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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 31, 2001
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 the Registrant's common stock, $.001 par value per share,
outstanding as of July 31, 2001 was 14,576,755 and the number of the
Registrant's Class B common stock, $1.00 par value, as of such date was 147.69.
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WHITEHALL JEWELLERS, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2001
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three months and six months
ended July 31, 2001 and 2000 (unaudited)
Balance Sheets - July 31, 2001, January 31, 2001 and July 31,
2000 (unaudited)
Statements of Cash Flows for the six months ended July 31,
2001 and 2000(unaudited)
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Whitehall Jewellers, Inc.
Statements of Operations
for the three months and six months ended July 31, 2001 and 2000
(unaudited)(in thousands, except for per share data)
Three months ended Six months ended
July 31, July 31, July 31, July 31,
2001 2000 2001 2000
--------- -------- -------- ---------
Net sales $ 74,366 $ 76,139 $ 143,297 $ 149,774
Cost of sales (including buying and occupancy
expenses) 46,464 46,651 89,781 91,055
--------- --------- --------- ---------
Gross profit 27,902 29,488 53,516 58,719
Selling, general and administrative expenses
26,980 27,576 53,462 52,758
--------- --------- --------- ---------
Income from operations 922 1,912 54 5,961
Interest expense 1,956 1,157 3,695 2,321
--------- --------- --------- ---------
(Loss) income before income taxes (1,034) 755 (3,641) 3,640
Income tax (benefit) expense (391) 291 (1,376) 1,402
--------- --------- --------- ---------
Net (loss) income before cumulative effect of
accounting change (643) 464 (2,265) 2,238
Cumulative effect of accounting
change, net of tax -- -- -- (3,068)
--------- --------- --------- ---------
Net income (loss) $ (643) $ 464 $ (2,265) $ (830)
========= ========= ========= =========
Basic earnings per share:
Net (loss) income before cumulative effect of
accounting change $ (0.04) $ 0.03 $ (0.16) $ 0.14
========= ========= ========= =========
Cumulative effect of accounting
change, net of tax $ -- $ -- $ -- $ (0.19)
========= ========= ========= =========
Net income (loss) $ (0.04) $ 0.03 $ (0.16) $ (0.05)
========= ========= ========= =========
Weighted average common share and common share
equivalents 14,582 16,654 14,578 16,267
========= ========= ========= =========
Diluted earnings per share:
Net (loss) income before cumulative effect of
accounting change $ (0.04) $ 0.03 $ (0.16) $ 0.13
========= ========= ========= =========
Cumulative effect of accounting
change, net of tax $ -- $ -- $ -- $ (0.18)
========= ========= ========= =========
Net income (loss) $ (0.04) $ 0.03 $ (0.16) $ (0.05)
========= ========= ========= =========
Weighted average common share and common share
equivalents 14,582 17,106 14,578 16,925
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
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Whitehall Jewellers, Inc.
Balance Sheets
(unaudited, in thousands)
July 31, January 31, July 31,
2001 2000 2000
-------- ----------- --------
ASSETS
Current Assets:
Cash $ 2,916 $ 2,926 $ 2,639
Accounts receivable, net 2,319 1,406 3,709
Merchandise inventories 178,047 178,053 179,322
Other current assets 912 688 821
Prepaid income tax 1,947 -- 492
Deferred financing costs 498 402 383
Deferred income taxes, net 2,955 2,817 4,006
--------- --------- ---------
Total current assets 189,594 186,292 191,372
Property and equipment, net 66,332 62,080 60,288
Goodwill 5,793 5,924 6,055
Deferred financing costs 956 971 1,119
Deferred income tax, net 732 527 613
--------- --------- ---------
Total assets $ 263,407 $ 255,794 $ 259,447
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolver loan $ 74,242 $ 47,220 $ 44,765
Term loan, current 4,750 4,250 3,750
Accounts payable 46,289 57,982 61,882
Customer deposits 4,359 4,214 4,169
Accrued payroll 4,661 5,170 4,796
Income taxes -- 2,940 --
Other accrued expenses 17,706 18,329 24,058
--------- --------- ---------
Total current liabilities 152,007 140,105 143,420
Term loan 7,250 9,750 12,000
Subordinated debt 640 640 640
Other long-term liabilities 2,404 2,128 1,876
--------- --------- ---------
Total liabilities 162,301 152,623 157,936
Commitments and contingencies
Stockholders' equity:
Common stock 17 17 17
Class B common stock -- -- --
Class C common stock -- -- --
Class D common stock -- -- --
Additional paid-in capital 103,541 103,341 103,341
Accumulated earnings 26,525 28,790 20,654
--------- --------- ---------
130,083 132,148 124,012
--------- --------- ---------
Less:
Treasury stock, at cost (3,200,876, 3,200,876 and
2,349,076 shares, respectively)
(28,977) (28,977) (22,501)
--------- --------- ---------
Total stockholders' equity, net 101,106 103,171 101,511
--------- --------- ---------
Total liabilities and stockholders' equity
$ 263,407 $ 255,794 $ 259,447
========= ========= =========
The accompanying notes are an integral part of the financial statements.
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Whitehall Jewellers, Inc.
Statements of Cash Flows
for the six months ended July 31, 2001 and 2000
(unaudited, in thousands)
Six months ended
----------------
July 31, July 31,
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ (2,265) $ (830)
Adjustments to reconcile net income to net cash (used in) operating
activities:
Depreciation and amortization 5,283 4,331
Loss on disposition of assets 58 74
Cumulative effect of accounting change, net -- 3,068
Changes in assets and liabilities:
(Increase)in accounts receivable, net (913) (550)
(Increase) in merchandise inventories, net of gold consignment
(3,102) (29,043)
(Increase)decrease in other current assets (224) 288
(Increase)decrease in prepaid income tax (1,947) 492
(Increase) in deferred income taxes (343) --
Increase in customer deposits 145 215
(Decrease) increase in accounts payable (766) 15,661
(Decrease) in taxes payable (2,940) (7,164)
(Decrease) increase in accrued liabilities (855) 3,383
--------- ---------
Net cash (used in) operating activities (7,869) (10,075)
Cash flows from investing activities:
Capital expenditures (9,227) (15,235)
--------- ---------
Net cash used in investing activities (9,227) (15,235)
Cash flows from financing activities:
Borrowing on revolver loan 533,118 231,416
Repayment of revolver loan (506,096) (227,768)
Repayment of term loan (2,000) (1,500)
Proceeds from gold consignment 3,107 2,016
Proceeds from exercise of stock options 200 380
Proceeds from equity offering, net -- 42,537
Purchases of Treasury Stock -- (12,504)
Financing costs (316) (375)
Decrease in outstanding checks, net (10,927) (8,680)
--------- ---------
Net cash provided by financing activities 17,086 25,522
--------- ---------
Net change in cash and cash equivalents (10) 212
Cash and cash equivalents at beginning of period 2,926 2,427
--------- ---------
Cash and cash equivalents at end of period $ 2,916 $ 2,639
========= =========
The accompanying notes are an integral part of the financial statements.
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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. The
Company has a national presence with 364 stores as of July 31, 2001, located in
37 states, operating in regional or superregional shopping malls.
2. Equity Offering
In March, 2000, the Company completed an offering of Common Stock (the
"Offering"). The Company issued 2,325,500 shares of Common Stock, and received
proceeds of $42.5 million net of underwriting discounts and offering costs. The
Company used the proceeds to reduce the Company's indebtedness and for working
capital and other general corporate purposes.
3. Common Stock Repurchase Program
On July 14, 2000, the Board of Directors authorized the Company to
repurchase up to $15.0 million of its Common Stock. On August 23, 2000, the
Company announced that its Board of Directors had increased the authorization to
purchase shares under the Stock Repurchase Program from $15.0 million to $20.0
million of the Company's Common Stock. Shares repurchased by the Company reduce
the weighted average number of common shares outstanding for basic and diluted
earnings per share calculations.
As of July 31, 2001, the Company had repurchased 2,317,500 shares under
this Stock Repurchase Program at a total cost of approximately $19.0 million.
4. Summary of Significant Accounting Policies
Basis for Presentation
The accompanying Balance Sheet as of January 31, 2001 was derived from the
audited financial statements for the year ended January 31, 2001. The
accompanying unaudited Balance Sheets as of July 31, 2001 and 2000, the
Statements of Income for the three and six months ended July 31, 2001 and 2000
and the Statements of Cash Flows for the six months ended July 31, 2001 and 2000
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,
2001. References in the Notes to Financial Statements to years and quarters are
references to fiscal years and fiscal quarters.
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Revenue Recognition
The Company recognizes revenue from sales of merchandise when earned.
Revenue is recognized when delivery has occurred and title and risk of loss have
transferred to the customer. The Company accrues an estimate based on historical
experience for expected returns which have not been presented.
5. Accounts Receivable, Net
Accounts receivable are shown net of the allowance for doubtful accounts of
$ 1,687,000, $ 1,474,000, and $1,100,000 as of July 31, 2001, January 31, 2001
and July 31, 2000, respectively.
6. Inventory
As of July 31, 2001, January 31, 2001 and July 31, 2000, merchandising
inventories consist of:
July 31, 2001 January 31, 2001 July 31, 2000
(in thousands)
Raw Materials $ 6,128 $ 7,104 $ 11,668
Finished Goods 171,919 170,949 167,654
--------------- ------------------- ---------------
Inventory $178,047 $178,053 $179,322
=============== =================== ===============
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 $3,477,000, $3,527,000, and
$4,817,000 as of July 31, 2001, January 31, 2001 and July 31, 2000,
respectively. As of July 31, 2001, January 31, 2001 and July 31, 2000,
consignment inventories held by the Company that are not included in the balance
sheets total $ 77,040,000, $76,079,000, and $48,116,000, respectively.
In addition, gold consignments of $29,416,000, $26,310,000 and $26,310,000
are not included in the Company's balance sheets as of July 31, 2001, January
31, 2001 and July 31, 2000, respectively.
Certain merchandise procurement, distribution and warehousing costs are
allocated to inventory. As of January 31, 2001 and 2000, these amounts included
in inventory are $2,958,000 and $2,464,000, respectively. The amounts comprising
the overhead pool of capitalizable costs were $4,964,000, $3,888,000 and
$2,945,000 for the years ended January 31, 2001, 2000 and 1999, respectively.
7. Store Closing Charges
The Company has recognized impairment charges, measured as the excess of
the net book value of furniture, fixtures and leasehold improvements over their
fair values, associated with management's decision to close stores. The Company
recognized $1.1 million in store closing charges for the year ended January 31,
2001, including $1.0 million recognized in fourth quarter in connection with
management's decision to close ten stores. As of July 31, 2001, the Company has
completed the closure of four of these stores, without requiring significant
adjustment to the recognized charges and continues to pursue the closure of the
remainder. Total store closing charges recognized for the year ended January 31,
2000 were $0.3 million.
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8. Accounts Payable
Accounts payable includes outstanding checks, which were $9,777,000,
$20,703,000 and $10,953,000 as of July 31, 2001, January 31, 2001 and July 31,
2000, respectively.
9. Financing Arrangements
Effective April 27, 2001, the Company amended certain terms and conditions
within its Amended and Restated Revolving Credit, Term Loan and Gold Consignment
Agreement (the "Credit Agreement") with its bank group which provides for a
total facility of $166.5 million through June 30, 2004. Interest rates and the
commitment fee charged on the unused portion of the facility float based upon
the Company's quarterly financial performance.
Under this Credit Agreement, the banks have a collateral security interest
in substantially all of the assets of the Company. The Credit Agreement contains
certain restrictions on capital expenditures, investments, payment of dividends,
assumption of additional debt, acquisitions and divestitures, among others, and
requires the Company to maintain certain financial ratios based on levels of
funded debt, capital expenditures and earnings before interest, taxes,
depreciation and amortization.
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 is limited by a borrowing base computed based on a
percentage of the value of the Company's inventory and accounts receivable.
Interest rates and commitment fees on the unused facility float based on the
Company's quarterly financial performance.
The interest rates for borrowings under this agreement are, at the
Company's option, based on Eurodollar rates or the banks' prime rate. Interest
is payable monthly for prime borrowings and upon maturity for Eurodollar
borrowings.
Term Loans
The term loan under the Credit Agreement is available up to a maximum of
$12.0 million ($16.5 million, less principal repayments). The interest rates for
these borrowings are, at the Company's option, based on Eurodollar rates or the
banks' prime rate. Interest is payable monthly for prime borrowings and upon
maturity for Eurodollar borrowings. Interest rates and the commitment fee
charged on the unused facility float based on the Company's quarterly financial
performance.
Gold Consignment Facility
During the first six months of fiscal 2001, the Company sold and
simultaneously consigned an additional 12,000 troy ounces of gold for $3.1
million under a gold consignment facility resulting in a total of 88,500 troy
ounces for $29.4 million outstanding under the gold consignment facility as of
July 31, 2001. The facility provides for the sale of a maximum 115,000 troy
ounces or $40.0 million. Under the agreement, the Company pays consignment fees
based on the London Interbank Bullion Rates payable monthly. Consignment rates
and commitment fees on the unused portion of the gold consignment facility float
based upon the Company's quarterly financial performance. Without renewal or
replacement of this facility by June 30, 2004, the Company
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is required to deliver or repurchase 88,500 troy ounces of gold under this
agreement at the prevailing gold rate in effect on that date.
10. 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, 2001 and 2000.
Three months ended Six Months Ended
July 31, July 31, July 31, July 31,
2001 2000 2001 2000
-------- -------- -------- --------
(in thousands, except per share amounts)
Net (loss) earnings for basic and diluted EPS $ (643) $ 464 $ (2,265) $ 2,238
Cumulative effect of accounting change, net
$ --- $ --- $ --- $ (3,068)
Net (loss) income for basic and diluted EPS
$ (643) $ 464 $ (2,265) $ (830)
Weighted average shares for basic EPS 14,582 16,654 14,578 16,267
Incremental shares upon conversions:
Stock options --- 452 --- 658
Weighted average shares for diluted EPS 14,582 17,106 14,578 16,925
Stock options excluded from
the calculation of diluted
earnings per share [due to
their antidilutive effect on
the calculations] 2,895 485 2,895 444
11. Accounting of Derivative Instruments and Hedging Activities
The Company has adopted FAS 133, as amended, which had no impact on its
financial statements.
12. Accounting for Business Combination and Goodwill and Other Intangible
Assets
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." The requirements of SFAS 141 are
effective for any business combination accounted for by the purchase method that
is completed after June 30, 2001. Under SFAS 142, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the Company will
adopt SFAS 142 on February 1, 2002. The Company has not yet determined the
effect of SFAS 142.
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13. Reclassifications
Certain Balance Sheet amounts from prior periods were reclassified to
conform to the current year presentation. These reclassifications had no impact
on earnings.
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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, 2001
Net sales for the second quarter of fiscal 2001 decreased $1.8 million, or
2.3%, to $74.4 million from $76.1 million in the second quarter of fiscal 2000.
Comparable store sales decreased $7.8 million, or 10.8%, in the second quarter
of fiscal 2001 from the second quarter of fiscal 2000. Additionally, there was a
sales decrease of $2.0 million related to closed stores. These decreases were
partially offset by sales from new stores of $8.1 million. The total number of
merchandise units sold increased by approximately 3.9% in the second quarter of
fiscal 2001 from the second quarter of fiscal 2000 while the average price per
merchandise sale declined to $313 in fiscal 2001 from $332 in fiscal 2000. The
slower economy and lower consumer confidence had a negative impact on sales.
Sales also declined because we eliminated two promotional practices, outside
trade-ins and certain break-up sales, which did not meet our gross margin
criteria. Credit sales as a percentage of net sales decreased slightly to 42.2%
in the second quarter of fiscal 2001 from 44.0% in the second quarter of fiscal
2000, primarily as a result of decreased sales through secondary credit programs
and less usage of one year interest free promotions partially offset by
increases in other private label credit programs. The Company opened three new
stores in the second quarter of fiscal 2001 increasing the number of stores open
to 364 as of July 31, 2001 compared to 331 as of July 31, 2000.
Gross profit for the second quarter of fiscal 2001 decreased $1.6 million,
or 5.4%, to $27.9 million from $29.5 million in the same period in fiscal 2000.
Gross profit as a percentage of net sales decreased to 37.5% in the second
quarter of fiscal 2001 from 38.7% in the second quarter of fiscal 2000. During
the second quarter of fiscal 2001 the merchandise component of gross margins
improved slightly compared to the same period of fiscal 2000. This improvement
primarily resulted from an improvement in the merchandise component of gross
margin in the diamond category. This increase was offset by a shift away from
slightly higher margin categories of gold, precious and semi-precious
merchandise to the diamond category which carries a relatively lower gross
margin. This slight improvement in merchandise gross margin was offset by
occupancy, depreciation and buying expenses which grew more quickly than the
rate of sales growth in the second quarter of fiscal 2001 compared to the same
period in fiscal 2000.
Selling, general and administrative expenses decreased $0.6 million, or
2.2%, to $27.0 million in the second quarter of fiscal 2001 from $27.6 million
in the second quarter of fiscal 2000. This decrease was primarily attributable
lower credit expense of $0.8 million due to lower sales on credit and fewer
credit promotions and other expenses of $0.4 million partially offset by higher
payroll expenses of $0.6 million due to the addition of thirty-three stores. As
a percentage of net sales, selling, general and administrative expenses
increased to 36.3% in the second quarter of fiscal 2001 from 36.2% in the second
quarter of fiscal 2000.
Interest expense increased $0.8 million to $2.0 million in the second
quarter of fiscal 2001 from $1.2 million in the second quarter of fiscal 2000,
resulting from higher average borrowings somewhat offset by lower market
interest rates.
Income taxes decreased $0.7 million to a benefit of $0.4 million in the
second quarter of fiscal 2001 from expense of $0.3 million in the second quarter
of fiscal 2000, reflecting an effective annual tax rate of 37.8% and 38.5% in
the second quarter of fiscal 2001 and 2000, respectively.
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Results of Operations for the Six Months Ended July 31, 2001
Net sales for the six months ended July 31, 2001 decreased $6.5 million, or
4.3%, to $143.3 million from $149.8 million in the six months ended July 31,
2000. Comparable store sales decreased $19.6 million, or 13.7%, in the first six
months of fiscal 2001 from the same period in fiscal 2000. Additionally there
was a sales decrease of $4.2 million related to closed stores. These decreases
were partially offset by sales from new stores of $17.3 million. The total
number of merchandise units sold decreased by approximately 1.1% in the first
six months of fiscal 2001 from the first six months of fiscal 2000 and the
average price per merchandise sale declined to $318 in fiscal 2001 from $330 in
fiscal 2000. The slower economy and lower consumer confidence had a negative
impact on sales. Sales also declined because we eliminated two promotional
practices, outside trade-ins and certain break-up sales, which did not meet our
gross margin criteria. Credit sales as a percentage of net sales decreased
slightly to 41.2% in the first six months of fiscal 2001 from 42.5% in the first
six months of fiscal 2000, primarily as a result of decreased sales through
secondary credit programs and less usage of one year interest free promotions
partially offset by increases in other private label credit programs. The
Company opened 23 new stores and closed seven stores in the first six months of
fiscal 2001 increasing the number of stores open to 364 as of July 31, 2001
compared to 331 as of July 31, 2000.
Gross profit for the first six months of fiscal 2001 decreased $1.3
million, or 1.4%, to $89.8 million from $91.1 million compared to the same
period in fiscal 2000. Gross profit as a percentage of sales decreased to 37.3%
from 39.2% in the same period of fiscal 2000. During the first six months of
fiscal 2001 the merchandise component of gross margins improved slightly
compared to the same period of fiscal 2000. This improvement primarily resulted
from an improvement in the merchandise component of gross margin in the diamond
category. This increase was offset by a shift away from slightly higher margin
categories of gold, precious and semi-precious merchandise to the diamond
category which carries a relatively lower gross margin. This improvement in
merchandise gross margin was offset by occupancy, depreciation and buying
expenses which grew more quickly than the rate of sales growth in the first six
months of fiscal 2001 compared to the same period in fiscal 2000.
Selling, general and administrative expenses increased $0.7 million, or
1.3%, to $53.5 million for the first six months of fiscal 2001 from $52.8
million in the first six months of fiscal 2000. As a percentage of net sales,
selling, general and administrative expenses increased to 37.3% in the first
half of fiscal 2001 from 35.2% in the first half of fiscal 2000. The dollar
increase primarily relates to higher payroll expenses of $1.4 million, higher
other expenses of $0.2 million, higher advertising costs of $0.2 million due to
the addition of thirty-three stores. These were partially offset by lower credit
expense of $1.1 million due to lower sales on credit and fewer credit
promotions.
Interest expense increased $1.4 million to $3.7 million in the first six
months of fiscal 2001 from $2.3 million in the first six months of fiscal 2000,
resulting from higher average borrowings somewhat offset by lower market
interest rates.
Income taxes decreased $2.8 million to a benefit of $1.4 million in the
first half of fiscal 2001 from expense of $1.4 million in the prior period,
reflecting an effective annual tax rate of 37.8% and 38.5%, respectively.
Liquidity and Capital Resources
The Company's cash requirements consist principally of funding increases in
inventory at existing stores, capital expenditures and acquisitions of new
stores and working capital (primarily inventory) associated with the Company's
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new stores. The Company's primary sources of liquidity have been cash flow from
operations and bank borrowings under the Company's revolver, which was amended
on April 27, 2001 as discussed in Note 9 of the July 31, 2001 financial
statements in this Form 10Q.
The Company has an agreement with its financial institution 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, 2001, the maximum availability under the credit facility was $19.0
million based on the borrowing base formula. The credit facility covenants also
require the Company to attain certain operating results.
The Company's cash flow used in operating activities decreased to $7.9
million in the six months ended July 31, 2001 from $10.1 million in the six
months ended July 31, 2000. Higher loss from operations together with increases
in merchandise inventories ($3.1 million), increases in prepaid income tax ($1.9
million), decreases in tax payable ($2.9 million), decreases in accrued
liabilities ($0.9 million) and decreases in accounts payable ($0.8 million),
were partially offset by depreciation and amortization ($5.3 million). The
increase in merchandise inventories primarily related to inventory for new store
openings which were partially offset by a decrease in average store inventory.
In the first half of 2001, the primary sources of the Company's liquidity
included a $27.0 million net increase in the amount outstanding under the
Company's revolver, proceeds of $3.1 million from gold consignment, partially
offset by a decrease of $10.9 million in outstanding checks. The Company
utilized cash in the first half of fiscal 2001 primarily to fund capital
expenditures of $9.2 million, primarily related to the opening of 23 new stores
in the first half of 2001, and to repay a portion of the term loan ($2.0
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 results of its operations.
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 currently does not use derivative financial instruments
to protect itself from fluctuations in interest rates.
Gold Price Risk
The Company's exposure to changes in the price of gold relates to its
borrowing activities under its gold consignment facility. The Company accepts as
consignee, and is responsible to return at a future date, a fixed number of
ounces of gold. The periodic charges paid by the Company are computed based on a
percentage of the value of the gold consigned. An increase in the price of gold
could substantially increase the annual costs to the Company of the gold
consigned and the eventual costs to the Company upon the termination of this
arrangement.
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There have been no material changes to the Company's market risk during the
six months ended July 31, 2001.
Effective February 1, 2001, the Company has adopted FAS 133, as amended,
which had no impact on its financial statements.
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PART II - OTHER INFORMATION
Item 5 - Other Information
Forward-Looking Statements
This release 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 judgement of the Company
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) the
extent and results of our store expansion strategy and associated occupancy
costs, and access to funds for new store openings; (2) the seasonality of our
business; (3) 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; (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
(b) Reports on Form 8-K
On May 10, 2001, the Company filed a Current Report on Form 8-K (dated May 10,
2001) with the Securities and Exchange Commission reporting the issuance of a
press release on that date announcing the Company's sales for the first quarter
ended April 30, 2001. A copy of the press release is attached as an exhibit to
the Current Report on Form 8-K.
On June 6, 2001, the Company filed a Current Report on Form 8-K (dated June 6,
2001) with the Securities and Exchange Commission reporting that it conducted
its annual meeting of stockholders on that date. A copy of the presentation made
by the Company at the annual meeting is attached as an exhibit to the Current
Report on Form 8-K.
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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 14, 2001 By: /s/ Jon H. Browne
--------------------------
Jon H. Browne
Executive Vice President -
Chief Financial Officer and
Treasurer
(principal financial officer)
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