SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _____________________
Commission File number: 0-028176
Whitehall Jewellers, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-1433610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 No. Wacker, Chicago, IL. 60606
(Address of principal executive offices)
312/782-6800
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of the Registrant's common stock, $.001 par value per
share, outstanding as of July 31, 2002 was 14,662,972 and the number of shares
of the Registrant's Class B common stock, $1.00 par value per share, outstanding
as of July 31, 2002 was 142.
WHITEHALL JEWELLERS, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2002
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three months and six months ended
July 31, 2002 and 2001 (unaudited)
Balance Sheets - July 31, 2002, January 31, 2002 and July 31, 2001
(unaudited)
Statements of Cash Flows for the six months ended July 31, 2002 and
2001 (unaudited)
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Whitehall Jewellers, Inc.
Statements of Operations
for the three months and six months ended July 31, 2002 and 2001
(unaudited)(in thousands, except for per share data)
Three months ended Six months ended
July 31, July 31, July 31, July 31,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 76,243 $ 74,366 $ 150,831 $ 143,297
Cost of sales (including buying and
occupancy expenses) 48,921 46,464 96,494 89,781
--------- --------- --------- ---------
Gross profit 27,322 27,902 54,337 53,516
Selling, general and administrative
expenses 25,322 26,980 50,949 53,462
--------- --------- --------- ---------
Income from operations 2,000 922 3,388 54
Interest expense 1,111 1,956 2,123 3,695
--------- --------- --------- ---------
Income (loss) before income taxes 889 (1,034) 1,265 (3,641)
Income tax (benefit) expense 318 (391) 452 (1,376)
--------- --------- --------- ---------
Net income (loss) $ 571 $ (643) $ 813 $ (2,265)
========= ========= ========= =========
Basic earnings per share:
Net income (loss) $ 0.04 $ (0.04) $ 0.06 $ (0.16)
========= ========= ========= =========
Weighted average common share
and common share equivalents 14,807 14,582 14,719 14,578
========= ========= ========= =========
Diluted earnings per share:
Net income (loss) $ 0.04 $ (0.04) $ 0.05 $ (0.16)
========= ========= ========= =========
Weighted average common share
and common share equivalents 15,594 14,582 15,476 14,578
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
3
Whitehall Jewellers, Inc.
Balance Sheets
(unaudited, in thousands)
July 31, 2002 January 31, 2002 July 31, 2001
------------- ---------------- -------------
ASSETS
Current Assets:
Cash $ 2,128 $ 2,741 $ 2,916
Accounts receivable, net 2,042 1,189 2,319
Merchandise inventories 170,637 173,931 178,047
Other current assets 511 973 912
Prepaid income tax 116 --- 1,947
Deferred financing costs 510 511 498
Deferred income taxes, net 2,461 2,704 2,955
--------- --------- ---------
Total current assets 178,405 182,049 189,594
Property and equipment, net 62,941 63,914 66,332
Goodwill 5,662 5,662 5,793
Deferred financing costs 468 723 956
Deferred income tax, net --- --- 732
--------- --------- ---------
Total assets $ 247,476 $ 252,348 $ 263,407
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolver loan $ 61,694 $ 35,277 $ 74,242
Term loan, current 5,750 5,250 4,750
Accounts payable 32,862 56,695 46,289
Customer deposits 3,655 3,963 4,359
Accrued payroll 4,989 6,270 4,661
Income taxes --- 3,226 ---
Other accrued expenses 17,191 18,171 17,706
--------- --------- ---------
Total current liabilities 126,141 128,852 152,007
Term loan 1,500 4,500 7,250
Subordinated debt 640 640 640
Deferred income taxes, net 1,868 2,012 ---
Other long-term liabilities 2,907 2,660 2,404
--------- --------- ---------
Total liabilities 133,056 138,664 162,301
Commitments and contingencies
Stockholders' equity:
Common stock 18 17 17
Class B common stock --- --- ---
Additional paid-in capital 105,633 103,767 103,541
Accumulated earnings 39,684 38,870 26,525
--------- --------- ---------
145,335 142,654 130,083
--------- --------- ---------
Less:
Treasury stock, at cost (3,357,646, 3,200,209 and
3,200,876 shares, respectively)
(30,915) (28,970) (28,977)
--------- --------- ---------
Total stockholders' equity, net 114,420 113,684 101,106
--------- --------- ---------
Total liabilities and stockholders' equity
$ 247,476 $ 252,348 $ 263,407
========= ========= =========
The accompanying notes are an integral part of the financial statements.
4
Whitehall Jewellers, Inc.
Statements of Cash Flows
for the six months ended July 31, 2002 and 2001
(unaudited, in thousands)
Six months ended
----------------
July 31, July 31,
2002 2001
--------- ---------
Cash flows from operating activities:
Net income $ 813 $ (2,265)
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 5,544 5,283
Loss on disposition of assets 24 58
Changes in assets and liabilities:
(Increase) in accounts receivable, net (853) (913)
Decrease (increase) in merchandise
inventories, net of gold consignment 3,294 (3,102)
(Increase) decrease in other current assets 462 (224)
(Increase) in prepaid income tax (116) (1,947)
Decrease (increase) in deferred income taxes 99 (343)
(Decrease) increase in customer deposits (308) 145
(Decrease) in accounts payable (20,123) (766)
(Decrease) in taxes payable (3,226) (2,940)
(Decrease) increase in accrued liabilities (3,508) (855)
--------- ---------
Net cash (used in) operating activities (17,898) (7,869)
Cash flows from investing activities:
Capital expenditures (4,339) (9,227)
--------- ---------
Net cash used in investing activities (4,339) (9,227)
Cash flows from financing activities:
Borrowing on revolver loan 439,385 533,118
Repayment of revolver loan (412,968) (506,096)
Repayment of term loan (2,500) (2,000)
Proceeds from gold consignment --- 3,107
Proceeds from exercise of stock options 1,407 200
Proceeds under employee stock purchase plan 10 ---
Financing costs --- (316)
Decrease in outstanding checks, net (3,710) (10,927)
--------- ---------
Net cash provided by financing activities 21,624 17,086
--------- ---------
Net change in cash and cash equivalents (613) (10)
Cash and cash equivalents at beginning of period 2,741 2,926
--------- ---------
Cash and cash equivalents at end of period $ 2,128 $ 2,916
========= =========
The accompanying notes are an integral part of the financial statements.
5
Whitehall Jewellers, Inc.
Notes to Financial Statements
1. Description of Operations
The financial statements of Whitehall Jewellers, Inc. (the "Company")
include the results of the Company's chain of specialty retail fine jewelry
stores. The Company operates exclusively in one reportable business segment,
specialty retail jewelry. The Company has a national presence with 374 stores as
of July 31, 2002, located in 38 states, operating in regional or superregional
shopping malls.
2. Common Stock Repurchase Program
On July 23, 2002, the Company announced that the Board of Directors had
authorized it to repurchase up to $25.0 million of its Common Stock. Shares
repurchased by the Company reduce the weighted average number of shares of
Common Stock outstanding for basic and diluted earnings per share calculations.
As of July 31, 2002, the Company had repurchased 136,600 shares of Common
Stock under this Stock Repurchase Program at a total cost of approximately $1.5
million. These purchases were settled subsequent to July 31, 2002.
See Footnote 12 regarding subsequent events as of September 12, 2002.
3. Summary of Significant Accounting Policies
Basis for Presentation
The accompanying Balance Sheet as of January 31, 2002 was derived from the
audited financial statements for the year ended January 31, 2002. The
accompanying unaudited Balance Sheets as of July 31, 2002 and 2001, the
Statements of Income and Cash Flows for the three and six months ended July 31,
2002 and 2001 have been prepared in accordance with generally accepted
accounting principles for interim financial information. The interim financial
statements reflect all adjustments (consisting only of normal recurring
accruals) which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. The interim
financial statements should be read in the context of the Financial Statements
and footnotes thereto included in the Whitehall Jewellers, Inc. Annual Report
for the fiscal year ended January 31, 2002. References in the Notes to Financial
Statements to years and quarters are references to fiscal years and fiscal
quarters.
4. Accounts Receivable, Net
Accounts receivable are shown net of the allowance for doubtful accounts of
$640,000, $673,000, and $1,687,000 as of July 31, 2002, January 31, 2002 and
July 31, 2001, respectively.
6
5. Inventory
As of July 31, 2002, January 31, 2002 and July 31, 2001, merchandising
inventories consisted of:
July 31, 2002 January 31, 2002 July 31, 2001
(in thousands)
Raw Materials $ 6,846 $ 6,958 $ 6,128
Finished Goods 163,791 166,973 171,919
-------- -------- --------
Inventory $170,637 $173,931 $178,047
======== ======== ========
Raw materials primarily consist of diamonds, precious gems, semi-precious
gems and gold. Included within finished goods inventory are allowances for
inventory shrink, scrap, and miscellaneous costs of $2,771,000, $3,003,000, and
$3,477,000 as of July 31, 2002, January 31, 2002 and July 31, 2001,
respectively. As of July 31, 2002, January 31, 2002 and July 31, 2001,
consignment inventories held by the Company that were not included in the
balance sheets total $68,520,000, $80,425,000, and $77,040,000, respectively.
In addition, gold consignments of $23,298,000, $23,298,000 and $29,416,000
were not included in the Company's balance sheets as of July 31, 2002, January
31, 2002 and July 31, 2001, respectively.
Certain merchandise procurement, distribution and warehousing costs were
allocated to inventory. As of July 31, 2002, January 31, 2002 and July 31, 2001,
the amounts included in inventory were $3,302,000, $3,306,000 and $3,162,000,
respectively.
6. Accounts Payable
Accounts payable includes outstanding checks, which were $3,430,000,
$7,140,000 and $9,776,000 as of July 31, 2002, January 31, 2002 and July 31,
2001, respectively.
7. Financing Arrangements
Effective June 30, 2002, the Company amended certain terms and conditions
within its Amended and Restated Revolving Credit, Term Loan and Gold Consignment
Agreement (the "Credit Agreement") with its bank group which provides for a
total facility of $166.5 million through June 30, 2004. A copy of the Credit
Agreement is attached as Exhibit 10.1 to this report. 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 this Credit Agreement, the participating banks have a collateral
security interest in substantially all of the assets of the Company. The Credit
Agreement contains certain restrictions, including restrictions on capital
expenditures, investments, payment of dividends, assumption of additional debt,
acquisitions and divestitures, and requires the Company to maintain certain
financial ratios based on levels of funded debt, capital expenditures and
earnings before interest, taxes, depreciation and amortization.
7
Revolver Loan
The revolving loan facility under the Credit Agreement is available up to a
maximum of $150.0 million, including amounts consigned under the gold
consignment facility and outstanding letters of credit, and is limited by a
borrowing base computed based on a percentage of the value of the Company's
inventory and accounts receivable.
The interest rates for borrowings under the revolving loan facility are, at
the Company's option, based on Eurodollar rates or the banks' prime rate.
Interest is payable monthly for prime borrowings and upon maturity for
Eurodollar borrowings.
Term Loans
As of July 31, 2002, the principal amount of the term loan under the Credit
Agreement was $7.3 million (an original $16.5 million, less principal repayments
to date). The interest rates for these borrowings are, at the Company's option,
based on Eurodollar rates or the banks' prime rate. Interest is payable monthly
for prime borrowings and upon maturity for Eurodollar borrowings.
Gold Consignment Facility
The Company has, from time to time, had the opportunity to enter into gold
consignments with certain third party financial institutions. The Company
provides the third party financial institution with title to a certain number of
troy ounces of gold held in the Company's existing merchandise inventory in
exchange for cash at the current market price of gold. The Company then consigns
the gold from the third party financial institution, pursuant to the Gold
Consignment Agreement. This agreement entitles the Company to use the gold in
the ordinary course of its business. Gold consignment is a transfer of title in
specified quantities of the gold content of the Company's inventory (a
non-financial asset) to a financial institution in exchange for cash. The
Company continues to bear responsibility for damage to the inventory, as is the
case in all of its consigned inventory arrangements with its other vendors.
The Company has accounted for the transaction as a reduction in its
inventories because it has transferred title to the gold to the financial
institution. Similar to other consigned inventories in the possession of the
Company (for which the Company bears risk of loss but does not possess title),
the value of the inventory is not included in the assets of the Company. The
terms of the Gold Consignment Agreement require the Company to deliver the
outstanding amounts of consigned gold back to the third party financial
institution at the end of the agreement (which currently expires in 2004).
Physical delivery can be made from the Company's inventory or from gold acquired
by the Company in the open market. As an alternative to physical delivery of
these specific troy ounces of gold, the Company can, from time to time, elect to
purchase the consigned quantities at the current market price for gold on that
date.
The Agreement provides for the consignment of a maximum 115,000 troy ounces
or $40.0 million. As of July 31, 2002, the Company consigned 66,500 troy ounces
of gold for $20.3 million under the Gold Consignment Agreement based upon the
market price of gold. Under the agreement, the Company pays consignment fees
based on the London Interbank Bullion Rates payable monthly. Consignment rates
and commitment fees on the unused portion of the gold consignment facility float
based upon the Company's financial performance as calculated quarterly. On June
30, 2004, the Company is required to return or
8
repurchase this 66,500 troy ounces of gold under this agreement at the
prevailing gold rate in effect on that date, or the facility may be renewed.
See Footnote 12 regarding a subsequent event on August 22, 2002.
8. Earnings per Common Share
The following table summarizes the reconciliation of the numerators and
denominators, as required by SFAS No. 128, for the basic and diluted EPS
computations at July 31, 2002 and 2001.
Three months ended Six Months Ended
July 31, July 31, July 31, July 31,
2002 2001 2002 2001
-------- -------- -------- --------
(in thousands, except per share amounts)
Net income (loss) for basic and diluted EPS $ 571 $ (643) $ 813 $ (2,265)
Weighted average shares for basic EPS 14,807 14,582 14,719 14,578
Incremental shares upon conversions:
Stock options 787 --- 757 ---
Weighted average shares for diluted EPS 15,594 14,582 15,476 14,578
Stock options excluded from the calculation
of diluted earnings per share [due to their
antidilutive effect on the calculations] 356 2,895 354 2,895
9. Accounting of Business Combinations and Goodwill and Other Intangibles
In July, 2001, the Financial Accounting Standards Board issued Statement
No. 141 ("SFAS 141"), "Business Combinations" and Statement No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets", which requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
rather be tested for impairment at least annually. 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 of its single reporting unit
using both a discounted cash flow analysis and market multiple approach and has
determined that the fair value of its reporting unit exceeds the carrying value
and, therefore, no future impairment testing of goodwill needed to be considered
as of February 1, 2002. The carrying amount of goodwill as of July 31, 2002,
January 31, 2002 and July 31, 2001 was $5,662,000, $5,662,000 and $5,793,000,
respectively. The table below shows income before income taxes, net income and
earnings per share amounts for the three months and six months ended July 31,
2002 and July 31, 2001 adjusted to add back goodwill amortization and related
tax effects for the first three months and six months of 2001.
9
Three months ended Six months ended
July 31, July 31, July 31, July 31,
2002 2001 2002 2001
--------- -------- --------- ---------
Reported income (loss) before income taxes $ 889 $(1,034) $ 1,265 $ (3,641)
Add back: Goodwill amortization --- 66 --- 132
--------- ------- --------- ---------
Adjusted income (loss) before income taxes $ 889 $ (968) $ 1,265 $ (3,509)
========= ======= ========= =========
Reported net (loss) income $ 571 $ (643) $ 813 $ (2,265)
Add back: After tax impact of goodwill
amortization --- 41 --- 82
--------- ------- --------- ---------
Adjusted net income (loss) $ 571 $ (602) $ 813 $ (2,183)
========= ======= ========= =========
BASIC EARNINGS PER SHARE:
Reported net income (loss) $ 0.04 $ (0.04) $ 0.06 $ (0.16)
Goodwill amortization --- --- --- .01
--------- ------- --------- ---------
Adjusted net income (loss) $ 0.04 $ (0.04) $ 0.06 $ (0.15)
========= ======= ========= =========
DILUTED EARNINGS PER SHARE:
Reported net income (loss) $ 0.04 $ (0.04) $ 0.05 $ (0.16)
Goodwill amortization --- --- --- .01
--------- ------- --------- ---------
Adjusted net income (loss) $ 0.04 $ (0.04) $ 0.05 $ (0.15)
========= ======= ========= =========
10. Reclassifications
Certain Balance Sheet amounts from prior periods were reclassified to
conform to the current year presentation. These reclassifications had no impact
on earnings.
11. Commitments and Contingencies
The Company was recently named a defendant in a wage hour class action suit
filed in California by two former store managers on August 5, 2002. The case is
based principally upon the allegation that store managers employed by the
Company in California should have been classified as non-exempt for overtime
purposes. The plaintiffs seek recovery of allegedly unpaid overtime wages for
the four year period preceding the filing date, along with certain penalties,
interest, and attorneys fees. The purported class includes all current and
former store managers employed by the Company in California for the four year
period preceding the filing of the complaint. During that four year period the
Company operated 19 to 49 stores in California. The Company is currently
evaluating the complaint and intends to defend the case vigorously.
The Company is subject to other claims and litigation in the normal course
of business. It is the opinion of management that additional liabilities, if
any, resulting from these claims and litigation are not expected to have a
material adverse effect on the Company's financial condition or results of
operations.
10
12. Subsequent Events
On August 22, 2002, the Company purchased 66,500 troy ounces of gold at an
average gold price of $307.56 per ounce for a total of $20.5 million. The
Company delivered gold to its banks and extinguished all existing Company gold
consignment obligations to the banks under the Credit Agreement. The purchase
has the effect of increasing the weighted average cost of gold available for
retail sale by the Company and will result in a higher weighted average cost of
sales in future periods. The Company estimates future cost of sales as a result
of this transaction will be approximately $1.5 million greater based on the
effect of the transaction on the weighted average cost of gold product in its
inventory prior to this purchase. Approximately 60% of this increase should be
reflected in the final two quarters of the fiscal year ending January 31, 2003,
and the balance of approximately 40% of the increase should be reflected over
the first half of fiscal year 2003. This purchase will increase the Company's
inventory by $20.5 million and was funded by revolver loan borrowings. The total
amount available to borrow under the Company's Credit Agreement is unchanged by
the transaction on August 22, 2002.
As of September 12, 2002, the Company had repurchased a total of 332,300
shares of common stock under the stock repurchase program (Note 2) at a total
cost of approximately $3.5 million.
11
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations for the Three Months Ended July 31, 2002
Net sales for the second quarter of fiscal 2002 increased $1.9 million, or
2.5%, to $76.2 million from $74.4 million in the second quarter of fiscal 2001.
Comparable store sales decreased $0.5 million, or 0.6%, in the second quarter of
fiscal 2002 from the second quarter of fiscal 2001. Additionally, there was a
sales decrease of $0.6 million related to closed stores. These decreases were
offset by sales from new stores of $2.9 million. The total number of merchandise
units sold increased by approximately 9.4% in the second quarter of fiscal 2002
from the second quarter of fiscal 2001 while the average price per merchandise
sale declined to $291 in fiscal 2002 from $313 in fiscal 2001. The slower
economy and lower consumer confidence contributed to a negative impact on sales.
Credit sales as a percentage of net sales remained about the same in the second
quarter of fiscal 2002 compared to the second quarter of fiscal 2001. The
Company opened two new stores and closed one store in the second quarter of
fiscal 2002 increasing the number of stores open to 374 as of July 31, 2002
compared to 364, as of July 31, 2001.
Gross profit for the second quarter of fiscal 2002 decreased $0.6 million,
or 2.1%, to $27.3 million from $27.9 million in the same period in fiscal 2001.
Gross profit as a percentage of net sales decreased to 35.8% in the second
quarter of fiscal 2002 from 37.5% in the second quarter of fiscal 2001. The
reduction in gross profit margin of 170 basis points primarily resulted from an
increase in selective and targeted promotional pricing activity, along with an
increase in the mix of sales of lower margin diamond merchandise. Gross profit
rate was also negatively impacted by store occupancy expense which increased at
a rate higher than the increase in sales. The resulting decrease in merchandise
gross margin was partially offset by improvements in margin from discounts
earned from suppliers, increased warranty sales and improved repair margin.
On August 22, 2002, the Company purchased 66,500 troy ounces of gold at an
average gold price of $307.56 per ounce for a total of $20.5 million. The
Company delivered gold to its banks and extinguished all existing Company gold
consignment obligations to the banks under the Credit Agreement. The purchase
has the effect of increasing the weighted average cost of gold available for
retail sale by the Company and will result in a higher weighted average cost of
sales in future periods. The Company estimates future cost of sales as a result
of this transaction will be approximately $1.5 million greater based on the
effect of the transaction on the weighted average cost of gold product in its
inventory. Approximately 60% of this increase should be reflected in the final
two quarters of the fiscal year ending January 31, 2003, and the balance of
approximately 40% of the increase should be reflected over the first half of
fiscal year 2003. This purchase will increase the Company's inventory by $20.5
million and was funded by revolver loan borrowings.
The Company's continued efforts to improve its expense structure resulted
in a decrease in selling, general and administrative expenses of $1.6 million,
or 5.9%, to $25.3 million in the second quarter of fiscal 2002 from $27.0
million in the second quarter of fiscal 2001. As a percentage of net sales,
selling, general and administrative expenses decreased to 33.2% in the second
quarter of fiscal 2002 from 36.3% in the second quarter of fiscal 2001. The
dollar decrease was primarily related to lower other expense ($1.6 million),
lower advertising expense ($0.4 million) and lower personnel expense ($0.2
million) which were partially offset by higher credit expense ($0.5 million).
The decrease in other expenses resulted from centralized control of the
consumption of certain supplies and services along with reductions in negotiated
rates for those items. Personnel expense decreased primarily due
12
to efforts to reduce payroll hours and the control of labor rates partially
offset by personnel associated with the opening of new stores. The reduction in
store personnel expense contributed 60 basis points of the 310 basis point
improvement in SG&A.
Interest expense decreased $0.8 million to $1.1 million in the second
quarter of fiscal 2002 from $2.0 million in the second quarter of fiscal 2001,
resulting from lower average borrowings and lower interest rates.
Income taxes increased $0.7 million resulting in an expense of $0.3 million
in the second quarter of fiscal 2002 compared to a benefit of $0.4 million in
the second quarter of fiscal 2001, reflecting an effective annual tax rate of
35.8% and 37.8% in the second quarter of fiscal 2002 and 2001, respectively. The
Company's annual effective tax rate was 34.8% for fiscal 2001.
Results of Operations for the Six Months Ended July 31, 2002
Net sales for the six months ended July 31, 2002 increased $7.5 million, or
5.3%, to $150.8 million from $143.3 million in the six months ended July 31,
2001. Comparable store sales increased $2.8 million, or 2.0%, in the first six
months of fiscal 2002 from the same period in fiscal 2001. Additionally, sales
from new stores were $6.5 million. These increases were partially offset by
sales decreases of $1.8 million related to closed stores. The total number of
merchandise units sold increased by approximately 11.30% in the first six months
of fiscal 2002 from the first six months of fiscal 2001 and the average price
per merchandise sale declined to $300 in fiscal 2002 from $318 in fiscal 2001.
The slower economy and lower consumer confidence had a negative impact on sales.
Credit sales as a percentage of net sales remained about the same in the first
six months of fiscal 2002 compared to the first six months of fiscal 2001. The
Company opened 15 new stores and closed five stores in the first six months of
fiscal 2002 increasing the number of stores open to 374 as of July 31, 2002
compared to 364 as of July 31, 2001.
Gross profit for the first six months of fiscal 2002 increased $0.8
million, or 1.5%, to $54.3 million from $53.5 million compared to the same
period in fiscal 2001. Gross profit as a percentage of sales decreased to 36.0%
from 37.3% in the same period of fiscal 2001. The 130 basis point reduction in
gross profit margin primarily resulted from an increase in selective and
targeted promotional pricing activity along with an increase in the mix of sales
of lower margin diamond merchandise. Gross profit rate was also negatively
impacted by store occupancy expense which increased at a rate higher than the
increase in sales. The resulting decrease in merchandise gross margin was
partially offset by improvements in margin from discounts earned from suppliers,
increased warranty sales and improved repair margin.
The Company's continued efforts to improve the expense structure of its
selling, general and administrative expenses resulted in a decrease of $2.5
million, or 4.7%, to $50.9 million for the first six months of fiscal 2002 from
$53.5 million in the first six months of fiscal 2001. As a percentage of net
sales, selling, general and administrative expenses decreased to 33.8% in the
first half of fiscal 2002 from 37.3% in the first half of fiscal 2001. The
dollar decrease was primarily related to lower other expense ($2.6 million), and
lower advertising expense ($ 0.6 million) which were partially offset by higher
personnel expense ($0.1 million) and by higher credit expense ($0.7 million).
The decrease in other expenses resulted from centralized control of the
consumption of certain supplies and services along with reductions in negotiated
rates for those items. Personnel expense increased primarily due to the
personnel expense associated with the opening of new stores which was partially
offset by efforts to reduce payroll hours and the control of labor rates. The
reduction in store personnel expense contributed 80 basis points of the 350
basis point improvement in SG&A.
13
Interest expense decreased $1.6 million to $2.1 million in the first six
months of fiscal 2002 from $3.7 million in the first six months of fiscal 2001,
resulting from lower average borrowings and lower interest rates.
Income taxes increased $1.8 million resulting in an expense of $0.5 million
in the first half of fiscal 2002 compared to a benefit of $1.4 million in the
prior period, reflecting an effective annual tax rate of 35.8% and 37.8%,
respectively. The Company's annual effective tax rate was 34.8% for fiscal 2001.
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 been cash flow from operations and bank borrowings
under the Company's Credit Agreement, which was amended on June 30, 2002 as
discussed in Note 7 of the July 31, 2002 financial statements in this Form 10-Q.
The Company has an agreement with its bank whereby checks are honored when
presented and the corresponding amount is automatically borrowed under the
revolving loan facility.
The Company's inventory levels and working capital requirements have
historically been highest in advance of the Christmas season. The Company has
funded these seasonal working capital needs through borrowings under the
Company's revolver and increases in trade payables and accrued expenses. As of
July 31, 2002, the maximum availability under the credit facility was $33.2
million based on the borrowing base formula. The credit facility covenants also
require the Company to attain certain operating results.
On July 23, 2002, the Company announced that its Board of Directors had
authorized it to repurchase up to $25.0 million of its Common Stock. Shares
repurchased by the Company reduce the weighted average number of shares of
common stock outstanding for basic and diluted earnings per share calculations.
As of September 12, 2002, the Company had repurchased 332,300 shares of common
stock under this Stock Repurchase Program at a total cost of approximately $3.5
million. The amount of shares purchased is restricted by the revolving loan
facility agreement, which requires a certain borrowing base availability level
prior to repurchasing shares.
On August 22, 2002, the Company purchased 66,500 troy ounces of fine gold
in the open market at a price of 307.56 per ounce totaling $20.5 million. The
Company delivered gold to its banks and extinguished all existing company gold
consignment obligations to the banks under the Credit Agreement. The Company
borrowed $20.5 million under the revolving loan portion of its Credit Agreement
to fund this purchase of gold. The total amount available to borrow under the
Company's Credit Agreement is unchanged by the transaction on August 22, 2002.
The Company's cash flow used in operating activities increased to $17.9
million in the six months ended July 31, 2002 from $7.9 million in the six
months ended July 31, 2001. Higher income from operations together with
depreciation and amortization ($5.5 million), decreases in merchandise
inventories ($3.3 million) and decreases in other current assets ($0.5 million)
were offset by decreases in accounts payable ($20.1 million), decreases in tax
payable ($3.2 million) and decreases in accrued liabilities ($3.5 million). The
decrease in merchandise inventories was primarily related to the planned
reduction of average store inventory and the closing of 5 stores, offset by
inventory purchases for the 15 new stores which were opened in the first six
months of fiscal 2002.
14
In the first six months of 2002, the primary sources of the Company's
liquidity included a net increase of $26.4 million in the amount outstanding
under the Company's revolver and proceeds for the exercise of options ($1.4
million). The Company's revolver loan balance was $61.7 million on July 31, 2002
versus $74.2 million on July 31, 2001. The Company also utilized cash in the
first six months of 2002 to fund decreases in outstanding checks ($3.7 million)
and capital expenditures of $4.3 million, which was primarily related to the
opening of 15 new stores in the first six months of 2002 and to repay a portion
of the term loan ($2.5 million).
Management expects that cash flow from operating activities and funds
available under its revolving credit facility should be sufficient to support
the Company's current new store expansion program and seasonal working capital
needs for the foreseeable future.
Inflation
Management believes that inflation generally has not had a material effect
on the Company's results of operations.
Internal Controls
Since the beginning of the second quarter of fiscal 2002, there have been
no significant changes in internal controls or in other factors that could
significantly affect internal controls.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
The Company's exposure to changes in interest rates relates primarily to
its borrowing activities to fund business operations. The Company principally
uses floating rate borrowings under its revolving credit and term loan
facilities. The Company's private label credit card provider charges the Company
varying discount rates for its customer's credit program purchases. These
discount rates are somewhat sensitive to significant changes in interest rates.
The Company currently does not use derivative financial instruments to protect
itself from fluctuations in interest rates.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company was recently named a defendant in a wage hour class action suit
filed in California by two former store managers on August 5, 2002. The case is
based principally upon the allegation that store managers employed by the
Company in California should have been classified as non-exempt for overtime
purposes. The plaintiffs seek recovery of allegedly unpaid overtime wages for
the four year period preceding the filing date, along with certain penalties,
interest, and attorneys fees. The purported class includes all current and
former store managers employed by the Company in California for the four year
period preceding the filing of the complaint. During that four year period the
Company operated 19 to 49 stores in California. The Company is currently
evaluating the complaint and intends to defend the case vigorously.
The Company is subject to other claims and litigation in the normal course
of business. It is the opinion of management that additional liabilities, if
any, resulting from these claims and litigation are not expected to have a
material adverse effect on the Company's financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of stockholders on June 11,
2002.
(b) No answer required.
(c) Proposal 1 involved the election of two directors to serve until
the 2005 annual meeting. Those directors and the voting results
were as follows:
Votes For Authority Withheld
--------- ------------------
Matthew M. Patinkin 11,031,285 2,311,626
Richard K. Berkowitz 12,574,226 768,685
Proposal 2 involved the approval of the amendment and restatement
of the Company's Restated Certificate of Incorporation
Votes For Votes Against Abstained
--------- ------------- ---------
13,330,126 7,909 4,875
Proposal 3 involved the approval of the Company's Employee Stock
Purchase Plan
Votes For Votes Against Abstained
--------- ------------- ---------
12,060,081 18,532 2,590
Proposal 4 involved the approval of an amendment to the Company's
1997 Long-Term Incentive Plan
Votes For Votes Against Abstained
--------- ------------- ---------
9,209,942 2,849,812 21,449
(d) Not applicable.
16
Item 5 - Other Information
Forward-Looking Statements
This report contains certain forward-looking statements (as such term is
defined in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) and information relating to the Company that
are based on the current beliefs of management of the Company as well as
assumptions made by and information currently available to management including
statements related to the markets for our products, general trends and trends in
our operations or financial results, plans, expectations, estimates and beliefs.
In addition, when used in this report, the words "anticipate," "believe,"
"estimate," "expect," "intend," "plan," "predict" and similar expressions and
their variants, as they relate to the Company or our management, may identify
forward-looking statements. Such statements reflect our judgment as of the date
of this report with respect to future events, the outcome of which is subject to
certain risks, including the factors described below, which may have a
significant impact on our business, operating results or financial condition.
Investors are cautioned that these forward-looking statements are inherently
uncertain. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results or outcomes may
vary materially from those described herein. 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)
economic conditions, the retail sales environment and our ability to execute our
business strategy and the related effects on comparable store sales and other
results; (2) the extent and results of our store expansion strategy and
associated occupancy costs, and access to funds for new store openings; (3) the
seasonality of our business; (4) the extent and success of our marketing and
promotional programs; (5) personnel costs and the extent to which we are able to
retain and attract key personnel; (6) competition; (7) the availability and cost
of consumer credit; (8) relationships with suppliers; (9) our ability to
maintain adequate information systems capacity and infrastructure; (10) our
leverage and cost of funds; (11) our ability to maintain adequate loss
prevention measures; (12) fluctuations in raw material prices, including
diamond, gem and gold prices; (13) the extent and results of our E-commerce
strategies and those of others; (14) regulation affecting the industry
generally, including regulation of marketing practices; (15) the successful
integration of acquired locations and assets into our existing operations; and
(16) the risk factors identified from time to time in our filings with the
Securities and Exchange Commission.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Tenth Amendment to Amended and Restated Revolving Credit, Term
Loan and Gold Consignment Agreement dated as of June 30, 2002, by and among
Whitehall Jewellers, Inc., the Banks (as defined therein), Fleet Capital
Corporation as Agents for the Banks, and LaSalle Bank National Association and
ABN AMRO Bank, N.V. as Agents for the Banks.
99.1 Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHITEHALL JEWELLERS, INC.
(Registrant)
Date: September 13, 2002 By: /s/ Jon H. Browne
--------------------------
Jon H. Browne
Executive Vice President -
Chief Financial Officer and
Treasurer
(duly authorized officer and
principal financial officer)
18
CERTIFICATE PURSUANT TO RULE 13A-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Hugh M. Patinkin, Chief Executive Officer of Whitehall Jewellers,
Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Whitehall
Jewellers, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading for the period covered by this
quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002
/s/ Hugh M. Patinkin
Name: Hugh M. Patinkin
Title: Chief Executive Officer
CERTIFICATE PURSUANT TO RULE 13A-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Jon H. Browne, Chief Financial Officer of Whitehall Jewellers, Inc.,
certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Whitehall
Jewellers, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading for the period covered by this
quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002
/s/ Jon H. Browne
Name: Jon H. Browne
Title: Chief Financial Officer