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: October 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 October 31, 2001 was 14,584,820 and the number of the
Registrant's Class B common stock, $1.00 par value, as of such date was 147.69.
WHITEHALL JEWELLERS, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2001
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three months and nine months ended
October 31, 2001 and 2000 (unaudited)
Balance Sheets - October 31, 2001, January 31, 2001 and October 31,
2000 (unaudited)
Statements of Cash Flows for the nine months ended October 31, 2001
and 2000(unaudited)
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
PART II - OTHER INFORMATION
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 nine months ended
October 31, 2001 and 2000 (unaudited)(in
thousands, except for per share data)
Three months ended Nine months ended
October October October October
31, 2001 31, 2000 31, 2001 31, 2000
--------- --------- --------- ---------
Net sales $ 65,136 $ 71,035 $ 208,433 $ 220,809
Cost of sales (including buying and occupancy
expenses) 43,029 44,896 132,810 135,951
--------- --------- --------- ---------
Gross profit 22,107 26,139 75,623 84,858
Selling, general and administrative expenses
25,821 27,684 79,283 80,442
--------- --------- --------- ---------
(Loss) income from operations (3,714) (1,545) (3,660) 4,416
Interest expense 1,900 1,700 5,595 4,021
--------- --------- --------- ---------
(Loss) income before income taxes (5,614) (3,245) (9,255) 395
Income tax (benefit) expense (2,122) (1,249) (3,498) 153
--------- --------- --------- ---------
(Loss) income before cumulative effect of
accounting change (3,492) (1,996) (5,757) 242
Cumulative effect of accounting
change, net of tax --- --- --- (3,068)
--------- --------- --------- ---------
Net (loss) $ (3,492) $ (1,996) $ (5,757) $ (2,826)
========= ========= ========= =========
Basic earnings per share:
(Loss) income before cumulative effect of
accounting change $ (0.24) $ (0.13) $ (0.39) $ 0.02
========= ========= ========= =========
Cumulative effect of accounting
Change, net of tax $ -- $ -- $ -- $ (0.20)
========= ========= ========= =========
Net (loss) $ (0.24) $ (0.13) $ (0.39) $ (0.18)
========= ========= ========= =========
Weighted average common share and common share
equivalents 14,588 15,178 14,581 15,902
========= ========= ========= =========
Diluted earnings per share:
(Loss) income before cumulative effect of
accounting change $ (0.24) $ (0.13) $ (0.39) $ 0.02
========= ========= ========= =========
Cumulative effect of accounting
Change, net of tax $ -- $ -- $ -- $ (0.19)
========= ========= ========= =========
Net (loss) $ (0.24) $ (0.13) $ (0.39) $ (0.17)
========= ========= ========= =========
Weighted average common share and common share
equivalents 14,588 15,178 14,581 16,385
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
3
Whitehall Jewellers, Inc.
Balance Sheets
(unaudited, in thousands)
October 31, January 31, October 31,
2001 2001 2000
----------- ----------- -----------
ASSETS
Current Assets:
Cash $ 2,811 $ 2,926 $ 3,402
Accounts receivable, net 1,044 1,406 2,213
Merchandise inventories 183,209 178,053 203,785
Other current assets 419 688 730
Prepaid income tax 4,776 --- 1,833
Deferred financing costs 498 402 383
Deferred income taxes, net 3,556 2,817 4,006
--------- --------- ---------
Total current assets 196,313 186,292 216,352
Property and equipment, net 65,008 62,080 62,747
Goodwill 5,728 5,924 5,990
Deferred financing costs 831 971 1,023
Deferred income tax, net --- 527 613
--------- --------- ---------
Total assets $ 267,880 $ 255,794 $ 286,725
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolver loan $ 83,343 $ 47,220 $ 76,532
Term loan, current 5,000 4,250 4,000
Accounts payable 44,305 57,982 69,473
Customer deposits 4,465 4,214 4,365
Accrued payroll 4,277 5,170 3,823
Income taxes --- 2,940 ---
Other accrued expenses 19,091 18,329 18,015
--------- --------- ---------
Total current liabilities 160,481 140,105 176,208
Term loan 6,000 9,750 11,000
Subordinated debt 640 640 640
Deferred income tax, net 565 --- ---
Other long-term liabilities 2,535 2,128 2,021
--------- --------- ---------
Total liabilities 170,221 152,623 189,869
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 103,586 103,341 103,341
Accumulated earnings 23,033 28,790 18,654
--------- --------- ---------
126,636 132,148 122,012
--------- --------- ---------
Less:
Treasury stock, at cost (3,200,876, 3,200,876 and
2,643,376 shares, respectively)
(28,977) (28,977) (25,156)
--------- --------- ---------
Total stockholders' equity, net 97,659 103,171 96,856
--------- --------- ---------
Total liabilities and stockholders' equity
$ 267,880 $ 255,794 $ 286,725
========= ========= =========
The accompanying notes are an integral part of the financial statements.
4
Whitehall Jewellers, Inc.
Statements of Cash Flows
for the nine months ended October 31, 2001 and 2000
(unaudited, in thousands)
Nine months ended
-----------------
October 31, October 31,
2001 2001
----------- ----------
Cash flows from operating activities:
Net (loss) $ (5,757) $ (2,826)
Adjustments to reconcile net income to net cash (used in) operating
activities:
Depreciation and amortization 7,966 6,865
Loss on disposition of assets 894 48
Cumulative effect of accounting change, net --- 3,068
Changes in assets and liabilities:
Decrease in accounts receivable, net 362 946
(Increase) in merchandise inventories, net of gold consignment
(4,944) (53,505)
Decrease in other current assets 269 379
(Increase) in prepaid income tax (4,776) (1,833)
Decrease in deferred income taxes 353 ---
Increase in customer deposits 251 411
Increase in accounts payable 145 26,154
(Decrease) in taxes payable (2,940) (7,315)
Increase (decrease) in accrued liabilities 277 (616)
--------- ---------
Net cash (used in) operating activities (7,900) (28,224)
Cash flows from investing activities:
Capital expenditures (11,233) (20,045)
--------- ---------
Net cash used in investing activities (11,233) (20,045)
Cash flows from financing activities:
Borrowing on revolver loan 781,545 343,180
Repayment of revolver loan (745,422) (307,765)
Repayment of term loan (3,000) (2,250)
Proceeds from gold consignment 3,107 2,016
Repurchase of consigned gold (3,319) ---
Proceeds from exercise of stock options 245 380
Proceeds from equity offering, net --- 42,537
Purchases of treasury stock --- (15,159)
Financing costs (316) (375)
Decrease in outstanding checks, net (13,822) (13,320)
--------- ---------
Net cash provided by financing activities 19,018 49,244
--------- ---------
Net change in cash and cash equivalents (115) 975
Cash and cash equivalents at beginning of period 2,926 2,427
--------- ---------
Cash and cash equivalents at end of period $ 2,811 $ 3,402
========= =========
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. The
Company has a national presence with 367 stores as of October 31, 2001, located
in 38 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 October 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 October 31, 2001 and 2000, the
Statements of Income for the three and nine months ended October 31, 2001 and
2000 and the Statements of Cash Flows for the nine months ended October 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.
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.
6
5. Accounts Receivable, Net
Accounts receivable are shown net of the allowance for doubtful
accounts and chargebacks of $ 1,358,000, $ 1,474,000, and $984,000 as of October
31, 2001, January 31, 2001 and October 31, 2000, respectively.
6. Inventory
As of October 31, 2001, January 31, 2001 and October 31, 2000,
merchandising inventories consist of:
October 31, 2001 January 31, 2001 October 31, 2000
(in thousands)
Raw Materials $ 8,456 $ 7,104 $ 12,733
Finished Goods 174,753 170,949 191,052
---------------- --------------- ---------------
Inventory $ 183,209 $ 178,053 $ 203,785
================ =============== ===============
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 $3,197,000,
$3,527,000, and $3,827,000 as of October 31, 2001, January 31, 2001 and October
31, 2000, respectively. As of October 31, 2001, January 31, 2001 and October 31,
2000, consignment inventories held by the Company that are not included in the
balance sheets total $ 81,870,000, $76,079,000, and $49,769,000, respectively.
In addition, gold consignments of $26,097,000, $26,310,000 and
$26,310,000 are not included in the Company's balance sheets as of October 31,
2001, January 31, 2001 and October 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 included in cost of
sales, 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 recorded $1.0 million in store closing
charges for the three and nine months ended October 31, 2001, in connection with
management's decision to close seven stores during the next twelve months. The
Company recorded $1.1 million in store closing charges for the year ended
January 31, 2001, including $1.0 million recognized in the fourth quarter in
connection with management's plan to close ten stores. As of October 31, 2001,
the Company has completed the closure of four of these ten stores, without
requiring significant adjustment to the recorded charges and continues to pursue
the closure of the remainder. Total store closing charges recorded for the year
ended January 31, 2000 were $0.3 million.
7
8. Accounts Payable
Accounts payable includes outstanding checks, which were $6,882,000
$20,703,000 and $6,314,000 as of October 31, 2001, January 31, 2001 and October
31, 2000, respectively.
9. Financing Arrangements
Effective October 31, 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 amended Credit
Agreement contains an additional requirement to clean down the revolver loan to
an agreed upon level for a 30-day period prior to year end as well as 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 outstanding balance on the term loan under the Credit Agreement is
$11.0 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 nine 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. The company subsequently repurchased
12,000 troy ounces of gold for $3.3 million resulting in a total of 76,500 troy
ounces for $26.1 million outstanding under the gold consignment facility as of
October 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
8
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 is required to deliver or repurchase 76,500 troy ounces of gold
under this agreement at the prevailing gold rate in effect on that date.
9
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 October 31, 2001 and 2000.
Three months ended Nine months Ended
October 31, October 31, October 31, October 31,
2001 2000 2001 2001
------------- ------------- ------------ -------------
(in thousands, except per share amounts)
(Loss) earnings for basic and diluted EPS $ (3,492) $ (1,996) $ (5,757) $ 242
Cumulative effect of accounting change, net
$ --- $ --- $ --- $ (3,068)
Net (loss) for basic and diluted EPS
$ (3,492) $ (1,996) $ (5,757) $ (2,826)
Weighted average shares for basic EPS 14,588 15,178 14,581 15,902
Incremental shares upon conversions:
Stock options --- --- --- 483
Weighted average shares for diluted EPS 14,588 15,178 14,581 16,385
Stock options excluded from
the calculation of diluted
earnings per share (due to
their antidilutive effect on
the calculations) 2,829 2,458 2,815 438
11. New Accounting Pronouncements
The Company has adopted FAS 133, "Accounting of Derivative Instruments
and Hedging Activities", as amended, which had no impact on its financial
statements.
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." SFAS 141 is effective for any
business combination that is completed after June 30, 2001 and requires the
application of the purchase method of accounting. 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.
In August 2001, the Financial Accounting Standards Board issued
Statement No. 144 ("SFAS 144"), "Accounting for the Impairment of Disposal of
Long-Lived Assets." SFAS 144 establishes accounting requirements for impaired
long-lived assets to be held and used, long-lived assets to be disposed of other
than by sale and long-lived assets to be disposed of by sale. These requirements
of SFAS 144 will become effective for the Company as of February 1, 2002. The
Company is in the process of evaluating the effect of adopting SFAS 144.
12. Reclassifications
Certain Balance Sheet amounts from prior periods were reclassified to
conform to the current year presentation. These reclassifications had no impact
on earnings.
10
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 October 31, 2001
Net sales for the third quarter of fiscal 2001 decreased $5.9 million,
or 8.3%, to $65.1 million from $71.0 million in the third quarter of fiscal
2000. Comparable store sales decreased $9.8 million, or 14.2%, in the third
quarter of fiscal 2001 from the third quarter of fiscal 2000. Additionally,
there was a sales decrease of $1.5 million related to closed stores. These
decreases were partially offset by sales from new stores of $5.4 million. The
total number of merchandise units sold remained flat in the third quarter of
fiscal 2001 compared with the third quarter of fiscal 2000 while the average
price per merchandise sale declined to $336 in fiscal 2001 from $368 in fiscal
2000. The slower economy, lower consumer confidence and the environment created
by the tragic events of September 11, 2001 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 to 43.7% in the third quarter of
fiscal 2001 from 48.2% in the third quarter of fiscal 2000, primarily as a
result of decreased sales through secondary credit programs and less usage of
one year interest free promotions. The Company opened four new stores and closed
one store in the third quarter of fiscal 2001 increasing the number of stores
open to 367 as of October 31, 2001 compared to 347 as of October 31, 2000.
Gross profit for the third quarter of fiscal 2001 decreased $4.0
million, or 15.4%, to $22.1 million from $26.1 million in the same period in
fiscal 2000. Gross profit as a percentage of net sales decreased to 33.9% in the
third quarter of fiscal 2001 from 36.8% in the third quarter of fiscal 2000.
During the third quarter of fiscal 2001 the merchandise component of gross
margin improved by 120 basis points compared to the same period of fiscal 2000.
This improvement primarily resulted from an improvement in diamond jewelry gross
margins and the impact of eliminating two promotional practices, outside
trade-ins and certain break-up sales. This increase was offset by a shift in
demand away from slightly higher margin categories of gold, precious and
semi-precious merchandise to the diamond category which carries a somewhat lower
gross margin. The improvement in merchandise gross margin was offset by higher
occupancy, depreciation and buying expenses which grew more quickly than the
rate of sales growth in the third quarter of fiscal 2001 compared to the same
period in fiscal 2000 due to costs associated with operating twenty additional
stores in the third quarter of fiscal 2001 compared to the third quarter of 2000
and the $1.0 million write off in the third quarter of 2001 of store fixed
assets resulting from the plan to close seven stores during the next twelve
months.
Selling, general and administrative expenses decreased $1.9 million, or
6.7%, to $25.8 million in the third quarter of fiscal 2001 from $27.7 million in
the third quarter of fiscal 2000. This decrease was primarily attributable to
lower credit expense of $0.9 million due to lower sales on credit and fewer
credit promotions, lower payroll expenses of $0.6 million and lower other
expenses of $0.6 million. These lower expenses were partially offset by higher
advertising expenses of $0.2 million and the incremental costs associated with
operating twenty additional stores. As a percentage of net sales, selling,
general and administrative expenses increased to 39.6% in the third quarter of
fiscal 2001 from 39.0% in the third quarter of fiscal 2000.
Interest expense increased $0.2 million to $1.9 million in the third
quarter of fiscal 2001 from $1.7 million in the third quarter of fiscal 2000,
resulting from higher average borrowings somewhat offset by lower market
interest rates.
11
Income tax benefit increased $0.9 million to $2.1 million in the third
quarter of fiscal 2001 from $1.2 million in the third quarter of fiscal 2000,
reflecting an effective annual tax rate of 37.8% and 38.5% in the third quarter
of fiscal 2001 and 2000, respectively.
Results of Operations for the Nine Months Ended October 31, 2001
Net sales for the nine months ended October 31, 2001 decreased $12.4
million, or 5.6%, to $208.4 million from $220.8 million in the nine months ended
October 31, 2000. Comparable store sales decreased $29.4 million, or 13.9%, in
the first nine months of fiscal 2001 from the same period in fiscal 2000.
Additionally, there was a sales decrease of $5.7 million related to closed
stores. These decreases were offset by sales from new stores of $22.7 million.
The total number of merchandise units sold decreased by approximately 0.7% in
the first nine months of fiscal 2001 from the first nine months of fiscal 2000
and the average price per merchandise sale declined to $323 in fiscal 2001 from
$341 in fiscal 2000. The slower economy, lower consumer confidence and the
environment created by the tragic events of September 11, 2001 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
to 42.0% in the first nine months of fiscal 2001 from 44.3% in the first nine
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 27 new stores and closed eight stores in the first nine months of
fiscal 2001 increasing the number of stores open to 367 as of October 31, 2001
compared to 347 as of October 31, 2000.
Gross profit for the first nine months of fiscal 2001 decreased $9.2
million, or 10.9%, to $75.6 million from $84.9 million compared to the same
period in fiscal 2000. Gross profit as a percentage of sales decreased to 36.3%
from 38.4% in the same period of fiscal 2000. During the first nine 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 diamond jewelry gross margins and the impact of
eliminating two promotional practices, outside trade-ins and certain break-up
sales. The improvement was offset by a shift in demand away from higher margin
categories of gold, precious and semi-precious merchandise to the diamond
category which carries a somewhat lower gross margin. The improvement in
merchandise gross margin was offset by higher occupancy, depreciation and
buying expenses which grew more quickly than the rate of sales growth in the
first nine months of fiscal 2001 compared to the same period in fiscal 2000 due
to the costs associated with operating twenty additional stores in the first
nine months of fiscal 2001 compared to the first nine months of fiscal 2000 and
the $1.0 million write-off in the third quarter of fiscal 2001 of store fixed
assets resulting from the plan to close seven stores during the next twelve
months.
Selling, general and administrative expenses decreased $1.2 million, or
1.4%, to $79.3 million for the first nine months of fiscal 2001 from $80.4
million in the first nine months of fiscal 2000. As a percentage of net sales,
selling, general and administrative expenses increased to 38.0% in the first
nine months of fiscal 2001 from 36.4% in the first nine months of fiscal 2000.
The dollar decrease primarily relates to lower credit expense of $2.0 million
due to lower sales on credit and fewer credit promotions and lower other
expenses of $0.5 million. These decreases were partially offset by higher
payroll expenses of $0.8 million, higher advertising costs of $0.5 million and
incremental costs associated with operating twenty additional stores.
12
Interest expense increased $1.6 million to $5.6 million in the first
nine months of fiscal 2001 from $4.0 million in the first nine months of fiscal
2000, resulting from higher average borrowings somewhat offset by lower market
interest rates.
Income taxes decreased $3.7 million to a benefit of $3.5 million in the
first nine months of fiscal 2001 from expense of $0.2 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 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 effective October 31, 2001 as discussed in Note 9 of the October 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
October 31, 2001, the maximum availability under the credit facility was $14.7
million based on the borrowing base formula. The credit facility covenants also
require the Company to attain certain operating results, which historically have
been heavily dependent on fourth quarter sales and earnings due to the high
degree of seasonality in its business.
The Company's cash flow used in operating activities decreased to $7.9
million in the nine months ended October 31, 2001 from $28.2 million in the nine
months ended October 31, 2000. Higher losses from operations were primarily
offset by a smaller increase in merchandise inventories of $4.9 million versus
$53.5 million in the nine months ended October 31, 2001 and 2000, respectively.
Total inventory as of October 31, 2001 decreased $20.6 million as compared to
October 31, 2000.
This decrease resulted from a decrease in average store inventory
offset by an increase related to inventory for twenty additional stores
operating at the end of October 31, 2001 compared to October 31,2000. Lower
inventory levels also resulted in a smaller increase in accounts payable of $0.1
million compared to $26.1 million. In the first nine months of 2001, the primary
sources of the Company's liquidity included a $36.1 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 $13.8 million in outstanding
checks. The Company utilized cash in the first nine months of fiscal 2001
primarily to fund capital expenditures of $11.3 million, primarily related to
the opening of 27 new stores in the first nine months of 2001, to repay a
portion of the term loan ($3.0 million) and to repurchase consigned gold ($3.3
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.
13
Inflation
Management believes that inflation generally has not had a material
effect on results of its operations.
14
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.
There have been no material changes to the Company's market risk during
the nine months ended October 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. Whitehall Jewellers
undertakes no obligation to update forward-looking statements. The following
factors, among others, may impact forward looking statements contained in this
report: (1) 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 high degree of 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
Exhibit No. Description
- ----------- -----------
10.1 Ninth Amendment to Amended and Restated Revolving Credit,
Term Loan and Gold Consignment Agreement dated as of October
31, 2001, 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.
(b) Reports on Form 8-K
None
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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: December 14, 2001 By: /s/ Jon H. Browne
-----------------
Jon H. Browne
Executive Vice President -
Chief Financial Officer and Treasurer
(authorized signatory and
principal financial officer)
17