower credit expense ($0.1
million). The increase in other expenses is primarily due to the increase in the
number of stores and increases in professional fees, but was partially offset by
lower expenses in existing stores resulting from centralized control of the
consumption of supplies and services along with reductions in negotiated rates
for those items. Advertising expense increased due to a new promotional
initiative in April 2003. Payroll costs increased primarily due to the increased
number of stores, but were offset by expense reductions to reduce payroll hours
and control labor rates in existing stores.
Interest expense decreased approximately $0.1 million to $0.9 million
in the first quarter of fiscal 2003 from $1.0 million in the first quarter of
fiscal 2002. The decrease resulted from lower interest rates partially offset by
higher average borrowings.
Income tax benefit of $1.8 million in the first quarter of 2003
compared to an income tax expense of $0.2 million in the first quarter of 2002,
reflects an expected annual effective tax rate of 39.0% for fiscal 2003. The
13
Company's annual effective tax rate was 38.1% for fiscal 2002. The expected
increase in effective annual tax rate for fiscal 2003 reflects statutory changes
in a number of states in which the Company operates stores.
Net loss of $2.7 million in the first quarter of fiscal 2003, compared
to net income of $0.4 million in the first quarter of fiscal 2002 resulted from
the factors discussed immediately above.
Liquidity and Capital Resources
The Company's cash requirements consist principally of funding
inventory at existing stores, capital expenditures and working capital
(primarily inventory) associated with the Company's new stores. The Company's
primary sources of liquidity have been cash flow from operations and bank
borrowings under the Company's revolver.
The Company's inventory levels and working capital requirements have
historically been highest in advance of the Christmas season. The Company has
funded these seasonal working capital needs through borrowings under the
Company's revolver and increases in trade payables and accrued expenses. As of
April 30, 2003, the maximum availability under the credit facility was $37.9
million based on the borrowing base formula. The credit facility covenants also
require the Company to attain certain operating results.
The Company's cash flow provided by operating activities was $8.9
million in the first quarter of 2003 compared to $15.6 million used in operating
activities in the first quarter of fiscal 2002. Increase in accounts payable
($19.1 million), increased accrued liabilities ($3.1 million), depreciation and
amortization ($2.9 million) and decreased accounts receivable ($0.9 million)
were partially offset by increases in merchandise inventories ($8.4 million),
decreased income tax payable ($3.3 million), increased prepaid income tax ($2.1
million) and loss from operations ($2.7 million). The increase in accounts
payable in fiscal 2003 reflects the impact of timing of vendor payments
resulting from the Company's strategy to pay certain accounts payable in advance
in the fourth quarter of fiscal 2002 in order to earn additional cash discounts.
The increase in merchandise inventories primarily related to inventory for new
store openings, including anticipated store openings in the second quarter of
fiscal 2003 and the 16 completed new store openings in the first quarter of
fiscal 2003.
The Company utilized cash in the first quarter of 2003 primarily to pay
down revolver borrowings of $5.9 million, to fund capital expenditures of $4.8
million, primarily related to the opening of 16 new stores in the first quarter
of 2003, and to repay a portion of the term loan ($1.5 million).
Management expects that cash flow from operating activities and funds
available under its revolving credit facility should be sufficient to support
the Company's current new store expansion program and seasonal working capital
needs for the foreseeable future.
Inflation
Management believes that inflation generally has not had a material
effect on the Company's results of operations.
14
Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the Financial Accounting Standards Board issued Statement
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 requires that costs associated with disposal or exit
activities after December 31, 2002 be recorded at fair value in the period the
liability is incurred. The Company adopted SFAS 146 effective January 1, 2003,
which had no impact on its financial statements.
Accounting by a Customer for Certain Consideration Received from a Vendor
Merchandise inventories are stated principally at the lower of weighted
average cost or market. Cost is reduced to reflect certain allowances and
discounts received from vendors. Periodic payments from vendors in the form of
buydowns, volume or other purchase discounts that are evidenced by signed
agreements are reflected in the carrying value of the inventory when earned and
as a component of cost of sales, buying and occupancy as the merchandise is
sold. To the extent the Company's agreements with vendors specify co-op
advertising, the Company has historically classified such credits as a reduction
to advertising expense in selling, general and administrative expenses. Emerging
Issues Task Force Issue No. 02-16, "Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"),
which was effective for all arrangements entered into after December 31, 2002,
requires vendor allowances to be classified as a reduction to inventory cost
unless evidence exists supporting an alternative classification. The Company has
recorded such vendor allowances earned pursuant to its 2003 vendor trade
agreements as a reduction of inventory cost. The total amount of these
allowances earned during the quarter ended April 30, 2003 was approximately
$1,000,000 of which approximately $500,000 represents co-op advertising
allowances.
Accounting for Stock-Based Compensation
The Financial Accounting Standards Board issued Statement No. 148
("SFAS 148"), "Accounting for Stock-Based Compensation-Transition and
Disclosure," during 2002. SFAS 148 amends Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and amends the disclosure requirements to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company adopted the disclosure requirements
of SFAS 148 as of January 31, 2003.
Accounting for Guarantees
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," an interpretation of FASB Statements No. 5, 57 and 107 and rescission
of FASB Interpretation No. 34. The Company has adopted the guidance of FIN 45
and has reflected the required disclosures in its financial statements
commencing with the financial statements for the year ended January 31, 2003.
15
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
The Company's exposure to changes in interest rates relates primarily
to its borrowing activities to fund business operations. The Company principally
uses floating rate borrowings under its revolving credit and term loan
facilities. The Company's private label credit card provider charges the Company
varying discount rates for its customers' credit program purchases. These
discount rates are sensitive to significant changes in interest rates. The
Company currently does not use derivative financial instruments to protect
itself from fluctuations in interest rates.
Item 4. Controls and Procedures
(a) Within 90 days prior to the date of the filing of this Quarterly
Report on Form 10-Q (the "Evaluation Date"), the Company evaluated,
under the supervision of our chief executive officer and our chief
financial officer, the effectiveness of our disclosure controls and
procedures. Based on this evaluation, our chief executive officer
and our chief financial officer concluded that our disclosure
controls and procedures are effective to ensure that information we
are required to disclose in reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
SEC's rules and forms.
(b) Subsequent to the Evaluation Date, there were no significant
changes in our internal controls or in other factors that could
significantly affect our internal controls.
16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On July 25, 2002, the Company was named a defendant in a wage hour
class action suit filed in California by three former store managers. The case
is based principally upon the allegation that store managers employed by the
Company in California should have been classified as non-exempt for overtime
purposes. The plaintiffs seek recovery of allegedly unpaid overtime wages for
the four-year period preceding the filing date, along with certain penalties,
interest and attorneys fees. The purported class includes all current and former
store managers employed by the Company in California for the four-year period
preceding the filing of the complaint. The Company denied liability and asserted
that its managers were properly classified. In April 2003, the parties reached a
preliminary agreement to settle the matter resulting in a pre-tax charge of
$1,000,000, inclusive of the plaintiffs' attorneys' fees, interest, penalties,
administrative costs and other Company costs. This settlement covers the period
from July 25, 1998 through the date of settlement approval. Completion of the
settlement is subject to, among other things, the successful negotiation and
execution of a written settlement agreement, opt out and other potential
contingencies in the settlement agreement, court approval and administration of
the claims process. The parties are in the process of negotiating the specific
settlement terms.
The Company was named a defendant in a wage hour suit filed in
California by a former employee on May 6, 2003. The case is based principally
upon the allegation that the amount of overtime paid to certain California
employees was less than the amount actually earned. The suit asserts a claim for
$1,000,000. The Company intends to defend the case vigorously. However, due to
the recency of the suit, the Company is unable to predict the outcome or
potential exposure, if any, at this time. An adverse outcome of this contingency
could have a material adverse impact on a future period.
The Company is subject to other claims and litigation in the normal
course of business. It is the opinion of management that additional liabilities,
if any, resulting from these claims and litigation are not expected to have a
material adverse effect on the Company's financial condition or results of
operations.
Item 5 - Other Information
Forward-Looking Statements
This report contains certain forward-looking statements (as such term
is defined in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) and information relating to the Company that
are based on the current beliefs of management of the Company as well as
assumptions made by and information currently available to management including
statements related to the markets for our products, general trends and trends in
our operations or financial results, plans, expectations, estimates and beliefs.
In addition, when used in this report, the words "anticipate," "believe,"
"estimate," "expect," "intend," "plan," "predict" and similar expressions and
their variants, as they relate to the Company or our management, may identify
forward-looking statements. Such statements reflect our judgment as of the date
of this report with respect to future events, the outcome of which is subject to
certain risks, including the factors described below, which may have a
significant impact on our business, operating results or financial condition.
Investors are cautioned that these forward-looking statements are inherently
uncertain. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results or outcomes may
vary materially from those described herein.
17
Whitehall Jewellers undertakes no obligation to update forward-looking
statements. The following factors, among others, may impact forward-looking
statements contained in this report: (1) a change in economic conditions or the
financial markets which negatively impacts the retail sales environment and
reduces discretionary spending on goods such as jewelry; (2) reduced levels of
mall traffic caused by economic or other factors; (3) our ability to execute our
business strategy and the related effects on comparable store sales and other
results; (4) the extent and results of our store expansion strategy and
associated occupancy costs, and access to funds for new store openings; (5) the
high degree of fourth quarter seasonality of our business; (6) the extent and
success of our marketing and promotional programs; (7) personnel costs and the
extent to which we are able to retain and attract key personnel; (8) the effects
of competition; (9) the availability and cost of consumer credit; (10)
relationships with suppliers; (11) our ability to maintain adequate information
systems capacity and infrastructure; (12) our leverage and cost of funds and
changes in interest rates that may increase such costs; (13) our ability to
maintain adequate loss prevention measures; (14) fluctuations in raw material
prices, including diamond, gem and gold prices; (15) the extent and results of
our E-commerce strategies and those of others; (16) regulation affecting the
industry generally, including regulation of marketing practices; (17) the
successful integration of acquired locations and assets into our existing
operations; and (18) the risk factors identified from time to time in our
filings with the SEC.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ---------- -----------
10.1 2003 Special Bonus Program
99.1 Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On March 7, 2003, the Company filed a Current Report on Form 8-K with
the SEC which contained revised Statements of Operations (unaudited) for the
three months ended April 30, 2002, July 31, 2002, October 31, 2002 and the nine
months ended October 31, 2002 and revised Balance Sheets (unaudited) as of April
30, 2002, July 31, 2002 and October 31, 2002.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHITEHALL JEWELLERS, INC.
(Registrant)
Date: June 6, 2003 By: /s/ Jon H. Browne
--------------------------
Jon H. Browne
Executive Vice President;
Chief Financial and Administrative Officer
and Treasurer
(on behalf of registrant and in capacity
of principal financial officer)
19
CERTIFICATE PURSUANT TO RULE 13a-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Hugh M. Patinkin, Chief Executive Officer of Whitehall Jewellers,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Whitehall Jewellers, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 6, 2003
/s/ Hugh M. Patinkin
--------------------
Name: Hugh M. Patinkin
Title: Chief Executive Officer
CERTIFICATE PURSUANT TO RULE 13a-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Jon H. Browne, Chief Financial Officer of Whitehall Jewellers, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Whitehall Jewellers, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 6, 2003
/s/ Jon H. Browne
-----------------
Name: Jon H. Browne
Title: Chief Financial Officer