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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL REPORT AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended January 31, 2005
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 1-15615
WHITEHALL JEWELLERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-1433610
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
155 N. WACKER DR., STE. 500, CHICAGO, IL 60606
(Address of Principal Executive Offices) (Zip Code)
(312) 782-6800
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share, Including
Associated Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 30, 2004 was $96,774,556 based on the closing price of
$7.55 of the registrant's common stock on the New York Stock Exchange. This
calculation does not reflect a determination that persons are affiliates for any
other purposes.
Number of shares of Common Stock outstanding as of April 1, 2005: 13,952,940
Number of shares of Class B Common Stock outstanding as of April 1, 2005: 142
TABLE OF CONTENTS
Item Description Page
- ---- ----------------------------------------------------------- ----
PART I
1 Business 4
2 Properties 11
3 Legal Proceedings 11
4 Submission of Matters to a Vote of Security Holders 13
PART II
5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 14
6 Selected Financial Data 15
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
7A Quantitative and Qualitative Disclosures about Market Risk 29
8 Financial Statements and Supplementary Data 30
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 57
9A Controls and Procedures 57
9B Other Information 58
PART III
10 Directors and Executive Officers of the Registrant 58
11 Executive Compensation 58
12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 58
13 Certain Relationships and Related Transactions 58
14 Principal Accountant Fees and Services 59
PART IV
15 Exhibits and Financial Statement Schedules 60
Signatures
2
DOCUMENTS INCORPORATED BY REFERENCE
Part III -- Portions of the registrant's definitive proxy statement to be
distributed in conjunction with the registrant's annual stockholders' meeting to
be held in 2005 (the "Proxy Statement"), as indicated herein.
FORWARD-LOOKING STATEMENT
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," "opinion" 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. The Company 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) increased competition from specialty jewelry retail stores, the Internet and
mass merchant discount stores which may adversely impact our sales and gross
margin; (4) our ability to execute our business strategy and the related effects
on comparable store sales and other results; (5) the extent and results of our
store expansion strategy and associated occupancy costs, and access to funds for
new store openings; (6) the high degree of fourth quarter seasonality of our
business and the impact on the Company's sales, profitability and liquidity; (7)
the extent and success of our merchandising, marketing and promotional programs;
(8) personnel costs and the extent to which we are able to retain and attract
key personnel; (9) the effects of competition; (10) the availability and cost of
consumer credit; (11) relationships with suppliers, including the timely
delivery to the Company of appropriate merchandise on payment terms consistent
with past practice; (12) our ability to maintain adequate information systems
capacity and infrastructure; (13) our continued ability to secure sufficient
financing on acceptable terms, including, if an event of default were to occur
pursuant to the Company's revolving loan facility, the Company may be required
to negotiate relief with its lenders or seek new financing to which there may be
no assurance that new financing agreements would be available on acceptable
terms or at all; (14) our leverage, liquidity, and cost of funds and changes in
interest rates that may increase such costs; (15) our ability to maintain
adequate loss prevention measures; (16) fluctuations in raw material prices,
including diamond, gem and gold prices; (17) the impact of current or future
price reductions on margins and resultant valuation allowances taken on certain
merchandise inventory identified from time to time as items which would not be
part of the Company's future merchandise presentation as well as alternative
methods of disposition of this merchandise inventory and resultant valuations
taken; (18) developments relating to settlement of the consolidated Capital
Factors actions, the non-prosecution agreement entered into with the United
States Attorney's Office, the Securities and Exchange Commission investigation,
and shareholder and other civil litigation, including the impact of such
developments on our results of operations and financial condition and
relationship with our lenders or with our vendors; and (19) regulation affecting
the industry generally, including regulation of marketing practices.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Founded in 1895, we are a national specialty retailer of fine jewelry
offering a selection of merchandise in the following categories: diamond, gold,
precious and semi-precious jewelry and watches. As of April 1, 2005, we operated
384 mall-based stores in 38 states under the established brand names of
Whitehall Co. Jewellers (327 stores), Lundstrom Jewelers (55 stores) and Marks
Bros. Jewelers (2 stores).
OPERATING STRATEGIES
The principal elements of our operating strategy are as follows:
Small, Flexible Store Format. Our average store size is approximately 874
square feet and adapts to various sizes and configurations. Our stores are
typically located in high visibility mall locations and provide our customers
with a comfortable and inviting shopping environment. The stores' open,
attractive design appeals to customers, while facilitating foot traffic and
enhancing sales opportunities for us. Furthermore, the stores' small, flexible
format (which lowers our fixed occupancy costs) and sales per square foot
productivity are desirable to mall owners. Because of our flexible store format
and our reputation among mall developers as a strong tenant, we have
historically received more offers for attractive new store sites than we accept.
We believe that real estate is important to our business, and site selection is
a competency of our management team.
Brand Imaging. We reinforce the image of our store brand names, Whitehall
Co. Jewellers and Lundstrom Jewelers, through merchandise selection and price
points, store layout and fixtures, packaging, marketing and promotions.
Whitehall Co. Jewellers is our primary trademark. Having multiple brands allows
us to enter a given mall with multiple locations, leverage our infrastructure
within a given region and increase the number of potential store sites available
to us.
Merchandising. The Company offers a selection of merchandise in the
following categories: diamond, gold, precious and semi-precious jewelry and
watches. Within these categories, we augment our selection with consignment
merchandise. We stock a broad assortment of higher price point merchandise. For
example, in fiscal 2004 more than 32% of our overall sales resulted from
purchases of items priced at or above $1,500. We carry a focused selection of
watches in most stores and virtually no costume jewelry or non-jewelry gift
merchandise.
Sales-Oriented Store Personnel. We believe that the quality of our sales
personnel is important to our success. Our sales personnel are authorized to
discount prices within specifically developed guidelines to assist their selling
efforts. We seek to enhance the selling skills of our sales associates through
recruitment of experienced sales personnel and training programs. Certain
non-sale activities are centralized, allowing sales personnel to focus more on
our customers.
Absence of Recourse Credit Risk. We operate based upon a "no credit risk"
policy. When purchasing on credit, customers must use their personal credit
cards (e.g., Visa, MasterCard, American Express and others), our private label
credit card (which is available through a third party and is non-recourse to us)
or other non-recourse third party credit arrangements. Our policy limits credit
risk associated with a customer's failure to pay. Recourse against us is limited
to those cases where the receivable itself is defective (such as incorrectly
completed documentation or certain situations involving fraud). In cooperation
with G.E. Capital Consumer Card Co. ("G.E.C.C."), our private label credit card
program provider, we often offer our customers competitive, interest-free terms
for varying periods of time and other attractive offerings in order to promote
our jewelry.
Experienced Management Team. Hugh M. Patinkin, the Company's Chairman and
Chief Executive Officer passed away unexpectedly on March 30, 2005. Lucinda M.
Baier, the Company's President and Chief Operating Officer was subsequently
appointed Chief Executive Officer, President and Chief Operating Officer. Before
his death, Mr. Hugh Patinkin was focused on strengthening the management team.
During fiscal year 2004, the Company hired Ms. Baier as the new President and
Chief Operating Officer and Ms. Debbie Nicodemus-Volker as the Executive Vice
President, Merchandising. The Company's Chief Financial Officer,
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John R. Desjardins and Executive Vice President, Store Operations, Matthew
Patinkin have both worked at the Company for over 25 years.
Our four-person executive management team has on average 20 years of
retail industry experience and an average of over 13 years of experience with
Whitehall Jewellers. In addition, this group has a combined beneficial interest
in the Company in excess of 11.1% of our common stock as of April 1, 2005. We
have an experienced middle management team. We are focused on identifying,
recruiting and retaining skilled and experienced individuals for our management
organization.
GROWTH STRATEGIES
The important elements of our growth strategy are as follows:
Refine Merchandising Initiatives. We continue to refine our product
offerings with the long-term goal of increasing the number of customer
transactions and the average transaction value per customer. We intend to
continue to refine our merchandising practices by adjusting the breadth and
depth of our merchandise assortment; the mix of our assortment; and the pricing
of our assortment.
Enhance Sales and Marketing Initiatives. We use direct marketing and
in-store promotions to stimulate store sales. We plan to continue to utilize
targeted direct mailing initiatives. The Company slightly reduced the size of
its total direct mailings during fiscal year 2004. We intend to continue to
refine the direct mail program in fiscal year 2005.
Strengthen Brand Imaging. We are focused on enhancing the Company's brand
names through improved marketing, merchandising and customer service.
Improve Operational Execution. We are focused on improving the consistency
of our operational execution. The Company is working to improve its in-stock
positions on featured merchandise.
New Store Growth. New stores are a part of our long-term growth plan. As
of January 31, 2005, we have grown to 382 stores. During fiscal year 2004, we
opened 6 new stores and closed 4 existing stores. During fiscal year 2005, we
expect to open 7 new stores and anticipate that 4 of the openings will be
completed by June and the remainder will be completed by September. Our new
stores are in what we consider to be some of the better malls in the country.
STORE OPERATIONS
Site Selection. We are disciplined in our site selection methodology. Our
stores average approximately 874 square feet and our layout is flexible. We
typically locate our stores in high traffic, "center court" or corner locations
in desirable regional and super-regional malls throughout the United States. We
select locations for stores based on our evaluation of individual site economics
and market conditions. When deciding to enter a new market, we evaluate a number
of criteria including the following:
- current and future size, demographic make-up and growth potential of the
market;
- total store sales potential;
- ability to leverage existing infrastructure, personnel and brand
awareness; and
- the size, strength and merchandising philosophy of existing and potential
competitors in the marketplace.
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In choosing specific sites within a given mall, whether in a new or
existing market, we apply site selection criteria taking into account numerous
factors, including the following:
- size of space;
- store visibility;
- traffic patterns;
- real estate costs;
- store locations of our competitors; and
- overall retail sales potential.
Store Layout. Our stores are typically located in high traffic, "center
court" or corner locations and provide our customers with a comfortable and
inviting shopping environment. Most of the stores have an open storefront.
Stores are brightly lit and generally are designed to have display cases
situated near the lease line. Formatting the stores in this "customer-friendly"
manner and without a formal entryway allows a casual mall shopper to come in
close contact with the store's merchandise and personnel.
Store Management. Typically, each of our stores is operated under the
direction of a store manager who is responsible for management of all
store-level operations, including sales and most personnel matters. A number of
non-sales related administrative functions are performed at our corporate office
in Chicago. The store managers are assisted by a staff that often includes an
assistant manager and four to eight sales associates, determined upon store
operating hours and anticipated sales volume. We have approximately 34 district
managers, each supervising between 8 and 14 stores, who concentrate their
efforts on execution of store-focused sales strategies. In addition, 8 regional
supervisors oversee all field operations and concentrate their efforts on the
execution of store-focused sales strategies, compliance with operating policies,
and communication between the corporate office and the field. The Company's
Executive Vice President - Operations is responsible for store operations and
the oversight of the 8 regional supervisors.
Operating Cost Controls. Our store operations are designed to maintain low
operating costs at the store level. Our small average store size reduces fixed
costs, and the lack of recourse credit eliminates the need for most overhead
expenses normally associated with credit operations. We seek to reduce
store-level operating costs through efficient sales staff utilization.
Store Employee Compensation. We seek to hire experienced sales personnel
and motivate our store employees by linking a percentage of employee
compensation to individual and/or store sales performance, as well as by
offering opportunities for promotion within the Company.
Employee Training. We believe that providing knowledgeable and responsive
customer service is important to our success and, accordingly, have developed
and implemented employee training programs. New sales staff receive on-the-job
training upon the commencement of employment. We utilize a workbook-based
program of product knowledge, sales and operational process training. New store
managers undergo a similar sequence of learning activities.
MERCHANDISING
We believe that an important element of our success is our merchandising
strategy that reflects our customer orientation and small store format. We seek
to provide an assortment of items across a broad range of price points in our
product categories: diamonds (such as diamond jewelry, diamond solitaires and
bridal), gold, precious and semi-precious jewelry and watches. We carry a
focused selection of watches and virtually no costume jewelry or non-jewelry
gift merchandise. In addition, customers may special-order certain items which
are not offered in our store merchandise assortment.
On average, our stores each offer approximately 2,700 individual items,
including approximately 1,450 core assortment items. These core items, which
comprise many of our more popular merchandise programs, accounted for
approximately 77% of net sales in fiscal 2004.
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The following table sets forth our percentage of total merchandise sales
by category for the following periods:
FISCAL YEAR ENDED JANUARY 31,
-------------------------------------------
2002 2003 2004 2005
----- ----- ----- -----
Diamonds 64.6% 66.4% 65.3% 65.6%
Gold 18.6 17.4 15.6 15.6
Precious/Semi-Precious 15.3 14.2 14.6 13.1
Watches 1.5 2.0 4.5 5.7
----- ----- ----- -----
Total Merchandise Sales 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
We customize the merchandising of our stores based upon each store's sales
volume and historical selling patterns. We test new items in our stores and
monitor their sales performance to identify additional sales opportunities.
Along with our merchandise assortments, we provide jewelry repair services
to our customers (sales from which represented 2.5% of fiscal 2004 net sales)
and jewelry service plans provided through a third party provider (sales from
which represented 2.9% of fiscal 2004 net sales). Jewelry repair services are
provided through independent jewelers under contract, which are performed
on-site at some of our stores.
ADVERTISING AND PROMOTIONS
Our advertising strategy includes in-store and point-of-sale marketing and
direct mail campaigns. Our customer database, which currently consists of over
1.1 million customers, has allowed us to develop targeted advertising, marketing
and promotional campaigns. We test various direct mail campaigns as part of our
advertising initiatives. Special promotions such as diamond restyling events and
"Vice President's Day Events," as well as point-of-sale signage and in-store
flyers, are designed to increase traffic through our stores and generate an
urgency for customers to make purchases. These promotions vary from year to year
and among stores.
We generally offer customers a 30-day return and 90-day exchange policy.
In addition, we offer a trade-in policy for certain merchandise.
We offer a layaway program that enables our customers to hold an item at
our stores and pay for it over a one-year period without interest charges. The
customer is required to make an initial deposit to establish the layaway and is
required to make monthly payments. We retain possession of merchandise placed in
layaway until the customer has made all required payments.
CREDIT
We operate based upon a "no credit risk" policy. When purchasing on
credit, customers must use their personal credit cards (e.g., Visa, MasterCard,
American Express and others), our private label credit card, which is available
through a third party, G.E.C.C., and is non-recourse to us, or other
non-recourse third party credit arrangements. Our policy limits credit risk
associated with a customer's failure to pay. We believe that our ability to
offer credit through our "private label" credit cards and other non-recourse
arrangements is attractive to many customers, including those who prefer not to
have their jewelry purchases count towards their credit limits on their personal
third party credit cards. Sales on our private label credit card or other
non-recourse third party credit arrangements tend to generate higher average
sales. In fiscal 2004, our average private label credit sale was approximately
$835, compared to our average personal credit card sale of approximately $247.
Under the credit programs, the financial services companies have no
recourse against us based on the customer's failure to pay; recourse against us
is limited to those cases where the receivable itself is defective (such as
incorrectly completed documentation or certain situations involving fraud). Our
expense related to these cases was approximately 0.2% of sales during fiscal
year 2004. Our credit card discount expense for fiscal year 2004 and fiscal year
2003 represented 3.2% and 3.0% of credit sales, respectively. In general, our
credit card discount expense is higher for our private label programs than for
personal credit cards, such as Visa and MasterCard. G.E.C.C. provides credit to
our customers using its own credit criteria
7
and policies. We pay a fee to G.E.C.C. based primarily upon the volume of
credit, average ticket and type of promotion extended. We have similar
non-recourse arrangements with other financial services companies, which we use
in addition to G.E.C.C.'s program to assist customers in financing their
purchases. In addition, we utilize a check authorization company which, for a
fee, guarantees payments on transactions involving certain personal checks.
From time to time, we offer our customers interest free promotions on our
private label credit program. Under this program, G.E.C.C. offers customers a
financing arrangement with no interest for certain periods of time (e.g. three
months no interest, six months no interest, twelve months no interest), for
which we pay G.E.C.C. a rate that varies based on the average transaction size
and type of credit promotion. This program enables us to offer our customers
competitive, interest-free terms and other attractive promotions despite our "no
credit risk" policy.
SEASONALITY
Our business is highly seasonal. During fiscal 2004, a significant portion
of our sales and net income was generated during the fourth fiscal quarter
ending January 31, 2005. Fourth quarter net income was $5.3 million as compared
to a net loss of $15.2 million recorded in the previous three quarters.
Historically, income generated in the fourth fiscal quarter ending each January
31 represents all or a majority of the income generated during the fiscal year.
The Company has historically experienced lower net sales in each of its first
three fiscal quarters and expects this trend to continue.
PURCHASING
We do not manufacture our merchandise. We purchase substantially all of
our inventory, including loose gems, directly from leading suppliers located in
the United States and abroad. We purchase merchandise from approximately 126
vendors, primarily in the United States, Israel, Italy, India, China, and the
Far East, who supply various jewelry products under U.S. dollar-denominated
agreements. During fiscal 2004, our largest supplier and five largest suppliers
accounted for approximately 12% and 38%, respectively, of the merchandise we
purchased. During fiscal 2003, our largest supplier and five largest suppliers
accounted for approximately 11% and 46%, respectively, of the merchandise we
purchased. We have certain subcontracting arrangements with jewelry finishers to
set loose diamonds and gemstones into rings and other jewelry, using styles
established by us or by other companies. We believe that the relationships we
have established with our suppliers and subcontractors are good. We have not
experienced difficulty in obtaining satisfactory sources of supply and believe
that adequate alternative sources of supply exist for most of the merchandise
sold in our stores. However, the loss of one or more of our major suppliers,
particularly at certain critical times of the year, could have a material
adverse effect on us.
We maintain a quality assurance program, with most shipments from
suppliers being counted or weighed and visually inspected upon receipt at our
distribution center in Chicago, Illinois.
During fiscal 2004, our average net monthly investment in inventory (i.e.,
the total cost of inventory owned and paid for) was approximately 57% of the
total cost of our on-hand merchandise with the remaining percentage being trade
payables and consignment inventory. Under the terms of our vendor trading
agreements for non-consignment inventory, we are often granted return
privileges, based on a formula, which permit us to return certain unsold
merchandise. Our consignment inventory permits us to have more merchandise
available for sale in stores, providing increased selection while reducing our
inventory risk.
As participants in the jewelry industry, we are affected by general
industry-wide fluctuations in the prices of diamonds and gold and, to a lesser
extent, other precious and semi-precious metals and stones. During fiscal 2004,
diamonds, gold, precious and semi-precious jewelry accounted for approximately
94.3% of our net merchandise sales. The supply and price of diamonds in the
principal world markets are significantly influenced by a single entity, the
Diamond Trading Company (formerly called the Central Selling Organization), a
marketing arm of DeBeers Consolidated Mines Ltd. of South Africa. The Diamond
Trading Company has traditionally controlled the marketing of a majority of the
world's supply of diamonds and sells rough diamonds to worldwide diamond site
holders from its London office in quantities and at prices determined in its
discretion. Several years ago the Diamond Trading Company implemented a
"Supplier of Choice" initiative. The impact of this initiative on the diamond
supplier base is not yet fully known. The availability of diamonds to the
Diamond Trading Company and our suppliers is to some extent dependent on the
political situation in diamond
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producing countries, such as South Africa, Botswana, Zaire, Canada, republics of
the former Soviet Union and Australia, and on continuation of the prevailing
supply and marketing arrangements for raw diamonds. Until alternate sources
could be developed, any sustained interruption in the supply of diamonds or any
oversupply from the producing countries could adversely affect us and the retail
jewelry industry as a whole.
We are constantly altering the mix of our products and we have over the
last several years increased the percentage of higher priced items in our
stores. Higher priced jewelry items tend to have a slower rate of turnover,
thereby increasing the risks to us associated with price fluctuations and
changes in fashion trends.
INVENTORY LOSS PREVENTION
We undertake substantial efforts to safeguard our jewelry inventory from
loss and theft, including the use of security alarm systems and safes at each
store and the taking of daily inventory of higher value items. In addition, our
inventory management and control system, which tracks each item in our
inventory, provides a further check against loss or theft. We have a full-time
executive who directs our loss prevention department. The loss prevention
department consists of corporate and field based employees who are responsible
for the development and maintenance of loss prevention procedures, including
training and investigations. We maintain insurance (subject to certain
deductibles) covering the risk of loss of merchandise in transit, on store
premises and in our distribution facility, whether owned or on consignment, in
amounts that we believe are reasonable and adequate for the types and amounts of
merchandise that we carry. During fiscal 2004, inventory shrinkage was
approximately 1.0% of sales.
MANAGEMENT INFORMATION SYSTEMS
We utilize customized management information systems throughout our
business to facilitate the design and implementation of selling strategies and
as an integral part of our financial and other operational controls. Our
management information system utilizes IBM AS400 systems as its foundation. The
system incorporates point-of-sale computers in our stores with a merchandise
management and purchase order management system and utilizes software
specifically designed or customized for the jewelry industry. The information
system has been upgraded to support our current needs but further upgrading is
necessary to support our operations and growth.
We use the management information system to track each individual item of
merchandise from receipt to ultimate sale to the customer or return to the
vendor. As a result, management can closely monitor inventory by location,
sales, gross margin, inventory levels and turnover statistics, reallocating
inventory among stores when beneficial. This system enables management to review
each store's and each employee's productivity and performance. The system
enables us to manage our inventory at the store level, including the automatic
replenishment of merchandise generally once or twice a week.
The system automatically provides a daily reconciliation of each store's
transactions for prompt investigation of discrepancies. The point-of-sale
computers are polled nightly and updated data is available at the beginning of
the following day for use by support office and store supervisory personnel, and
for transfer into our accounting, merchandising and other management information
systems.
We have implemented, through our point-of-sale system, the ability to
capture and retain selected customer data from each sale (name, address, phone,
birthday, anniversaries, historical purchases, etc.). Our store managers and
sales associates often use this data in their efforts to contact customers and
anticipate and facilitate future add-on purchases by our customers. We also use
the customer data in our direct marketing promotional campaigns. In addition,
the point-of-sale systems track required inspection dates for customers with
diamond warranties.
COMPETITION
The jewelry retail business is fragmented and highly competitive. We
primarily compete with national and regional jewelry chains and local
independently owned jewelry stores, especially those that operate in malls, as
well as with department stores, mass merchant discount stores, direct mail
suppliers, televised home shopping networks and Internet commerce. Diamond
Promotional Service, a marketing arm of DeBeers, has traditionally supported the
national marketing of diamonds. Certain of our competitors are substantially
larger and have greater financial resources than the Company and can take
advantage of national advertising
9
programs. We believe that we compete for consumers' discretionary spending
dollars with retailers that offer merchandise other than jewelry.
We believe that the primary competitive factors affecting our operations
are store location and atmosphere; quality of sales personnel and service;
breadth, depth and quality of merchandise offered; pricing; credit; marketing
and our stores' reputation.
Over the past several years a number of businesses began marketing fine
jewelry via the Internet. Large scale consumer acceptance of Internet fine
jewelry retailing is impacting the jewelry retailing business, resulting in
lower price points and margins, and may adversely affect our results of
operations or financial condition. We are not currently transacting Internet
sales of jewelry.
INTELLECTUAL PROPERTY
Whitehall(R) Co. Jewellers and Lundstrom(R) Jewelers are registered
trademarks in the United States. In addition, the Company operates a limited
number of stores under the Mark Bros. (TM) name. The Company sells proprietary
branded solitaire diamond merchandise under the White Star(R) brand. We also
have registered the Internet domain names "whitehalljewellers.com" and
"lundstromjewelers.com." Our trademarks are held by, and our licensing activity
is conducted by, WH Inc. of Illinois, a wholly owned subsidiary of Whitehall
Jewellers.
EMPLOYEES
As of January 31, 2005, we had 2,503 employees, including 2,299 full and
part-time store level employees. We usually hire a limited number of temporary
employees during each Christmas selling season. None of our employees are
represented by a union.
REGULATION
Our operations are affected by numerous federal and state laws that impose
disclosure and other requirements upon the origination, servicing, enforcement
and advertising of credit accounts, and limitations on the maximum amount of
finance charges that may be charged by a credit provider. Although credit to our
customers is provided by third parties with limited recourse to us based upon a
customer's failure to pay, any restrictive change in the regulation of credit,
including the imposition of, or changes in, interest rate ceilings, could
adversely affect the cost or availability of credit to our customers and,
consequently, our results of operations or financial condition.
In addition, our operations are affected by federal and state laws
relating to marketing practices in the retail jewelry industry.
The Company is subject to the jurisdiction of federal, various state and
other taxing authorities. From time to time, these taxing authorities conduct
reviews or audits of the Company.
AVAILABLE INFORMATION
We maintain an Internet website at www.whitehalljewellers.com that
includes a hypertext link to the Securities and Exchange Commission's website
where our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive
officers, and all amendments to those reports are available without charge, as
soon as reasonably practicable following the time that they are filed with or
furnished to the Securities and Exchange Commission (the "SEC"). You may read
and copy any document we file at the SEC's Public Reference Room at Room 1024,
450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for information on the Public Reference Room. The SEC maintains
an Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC at
http://www.sec.gov.
The Company's Corporate Governance Guidelines, Audit Committee Charter,
Compensation Committee Charter, Corporate Governance and Nominating Committee
Charter and Long Range Planning Committee Charter are available on the Company's
website and upon written or verbal request. Requests for copies of any of these
documents 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.
10
ITEM 2. PROPERTIES
As of April 1, 2005, we operated 384 stores in 38 states. All of these
stores are leased and are predominantly located in regional or super-regional
malls. Our typical new store lease has a term of 10 years plus the first partial
lease year. Terms generally include a minimum base rent, a percentage rent
payment based on store sales and certain other occupancy charges. At January 31,
2005 the average remaining life of the leases for our stores was approximately
five years. While there can be no assurance, we expect to be generally able to
renew desirable leases as they expire.
We lease approximately 41,000 square feet of office and administrative
space in Chicago, Illinois, in an office building housing our corporate
headquarters, distribution functions and quality assurance operations. This
lease expires on December 31, 2005.
ITEM 3. LEGAL PROCEEDINGS
On February 12, 2004, a putative class action complaint captioned Greater
Pennsylvania Carpenters Pension Fund, et al. v. Whitehall Jewellers, Inc. et
al., Case No. 04 C 1107, 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 complaint makes reference to the litigation filed by
Capital Factors, Inc. ("Capital Factors") and settled as disclosed in the
Company's Quarterly Report in Form 10-Q for the fiscal quarter ended October 31,
2004 and to the Company's November 21, 2003 announcement that it had discovered
violations of Company policy by the Company's Executive Vice President,
Merchandising, with respect to Company documentation regarding the age of
certain store inventory. The complaint further makes reference to the Company's
December 22, 2003 announcement that it would restate results for certain prior
periods. The complaint purports to allege the Company and its officers made
false and misleading statements and falsely accounted for revenue and inventory
during the putative class period of November 19, 2001 to December 10, 2003. The
Complaint purports to allege violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 ("1934 Act") and Rule 10b-5 promulgated
thereunder.
On February 18, 2004, a putative class action complaint captioned Michael
Radigan, et al., v. Whitehall Jewellers, Inc. et al., 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, charging
violations of Sections 10(b) and 20(a) of the 1934 Act and Rule 10b-5
promulgated thereunder, and alleging that the Company and its officers made
false and misleading statements and falsely accounted for revenue and inventory
during the putative class period of November 19, 2001 to December 10, 2003. The
factual allegations of this complaint are similar to those made in the Greater
Pennsylvania Carpenters Pension Fund complaint discussed above.
On February 20, 2004, a putative class action complaint captioned Milton
Pfeiffer, et al., v. Whitehall Jewellers, Inc. et al., 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, charging
violations of Sections 10(b) and 20(a) of the 1934 Act and Rule 10b-5
promulgated thereunder, and alleging that the Company and its officers made
false and misleading statements and falsely accounted for revenue, accounts
payable, inventory, and vendor allowances during the putative class period of
November 19, 2001 to December 10, 2003. The factual allegations of this
complaint are similar to those made in the Greater Pennsylvania Carpenters
Pension Fund complaint discussed 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 granted the
plaintiffs up to 60 days to file an amended consolidated complaint. The Court
also 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, et al., v. Whitehall Jewellers, Inc. et al., 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, charging
violations of Sections 10(b) and 20(a) of the 1934 Act and Rule 10b-5
promulgated thereunder, and alleging that the Company and
11
its officers made false and misleading statements and falsely accounted for
revenue, accounts payable, inventory, and vendor allowances during the putative
class period of November 19, 2001 to December 10, 2003. The factual allegations
of this complaint are similar to those made in the Greater Pennsylvania
Carpenters Pension Fund complaint discussed 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,
Whitehall filed a motion to dismiss the consolidated amended complaint. 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. Briefing
on this motion is not yet complete. If the Company is successful on its motion,
the class in this action may be limited to the period November 19, 2001 through
June 6, 2002.
On June 15, 2004, a shareholder derivative action complaint captioned
Richard Cusack v. Hugh Patinkin, et al., 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 discussed
above. The plaintiff has agreed to the filing of a joint motion to stay the
proceedings in this case pending the District Court's determination of the
Defendants' motions to dismiss in the federal securities class actions. On
September 8, 2004, the Court granted a stay motion without argument. The lawsuit
has been stayed through June 30, 2005.
On February 22, 2005, a verified derivative complaint captioned Myra
Cureton v. Richard K. Berkowitz, et. al., 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 Richard
Cusack and Greater Pennsylvania Carpenters Pension Fund complaints discussed
above. The defendants' time to answer or otherwise plead has not yet come.
The Company intends to vigorously contest these putative class action
complaints and the derivative complaints and exercise all of its available
rights and remedies. Given that these cases are in their early stages, 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 or liquidity.
As previously disclosed in September 2003, 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.
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.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock began trading on the New York Stock Exchange under
the symbol "JWL" on January 27, 2000. Prior to that date the Company's common
stock traded on the NASDAQ National Market System under the symbol "WHJI." At
March 31, 2005, there were 103 registered holders of Class B stock and 325
registered holders of Common Stock for a total of 428 registered shareholders.
There is no established trading market for the Company's Class B stock.
Year ended January 31 2005 2004
- --------------------- High Low High Low
------ ----- ------ ------
First Quarter $ 9.98 $8.65 $10.23 $ 7.90
Second Quarter 9.10 7.05 12.20 8.88
Third Quarter 8.63 7.42 12.60 10.23
Fourth Quarter 8.95 6.88 13.25 8.66
------ ----- ------ ------
The Company did not declare any dividends in fiscal 2004 and 2003 and intends to
retain its earnings to finance future growth. Therefore, the Company does not
anticipate paying any cash dividends in the foreseeable future. The declaration
and payment of dividends, if any, is subject to the discretion of the Board of
Directors of the Company and to certain limitations under the General
Corporation Law of the State of Delaware. In addition, the Company's Credit
Agreement contains restrictions of the Company's ability to pay dividends. The
timing, amount and form of dividends, if any, will depend, among other things,
on the Company's results of operations, financial condition, cash requirements
and other factors deemed relevant by the Board of Directors.
14
ITEM 6. SELECTED FINANCIAL DATA
Selected Historical Financial and Operating Data
The following table sets forth certain financial and operating data of the
Company. The selected statement of operations data and balance sheet data as of
and for the fiscal year ended January 31, 2005 (fiscal 2004) and each of the
four prior fiscal years are derived from audited financial statements of the
Company. The selected financial information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's audited financial statements
appearing elsewhere herein.
(In thousands, except per
share and selected operating data) Fiscal 2004 Fiscal 2003 Fiscal 2002 Fiscal 2001 Fiscal 2000
- ----------------------------------------------- ----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Net sales $ 334,206 $ 344,655 $ 341,037 $ 338,911 $ 355,065
Cost of sales (including buying
and occupancy expenses) 221,370 217,622 213,242 207,227 217,344
----------- ----------- ----------- ----------- -----------
Gross profit 112,836 127,033 127,795 131,684 137,721
Selling, general and
administrative expenses (1) 115,028 114,624 104,891 108,481 112,706
Professional fees and other charges (2) 7,679 21,874 2,899 1,494 2,894
----------- ----------- ----------- ----------- -----------
(Loss) income from operations (9,871) (9,465) 20,005 21,709 22,121
Interest expense 4,365 4,110 4,341 6,902 5,757
----------- ----------- ----------- ----------- -----------
(Loss) income before income taxes (14,236) (13,575) 15,664 14,807 16,364
Income tax (benefit) expense (4,353) (4,861) 5,970 5,153 6,103
----------- ----------- ----------- ----------- -----------
(Loss) income before cumulative
effect of accounting change (9,883) (8,714) 9,694 9,654 10,261
Cumulative effect of accounting change, net (3) -- -- -- -- (3,068)
----------- ----------- ----------- ----------- -----------
Net (loss) income $ (9,883) $ (8,714) $ 9,694 $ 9,654 $ 7,193
=========== =========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
(Loss) income before cumulative
effect of accounting change $ (0.71) $ (0.62) $ 0.64 $ 0.66 $ 0.64
Selected Operating Data:
Stores open at end of period 382 380 370 364 348
Average net sales per store (4) $ 861,000 $ 925,000 $ 925,000 $ 952,000 $ 1,116,000
Average net sales per gross square foot (5) $ 976 $ 1,066 $ 1,068 $ 1,093 $ 1,286
Average merchandise sale $ 304 $ 285 $ 302 $ 304 $ 319
Comparable store sales decrease increase (6) (3.7%) (0.6%) (1.9%) (10.7%) (1.7%)
Balance Sheet Data (at end of period)
Merchandise inventories $ 183,676 $ 206,146 $ 196,694 $ 173,098 $ 184,185
Working capital 40,200 45,678 57,777 52,658 46,074
Total assets 256,830 286,997 272,479 252,091 261,926
Total debt 73,793 80,980 99,630 45,667 61,860
Stockholders' equity, net 96,623 105,768 117,901 113,145 103,058
(1) In fiscal 2002, the Company adopted Financial Accounting Standards Board
Statement No. 142, "Goodwill and Other Intangible Assets," and has discontinued
amortization of goodwill. (See Note 7)
(2) Includes legal, accounting and consulting services expenses, litigation
charges and severance accruals.
(3) Reflects net cumulative effect in the change in accounting for layaway
sales.
(4) Average net sales per store represents the total net sales for stores open
for a full fiscal year divided by the total number of such stores.
(5) Average net sales per gross square foot represents total net sales for
stores open for a full fiscal year divided by the total square feet of such
stores.
(6) Comparable store sales are defined as net sales of stores which are
operating for each month in the current reporting period as well as open for the
same month during the prior year reporting period.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's financial
statements, including the notes thereto. This section contains statements that
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. See the information contained under
the heading "Forward-Looking Statements" at the beginning of this report.
OVERVIEW The Company is a mall-based national retailer of fine jewelry operating
382 stores in 38 states as of January 31, 2005. The Company offers a selection
of merchandise in the following categories: diamond, gold, precious and
semi-precious jewelry and watches. Jewelry purchases are discretionary for
consumers and may be particularly affected by adverse trends in the general
economy and perceptions of such conditions affecting disposable consumer income.
Although fiscal year 2004 was a challenging one for the Company's business, the
Company also took a number of significant steps during the year, including that
the Company:
- Strengthened its executive management team by filling a newly
created role of President and Chief Operating Officer and hiring a
new Executive Vice President, Merchandising. These new members of
the management team add general management, business process,
financial and brand building expertise.
- Signed a non-prosecution agreement with the United States Attorney's
Office for the Eastern District of New York and settled the
consolidated Capital Factors actions.
- Instituted a program to identify and sell non-productive inventory
that would no longer be part of the Company's future merchandise
presentation. This program resulted in the sell through of
approximately $18.5 million of such merchandise at cost, which
negatively impacted gross margin.
- Enhanced the Company's assortment of merchandise through the
introduction of 157 new styles nationwide for the 2004 Christmas
holiday season. Sales of such items plus other new items tested in
certain store locations accounted for approximately 15% of
merchandise sales in the November and December 2004 holiday season.
On March 30, 2005, Hugh M. Patinkin, the Company's Chairman and Chief Executive
Officer passed away unexpectedly. The Company's Board of Directors appointed
Daniel H. Levy, a member of the Company's Board of Directors since 1997, as
Chairman and Lucinda M. Baier, the Company's President and Chief Operating
Officer as Chief Executive Officer.
The Company's business is highly seasonal. During fiscal year 2004, a
significant portion of the Company's sales and net income was generated during
the fourth fiscal quarter ending January 31, 2005. Fourth quarter fiscal year
2004 net income was $5.3 million as compared to a net loss of $15.2 million
recorded in the previous three quarters. Historically, income generated in the
fourth fiscal quarter ending each January 31 represents all or a majority of the
income generated during the fiscal year. The Company has historically
experienced lower net sales in each of its first three fiscal quarters and
expects this trend to continue. The Company's quarterly and annual results of
operations may fluctuate significantly as a result of factors including, among
others: increases or decreases in comparable store sales; the timing of new
store openings; net sales contributed by new stores; timing of store remodels
and closures; timing of certain holidays and Company-initiated special events;
changes in the Company's merchandise; inventory availability and the Company's
ability to fund inventory purchases and to time such purchases correctly;
marketing or credit programs; general economic, industry, weather conditions and
disastrous national events that affect consumer spending; and the pricing,
merchandising, marketing, credit and other programs of competitors.
16
RESULTS OF OPERATIONS The following table sets forth for the periods indicated
certain information derived from the statements of operations of the Company
expressed as a percentage of net sales for such periods.
Percentage of net sales Fiscal 2004 Fiscal 2003 Fiscal 2002
- ------------------------------------------------------- ----------- ----------- -----------
Net sales 100.0% 100.0% 100.0%
Cost of sales (including buying and occupancy expenses) 66.2 63.1 62.5
----- ----- -----
Gross profit 33.8 36.9 37.5
Selling, general and administrative expenses 34.4 33.3 30.8
Professional fees and other charges 2.3 6.3 0.8
----- ----- -----
(Loss) income from operations (2.9) (2.7) 5.9
Interest expense 1.3 1.2 1.3
----- ----- -----
(Loss) income before income taxes (4.2) (3.9) 4.6
Income tax (benefit) expense (1.3) (1.4) 1.8
----- ----- -----
Net (loss) income (2.9%) (2.5%) 2.8%
===== ===== =====
FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003
NET SALES
Net sales decreased $10.5 million, or 3.0%, to $334.2 million in fiscal year
2004 from $344.7 million in fiscal year 2003. Comparable store sales decreased
$12.5 million, or 3.7%, in fiscal year 2004. Additionally, sales were lower by
$4.2 million due to store closings and stores closed for remodeling for limited
periods. These decreases were partially offset by sales from new store openings
of $5.9 million, $0.3 million due to changes in the provision for sales returns
and allowances and support office sales. The comparable store sales decrease was
primarily due to lower unit sales in fiscal year 2004 in comparison to the prior
year. The total number of merchandise units sold decreased 9.8% in fiscal year
2004 compared to fiscal year 2003 while the average price per item sold
increased by approximately 6.7% to $304 in fiscal year 2004 from $285 in fiscal
year 2003. The decline in the number of merchandise units sold was due in part
to a decrease in the number of lower price-point items sold during promotional
events and the holiday season during fiscal year 2004 compared to fiscal year
2003. The increase in average price per merchandise sale was due in part to
sales of certain discontinued merchandise on which price reductions were taken
which had an average price per merchandise sale of $378 in fiscal year 2004.
Excluding such merchandise, the average price per merchandise sale was $297 in
fiscal year 2004. Credit sales as a percentage of net sales increased to 42.1%
in fiscal year 2004 from 40.3% in fiscal 2003. The Company opened 6 new stores
and closed 4 stores during fiscal year 2004, increasing the number of stores
operated to 382 as of January 31, 2005 from 380 as of January 31, 2004.
GROSS PROFIT
Gross profit decreased $14.2 million, or 11.2%, to $112.8 million in fiscal year
2004, from $127.0 million in fiscal year 2003. As a percentage of net sales,
gross profit decreased to 33.8% in fiscal year 2004 from 36.9% in fiscal year
2003. The gross profit rate decreased by approximately 140 basis points due to
increases in store occupancy, depreciation and buying costs, and the
de-leveraging of such costs due to the decrease in fiscal year 2004 sales.
Merchandise gross margins declined by approximately 115 basis points resulting
from price reductions on certain discontinued merchandise beginning mid-July
2004. The gross profit rate was negatively impacted by approximately 55 basis
points due to an increase in the provision for certain damaged and other
merchandise inventories. The gross profit rate was also negatively impacted by
an increase in the sales mix of items which carry a lower margin. These margin
decreases were partially offset by somewhat
17
lower in-store discounting, and price increases which were implemented during
2004 on certain merchandise items.
The Company has historically offered clearance merchandise for sale,
representing merchandise identified from time to time that will not be part of
its future merchandise presentation. During the second and third quarters of
fiscal year 2004, the Company reviewed its merchandise inventory presentation
and determined that $70.4 million of its merchandise inventory at cost would not
be part of its future merchandise presentation in addition to the items
remaining in the Company's clearance program. Price reductions were taken on
these items which have resulted in and will continue to result in lower than
historical margins on such merchandise. Sales of these items totaled
approximately $30.8 million with an approximate merchandise cost of $18.5
million since program inception in July 2004. In addition, the Company has
reduced such discontinued merchandise by approximately $2.1 million due in part
to vendor returns. As of January 31, 2005, the Company had approximately $49.8
million, at cost, of such discontinued merchandise inventory. The impact of
these sales accounted for a margin decline of approximately 115 basis points
during fiscal year 2004. Based on currently anticipated selling prices, the
Company expects to achieve positive, but lower than historical merchandise
margins on such merchandise. It is the Company's current expectation to continue
to offer for sale in all or a portion of its stores the remaining amount of this
merchandise in future periods, which will negatively impact margins. The Company
in future periods may consider alternative methods of disposition for this
inventory. Such alternatives may result in additional valuation allowances.
EXPENSES
Selling, general and administrative expenses, excluding professional fees and
other charges, in fiscal year 2004 increased $0.4 million, or 0.4%, to $115.0
million from $114.6 million in fiscal year 2003. As a percentage of net sales,
selling, general and administrative expenses increased to 34.4% in fiscal year
2004 from 33.3% in fiscal year 2003. Higher personnel expense ($2.2 million) and
higher credit expense ($0.1 million) were partially offset by lower advertising
expense ($1.1 million) and lower other expense ($0.8 million). Payroll costs
increased primarily due to the addition of support office positions, improving
the quality of support office staff and associated recruiting costs. Advertising
expense decreased due to the elimination of holiday radio advertising, a
reduction in the number of names mailed in direct mail campaigns and the
elimination of certain promotional flyers. The decrease in other expense is
primarily due to lower accruals for insurance and lower accruals for state and
local taxes, based on revised estimates, than those recorded in the prior year.
Professional fees and other charges decreased by $14.2 million to $7.7 million
in fiscal year 2004 from $21.9 million in fiscal year 2003. As previously
disclosed, on September 28, 2004, the Company announced that it entered into a
non-prosecution agreement with the United States Attorney's Office for the
Eastern District of New York and that it reached a settlement of the
consolidated Capital Factors actions. Professional fees decreased by
approximately $6.5 million in fiscal year 2004 from the prior year primarily due
to the settlement of the consolidated Capital Factors actions and the
non-prosecution with the United States Attorney's Office for the Eastern
District of New York, partially offset by approximately $1.2 million of costs
incurred in connection with compliance with certain sections of the
Sarbanes-Oxley Act of 2002. In addition, during fiscal year 2004, the Company
recorded an accrual of approximately $1.0 million primarily related to the
settlement of the consolidated Capital Factors actions, the non-prosecution
agreement with the United States Attorney's as compared to an accrual of $8.6
million recorded in fiscal year 2003 due to such matters. In addition, the
Company recorded a severance related charge of approximately $0.8 million during
fiscal year 2004 as compared to a charge of approximately $1.0 million during
fiscal year 2003.
18
LOSS FROM OPERATIONS
As a result of the factors discussed above, loss from operations was $9.9
million in fiscal year 2004 compared to $9.5 million in fiscal year 2003. As a
percentage of net sales, loss from operations was 2.9% in fiscal year 2004 as
compared to 2.7% in fiscal year 2003.
INTEREST EXPENSE
Interest expense increased $0.3 million, or 6.2%, to $4.4 million in fiscal year
2004 from $4.1 million in fiscal year 2003. The increase in interest expense
resulted from higher average interest rates and higher average outstanding
borrowings, which were partially offset by the write-off in fiscal year 2003 of
deferred loan costs associated with the prior credit facility.
INCOME TAX BENEFIT
Income tax effective rate decreased in fiscal year 2004 to 30.6% from 35.8% in
fiscal year 2003. The income tax benefit associated with the loss in fiscal year
2004 was partially offset by a change in the Company's valuation allowance with
respect to the Company's current expected ability to use certain state income
tax net operating loss carry forwards in certain jurisdictions, resulting in an
overall decrease in the effective tax rate. At January 31, 2005, the Company had
$8.3 million of federal net operating loss carryforwards available. The deferred
tax asset for federal net operating loss carryforwards is reviewed for
recoverability based on historical taxable income, the expected reversals of
existing temporary differences and management's forecast of future taxable
income. Management has concluded that no valuation allowance was necessary on
the federal net operating loss carryforward and remaining net deferred tax
assets as utilization is more likely than not to occur. However, should actual
taxable income for fiscal year 2005 differ unfavorably in comparison to
management's forecast of future taxable income, a valuation allowance against
the full amount of the federal net operating loss may be required.
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002
NET SALES
Net sales increased $3.7 million, or 1.1%, to $344.7 million in fiscal year 2003
from $341.0 million in fiscal year 2002. Comparable store sales decreased $1.9
million, or 0.6%, in fiscal year 2003. The slower economy and lower consumer
confidence had a negative impact on sales, which was partially offset by
increased sales generated from new promotional initiatives, including
semi-annual two-day events and the enhancement of other special promotions and
the expansion of the watch lines carried in inventory. These new initiatives
were introduced primarily during the first three quarters of fiscal year 2003.
Comparable store sales in the first six months of fiscal year 2003 decreased
7.9% while comparable sales in the last six months of fiscal year 2003 increased
5.3%. Additionally, sales were lower by $6.5 million due to store closings and
stores closed for remodeling for limited periods and by $1.9 million due to
changes in sales returns and allowances, of which, $0.3 million was due to
fiscal year 2003 reserve activity. The remaining $1.6 million change in the
reserve for sales returns and allowances reflects the historical trends in
returns which are governed by the Company's return policies and management's
initiatives to ensure compliance with those policies which resulted in a
reduction in the sales returns and allowances in fiscal year 2002.
These decreases were offset by sales from new store openings of $14.0 million.
The Company plans to significantly reduce new store openings in fiscal year
2004. The total number of merchandise units sold increased 7.7% in fiscal year
2003 compared to fiscal year 2002 while the average price per item sold
decreased by approximately 5.7% to $285 in fiscal year 2003 from $302 in fiscal
year 2002. The decline in average price per merchandise sale and the increase in
the number of merchandise units sold was primarily due to a significant increase
in the number of lower price-point advertised items sold during promotional
events during fiscal year 2003 compared to
19
fiscal year 2002. The Company opened 21 new stores and closed 11 stores during
fiscal year 2003, increasing the number of stores operated to 380 as of January
31, 2004 from 370 as of January 31, 2003.
GROSS PROFIT
Gross profit decreased $0.8 million, or 0.6%, to $127.0 million in fiscal year
2003, from $127.8 million in fiscal year 2002. As a percentage of net sales,
gross profit decreased to 36.9% in fiscal 2003 from 37.5% in fiscal year 2002.
The gross profit rate was negatively impacted by an increase in the cost of gold
and an increase mix in watch sales, which carry a lower margin than other
categories, a decrease in the mix of diamond and gold merchandise sales which
carry a higher gross margin, as well as the competitive pricing environment.
These declines in gross margin were partially offset by lower inventory cost
associated with higher vendor discounts and allowances compared to the same
period in the prior year. Store occupancy and buying expenses, which increased
at a higher rate than the increase in sales, also contributed to the reduction
in gross profit percentage. In response to the increased cost of gold, beginning
in March 2004, the Company has increased prices of certain items, primarily in
gold merchandise categories, which may result in gross profit rate improvements.
The Company expects higher watch sales to have a continued negative impact on
gross profit rate.
EXPENSES
Selling, general and administrative expenses, excluding professional fees and
other charges, in fiscal year 2003 increased $9.7 million, or 9.3%, to $114.6
million from $104.9 million in fiscal year 2002. As a percentage of net sales,
selling, general and administrative expenses increased to 33.3% in fiscal year
2003 from 30.8% in fiscal year 2002. Higher personnel expense ($3.6 million),
higher other expense ($3.9 million), and higher advertising expense ($2.5
million) were partially offset by lower credit expense ($0.5 million). These
dollar increases primarily related to operating costs associated with new store
openings. During fiscal year 2003, the Company opened 21 new stores, as compared
to 17 new stores in the prior year. Payroll costs increased primarily due to the
increased number of stores and the addition of support office positions and
enhancing the hiring requirements and compensation associated with new personnel
in fiscal year 2003. The increase in other expense is primarily due to the
increase in the number of stores, increases in insurance expense ($0.9 million)
and increases in accruals for state and local taxes ($0.6 million). Advertising
expense increased due to new promotional initiatives in 2003 and the impact of
the adoption of 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") as of February 1, 2003. To the extent the Company's
agreements with merchandise vendors provide credits for co-op advertising, the
Company had historically classified such credits as a reduction to advertising
expense in selling, general and administrative expenses. EITF 02-16, which was
effective for all arrangements entered into after December 31, 2002, requires
certain merchandise vendor allowances to be classified as a reduction to
inventory cost unless evidence exists supporting an alternative classification.
During fiscal year 2003, the Company received $2.7 million of vendor allowances
for advertising. Credit expense decreased due to lower historical experience in
fiscal 2003 associated with exposures for chargebacks on credit card receivables
that have already been collected. The decrease in credit expense was partially
offset by higher credit card discounts due to increased credit card sales.
Professional fees and other charges increased by $19.0 million to $21.9 million
in fiscal year 2003 from $2.9 million in fiscal year 2002, primarily associated
with the Capital Factors matters. As required by Financial Accounting Standards
Board Statement No. 5, "Accounting for Contingencies," the Company determines
whether an estimated loss from a loss contingency should be accrued by assessing
whether a loss is deemed probable and can be reasonably estimated. During the
fourth quarter of the fiscal year ended January 31, 2004, the Company accrued a
litigation reserve of $8.6 million for the consolidated Capital Factors actions
and the United States Attorney and SEC
20
investigations. Professional fees of approximately $9.6 million incurred as a
result of the consolidated Capital Factors actions, the United States Attorney
and SEC investigations and the Company's internal investigation were expensed
through January 31, 2004. The Company also recorded approximately $1.0 million
for certain severance related costs that were governed by existing severance
agreements.
(LOSS) INCOME FROM OPERATIONS
As a result of the factors discussed above, loss from operations was $9.5
million in fiscal year 2003 compared to income from operations of $20.0 million
in fiscal year 2002. As a percentage of net sales, loss from operations was 2.7%
in fiscal year 2003 as compared to income from operations in fiscal year 2002 of
5.9%.
INTEREST EXPENSE
Interest expense decreased $0.2 million, or 5.3%, to $4.1 million in fiscal year
2003 from $4.3 million in fiscal year 2002. The decrease in interest expense
resulted from lower average interest rates, which were partially offset by
higher average outstanding borrowings and the write-off of deferred loan costs
associated with the prior credit facility.
INCOME TAX (BENEFIT) EXPENSE
Income tax effective rate decreased in fiscal year 2003 to 35.8% from 38.1% in
fiscal year 2002. The income tax benefit associated with the loss in fiscal 2003
was partially offset by a change in the Company's valuation allowance with
respect to the Company's current expected ability to use certain state income
tax net operating loss carry forwards, resulting in a decrease in the effective
tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of funding inventory for
existing stores, capital expenditures and working capital (primarily inventory)
associated with the Company's new stores. The Company's primary sources of
liquidity have historically been cash flow from operations and bank borrowings
under the Company's Second Amended and Restated Revolving Credit and Gold
Consignment agreement dated July 29, 2003 (the "Credit Agreement"), as amended.
As of January 31, 2005, the calculated revolver borrowing base availability
pursuant to the Credit Agreement was $95.2 million. The Company had $73.8
million of outstanding borrowings under the revolving loan facility as of
January 31, 2005.
FISCAL YEAR 2004 The Company's cash flow provided by operating activities was
$12.6 million in fiscal 2004 compared to $36.9 million in fiscal 2003. Decreases
in merchandise inventories ($22.5 million) and other current assets ($0.5
million) were offset by decreases in other accrued expenses ($10.0 million),
deferred income taxes ($1.1 million), accrued payroll ($0.6 million), customer
deposits ($0.6 million), accounts payable ($0.3 million) and accounts receivable
($0.1 million) and an increase in current income tax benefit ($1.7 million). The
decrease in merchandise inventories was due in part to the sales of certain
merchandise that will no longer be part of the Company's future merchandise
presentation. The decrease in accrued expenses is due in part to the payments to
Capital Factors, International Diamonds, L.L.C. and Astra Diamonds Manufacturers
in connection with the settlement of the consolidated Capital Factors actions.
Cash used in investing activities included the funding of capital
expenditures of $4.7 million, related primarily to the opening of 6 new stores
as well as remodels in fiscal 2004, compared to $11.5 million used for capital
expenditures in 2003.
21
The Company utilized cash for financing activities in fiscal 2004
primarily to decrease revolver borrowing ($6.5 million), to repay the Company's
subordinated debt at maturity, ($0.6 million), to pay financing costs ($0.3
million) associated with amendments to the Credit Agreement, and to decrease
outstanding checks ($0.1 million). Stockholders' equity decreased to $96.6
million at January 31, 2005 from $105.8 million at January 31, 2004.
FISCAL YEAR 2003 The Company's cash flow provided by operating activities was
$36.9 million in fiscal 2003 compared to cash flow used in operating activities
of $20.1 million in fiscal 2002. Increases in accounts payable ($36.1 million),
accrued expenses ($13.1 million) and accrued payroll ($1.2 million) were offset
by increases in merchandise inventories ($9.5 million), current income tax
benefit ($2.3 million) and accounts receivable ($0.9 million) and decreases in
income taxes payable ($3.3 million) and deferred income taxes ($3.1 million).
Cash used in investing activities included the funding of capital
expenditures of $11.5 million, related primarily to the opening of 21 new stores
in fiscal 2003, compared to $8.6 million used for capital expenditures in 2002.
The Company utilized cash for financing activities in fiscal 2003
primarily to (i) decrease revolver borrowing ($14.2 million), (ii) make
principal payments on the term loan ($4.5 million), (iii) purchase 321,400
shares of common stock at an average price of $11.92 per share under the Stock
Repurchase Program ($3.8 million), (iv) pay financing costs ($1.0 million)
associated with the second amended and restated credit facility, and (v)
decrease outstanding checks ($2.3 million). Cash generated by financing
activities included proceeds from the exercise of options ($0.3 million).
Stockholders' equity decreased to $105.8 million at January 31, 2004 from $117.9
million at January 31, 2003.
OTHER LIQUIDITY AND CAPITAL RESOURCES ELEMENTS Effective July 29, 2003, the
Company entered into a Second Amended and Restated Revolving Credit and Gold
Consignment Agreement (the "Credit Agreement") with certain members of its prior
bank group to provide a total facility of up to $125.0 million through July 28,
2007. Interest rates and the commitment fee charged on the unused facility float
based on the Company's financial performance as calculated quarterly. Since
these interest rates are determined by reference to LIBOR or prime rates,
changes in market interest rates can materially affect the Company's interest
expense. Borrowings under the revolver are limited to a borrowing base
determined based on the levels of the Company's inventory and accounts
receivable. Availability under the revolver is based on amounts outstanding
thereunder.
The Company amended the Credit Agreement effective April 6, 2005 in order
to, among other things, (i) provide for additional availability under the
revolving credit facility through the funding of a $15.0 million additional
facility from LaSalle Bank National Association ("LaSalle") and Back Bay Capital
Funding LLC ("Back Bay") which was funded at closing and will be due July 31,
2006, (ii) add a discretionary overadvance subfacility from LaSalle in the
amount of $2 million, (iii) terminate the precious metal consignment facility,
(iv) change the maturity date for all outstanding amounts under the Credit
Agreement from July 28, 2007 to July 31, 2006, (v) increase the interest rate
payable on LIBOR loans from 2.50% to 3.00% above LIBOR, (vi) amend the Fixed
Charge Coverage Ratio (as defined in the Credit Agreement) covenant not to be
less than 0.75:1.00 as measured at the last day of each of the months during the
period of April 2005 to October 2005, 0.80:1.00 at November 30, 2005 and
1.00:1.00 as measured at the last day of each of the months from December 2005
and each month thereafter, (vii) add additional financial covenants related to
Minimum Accounts Payable, Capital Expenditures and Minimum Borrowing
Availability of $2.0 million (each as defined in the Credit Agreement), (viii)
amend the calculation of the borrowing base to lower the advance rate on
inventory for certain periods and to modify the types of inventory and accounts
receivable included, (ix) add a reserve in the amount of $7.0 million to the
borrowing base pending satisfactory completion of a field examination report by
LaSalle and Back Bay and (x) add a reserve in the amount of $5.0 million to the
borrowing base effective February 1, 2006. The Company expects to have adequate
availability under its revolving credit facility throughout fiscal year 2005.
However, should actual financial results differ unfavorably from the Company's
current forecast, the availability under its revolving credit facility may be
adversely impacted.
22
The Company amended the Credit Agreement effective January 29, 2005 in
order to, among other things, (i) add a reserve in the amount of $15.0 million
to the Borrowing Base, and (ii) amend the Fixed Charge Coverage Ratio not to be
less than 1.00:1.00 as measured at January 31, 2005 and 1.25:1.00 at the end of
each fiscal quarter thereafter.
The Company amended the Credit Agreement effective March 23, 2004 in order
to, among other things, (i) add a Layaway Reserve (as defined in the Credit
Agreement) to the Borrowing Base, (ii) add and amend certain financial covenants
including, amending the Fixed Charge Coverage Ratio and adding a covenant to
maintain a Net Worth (as defined in the Credit Agreement) of at least $90.0
million at January 31, 2005, (iii) cap the borrowings under the facility to a
maximum of $85.0 million for at least thirty consecutive calendar days during
the period December 15, 2004 through and including February 15, 2005, (iv)
increase the interest rate at which LIBOR based borrowings are available under
the Credit Agreement to LIBOR plus 2.5% through April 30, 2005, (v) set the
Commitment Fee Rate (as defined in the Credit Agreement) at 0.5% through April
30, 2005, and (vi) set the Standby Letter of Credit Fee Rate (as defined in the
Credit Agreement) at 2.0% through April 30, 2005.
The Company periodically determines the value of the unused facility based
upon a formula the result of which varies with fluctuations in inventory and
receivable levels and aggregate borrowings. The peak outstanding borrowing under
the Company's revolver during fiscal 2004 and 2003 was $106.5 million and $110.4
million, respectively. The unused facility and availability was $21.4 million as
of January 31, 2005. Cash receipts are applied against the outstanding
borrowings on a daily basis in accordance with the credit facility provisions.
The Company was in compliance with the financial covenants of the amended
Credit Agreement as of January 31, 2005. The Company's business is highly
seasonal, and historically, income generated in the fourth fiscal quarter ending
each January 31 represents all or a significant majority of the income generated
during the fiscal year. The Fixed Charge Coverage Ratio is sensitive to changes
in the level of the Company's profitability. Should actual financial results
differ unfavorably from the Company's current forecast, such results may have an
adverse impact on the Fixed Charge Coverage Ratio. If an event of default occurs
pursuant to the Credit Agreement, the Company may be required to negotiate
relief with its lenders or to seek new financing. There is no assurance that new
financing arrangements would be available on acceptable terms or at all. If the
existing lenders were to cease funding under the revolving loan facility or
require immediate repayment and if the Company were not able to arrange new
financing on acceptable terms, this would have a material adverse effect on the
Company, which could affect the underlying valuation of its assets and
liabilities.
Subject to the contingencies identified in Note 16 to the financial
statements and other risks, including those identified in Forward-Looking
Statements, management expects that the cash flow from operating activities and
funds available under the Company's revolving credit facilities should be
sufficient to support the Company's current new store expansion program and
seasonal working capital needs.
The Company intends to vigorously contest the putative class action
complaints and exercise all of its available rights and remedies. Given that
these class action cases are in their early stages, it is not possible to
evaluate the likelihood of an unfavorable outcome in any of these matters, or to
estimate any amount or range of potential loss, if any. While there are many
potential outcomes, an adverse outcome in these actions could have a material
adverse effect on the Company's results of operations, financial condition
and/or liquidity.
A substantial portion of the merchandise sold by the Company is carried on
a consignment basis prior to sale or is otherwise financed by vendors, thereby
reducing the Company's direct capital investment in inventory. The peak
consigned inventories from merchandise vendors were $92.6 million and $99.0
million during fiscal 2004 and 2003, respectively. The willingness of vendors to
enter into such arrangements may vary substantially from time to time based on a
number of
23
factors, including the merchandise involved, the financial resources of vendors,
interest rates, availability of financing, fluctuations in diamond, colored
stone and gold prices, inflation, the financial condition of the Company, the
vendors' understanding that the Company bears risk of loss but does not possess
title, and a number of economic or competitive conditions in the jewelry
business or the general economy. Any change in these relationships could have a
material adverse effect on the Company's results of operations or financial
condition.
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.
CONTRACTUAL OBLIGATIONS The following summarizes the Company's contractual
obligations at January 31, 2005:
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------
Less than More than
(in thousands) Total 1 year 1 - 3 Years 3 - 5 Years 5 years
- ----------------------------- --------- --------- ----------- ----------- ---------
Revolver $ 73,793 $ -- $ 73,793 $ -- $ --
Operating leases 184,262 31,142 83,228 38,296 31,596
--------- --------- ----------- ----------- ---------
Total contractual obligations $ 258,055 $ 31,142 $ 157,021 $ 38,296 $ 31,596
--------- --------- ----------- ----------- ---------
In the normal course of business, the Company issues purchase orders to
vendors for purchase of merchandise inventories. The outstanding amount of these
purchase orders is not included in the above table, as the purchase orders may
be cancelled at the option of the Company. In addition, the Company is party to
employment and severance agreements, previously filed with the SEC, with certain
executive officers.
During fiscal year 2005, the Company entered into a letter agreement with
one of its merchandise vendors. Under the terms of this letter agreement, the
merchandise vendor has the sole option to require the Company to purchase
certain consignment goods of up to a maximum of $2,010,000, based on current
prices, held by the Company as of February 1, 2006.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's critical accounting
policies and estimates, including the assumptions and judgments underlying them,
are disclosed in the Notes to the Financial Statements. These policies have been
consistently applied in all material respects and address such matters as
revenue recognition, inventory valuation, depreciation methods and asset
impairment recognition. While the estimates and judgments associated with the
application of these policies may be affected by different assumptions or
conditions, the Company believes the estimates and judgments associated with the
reported amounts are appropriate in the circumstances. Management has discussed
the development and selection of these critical accounting estimates with the
Audit Committee of our Board of Directors.
ACCOUNTS RECEIVABLE Accounts receivable consist primarily of customer credit
card charges and other non-recourse third party credit arrangements for
merchandise delivered to the customer for which the Company has not yet received
payment under the terms of the arrangements. Allowance for doubtful accounts
represents reserves established to address exposures to chargebacks on credit
receivables that have already been collected. The Company accrues an estimate of
expected chargebacks based on the Company's historical chargeback experience.
24
MERCHANDISE INVENTORIES Merchandise inventories are stated principally at the
lower of weighted average cost or market. Purchase cost is reduced to reflect
certain allowances and discounts received from merchandise vendors. Periodic
credits or payments from merchandise vendors in the form of consignment
buydowns, volume or other purchase discounts and other vendor consideration are
reflected in the carrying value of the inventory and recognized as a component
of cost of sales as the merchandise is sold. Additionally, to the extent it is
not addressed by established vendor return privileges, and if the amount of cash
consideration received from the vendor exceeds the estimated fair value of the
goods returned, that excess amount is reflected as a reduction in the purchase
cost of the inventory acquired. Allowances for inventory shrink, scrap and other
provisions are recorded based upon analysis and estimates by the Company.
Certain of the Company's agreements with merchandise vendors provide
credits for co-op advertising, as calculated as a percentage of net merchandise.
The Company adopted EITF 02-16 in fiscal year 2002, which was effective for all
arrangements entered into after December 31, 2002. In accordance with EITF
02-16, the Company classifies certain merchandise vendor allowances as a
reduction to inventory cost unless evidence exists supporting an alternative
classification. The Company has recorded such merchandise vendor allowances as a
reduction of inventory costs.
The Company earned $2.4 million and $2.7 million of vendor allowances for
advertising during fiscal 2004 and 2003, respectively. The Company records such
allowances as a reduction of inventory cost and as the inventory is sold, the
Company will recognize a lower cost of sales.
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.
LEGAL CONTINGENCIES The Company is involved in certain legal matters and other
claims including those discussed in Note 16 to the financial statements. As
required by Financial Accounting Standards Board Statement No. 5, "Accounting
for Contingencies," the Company determines whether an estimated loss from a loss
contingency should be accrued by assessing whether a loss is deemed probable and
can be reasonably estimated. The Company analyzes its legal matters and other
claims based on available information to assess potential liability. The Company
consults with outside counsel involved in our legal matters when analyzing
potential outcomes.
Based on the nature of such estimates, it is possible that future results
of operations or net cash flows could be materially affected if actual outcomes
are significantly different than management's estimates related to these
matters.
REVENUE RECOGNITION The Company recognizes revenue in accordance with the
Securities and Exchange Commission Staff Accounting Bulletin No. 104, "Revenue
Recognition." Revenue from merchandise sales is recognized when delivery has
occurred and title and risk of loss has transferred to the customer. The Company
accrues an estimate of expected returns, which have not yet been presented,
based on its historical returns experience, which is governed by the Company's
merchandise returns policy. Repair revenues are recognized when the service is
complete and the merchandise is delivered to the customer. The Company
recognizes revenue, net of cost reimbursed to a third party service provider,
from the sale of an extended service plan at the time the contract is executed
with the customer. The Company records revenue from layaway program sales at the
time the customer fulfills the terms of the program, including receipt of full
payment and delivery of the merchandise to the customer. The Company charges a
monthly fee to cover the costs of administration of inactive layaways.
25
LEASE EXPENSE The Company leases the premises for its office facilities and all
of its retail stores. Certain leases require increasing annual minimum lease
payments over the term of the lease. The Company's retail store lease term is
deemed to commence on the date the Company has access to and control of the
retail space, which is generally two months earlier than the date the Company
becomes legally obligated for rent payments. Minimum lease expense under these
agreements is recognized on a straight-line basis over the terms of the
respective leases.
Effective with the fourth quarter of fiscal year 2004, the Company has
capitalized straight-line rent incurred during the construction period of a
retail store as a leasehold improvement. Straight-line rent subsequent to the
construction period and prior to the store opening is recognized as expense. The
Company recorded a cumulative rent expense adjustment of approximately $187,000
to account for the straight-line rent subsequent to the construction period and
prior to the store opening. The Company deemed that this adjustment was
immaterial in relation to the results of its fourth quarter of fiscal year 2004
and for the fiscal years ended January 31, 2005, 2004 and 2003 respectively. In
addition, the Company recorded a cumulative adjustment of approximately $1.4
million to its balance sheet to record the unamortized portion of rent
capitalized during the construction period from current and non-current accrued
rents to leasehold improvements.
Virtually all leases covering retail stores provide for additional
contingent rentals based on a percentage of sales. These costs are expensed in
the period incurred.
ACCOUNTING FOR STOCK BASED COMPENSATION The Company follows Accounting
Principles Board Opinion No. 25 ("APB No. 25") "Accounting for Stock Issued to
Employees" and the related interpretations in accounting for its stock option
plans. Since the stock option plans meet certain criteria of APB No. 25, the
Company does not recognize any compensation cost in the income statement.
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation" issued
subsequent to APB No. 25, defines a "fair value based method" of accounting for
employee stock options but allows companies to continue to measure compensation
cost for employee stock options using the "intrinsic value based method"
prescribed in APB No. 25.
The Company believes that applying the intrinsic value based method of
accounting for stock options prescribed by APB No. 25 is a critical accounting
policy because application of SFAS 123 would require the Company to estimate the
fair value of employee stock options at the date of the grant and record an
expense in the income statement over the vesting period for the fair value
calculated, thus reducing net income and earnings per share.
The FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS
148"), "Accounting for Stock-Based Compensation-Transition and Disclosure,"
during fiscal 2002. This Statement amends 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
this statement as of January 31, 2003.
LONG-LIVED ASSETS When facts and circumstances indicate potential impairment,
the Company evaluates the recoverability of long-lived asset carrying values,
using projections of undiscounted future cash flows over remaining asset lives.
When impairment is indicated, any impairment loss is measured by the excess of
carrying values over fair values.
ACCOUNTING FOR BUSINESS COMBINATIONS AND GOODWILL AND OTHER TANGIBLES In
accordance with the FASB Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets," the Company evaluates
goodwill for impairment on an annual basis in the fourth quarter or earlier
whenever indicators of impairment exist. SFAS 142 requires that if the carrying
26
value of a reporting unit to which the goodwill relates exceeds its fair value,
an impairment loss is recognized to the extent that the carrying value of the
reporting unit goodwill exceeds the "implied fair value" of reporting unit
goodwill. As discussed in the Notes to the Financial Statements, the Company
evaluated goodwill using discounted cash flow and a market multiple approach for
impairment and concluded that no impairment currently exists.
The Company believes that the accounting estimate related to determining
fair value is a critical accounting estimate because: (1) it is highly
susceptible to change from period to period because it requires Company
management to make assumptions about the future cash flows over several years in
the future and (2) the impact that recognizing an impairment would have on the
assets reported on our balance sheet as well as our results of operations could
be material. Management's assumptions about future cash flows require
significant judgment and actual cash flows in the future may differ
significantly from those forecasted today.
ACCOUNTING FOR GUARANTEES The Financial Standards Accounting 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. Under its bylaws, the Company has agreed to
indemnify its officers and directors for certain events or occurrences while the
officer or director is serving, or was serving, at its request in such capacity.
The maximum potential amount of future payments the Company could be required to
make pursuant to indemnification obligations is unlimited; however, the Company
has purchased directors and officer liability insurance that, under certain
circumstances, enables it to recover a portion of certain future amounts paid.
The Company has no liabilities recorded for these obligations as of January 31,
2004 and 2005; however, reference should be made to Note 16 to the Financial
Statements with respect to legal contingencies.
NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR EXCHANGES OF NONMONETARY ASSETS The FASB issued SFAS No. 153,
"Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29,
"Accounting for Nonmonetary Transactions." SFAS No. 153 eliminated the exception
from fair value measurement for nonmonetary exchanges of similar productive
assets in paragraph 21(b) of ABP Opinion No. 29, and replaces it with an
exception for exchanges that do not have commercial substance. SFAS No. 153 is
effective for fiscal periods beginning after June 15, 2005. The Company does not
expect SFAS No. 153 to have a material impact on the Company.
ACCOUNTING FOR STOCK BASED COMPENSATION The FASB issued SFAS No. 123 (revised
2004), "Shared-Based Payment". This statement revised SFAS No. 123, "Accounting
for Stock-Based Compensation," and requires companies to expense the value of
employee stock options and similar awards. The effective date of this standard
is annual periods beginning after June 15, 2005. Historically, the Company has
elected to follow the intrinsic value method in accounting for its employee
stock options and employee stock purchase plans. No stock option based
compensation costs were reflected in net income, as no options granted under
those plans had an exercise price less than the market value of the underlying
common stock on the date of grant.
Upon the adoption of SFAS No. 123R, the Company will be required to
expense stock options over the vesting period in its statement of operations. In
addition, the Company will need to recognize expense over the remaining vesting
period associated with unvested options outstanding for the fiscal years
beginning after June 15, 2005. The Company is currently evaluating which
transition method to use in connection with the adoption of SFAS No. 123R.
27
TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES At the end of fiscal year 2004,
Messrs. Hugh Patinkin, John Desjardins and 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.
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 2004, Messrs. Hugh
Patinkin, John 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, John 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 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 as compared to approximately $174,000 of such
purchases in fiscal year 2003. 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.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 facility.
The Company currently does not use derivative financial instruments to protect
itself from fluctuations in interest rates.
The information below summarizes the Company's interest rate risk
associated with debt obligations outstanding as of January 31, 2005. The table
presents principal cash flows and related interest rates by fiscal year of
maturity or repricing date.
(in thousands) 2005 2006 Total
- --------------------- -------- ---- -------
Variable rate (a) $ 73,793 -- $73,793
Average interest rate 4.39% -- 4.39%
(a) Interest rates charged on the facility float based on the Company's
quarterly financial performance.
GOLD PRICE RISK The Company does not hedge gold price changes. Current increases
in gold prices have had and may have a future negative impact on gross margin to
the extent sales prices for such items do not increase commensurately.
DIAMOND PRICE RISK Recent increases in diamond prices may have a future negative
impact on gross margin to the extent that sales prices for such items do not
increase commensurately.
INFLATION The Company believes that inflation generally has not had a material
effect on the results of its operations. There is no assurance, however, that
inflation will not materially affect the Company in the future.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page
----
Financial Statements
Report of Independent Registered Public Accounting Firm 31
Statements of Operations for the years ended January 31, 2005, 2004
and 2003 33
Balance Sheets as of January 31, 2005 and 2004 34
Statements of Stockholders' Equity for the years ended January 31,
2005, 2004 and 2003 35
Statements of Cash Flows for the years ended January 31, 2005, 2004
and 2003 36
Notes to Financial Statements 37
Financial Statements Schedule
Report of Independent Registered Public Accounting Firm on Financial
Statement Schedule 55
Schedule II - Valuation and Qualifying Accounts 56
All other schedules are omitted because they are not applicable. The required
information is shown in the Financial Statements of Notes thereto.
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders,
Whitehall Jewellers, Inc.:
We have completed an integrated audit of Whitehall Jewellers, Inc.'s January 31,
2005 financial statements and of its internal control over financial reporting
as of January 31, 2005 and audits of its January 31, 2004 and 2003 financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Financial statements
In our opinion, the accompanying balance sheets and the related statements of
operations, shareholders' equity, and cash flow present fairly, in all material
respects, the financial position of Whitehall Jewellers, Inc. at January 31,
2005 and January 31, 2004, and the results of its operations and its cash flows
for each of the three years in the period ended January 31, 2005 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the accompanying
"Management Report on Internal Control Over Financial Reporting", that the
Company maintained effective internal control over financial reporting as of
January 31, 2005 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of January 31,
2005, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's
31
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Chicago, Illinois
April 13, 2005
32
Whitehall Jewellers, Inc.
Statements of Operations
For the Years Ended January 31, 2005, 2004 and 2003
(in thousands, except per share data) 2005 2004 2003
- ------------------------------------------------------------- --------- --------- ---------
Net sales $ 334,206 $ 344,655 $ 341,037
Cost of sales (including buying and occupancy expenses) 221,370 217,622 213,242
--------- --------- ---------
Gross profit 112,836 127,033 127,795
Selling, general and administrative expenses 115,028 114,624 104,891
Professional fees and other charges 7,679 21,874 2,899
--------- --------- ---------
(Loss) income from operations (9,871) (9,465) 20,005
Interest expense 4,365 4,110 4,341
--------- --------- ---------
(Loss) income before income taxes (14,236) (13,575) 15,664
Income tax (benefit) expense (4,353) (4,861) 5,970
--------- --------- ---------
Net (loss) income $ (9,883) $ (8,714) $ 9,694
--------- --------- ---------
Basic earnings per share:
Net (loss) income $ (0.71) $ (0.62) $ 0.67
--------- --------- ---------
Weighted average common shares 13,943 14,098 14,545
--------- --------- ---------
Diluted earnings per share:
Net (loss) income $ (0.71) $ (0.62) $ 0.64
--------- --------- ---------
Weighted average common shares and common share equivalents 13,943 14,098 15,038
--------- --------- ---------
The accompanying notes are an integral part of the financial statements.
33
Whitehall Jewellers, Inc.
Balance Sheets
As of January 31, 2005 and January 31, 2004
(in thousands, except share data) 2005 2004
- ------------------------------------------------------------------- --------- ----------
ASSETS
Current assets:
Cash $ 2,206 $ 1,901
Accounts receivable, net 2,688 2,544
Merchandise inventories 183,676 206,146
Other current assets 383 875
Current income tax benefit 3,959 2,294
Deferred income taxes, net 2,255 5,712
Deferred financing costs 360 261
--------- ----------
Total current assets 195,527 219,733
Property and equipment, net 54,200 60,948
Goodwill, net 5,662 5,662
Deferred income taxes, net 902 --
Deferred financing costs 539 654
--------- ----------
Total assets $ 256,830 $ 286,997
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolver loans $ 73,793 $ 80,340
Current portion of long-term debt -- 640
Customer deposits 3,042 3,601
Accounts payable 60,076 60,538
Accrued payroll 3,829 4,457
Other accrued expenses 14,587 24,479
--------- ----------
Total current liabilities 155,327 174,055
Deferred income taxes, net -- 3,639
Other long-term liabilities 4,880 3,535
--------- ----------
Total liabilities 160,207 181,229
Commitments and contingencies -- --
Stockholders' equity:
Common Stock, ($.001 par value; 60,000,000 shares authorized;
18,058,902 shares and 18,055,008 shares issued, respectively)
18 18
Class B Common Stock, ($1.00 par value; 26,026 shares authorized;
142 shares issued and outstanding) -- --
Additional paid-in capital 106,123 106,091
Retained earnings 29,428 39,311
Treasury stock, (4,108,703 and 4,134,141 shares,
respectively, at cost) (38,946) (39,652)
--------- ----------
Total stockholders' equity, net 96,623 105,768
--------- ----------
Total liabilities and stockholders' equity $ 256,830 $ 286,997
========= ==========
The accompanying notes are an integral part of the financial statements.
34
Whitehall Jewellers, Inc.
Statements of Stockholders' Equity
For the Years Ended January 31, 2005, 2004, and 2003
Class B Additional
Common Common Paid-in Retained Treasury
(in thousands) Stock Stock Capital Earnings Stock
- ----------------------------------------------- ------ ------- ---------- -------- --------
Balance at January 31, 2002 $ 17 $ -- $ 103,767 $ 38,331 $(28,970)
------ ------- ---------- -------- --------
Net income -- -- -- 9,694 --
Exercise of options 1 -- 2,028 -- (459)
Treasury stock repurchase -- -- -- -- (6,548)
Stock issued under Employee Stock Purchase Plan -- -- -- -- 40
------ ------- ---------- -------- --------
Balance at January 31, 2003 18 -- 105,795 48,025 (35,937)
Net loss -- -- -- (8,714) --
Exercise of options -- -- 296 -- 40
Treasury stock repurchase -- -- -- -- (3,831)
Stock issued under Employee Stock Purchase Plan -- -- -- -- 76
------ ------- ---------- -------- --------
Balance at January 31, 2004 18 -- 106,091 39,311 (39,652)
Net loss -- -- -- (9,883) --
Exercise of Options -- -- 12 -- --
Issuance of Shares -- -- (652) -- 652
Deferred Compensation -- -- 672 -- --
Stock issued under Employee Stock Purchase Plan -- -- -- -- 54
------ ------- ---------- -------- --------
Balance at January 31, 2005 $ 18 $ -- $ 106,123 $ 29,428 $(38,946)
------ ------- ---------- -------- --------
The accompanying notes are an integral part of the financial statements.
35
Whitehall Jewellers, Inc.
Statements of Cash Flows
For the Years Ended January 31, 2005, 2004 and 2003
(in thousands) 2005 2004 2003
- ------------------------------------------------------------------- --------- ----------- -----------
Cash flows from operating activities:
Net (loss) income $ (9,883) $ (8,714) $ 9,694
Adjustments to reconcile net income to net cash provided by
(used in)
operating activities:
Depreciation and amortization 12,834 12,209 11,216
Deferred Compensation 672 -- --
Loss on disposition of assets 343 435 146
Write-off of deferred loan cost -- 516 --
Changes in assets and liabilities:
(Increase) in accounts receivable, net (144) (923) (432)
Decrease (increase) in merchandise inventories, net of gold
consignment 22,470 (9,452) (3,143)
Decrease (increase) in other current assets 492 595 (246)
(Increase) in current income tax benefit (1,665) (2,294) --
(Decrease) increase in deferred taxes, net (1,084) (3,053) 1,997
(Decrease) increase in accounts payable (329) 36,100 (34,381)
(Decrease) increase customer deposits (559) 147 (509)
(Decrease) increase in income taxes payable -- (3,303) 46
(Decrease) increase in accrued payroll (628) 1,175 (2,988)
(Decrease) increase in other accrued expenses (10,019) 13,099 (1,944)
Increase in other long-term liabilities 80 397 478
--------- ----------- -----------
Net cash provided by (used in) operating activities 12,580 36,934 (20,066)
--------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (4,739) (11,509) (8,571)
--------- ----------- -----------
Net cash used in investing activities (4,739) (11,509) (8,571)
--------- ----------- -----------
Cash flows from financing activities:
Borrowing on revolver loan 960,168 1,007,773 1,065,170
Repayment of revolver loan (966,715) (1,021,923) (1,005,957)
Repayment of term loan -- (4,500) (5,250)
Purchase of gold to settle gold consignment -- -- (20,453)
Repayment of subordinated debt (640) -- --
Financing costs (282) (1,117) --
Proceeds from exercise of stock options 12 296 1,570
Proceeds from stock issued under the Employee Stock Purchase Plan 54 76 40
Purchase of treasury stock -- (3,831) (6,548)
(Decrease) in outstanding checks (133) (2,346) (628)
--------- ----------- -----------
Net cash (used in) provided by financing activities (7,536) (25,572) 27,944
--------- ----------- -----------
Net change in cash and cash equivalents 305 (147) (693)
--------- ----------- -----------
Cash and cash equivalents at beginning of period 1,901 2,048 2,741
--------- ----------- -----------
Cash and cash equivalents at end of period $ 2,206 $ 1,901 $ 2,048
--------- ----------- -----------
Supplemental disclosures of cash flow information:
Interest paid during year $ 4,062 $ 2,962 $ 2,515
Income taxes (refunded)/paid during year $ (1,829) $ 3,813 $ 3,809
--------- ----------- -----------
The accompanying notes are an integral part of the financial statements.
36
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 382 and 380 stores located in 38 states
operating in regional or superregional shopping malls as of January 31, 2005 and
January 31, 2004, respectively.
(2) Summary of significant accounting policies
CONSOLIDATION The consolidated financial statements include the accounts and
transactions of the Company and its subsidiaries. Intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES The preparation of financial statements in conjunction with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Valuation reserves for
inventory, accounts receivable, sales returns and deferred tax assets are
significant examples of the use of such estimates. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS Cash and Cash Equivalents includes cash on hand,
deposits in banks and any temporary cash investments purchased with an original
maturity of three months or less.
ACCOUNTS RECEIVABLE Accounts receivable consists primarily of customer credit
card charges and other non-recourse third party credit arrangements for
merchandise delivered to the customer for which the Company has not yet received
payment under the terms of the arrangements. Allowance for doubtful accounts
represents reserves established to address exposures to chargebacks on credit
receivables that have already been collected. The Company accrues an estimate of
expected chargebacks based on the Company's historical chargeback experience.
MERCHANDISE INVENTORIES Merchandise inventories are stated principally at the
lower of weighted average cost or market. Purchase cost is reduced to reflect
certain allowances and discounts received from merchandise vendors. Periodic
credits or payments from merchandise vendors in the form of consignment
buydowns, volume or other purchase discounts and other vendor consideration are
reflected in the carrying value of the inventory and recognized as a component
of cost of sales as the merchandise is sold. Additionally, to the extent it is
not addressed by established vendor return privileges, and if the amount of cash
consideration received from the vendor exceeds the estimated fair value of the
goods returned, that excess amount is reflected as a reduction in the purchase
cost of the inventory acquired. Allowances for inventory shrink, scrap and other
provisions are recorded based upon analysis and estimates by the Company.
Certain of the Company's agreements with merchandise vendors provide
credits for co-op advertising as calculated as a percentage of net merchandise
purchases. The Company adopted Emerging Issues Task Force ("EITF") Issue No.
02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" ("EITF 02-16") in fiscal year 2002, which
was effective for all arrangements entered into after December 31, 2002. In
accordance with EITF 02-16, the Company classifies certain merchandise vendor
allowances as a reduction to inventory cost unless evidence exists supporting an
alternative classification. The Company has recorded such merchandise vendor
allowances as a reduction of inventory costs.
37
The Company earned $2.4 million and $2.7 million of vendor allowances for
advertising during fiscal years 2004 and 2003, respectively. The Company records
such allowances as a reduction of inventory cost, and as the inventory is sold,
the Company will recognize a lower cost of sales.
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.
PROPERTY AND EQUIPMENT Property and equipment are carried at cost, less
accumulated depreciation and amortization. Furniture and fixtures are
depreciated on a straight-line basis over estimated useful lives ranging from
five to ten years. Software costs are amortized on a straight-line basis over
five years. Leasehold improvements are amortized on a straight-line basis over
the lesser of the remaining lease term or ten years.
Effective with the fourth quarter of fiscal year 2004, the Company has
capitalized straight-line rent incurred during the construction period of a
retail store as a leasehold improvement. Straight-line rent subsequent to the
construction period and prior to the store opening is recognized as expense. As
such, the Company recorded a cumulative adjustment of approximately $1.4 million
to its balance sheet to record the unamortized portion of rent capitalized
during the construction period from current and non-current accrued rents to
leasehold improvements.
Upon retirement or disposition of property and equipment, the applicable
cost and accumulated depreciation are removed from the accounts and any
resulting gains or losses are included in the results of operations.
LONG-LIVED ASSETS When facts and circumstances indicate potential impairment,
the Company evaluates the recoverability of long-lived asset carrying values,
using projections of undiscounted future cash flows over remaining asset lives.
When impairment is indicated, any impairment loss is measured by the excess of
carrying values over fair values.
GOODWILL Goodwill represents the excess of cost over the fair value of assets
acquired in purchase business combinations. Under the Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets," goodwill and indefinite
lived intangible assets are reviewed annually in the fourth quarter (or more
frequently if impairment indicators arise) for impairment. The Company adopted
SFAS 142 on February 1, 2002 and has discontinued the amortization of goodwill.
The Company reviewed goodwill for impairment as of January 31, 2005 and
determined that no impairment existed.
DEFERRED FINANCING COSTS In connection with the Company's financing agreements,
the Company incurred various financing costs, which have been deferred on the
Company's balance sheet and are amortized over the terms of the agreements and
included in interest expense.
ACCOUNTS PAYABLE Accounts payable include outstanding checks, which were
$4,033,000 and $4,166,000 as of January 31, 2005 and 2004, respectively.
ADVERTISING AND MARKETING EXPENSE The Company expenses the production costs of
advertising the first time the advertising takes place, except for
direct-response advertising, which is capitalized and amortized over the
expected period of future benefit. Advertising expense was $7,392,000 and
$8,505,000 for fiscal year 2004 and 2003, respectively.
38
Direct-response advertising consists primarily of special offers, fliers
and catalogs that include value-off coupons for the merchandise.
STORE PRE-OPENING EXPENSE Expenses associated with the opening of new store
locations are expensed in the period such costs are incurred.
LEASE EXPENSE The Company leases the premises for its office facilities and all
of its retail stores. Certain leases require increasing annual minimum lease
payments over the term of the lease. The Company's retail store lease term is
deemed to commence on the date the Company has access to and control of the
retail space, which is generally two months earlier than the date the Company
becomes legally obligated for rent payments. Minimum lease expense under these
agreements is recognized on a straight-line basis over the terms of the
respective leases.
Effective with the fourth quarter of fiscal year 2004, the Company has
capitalized straight-line rent incurred during the construction period of a
retail store as a leasehold improvement. Straight-line rent subsequent to the
construction period and prior to the store opening is recognized as expense. The
Company recorded a cumulative rent expense adjustment of approximately $187,000
to account for the straight-line rent subsequent to the construction period and
prior to the store opening. The Company deemed that this adjustment was
immaterial in relation to the results of its fourth quarter of fiscal year 2004
and for the fiscal years ended January 31, 2005, 2004 and 2003 respectively. In
addition, the Company recorded a cumulative adjustment of approximately $1.4
million to its balance sheet to record the unamortized portion of rent
capitalized during the construction period from current and non-current accrued
rents to leasehold improvements.
Virtually all leases covering retail stores provide for additional
contingent rentals based on a percentage of sales. These costs are expensed in
the period incurred.
SELF-INSURANCE The Company self-insures or retains a portion of the exposure for
losses related to workers compensation and general liability costs. It is the
Company's policy to record self-insurance reserves, as determined actuarially,
based upon claims filed and an estimate of claims incurred but not yet reported.
REVENUE RECOGNITION The Company recognizes revenue in accordance with the
Securities and Exchange Commission Staff Accounting Bulletin No. 104, "Revenue
Recognition." Revenue from merchandise sales is recognized when delivery has
occurred and title and risk of loss has transferred to the customer. The Company
accrues an estimate of expected returns, which have not yet been presented,
based on its historical returns experience, which is governed by the Company's
merchandise returns policy. Repair revenues are recognized when the service is
complete and the merchandise is delivered to the customer. The Company
recognizes revenue, net of cost reimbursed to an unrelated third party service
provider, from the sale of an extended service plan at the time the contract is
executed with the customer. The Company records revenue from layaway program
sales at the time the customer fulfills the terms of the program, including
receipt of full payment and delivery of the merchandise to the customer. The
Company charges a monthly fee to cover the costs of administration of inactive
layaways.
EARNINGS PER SHARE Basic earnings per share are computed by dividing net
earnings available to holders of common stock by the weighted average number of
shares of common stock outstanding. Diluted earnings per share are computed
assuming the exercise of all dilutive stock options. Under these assumptions,
the weighted average number of common shares outstanding is increased
accordingly.
INCOME TAXES Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax basis of assets and liabilities and
their financial reporting amounts based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are
39
expected to affect taxable earnings. A valuation allowance is established when
necessary to reduce deferred tax assets to the amount expected to be realized.
STOCK BASED COMPENSATION The FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure," during 2002. This Statement amends
Financial Accounting Standards Board 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 this statement 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 (loss) income and
earnings per share for the fiscal years ended January 31, 2005, 2004 and 2003 if
the Company had applied the fair value recognition provisions of SFAS 123, as
amended by SFAS 148, to stock-based employee compensation:
(in thousands, except per share amounts) 2005 2004 2003
- ------------------------------------------------------------------------- --------- -------- -------
Net (loss) income, as reported $ (9,883) $ (8,714) $ 9,694
Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of related tax effects (611) (921) (1,951)
--------- -------- -------
Pro forma net (loss) income $ (10,494) $ (9,635) $ 7,743
--------- -------- -------
Earnings per share:
Basic-as reported $ (0.71) $ (0.62) $ 0.67
Basic-pro forma $ (0.75) $ (0.68) $ 0.53
Diluted-as reported $ (0.71) $ (0.62) $ 0.64
Diluted-pro forma $ (0.75) $ (0.68) $ 0.51
--------- -------- -------
For purposes of pro forma net income and earnings per share calculations
in accordance with SFAS 123, for each option granted during the years ended
January 31, 2005, 2004 and 2003 the fair value is estimated using the
Black-Scholes option-pricing model. The assumptions used are as follows:
2005 2004 2003
--------- --------- ---------
Risk-free interest rate 3.5% 3.3% 4.1%
Dividend yield 0 0 0
Option life 5.5 years 5.5 years 5.5 years
Volatility 58% 60% 62%
--------- --------- ---------
The FASB issued SFAS No. 123 (revised 2004), "Share-based Payment." This
statement revised SFAS No. 123, and requires companies to expense the value of
employee stock options and similar awards. The effective date of this standard
is annual periods beginning after June 15, 2005.
Upon the adoption of SFAS No. 123R, the Company will be required to expense
stock options over the vesting period in its statement of operations. In
addition, the Company will need to recognize expense over the remaining vesting
period associated with unvested options outstanding for fiscal years beginning
after June 15, 2005. The Company is currently evaluating which transition method
to use and the financial statement effects in connection with the adoption of
SFAS No. 123R.
ACCOUNTING FOR GUARANTEES In November 2002, the FASB 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 Nos. 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 fiscal year ended January 31, 2003. Under its bylaws, the
Company has agreed to indemnify its officers and directors for certain events or
occurrences while the officer or director is serving, or was serving, at its
request in such capacity. The maximum potential amount of future payments the
Company could be required to make pursuant to these indemnification obligations
is unlimited; however, the Company has a directors and officers liability
insurance policy that, under certain circumstances, enables it to recover
40
a portion of certain future amounts paid. The Company has no liabilities
recorded for these obligations as of January 31, 2005; however, reference is
made to Note 16 to the financial statements with respect to legal contingencies.
(3) Common stock repurchase program
On July 23, 2002, the Company announced that the Board of Directors had
established a stock repurchase program covering up to $25.0 million of its
common stock. The stock repurchase program has expired. The Company repurchased
a total of 927,000 shares of common stock under the stock repurchase program at
a total cost of approximately $10.4 million. During fiscal 2004, the Company did
not repurchase any shares of its common stock under this program. During fiscal
2003, the Company repurchased 321,400 shares of common stock under the stock
repurchase program at a total cost of approximately $3.8 million. Shares
repurchased by the Company reduced the weighted average number of shares of
Common Stock outstanding for basic and diluted earnings per share calculations.
(4) Accounts receivable, net
As of January 31, 2005 and 2004, accounts receivable consisted of:
(in thousands) 2005 2004
- ----------------- ------- --------
Accounts receivable $ 3,083 $ 3,082
Less: allowance for doubtful accounts (395) (538)
------- --------
Accounts receivable, net $ 2,688 $ 2,544
------- --------
The Company has charged bad debt expense of $517,000, $973,000 and
$1,686,000 for doubtful accounts for the years ended January 31, 2005, 2004 and
2003, respectively.
(5) Merchandise inventories
As of January 31, 2005 and 2004, merchandise inventories consisted of:
(in thousands) 2005 2004
- ----------------- ---------- ---------
Raw materials $ 9,796 $ 9,827
Finished goods inventory 173,880 196,319
---------- ---------
Merchandise inventories $ 183,676 $ 206,146
========== =========
Raw materials primarily consist of diamonds, precious gems, semi-precious
gems and gold. Included within finished goods inventory were allowances for
inventory shrink, scrap and miscellaneous costs of $4,257,000 and $3,731,000 for
the years ended January 31, 2005 and 2004, respectively. As of January 31, 2005
and 2004, merchandise consignment inventories held by the Company that were not
included in the balance sheets total $82,819,000 and $91,635,000, respectively.
Certain merchandise procurement, distribution and warehousing costs are
allocated to inventory. As of January 31, 2005 and 2004, these amounts included
in inventory are $3,589,000 and $3,500,000, respectively. The amounts comprising
the overhead pool of capitalizable costs were $6,082,000, $5,521,000 and
$5,566,000 for the years ended January 31, 2005, 2004 and 2003, respectively.
41
(6) Property and equipment, net
As of January 31, 2005 and 2004, property and equipment included:
(in thousands) 2005 2004
- ------------------------------------ ---------- ---------
Furniture and fixtures, and software $ 89,373 $ 86,506
Leasehold improvements 35,830 35,098
---------- ---------
Property and equipment 125,203 121,604
Accumulated depreciation and amortization (71,003) (60,656)
---------- ---------
Property and equipment, net $ $54,200 $ 60,948
---------- ---------
Depreciation expense was $12,116,000, $11,760,000 and $10,704,000 for the
years ended January 31, 2005, 2004, and 2003, respectively.
The Company has recognized impairment charges included in costs of sales,
measured as the excess of net book value of furniture, fixtures and leasehold
improvements over their fair values. When facts and circumstances indicate
potential impairment, the Company evaluates the recoverability of long-lived
asset carrying values, using projections of undiscounted future cash flows over
remaining asset lives. When impairment is indicated, any impairment loss is
measured by the excess of carrying values over fair values. The Company recorded
impairment charges of $422,000 during fiscal year 2004, which is included with
depreciation and amortization in the statement of cash flows. The Company did
not record any impairment charges for the fiscal years ended January 31, 2004
and 2003.
The amount of internally developed software capitalized during the year
ending January 31, 2005 and 2004 was $27,000 and $115,000, respectively, and is
included in furniture, fixtures and software. Amortization of capitalized
software in each of the years ended January 31, 2005 and 2004 was $50,000, and
$69,000 in the year ended January 31, 2003. The remaining unamortized costs of
internally developed software included in property and equipment as of January
31, 2005 and 2004 was $206,000 and $229,000, respectively.
(7) Goodwill, net
On September 10, 1998, the Company acquired substantially all of the assets of
36 jewelry stores operating under the Jewel Box name from Carlyle & Co. Jewelers
and its affiliates, headquartered in Greensboro, North Carolina. The Company
purchased all associated inventory, accounts receivable and fixed assets for
approximately $22 million (including fees and other costs) in cash (the
"Acquisition"). The Acquisition has been accounted for using the purchase method
of accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair values at the
date of Acquisition. The excess of the purchase price over the fair values of
the net assets acquired was $6.6 million and has been recorded as goodwill.
The Company adopted the provisions of SFAS 142 effective February 1, 2002
and has discontinued the amortization of goodwill. The Company has no other
separately identifiable intangible assets. Pursuant to this standard, the
Company has completed an assessment of the categorization of its existing
goodwill. In addition, the Company completed an analysis of the fair value using
both a discounted cash flow analysis and a market multiple approach and has
determined that no impairment of goodwill should be recorded. The carrying
amount of goodwill as of January 31, 2005 and January 31, 2004 was $5,662,000.
(8) Other long-term liabilities
Included in long-term liabilities at January 31, 2005 and 2004 are $4,880,000
and $3,535,000, respectively, of deferred lease costs. Effective with the fourth
quarter of fiscal year 2004, the Company has capitalized straight-line rent
incurred during the construction period of a retail store as a leasehold
improvement. Straight-line rent subsequent to the construction period and prior
to the
42
store opening is recognized as expense. As such, the Company recorded a
cumulative adjustment of approximately $1.3 million to its balance sheet to
record the unamortized portion of rent capitalized during the construction
period from non-current accrued rent to leasehold improvements.
(9) Financing arrangements
Effective July 29, 2003, the Company entered into a Second Amended and Restated
Revolving Credit and Gold Consignment Agreement (the "Credit Agreement"), with
certain members of its prior bank group to provide for a total facility of up to
$125.0 million through July 28, 2007. Interest rates and the commitment fee
charged on the unused portion of the facility float based upon the Company's
financial performance as calculated quarterly. 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, including
restrictions on investments, payment of dividends, assumption of additional
debt, acquisitions and divestitures. The Credit Agreement also requires the
Company to maintain a specified ratio of the sum of earnings before interest,
taxes, depreciation and amortization plus minimum store rent to the sum of
minimum store rent plus cash interest expense. As of January 31, 2005, the
calculated revolver availability, pursuant to the Credit Agreement, was $95.2
million. The Company had $73.8 million of outstanding borrowings under the
revolving loan facility as of January 31, 2005.
The Company amended the Credit Agreement effective April 6, 2005 in order
to, among other things, (i) provide for additional availability under the
revolving credit facility through the funding of a $15.0 million additional
facility from LaSalle Bank National Association ("LaSalle") and Back Bay Capital
Funding LLC ("Back Bay") which was funded at closing and will be due July 31,
2006, (ii) add a discretionary overadvance subfacility from LaSalle in the
amount of $2 million, (iii) terminate the precious metal consignment facility,
(iv) change the maturity date for all outstanding amounts under the Credit
Agreement from July 28, 2007 to July 31, 2006, (v) increase the interest rate
payable on LIBOR loans from 2.50% to 3.00% above LIBOR, (vi) amend the Fixed
Charge Coverage Ratio (as defined in the Credit Agreement) covenant not to be
less than 0.75:1.00 as measured at the last day of each of the months during the
period of April 2005 to October 2005, 0.80:1.00 at November 30, 2005 and
1.00:1.00 as measured at the last day of each of the months from December 2005
and each month thereafter, (vii) add additional financial covenants related to
Minimum Accounts Payable, Capital Expenditures and Minimum Borrowing
Availability of $2.0 million (each as defined in the Credit Agreement), (viii)
amend the calculation of the borrowing base to lower the advance rate on
inventory for certain periods and to modify the types of inventory and accounts
receivable included, (ix) add a reserve in the amount of $7.0 million to the
borrowing base pending satisfactory completion of a field examination report by
LaSalle and Back Bay and (x) add a reserve in the amount of $5.0 million to the
borrowing base effective February 1, 2006. The Company expects to have adequate
availability under its revolving credit facility throughout fiscal year 2005.
However, should actual results differ unfavorably from the Company's current
forecast, the availability under its revolving credit facility may be adversely
impacted.
The Company amended the Credit Agreement effective January 29, 2005 in
order to, among other things, (i) add a reserve in the amount of $15.0 million
to the Borrowing Base, and (ii) amend the Fixed Charge Coverage Ratio not to be
less than 1.00:1.00 as measured at January 31, 2005 and 1.25:1.00 at the end of
each fiscal quarter thereafter.
The Company amended the Credit Agreement effective March 23, 2004 in order
to, among other things, (i) add a Layaway Reserve (as defined in the Credit
Agreement) to the Borrowing Base, (ii) add and amend certain financial
covenants, including amending the Fixed Charge Coverage Ratio and adding a
covenant to maintain a Net Worth (as defined in the Credit Agreement) of at
least $90.0 million at January 31, 2005, (iii) cap the borrowings under the
facility to a maximum of $85.0 million for at least thirty consecutive calendar
days during the period December 15, 2004 through and including February 15,
2005, (iv) increase the interest rate at which LIBOR based borrowings are
available under the Credit Agreement to LIBOR plus 2.5% through April 30, 2005,
(v) set the Commitment Fee Rate (as defined in the Credit Agreement) at 0.5%
through April 30, 2005,
43
and (vi) set the Standby Letter of Credit Fee Rate (as defined in the Credit
Agreement) at 2.0% through April 30, 2005.
Subject to the contingencies identified in Note 16 to the financial
statements and other risks, including those identified in Forward-Looking
Statements, management expects that the cash flow from operating activities and
funds available under the Company's revolving loan facility should be sufficient
to support the Company's current new store expansion program and seasonal
working capital needs.
The Company intends to contest vigorously the putative class action
complaints and the shareholder derivative complaint described in Note 16 to the
financial statements and exercise all of its available rights and remedies.
Given that these class action cases and the shareholder derivative complaint are
in their early stages and 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 these actions could have a material
adverse effect on the Company's results of operations, financial condition
and/or liquidity.
The Company was in compliance with the financial covenants of the amended
Credit Agreement as of January 31, 2005. The Company's business is highly
seasonal, and historically, income generated in the fourth fiscal quarter ending
each January 31 represents all or a significant majority of the income generated
during the fiscal year. The Fixed Charge Coverage Ratio is sensitive to changes
in the level of the Company's profitability. Should actual financial results
differ unfavorably from the Company's current forecast, such results may have an
adverse impact on the Fixed Charge Coverage Ratio. If an event of default occurs
pursuant to the Credit Agreement, the Company may be required to negotiate
relief with its lenders or to seek new financing. There is no assurance that new
financing arrangements would be available on acceptable terms or at all. If the
existing lenders were to cease funding under the revolving loan facility or
require immediate repayment and if the Company were not able to arrange new
financing on acceptable terms, this would have a material adverse effect on the
Company, which could affect the underlying valuation of its assets and
liabilities.
REVOLVER LOAN The revolving loan facility under the Credit Agreement is
available up to a maximum of $125.0 million and is limited by a borrowing base
computed based on the value of the Company's inventory and accounts receivables.
Availability under the revolver is based on amounts outstanding thereunder.
Interest rates and commitment fees on the unused facility float based on the
Company's quarterly financial performance.
The interest rates for borrowings under the Credit Agreement are, at the
Company's option, based on LIBOR rates or the United States banks' prime rate.
Interest is payable monthly for prime borrowings and upon maturity for LIBOR
borrowings.
The interest expense under the revolver facility for the years ended
January 31, 2005, 2004 and 2003 was $3,981,000, $2,900,000 and $3,008,000,
respectively, reflecting a weighted average interest rate of 4.4%, 3.2% and
4.2%, respectively.
GOLD CONSIGNMENT FACILITY During fiscal year 2004, the Company had the
opportunity to enter into gold consignments with certain third party financial
institutions. The Company had no obligations under the gold consignment
facility. In the event of a consignment of gold, 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
44
all of its consigned inventory arrangements with its other vendors. Pursuant to
the Third Amendment to the Credit Agreement, this gold consignment facility has
been terminated.
SUBORDINATED NOTES During the third quarter of fiscal 2004, the Company repaid
the Series C Senior Notes due 2004 (the "Series C Notes") totaling $640,000 at
final scheduled maturity. The interest rate for the Series C Notes was 12.15%
per annum payable in cash, with interest payments due quarterly. Interest
expense was $58,000 for the year ended January 31, 2005, and $78,000 for each of
the years ended January 31, 2004 and 2003, respectively.
The carrying amount of the Company's borrowings under the Credit Agreement
and other long-term borrowings approximates fair value based on current market
rates.
(10) Deferred financing costs
In conjunction with the Company's refinancing of its prior credit agreement with
certain members of its prior bank group, deferred financing costs of $516,000
related to the prior credit facility were written off and included in interest
expense in fiscal 2003. Costs associated with the second amended and restated
credit facility totaling approximately $1.0 million are being amortized over the
term of the Credit Agreement. Amortization expense in the years ended January
31, 2005, 2004 and 2003 was $298,000, $926,000 and $511,000, respectively.
(11) Income taxes
The temporary differences between the tax basis of assets and liabilities and
their financial reporting amounts that give rise to a significant portion of the
deferred tax asset and deferred tax liability and their approximate tax effects
are as follows, as of January 31:
2005 2004
--------------------- -------------------------
Temporary Tax Temporary
(in thousands) Difference Effect Difference Tax Effect
- ------------------------------- ---------- ------- ---------- ----------
Merchandise inventories $ 2,216 $ 864 $ 1,988 $ 775
Accrued rent 4,295 1,675 3,798 1,481
Accounts receivable 674 263 872 340
Sales returns 886 345 920 359
Vacation pay 1,140 445 1,154 450
Severance -- -- 900 351
Litigation reserve -- -- 8,572 3,342
Workers' compensation reserve 1,151 449 774 302
State and local government fees 2,185 852 1,926 752
Store closing payables -- -- 121 47
Other 19 8 4 1
Net operating loss carryforward 11,500 4,485 1,971 769
AMT credit carryforward 110 43 53 21
---------- ------- -------- --------
Total deferred tax asset 24,176 9,429 23,053 8,990
---------- ------- -------- --------
Property and equipment, net 10,498 4,094 14,181 5,530
Goodwill 2,008 783 1,584 618
Valuation allowance 3,508 1,368 1,971 769
Other 68 27 -- --
---------- ------- -------- --------
Total deferred tax liability (16,082) (6,272) (17,736) (6,917)
---------- ------- -------- --------
Net deferred tax asset $ 8,094 $ 3,157 $ 5,317 $ 2,073
---------- ------- -------- --------
45
The net current and non-current components of deferred income taxes recognized
in the balance sheet at January 31 are as follows:
(in thousands) 2005 2004
- -------------------------------- -------- --------
Net current assets $ 2,255 $ 5,712
Net non-current asset (liability) 902 (3,639)
-------- --------
Net deferred tax asset $ 3,157 $ 2,073
-------- --------
At January 31, 2005, the Company had a state net operating loss
carryforward of $37,743,000. This net operating loss will expire in tax years
2006 to 2024. A valuation allowance of $1,368,000 and $769,000 for the years
ending January 31, 2005 and 2004, respectively, has been established to reflect
management's belief that based on the nature of the net operating losses, the
jurisdictions involved and consideration of current tax planning strategies, it
is currently unlikely that the deferred tax associated with certain net
operating loss carryforwards will be fully realized prior to expiration.
At January 31, 2005, the Company had $8.3 million of federal net operating
loss carryforwards available. The deferred tax asset for net operating loss
carryforwards is reviewed for recoverability based on historical taxable income,
the expected reversals of existing temporary differences and management's
forecast of future taxable income. Management has concluded that no valuation
allowance was necessary on the federal net operating loss carryforward and
remaining net deferred tax assets as utilization is considered more likely than
not to occur. However, should actual taxable income for fiscal year 2005 differ
unfavorably in comparison to management's forecast of future taxable income, a
valuation allowance against the full amount of the federal net operating loss
may be required.
The income tax expense for the years ended January 31, consists of the
following:
(in thousands) 2005 2004 2003
- ---------------------------------- -------- -------- --------
Current tax (benefit) expense $ (5,702) $ (1,636) $ 3,795
Deferred tax (benefit) expense 1,349 (3,225) 2,175
-------- -------- --------
Total income tax (benefit) expense $ (4,353) $ (4,861) $ 5,970
-------- -------- --------
The provision for income taxes on income differs from the statutory tax expense
computed by applying the federal corporate tax rate of 34%, 34% and 35% for the
years ended January 31, 2005, 2004 and 2003, respectively.
(in thousands) 2005 2004 2003
- ------------------------------------------- -------- --------- -------
Taxes computed at statutory rate $ (4,840) $ (4,616) $ 5,482
State income tax (benefit) expense, net of
federal tax effect (800) (1,032) 499
Valuation expense 599 769 --
Other 688 18 (11)
-------- --------- -------
Total income tax (benefit) expense $ (4,353) $ (4,861) $ 5,970
-------- --------- -------
Other includes amounts recorded for federal and certain state tax reserves and
certain permanent tax differences.
46
(12) Common stock
Following are the number of shares issued and outstanding for each of the
Company's classes of Common Stock as of January 31:
Class B
Common Stock Common Stock Treasury
(in thousands) (par value $.001) (par value $1.00) Stock
- ------------------------------------- ----------------- ----------------- ----------
Balance at January 31, 2002 17,809,830 142 (3,200,209)
Exercise of Options/Restricted Shares 211,138 -- (21,418)
Purchase of Treasury Stock -- -- (605,600)
Issuance of Stock -- -- 4,590
---------- ------ ----------
Balance at January 31, 2003 18,020,968 142 (3,822,637)
Exercise of Options/Restricted Shares 34,040 -- --
Purchase of Treasury Stock -- -- (321,400)
Issuance of Stock -- -- 9,896
---------- ------ ----------
Balance at January 31, 2004 18,055,008 142 (4,134,141)
Exercise of Options/Restricted Shares 3,894 -- 18,030
Issuance of Stock -- -- 7,408
---------- ------ ----------
Balance at January 31, 2005 18,058,902 142 (4,108,703)
---------- -- ----------
Each share of Class B Common Stock is exchangeable into common stock on a
35.4 for 1 basis. Each share of Common Stock is entitled to one vote, and each
share of Class B Common Stock is entitled to 35.4 votes on each matter submitted
to stockholders for vote.
(13) Earnings per common share
Basic earnings per share are computed by dividing net earnings available to
holders of common stock by the weighted average number of shares of common stock
outstanding. Diluted earnings per share are computed assuming the exercise of
all dilutive stock options. Under these assumptions, the weighted average number
of common shares outstanding is increased accordingly.
The following table reconciles the numerators and denominators of the
basic and diluted earnings per share ("EPS") computations for the years ended
January 31:
2005 2004 2003
---------------------- --------------------- -------------------
(in thousands, except per share amounts) Basic Diluted Basic Diluted Basic Diluted
- ---------------------------------------- -------- -------- -------- -------- ------- -------
EPS Numerator:
Net (loss) income $ (9,883) $ (9,883) $ (8,714) $ (8,714) $ 9,694 $ 9,694
EPS Denominator:
Average common shares outstanding: 13,943 13,943 14,098 14,098 14,545 14,545
Effect of dilutive securities:
Stock options -- -- -- -- -- 493
-------- -------- -------- -------- ------- -------
Total shares 13,943 13,943 14,098 14,098 14,545 15,038
-------- -------- -------- -------- ------- -------
Earnings per share $ (0.71) $ (0.71) $ (0.62) $ (0.62) $ 0.67 $ 0.64
-------- -------- -------- -------- ------- -------
Stock options excluded from the
calculation of diluted earnings per share
(due to their antidilutive effect on the
calculation) -- 2,713 -- 2,909 -- 606
-------- -------- -------- -------- ------- -------
(14) Employee benefit plans
Effective October 1, 2001, the Company established an Employee Stock Purchase
Plan ("ESPP") for the benefit of substantially all employees. Employees become
eligible to participate in the ESPP after six consecutive months of employment
and if the employee's customary employment is more than 20 hours per week.
Through employee contributions to the ESPP, the employee can purchase common
stock of the Company at 90% of the market value.
Effective October 1, 1997, the Company established a 401(k) Plan (the
"Plan") for the benefit of substantially all employees, the assets of which are
not commingled with Company funds.
47
Employees become eligible to participate in the Plan after one year of service,
which is defined as at least one year of employment and 1,000 hours worked in
that year. The Company may make discretionary contributions to the Plan. No such
discretionary contributions have been made since inception.
In 1988, the Company established an Employee Stock Ownership Plan (the
"ESOP"), which is a noncontributory plan established to acquire shares of the
Company's Class B Common Stock for the benefit of all employees. In conjunction
with completion of the Company's initial public offering and recapitalization of
its financing arrangements, the Company restructured the ESOP. As of January 31,
1998, all remaining shares had been released to participants. As long as the
stock is publicly traded the Company is not required to repurchase shares from
ESOP participants. However, if the Company were to cease being public, the
Company's shares held by the ESOP would be subject to redemption at market
value. As of January 31, 2005 and 2004, there were approximately 380,000 and
425,000 Company shares with a market value of approximately $2.7 million and
$3.9 million held by ESOP, respectively. The only remaining activity of the ESOP
is to make distributions to existing participants or beneficiaries.
(15) Stock plans
In April 1996, the Company approved the 1996 Long-Term Incentive Plan (the "1996
Plan"). Under the 1996 Plan, the Company may grant incentive stock options
("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, or nonqualified stock options.
In addition, the Company may grant stock appreciation rights ("SARs"),
bonus stock awards which are vested upon grant, stock awards which may be
subject to a restriction period and specified performance measures and
performance shares. Performance shares are rights, contingent upon the
attainment of the performance measures within a specified performance period, to
receive one share of common stock, which may be restricted, or the fair market
value of such performance share in cash. No compensatory options have been
granted under the 1996 Plan during fiscal 2004. A total of 1,156,784 shares of
common stock have been reserved for issuance under the 1996 Plan. Grants may be
made under the 1996 Plan during the ten years after its effective date. Options
granted under the 1996 Plan generally vest in four equal annual installments and
expire ten years after the date of grant. Options and shares granted under the
plans are subject to forfeiture based on, among other things, the nature and
timing of the termination of employment.
The Company approved the 1997 Long-Term Incentive Plan (the "1997 Plan")
on February 24, 1997 and the stockholders adopted the 1997 Plan on June 5, 1997.
On June 8, 1999, June 1, 2000 and June 11, 2002, the stockholders adopted
amendments to the 1997 Plan to increase the common stock reserved for issuance
under the 1997 Plan. Under the 1997 Plan, the Company may grant ISOs or
nonqualified stock options. The 1997 Plan also provides for the grant of SARs,
bonus stock awards which are vested upon grant, stock awards which may be
subject to a restriction period and specified performance measures, and
performance shares. Performance shares are rights, contingent upon the
attainment of performance measures within a specified performance period, to
receive one share of common stock, which may be restricted, or the fair market
value of such performance share in cash. No compensatory options have been
granted under the 1997 Plan during fiscal 2004. A total of 2,500,000 shares of
Common Stock have been reserved for issuance under the 1997 Plan. Grants may be
made under the 1997 Plan during the ten years after its effective date. Options
granted under the 1997 Plan generally vest in three or four equal annual
installments and expire ten years after the date of grant.
In December 1998, the Company adopted the 1998 Non-Employee Director Stock
Option Plan (the "1998 Plan"), effective February 1, 1998. Under the 1998 Plan,
non-employee directors may elect to receive all or a designated amount of their
directors' fee in the form of stock options. A total of 37,500 shares have been
reserved for issuance under the 1998 Plan. Grants may be made during
48
the ten years after its effective date. Options granted under the 1998 Plan vest
at the end of the quarter in which the date of grant occurs and expire ten years
after the date of grant. During fiscal 2004 and fiscal 2003, no options were
granted under the 1998 Plan.
Grants of restricted stock, which generally are subject to a restriction
period from the date of grant before vesting and receiving the shares without
restriction, have been awarded to certain officers and key employees under the
1997 plan. During fiscal year 2004, restrictions on 7,799 shares of restricted
stock previously granted to officers and employees lapsed. There were 105,501
shares of restricted stock outstanding at January 31, 2005, for which
restrictions have not yet lapsed. Unearned deferred compensation expense with
respect to the restricted stock grants was $711,000 at January 31, 2005, which
is included in additional paid-in capital. Deferred compensation expense was
$672,000 in fiscal year 2004. During fiscal year 2004, 98,112 shares of
restricted stock were granted with a weighted average fair value of $8.46 per
share.
Option activity for the years ended January 31, 2003, 2004 and 2005 was as
follows:
Weighted-Average Options
Shares Exercise Price Exercisable
--------- ---------------- -----------
Balance at January 31, 2002 2,760,958 $ 11.36 1,566,879
--------- ------- ---------
Options granted 394,489 13.58
Options exercised (206,198) 8.89
Options canceled (22,257) 14.16
--------- ------- ---------
Balance at January 31, 2003 2,926,992 $ 11.81 2,105,495
--------- ------- ---------
Options granted 72,834 10.36
Options exercised (34,066) 7.60
Options canceled (246,596) 11.19
--------- ------- ---------
Balance at January 31, 2004 2,719,164 $ 11.88 2,337,028
--------- ------- ---------
Options granted 9,110 9.41
Options exercised (1,626) 7.52
Options canceled (31,229) 11.67
--------- ------- ---------
Balance at January 31, 2005 2,695,419 $ 11.87 2,545,752
--------- ------- ---------
The weighted-average fair value of 9,110, 72,834 and 394,489 options
granted was $9.41, $10.36 and $13.58 for the years ended January 31, 2005, 2004
and 2003, respectively.
The following table summarizes the status of outstanding stock options as
of January 31, 2005:
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------
Number of Weighted Average Number of
Options Remaining Weighted-Average Options Weighted-Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------ ----------- ---------------- ---------------- ----------- ----------------
$6.753 - $9.290 458,236 5.59 $ 8.018 422,954 $ 7.965
$9.333 - $9.333 978,550 1.26 9.333 978,550 9.333
$9.525 - $12.165 676,654 4.84 11.143 641,157 11.214
$12.167 - $24.250 581,979 5.77 20.035 503,091 20.749
--------- ---- -------- --------- -------
$6.753 - $24.250 2,695,419 3.87 $ 11.874 2,545,752 $11.836
--------- ---- -------- --------- -------
(16) Commitments and contingencies
During fiscal year 2005, the Company entered into a letter agreement with
one of its merchandise vendors. Under the terms of this letter agreement, the
merchandise vendor has the sole option to require the Company to purchase
certain consignment goods up to a maximum of $2,010,000, based on current
prices, held by the Company as of February 1, 2006.
On February 12, 2004, a putative class action complaint captioned Greater
Pennsylvania Carpenters Pension Fund, et al. v. Whitehall Jewellers, Inc. et
al., Case No. 04 C 1107, 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 complaint makes reference to the litigation filed by
Capital Factors, Inc. ("Capital Factors") and settled as disclosed in the
Company's Quarterly Report
49
on Form 10-Q for the fiscal quarter ended October 31, 2004 and to the Company's
November 21, 2003 announcement that it had discovered violations of Company
policy by the Company's Executive Vice President, Merchandising, with respect to
Company documentation regarding the age of certain store inventory. The
complaint further makes reference to the Company's December 22, 2003
announcement that it would restate results for certain prior periods. The
complaint purports to allege that the Company and its officers made false and
misleading statements and falsely accounted for revenue and inventory during the
putative class period of November 19, 2001 to December 10, 2003. The complaint
purports to allege violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 ("1934 Act") and Rule 10b-5 promulgated thereunder.
On February 18, 2004, a putative class action complaint captioned Michael
Radigan, et al., v. Whitehall Jewellers, Inc. et al., 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, charging
violations of Sections 10(b) and 20(a) of the 1934 Act and Rule 10b-5
promulgated thereunder, and alleging that the Company and its officers made
false and misleading statements and falsely accounted for revenue and inventory
during the putative class period of November 19, 2001 to December 10, 2003. The
factual allegations of this complaint are similar to those made in the Greater
Pennsylvania Carpenters Pension Fund complaint discussed above.
On February 20, 2004, a putative class action complaint captioned Milton
Pfeiffer, et al., v. Whitehall Jewellers, Inc. et al., 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, charging
violations of Sections 10(b) and 20(a) of the 1934 Act and Rule 10b-5
promulgated thereunder, and alleging that the Company and its officers made
false and misleading statements and falsely accounted for revenue, accounts
payable, inventory, and vendor allowances during the putative class period of
November 19, 2001 to December 10, 2003. The factual allegations of this
complaint are similar to those made in the Greater Pennsylvania Carpenters
Pension Fund complaint discussed 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 granted the
plaintiffs up to 60 days to file an amended consolidated complaint. The Court
also 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, et al., v. Whitehall Jewellers, Inc. et al., 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, charging
violations of Sections 10(b) and 20(a) of the 1934 Act and Rule 10b-5
promulgated thereunder, and alleging that the Company and its officers made
false and misleading statements and falsely accounted for revenue, accounts
payable, inventory, and vendor allowances during the putative class period of
November 19, 2001 to December 10, 2003. The factual allegations of this
complaint are similar to those made in the Greater Pennsylvania Carpenters
Pension Fund complaint discussed 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,
Whitehall filed a motion to dismiss the consolidated amended complaint. 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
50
complaint. Briefing on this motion is not yet complete. If the Company is
successful on its motion, the class in this action may be limited to the period
November 19, 2001 through June 6, 2002.
On June 15, 2004, a shareholder derivative action complaint captioned
Richard Cusack v. Hugh Patinkin, et al., 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 discussed
above. The plaintiff has agreed to the filing of a joint motion to stay the
proceedings in this case pending the District Court's determination of the
Defendants' motions to dismiss in the federal securities class actions. On
September 8, 2004, the Court granted a stay motion without argument. The lawsuit
has been stayed through June 30,2005.
On February 22, 2005, a verified derivative complaint captioned Myra
Cureton v. Richard K. Berkowitz, et. al., 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 Richard
Cusack and Greater Pennsylvania Carpenters Pension Fund complaints discussed
above. The defendants' time to answer or otherwise plead has not yet come.
The Company intends to vigorously contest these putative class action
complaints and the derivative complaints and exercise all of its available
rights and remedies. Given that these cases are in their early stages, 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 or liquidity.
As previously disclosed in September 2003, 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.
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.
51
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, 2005 are as follows:
Years ending January 31 (in thousands) Amount
- -------------------------------------- ---------
2006 $ 31,142
2007 29,853
2008 28,322
2009 25,053
2010 21,245
Thereafter 48,647
---------
Total future minimum rent obligations $ 184,262
---------
Total rental expense for all operating leases for the years ended January 31, is
as follows:
(in thousands) 2005 2004 2003
- ------------------------- ------- ------- -------
Rental expense:
Minimum $30,736 $29,750 $28,437
Rentals based on sales 570 761 923
Other 151 387 431
------- ------- -------
Total rental expense $31,457 $30,898 $29,791
------- ------- -------
(17) Related party transactions
At the end of fiscal year 2004, Messrs. Hugh Patinkin, John Desjardins and
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. 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 Company's Board of Directors. One of
Norman Patinkin's adult children is a director and chief executive officer of
Double P Corporation. Messrs. Hugh Patinkin, John 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, John 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 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 as compared to approximately $174,000 of such
purchases in fiscal year 2003. 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
52
and store managers, which is less favorable in comparison to the discount that
was offered under the discontinued program.
(18) 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 2004 and 2003. In the opinion of management,
this quarterly information has been prepared on a basis consistent with the
Company's audited financial statements appearing elsewhere in this annual
report, and reflects adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of such unaudited quarterly results when read
in conjunction with the audited financial statements and notes thereto.
2004 Quarters Ended
---------------------------------------------------------------------------
(in thousands, except per share data) April 30, 2004 July 31, 2004 October 31, 2004 January 31, 2005
- ------------------------------------- -------------- ------------- ---------------- ----------------
Net sales $ 73,028 $ 72,284 $ 63,340 $ 125,554
Gross profit 24,276 24,064 17,559 46,937
Income (loss) from operations (5,413) (4,552) (10,593) 10,687
Net income (loss) (3,696) (3,183) (8,308) 5,304
Diluted earnings per share:
Net income (loss) $ (0.27) $ (0.23) $ (0.60) $ 0.38
------- -------- ------- ---------
2003 Quarters Ended
---------------------------------------------------------------------------
(in thousands, except per share data) April 30, 2003 July 31, 2003 October 31, 2003 January 31, 2004
- ------------------------------------- -------------- ------------- ---------------- ----------------
Net sales $ 69,149 $ 72,732 $ 66,179 $ 136,595
Gross profit 23,111 24,192 20,880 58,850
Income (loss) from operations (3,659) (3,031) (9,661) 6,886
Net income (loss) (2,787) (2,803) (7,408) 4,284
Diluted earnings per share:
Net income (loss) $ (0.20) $ (0.20) $ (0.53) $ 0.30
-------- -------- -------- ---------
In the fourth quarter of fiscal 2003, the Company accrued a litigation
reserve of $8.6 million for the consolidated Capital Factors actions and the
United States Attorney and SEC investigation.
(19) Sales by merchandise category
The following table sets forth our percentage of total merchandise sales
by category for the following periods:
FISCAL YEAR ENDED JANUARY 31,
------------------------------
2003 2004 2005
------ ------ ------
Diamonds 66.4% 65.3% 65.6%
Gold 17.4 15.6 15.6
Precious/Semi-Precious 14.2 14.6 13.1
Watches 2.0 4.5 5.7
----- ----- -----
Total Merchandise Sales 100.0% 100.0% 100.0%
===== ===== =====
Along with our merchandise assortments, we provide jewelry repair services to
our customers (sales from which represented 2.5%, 2.4%, and 2.7% of net sales in
the fiscal years ended January 31, 2005, 2004 and 2003, respectively) and
jewelry service plans provided through a third party provider (sales from which
represented 2.9%. 2.4%, 2.0% in the fiscal years ended January 31, 2005, 2004
and 2003, respectively). Jewelry repair services are provided through
independent jewelers under contract.
53
(20) Subsequent events
On March 30, 2005, Hugh M. Patinkin, the Company's Chairman and Chief Executive
Officer, passed away unexpectedly. The Company's Board of Directors appointed
Daniel H. Levy, a member of the Company's Board of Directors since 1997, as
Chairman and Lucinda M. Baier, the Company's President and Chief Operating
Officer as Chief Executive Officer, President and Chief Operating Officer.
The Company amended the Credit Agreement effective April 6, 2005 in order
to, among other things, (i) provide for additional availability under the
revolving credit facility through the funding of a $15.0 million additional
facility from LaSalle Bank National Association ("LaSalle") and Back Bay Capital
Funding LLC ("Back Bay") which was funded at closing and will be due July 31,
2006, (ii) add a discretionary overadvance subfacility from LaSalle in the
amount of $2 million, (iii) terminate the precious metal consignment facility,
(iv) change the maturity date for all outstanding amounts under the Credit
Agreement from July 28, 2007 to July 31, 2006, (v) increase the interest rate
payable on LIBOR loans from 2.50% to 3.00% above LIBOR, (vi) amend the Fixed
Charge Coverage Ratio (as defined in the Credit Agreement) covenant not to be
less than 0.75:1.00 as measured at the last day of each of the months during the
period of April 2005 to October 2005, 0.80:1.00 at November 30, 2005 and
1.00:1.00 as measured at the last day of each of the months from December 2005
and each month thereafter, (vii) add additional financial covenants related to
Minimum Accounts Payable, Capital Expenditures and Minimum Borrowing
Availability of $2.0 million (each as defined in the Credit Agreement), (viii)
amend the calculation of the borrowing base to lower the advance rate on
inventory for certain periods and to modify the types of inventory and accounts
receivable included, (ix) add a reserve in the amount of $7.0 million to the
borrowing base pending satisfactory completion of a field examination report by
LaSalle and Back Bay and (x) add a reserve in the amount of $5.0 million to the
borrowing base effective February 1, 2006. The Company expects to have adequate
availability under its revolving credit facility throughout fiscal year 2005.
However, should actual financial results differ unfavorably from the Company's
current forecast, the availability under its revolving credit facility may be
adversely impacted.
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of,
Whitehall Jewellers, Inc.:
Our audits of the financial statements, of management's assessment of the
effectiveness of internal control over financial reporting and of the
effectiveness of internal control over financial reporting referred to in our
report dated April 13, 2005 appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedule listed in Item 8 of this
Form 10-K (Schedule II). 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.
PricewaterhouseCoopers LLP
Chicago, Illinois
April 13, 2005
55
WHITEHALL JEWELLERS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
TWELVE MONTHS ENDED JANUARY 31, 2003, 2004 AND 2005
(DOLLARS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ---------- --------- ----------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
DESCRIPTION OF PERIOD EXPENSES DEDUCTION OF PERIOD
- ------------------------------------- --------- --------- --------- ----------
Twelve months ended 1/31/03
Allowance for doubtful accounts $ 673 $ 1,686 $ 1,815 $ 544
======== ======== ======== ========
Inventory allowance 3,579 7,480 7,492 3,567
======== ======== ======== ========
Deferred tax valuation allowance -- -- -- --
======== ======== ======== ========
Twelve months ended 1/31/04
Allowance for doubtful accounts $ 544 $ 973 $ 979 $ 538
======== ======== ======== ========
Deferred tax valuation allowance
-- 769 -- 769
======== ======== ======== ========
Inventory allowance 3,567 5,987 5,823 3,731
======== ======== ======== ========
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
======== ======== ======== ========
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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
Securities Exchange Act of 1934) as of January 31, 2005, the Chief Executive
Officer and Chief Financial Officer of Whitehall Jewellers, Inc. 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 Securities Exchange Act of 1934 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 our principal executive
officer and principal financial officer, we conducted an evaluation of the
effectiveness of our 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 our evaluation
under the framework in Internal Control - Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of
January 31, 2005.
Our management's evaluation of the effectiveness of our internal control over
financial reporting as of January 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
CHANGES IN INTERNAL CONTROLS
There were no changes in the Company's internal controls over financial
reporting that occurred during the quarter ended January 31, 2005 that have
materially affected or are reasonably likely to materially affect internal
controls 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 the Annual Report on
Form 10-K.
ITEM 9B. OTHER INFORMATION
None
57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the headings "Election of Directors,"
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement (which Proxy Statement we intend to file with
the SEC no later than May 31, 2005) is incorporated herein by reference.
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.
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
Except for information referred to in Item 402(a)(8) of Regulation S-K,
the information contained under the headings "Election of Directors" and
"Executive Compensation and Other Information" in the Proxy Statement (which
Proxy Statement we intend to file with the SEC no later than May 31, 2005) is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement (which Proxy Statement
we intend to file with the SEC no later than May 31, 2005) is incorporated
herein by reference.
EQUITY COMPENSATION PLAN INFORMATION TABLE
The following table provides information as of January 31, 2005 regarding
the number of shares of the Company's common stock that may be issued under its
equity compensation plans.
(a) (b) (c)
----------------------------- ------------------------------- ------------------------------
Number of securities remaining
Number of securities to be available for future issuance
issued upon exercise of Weighted-average exercise price under equity compensation plans
outstanding options, warrants of outstanding options, (excluding securities reflected
Plan Category and rights warrants and rights in column (a))
- ---------------------------------- ----------------------------- -------------------------------- -------------------------------
Equity compensation plans approved
by security holders 2,695,419 $11.874 430,008
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information contained under Item 7, "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and the heading
"Certain Relationships and Related Transactions" in the Proxy Statement (which
Proxy Statement we intend to file with the SEC no later than May 31, 2005) is
incorporated herein by reference.
58
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information contained under the heading "Independent Registered Public
Accounting Firm" in the Proxy Statement (which Proxy Statement we intend to file
with the SEC no later than May 31, 2005) is incorporated herein by reference.
59
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statement
See Financial Statements commencing on page 30 hereof.
(a)(2) Financial Statement Schedules
See Financial Statement Schedule on page 55 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, 2005; January 31, 2004; and January 31, 2003
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
(a)(3) Exhibits 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
*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.
*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 with the Securities
and Exchange Commission on April 28, 1999, file No. 0-028176.
*4.2 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).
*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).
*10.2 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)
*10.3 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).
*10.4 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).
60
*10.5 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.
*10.6 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)
*10.7 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)
*10.8 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)
*10.9 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)
*10.10 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)
*10.11 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)
*10.12 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)
*10.13 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)
*10.14 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)
61
*10.15 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)
*10.16 Form of Restricted Stock Award to 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.
*10.17 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)
*10.18 Description of Director compensation arrangement. Incorporated
by reference to the paragraph "Compensation of Directors" in the
Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission and delivered to stockholders
in connection with the Annual Meeting of Stockholders to be held
June 22, 2005.
*10.19 Amendment Number One to the 1998 Non-Employee Directors Stock
Option Plan. 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)
*10.20 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)
*10.21 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.
*10.22 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.
*10.23 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.
62
*10.24 Third Amendment, dated as of April 5, 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 April 8, 2005, file No. 1-15615.
*10.25 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.
*10.26 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, 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.
*10.27 401(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)
*10.28 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)
*10.29 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)
*10.30 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)
*10.31 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)
*10.32 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)
*10.33 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.
63
*10.34 Non-Prosecution Agreement dated as of September 28, 2004.
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.
*10.35 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.
21 Subsidiaries of the Company
23 Consent of Independent Registered Public Accounting Firm
24 Powers of Attorney (included on signature page)
31.1 Certificate Pursuant to Rule 13a-14a under the Securities
Exchange Act of 1934 of the Principal Executive Officer.
31.2 Certificate Pursuant to Rule 13a-14a under the Securities
Exchange Act of 1934 of the Principal Financial Officer.
32.1 Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- -------------------
(1) Represents management contract or compensatory plan or arrangement.
(2) There is no First Amendment to 401(k) Plan.
64
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 15, 2005 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)
POWER OF ATTORNEY AND SIGNATURES
Each of the undersigned officers and directors of Whitehall Jewellers,
Inc. hereby severally constitutes and appoints Lucinda M. Baier 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 15th day of April, 2005.
Name Capacity
---- --------
/s/ Lucinda M. Baier Chief Executive Officer, President
- ------------------------------- and Chief Operating Officer
Lucinda M. Baier (Principal executive officer)
/s/ Richard K. Berkowitz Director
- -------------------------------
Richard K. Berkowitz
/s/ Daniel H. Levy Chairman and Director
- -------------------------------
Daniel H. Levy
/s/ Norman J. Patinkin Director
- -------------------------------
Norman J. Patinkin
/s/ Sanford Shkolnik Director
- -------------------------------
Sanford Shkolnik
/s/ John R. Desjardins Executive Vice President, Chief Financial
- ------------------------------- Officer, Treasurer and Secretary
John R. Desjardins (Principal financial and accounting officer)
65